Navient Corporation (NASDAQ:NAVI) Q4 2022 Earnings Call Transcript

Navient Corporation (NASDAQ:NAVI) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Navient Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to your speaker host for today, Jennifer Earyes, Head of Investor Relations. Please go ahead.

Jennifer Earyes: Hello, good morning, and welcome to Navient’s earnings call for the fourth quarter of 2022. With me today are Jack Remondi, Navient’s CEO; and Joe Fisher, Navient’s CFO. After their prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management’s current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. So listeners should refer to the discussion of those factors on the Company’s Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjustable tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. We will also refer to adjusted core earnings which are measurements derived from core earnings and adjusted to exclude one-time expenses related to regulatory and restructuring costs. Our GAAP results and description of our non-GAAP financial measures can be found in the fourth quarter 2022 supplement earnings disclosure, which is posted on the Investors page at navient.com. You will find more information about these measures beginning on Page 18 of Navient’s fourth quarter earnings release. There is also a full reconciliation of core earnings to GAAP results included in the disclosure.

Thank you. And now I will turn the call over to Jack.

Jack Remondi: Thank you, Jen. Good morning, everyone, and thank you for joining us today, and thank you for your interest in Navient. We completed 2022 with another quarter of strong financial performance. We delivered adjusted core earnings of $0.85 for the quarter and $3.43 for the year and a core return on equity of 17%. These results demonstrate our ability to deliver solid financial performance even in disruptive economic environments. The business environment ended 2022 very differently than it started. For example, inflation pressured operating expenses, rising rates and the CARES Act extensions virtually eliminated current demand for student loan refinancing and rule changes impacting the management of defaulted federal loans ended our portfolio management business earlier than anticipated.

A strength of our franchise is our ability to adjust to both expected and unexpected events to deliver for our customers and investors. For example, in-school originations grew 52% this year, with our growth outlook increasing. We are leveraging our client relationships to win new business processing contracts. We successfully reduced operating expense in a high inflationary environment, and our hedging strategies and efficient funding programs mitigated the impact of rising rates to our net interest margins. Your management team is focused on delivering exceptional results by executing our strategy, delivering on our growth potential, maximizing our loan portfolio cash flows, continuously improving our operating efficiency and prudent and consistent capital management.

In Consumer Lending, we are focused on growing originations of high-quality loans with attractive risk-adjusted returns. In 2022, rising rates and zero interest federal loans reduced our opportunities in refi to $1.7 billion in new originations. We rapidly adapted to these conditions to slash marketing spend and focus on our in-school products. Here, we grew new loan volume by 52% over last year to $321 million, an estimated 10x market growth. We also continued to build relationships with students planning to go to college, adding over 700,000 new students to our Going Merry platform. Here, we help students and families complete the FAFSA, compare financial aid award packages from schools and apply for scholarships. We see these products as important ways of helping students and families throughout their going to and paying-for-college journey.

In our Business Processing Solutions segment, we grew non-pandemic-related revenue by $25 million or 11%. It’s also worth noting that our pandemic-related contracts extended longer than the original award, and we have been able to leverage this to win several new contracts in 2022, both strong statements on the value we provided to our clients. Our large and profitable portfolio of student loans is a key contributor to earnings. Our goal has and continues to be to maximize the performance of this portfolio. This includes helping borrowers navigate repayment options and avoid default and innovative funding and hedging strategies to maximize net interest income. Our funding and hedging strategies helped deliver a stable net interest margin, despite the rapid rise in rates this year.

Since our founding in 2014, we have clearly excelled at maximizing the value of our portfolio, and we will continue to do so. We are also continuously improving our operating efficiency. In 2022, operating expense declined by 21% or $205 million. We delivered improved efficiency in our operating segments, and we continue to take action that reduced our risk profile. In the final area, we seek to be excellent stewards of your capital. Our goals are to be efficient and prudent while delivering attractive returns. Here, our priorities remain unchanged, invest capital and attractive and relevant growth opportunities, support our dividend and return excess capital to you via share repurchases. This consistent and transparent approach supports our business growth, our debt investors, our corporate ratings and enabled the return of $491 million via dividends and share repurchases last year.

Our financial and business success last year positions us for another year of strong performance. For 2023, we are focused on the same four objectives: profitably growing our loan origination and BPS revenue; maximizing the performance of our loan portfolios; improving operating efficiency; and prudent and consistent capital management. In Consumer Lending, we expect to double in-school loan originations, building on the progress we made in 2022. We expect that demand for refi loans will continue to be suppressed, but we are prepared to move quickly when market conditions change. We will also continue to grow and build long-term relationships with students and families as we support their going to college journey. In BPS, we are well positioned to deliver 10% growth in revenue from our traditional clients.

With this growth, we also expect to earn a high-teen EBITDA margin, and new contract wins in late 2022 and expansions of existing contracts have created a clear path to these goals. As a result of our ongoing focus on operating efficiency, we will reduce operating expense by an additional 10% in 2023. And in capital management, our plan is to complete approximately $310 million in share repurchases. Our results this quarter capped a strong year for Navient. They reflect our commitment and ability to generate high-quality, high-value products and services and deliver solid financial results even in volatile and changing markets. They also reflect our ongoing commitment to simplify our business model and reduce our risk profile. More importantly, our efforts have built a solid foundation from which to create and deliver value.

Our guidance for 2023 reflects our confidence in our ongoing ability to grow new business, maximize portfolio performance, deliver better margins through operating efficiency and deliver attractive returns on capital. I want to thank my colleagues for their efforts and commitment to success. And together, we look forward to delivering another great year of results in 2023. Joe will now provide a more detailed review of our results. Thank you for your time, and I look forward to your questions later in the call. Joe?

Joe Fisher: Thank you, Jack, and thank you to everyone on today’s call for your interest in Navient. During my prepared remarks, I will review the fourth quarter and full-year results for 2022 and provide our outlook for 2023. I’ll be referencing the earnings call presentation, which can be found on the company’s website in the Investors section. In 2022, we successfully met or exceeded our original full-year guidance targets. Key highlights from the quarter and year, beginning on Slide 3, includes fourth quarter adjusted core EPS of $0.85 and full-year EPS of $3.43. We achieved an ROE of 17% and an overall efficiency ratio of 52% for the year in the face of a challenging inflationary environment. FFELP NIM of 94 basis points and full-year NIM of 101 basis points, private NIM of 287 basis points and full-year NIM of 281 basis points.

Grew in-school originations by 52% to $322 million for the full-year and achieved total originations of $2 billion. Reported BPS revenues of $70 million in the quarter and $330 million for the year while achieving full-year EBITDA margins of 16%, increased our adjusted tangible equity ratio to 7.7% while returning $491 million to shareholders through dividends and repurchases. I’ll provide additional detail on the quarter and our 2023 full-year outlook by segment, beginning with Federal Education Loans on Slide 5. In the Federal Education Loan segment, we achieved a net interest margin of 101 basis points for the full-year, exceeding our original mid-90s guidance in a volatile interest rate environment. The quarter’s results continue to be impacted by an incremental level of consolidation activity from previously announced loan forgiveness proposals.

The incremental prepayments that were processed during the fourth quarter represented 3% of our portfolio. This activity reduced FFELP net interest margin by 11 basis points to 94 basis points. There has since been a significant decline in consolidation request to historical levels. Our expectation for full-year 2023 FFELP NIM of 100 basis points to 110 basis points assumes that prepayment speeds remain at historical levels in 2023. FFELP delinquency rates decreased to 15.6% from 18.6% in the third quarter, and charge-offs declined by $1 million, resulting in a net charge-off rate of 13 basis points in the quarter. We anticipate a net charge-off rate between 10 basis points and 20 basis points for the full-year 2023. Let’s turn to our Consumer Lending segment on Slide 6.

Net interest income in the quarter was $147 million and resulted in a net interest margin of 287 basis points, an improvement of 11 basis points compared to the prior year. We are seeing a slowdown in prepayment speeds in the overall portfolio as borrowers with fixed interest rates have less of an incentive to refinance in the current environment, which is benefiting net interest income. We anticipate our full-year net interest margin for 2023 to be between 280 basis points and 290 basis points. Our credit trends continue to perform as expected as net charge-offs ended on the low end of our original guidance of 1.5% to 2% with 156 basis points for the quarter and 159 basis points for the full-year of 2022. The $17 million of provisions in the quarter included $3 million related to new originations.

We feel confident that we are adequately reserved for the expected life of loan losses given the well-seasoned and high credit quality of our portfolio and anticipate net charge-offs to remain in the 1.5% to 2% range for 2023. In the quarter, we originated $169 million of private education loans. This was comprised of $35 million of new in-school volume, representing a 52% increase compared to the prior year. The expected decline in refinance loan origination volume to $134 million was primarily driven by the higher rate environment and delay in Department of Education loans entering repayment. We expect that the higher rate environment continues throughout 2023, and the extension of the CARES Act will result in lower quarterly originations for our refi product.

Let’s continue to Slide 7 to review our Business Processing segment. Revenue from our traditional BPS services increased 27% from the year ago quarter, partially offsetting the expected wind down of revenue from pandemic-related services. Fourth quarter revenues totaled $70 million and earned an 11% EBITDA margin. The 11% margin was below our targeted levels due to wind down costs associated with pandemic-related services in the quarter. We anticipate the benefit of recent efficiency initiatives to increase the margin in this segment as we progress throughout the year. We expect to see continued fee revenue growth of 10% in our traditional services in 2023 with full-year EBITDA margins in the high teens. Turning to our financing and capital allocation activity that is highlighted on Slide 8.

During the year, we reduced our share count by 15% due to repurchase of 24.8 million shares. In total, we returned $491 million to shareholders through share repurchases and dividends while increasing our adjusted tangible equity ratio to 7.7% from 5.9% a year ago. Our 2023 guidance includes the repurchase of $310 million of shares while building our adjusted tangible equity ratio to a range of 8% to 9%. Turning to GAAP results on Slide 9. We recorded fourth quarter GAAP net income of $105 million or $0.78 per share compared with a net loss of $11 million or a loss of $0.07 per share in 2021 for the same period. In closing and turning to our outlook for 2023 on Slide 10, the success of 2022 and steps we have taken to simplify the business, improve efficiency while building capital positions us well for 2023.

As a result, we expect our 2023 adjusted core earnings per share to be $3.15 and $3.30, reflecting our continued efforts to improve efficiency. Our outlook excludes regulatory and restructuring costs, assumes no gains or losses from future loan sales or debt repurchases, reflects a continued rising interest rate environment and no meaningful impact from an expiration of the CARES Act in 2023. Thank you for your time, and I will now open the call for questions.

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Q&A Session

Operator: Thank you. And our first question coming from the line of with Jefferies. Your line is open.

Unidentified Analyst: Hi, there. I’m on for John Hecht and thanks for taking our questions. Our first one is just about funding markets. If you can provide a bit more detail on puts and takes for NIM over the next few quarters, that would be helpful.

Joe Fisher: So from a funding perspective, we feel we’re very well positioned. We have $1.3 billion due this coming year, of which $1 billion is actually being paid off today. So we have $1.5 billion sitting on our balance sheet at the end of the year. So we’re well cushioned for the remainder of 2023. And also we feel we’re well placed for entering into 2024. We certainly think that the securitization market overall is starting to move on. We’re starting to see benefits here over the last month. And for us, while we expect to do fewer securitizations compared to prior years, that’s primarily driven just by the growth of our refi business. So we do anticipate that there will be less originations on the refi side compared to prior year. But if that market potentially picks up, if you see a change in the interest rate environment or the expiration of CARES Act, I would anticipate that you would see further securitizations from us.

Unidentified Analyst: Okay. Great. Thank you. And the second question would be mix of business in the Business Services segment and what’s growing or shrinking? You mentioned COVID services slowing down. Could you provide more detail on mix otherwise?

Jack Remondi: Sure. So during the pandemic, we picked up a number of contracts with various states and municipalities to deliver €“ to help them deliver our COVID relief initiatives. Some of that would be things like unemployment insurance, contact tracing, vaccination, awareness, et cetera. Those naturally do run off, and that’s a good thing, right, that they’re running off because it means we €“ as a country, we don’t need them any longer. What is growing is our traditional services. So these would be things that we do for states, in municipalities, toll authorities and in healthcare institutions. We’re pretty excited about the growth opportunities in these areas. Some of them were certainly suppressed during the pandemic, and they’re starting to rebound.

But more importantly, and as I mentioned in my comments, we’ve been able to leverage the work we did for a number of entities during the pandemic and translate that into new more permanent contracts. This is what we do, handling communications for these entities, both inbound and outbound, and kind of omnichannel types of directions, processing forms, completing applications, things of that nature. So it’s really right within our wheelhouse of the years and years of experience we’ve developed in loan servicing. So this is €“ as we said, we expect to grow that revenue by 10% next year on the traditional side, so that excludes all the pandemic-related revenue we generated, and we are forecasting a high-teens EBITDA margin in that business.

Unidentified Analyst: Got it. Thanks very much.

Operator: And our next question coming from the line of Bill Ryan with Seaport. Your line is open.

William Ryan: Thanks and good morning. A couple of questions. First, to start off with, there’s been some proposed changes in IDR and debt forgiveness in the Federal Register. I wonder if you’ve taken a look at it and maybe give some initial thoughts about how it might impact your business. It seems like the administration is trying to do an in run around the debt forgiveness program. Thanks. That’s just the first question.

Jack Remondi: Sure. Thanks, Bill. So on the first €“ on broad-based loan forgiveness, this is in limbo right now, a number of states filed lawsuits against the proposed administration, and it is now scheduled for hearing at the Supreme Court sometime later this year. Briefs are just being filed kind of as we speak. So we’ll learn more about where that goes in the next couple of weeks and months. As you pointed out, the administration also announced broad changes to the income-based repayment programs that they offer to students in the federal €“ on the federal program side of the equation. These are proposed right now. They’re open for comments and questions. They are pretty significant in terms of their reach compared to what was in place before and what Congress had initially established as the guidelines for income-based repayment plans.

So we have to €“ we’ll wait and see here what those comments are and what kinds of challenges might arise. But to some extent, you’re looking at what’s the impact on the private loan originations business. I think in the area that probably is going to have the greatest impact would be on the graduate school side of the equation, graduate school demand and how that is financed. I think the bigger questions that we would have as a taxpayer might be how do these programs release pressure on schools to kind of control the cost of education just to make it more likely or not that college costs increase faster. Those are some of the policy issues that we’ll be watching.

William Ryan: Thanks. And just as a follow-up, it looks like you kind of bumped up your adjusted tangible equity ratio target from what it had been historically, and that’s reflected in the buyback. Is that in anticipation of growing the in-school loans, which have higher capital requirements? Or is there something other type that you might be looking at?

Joe Fisher: Yes. So that’s a good question. So in terms of the 8% to 9% guidance, that is purely a function of what we anticipate our book to look like over the next year and beyond. So as the refinance loan originations, as we anticipate shrinking for this year, we hold 5% capital against refinance loans and we hold closer to 10% for our in-school. So it really is benefiting the overall capital ratio that mix shift of growing the in-school volume, which brings us above our levels that we had guided last year of about 6% to that range of 8% to 9% for this coming year.

William Ryan: Thanks for taking my questions.