Navient Corporation 2026 Q2 Earnings Call

Please go ahead. Hello, good afternoon, welcome to Navient's earnings call for the second quarter of 2026.

Joining me today are Edward Bramson, Navient chief executive officer and chair of the board, and Steve Hauber, Navient chief financial officer. After Ed and Steve's prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. 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 the presentation. Actual results in the future may differ materially from those discussed today due to a variety of risks and uncertainties. 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 certain non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures derived from core earnings. Our GAAP results, description of our non-GAAP financial measures, and a reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2026 earnings release, which is posted on our website. Thank you, I will now turn the call over to Ed.

Thank you, Roger, thank you to everyone for joining the call today. Before turning to the results themselves, I want to express our thanks to David Yowan, my predecessor as CEO, who stepped down from the role in June of this year. David led the Navient team through a period of significant strategic change. Under his leadership, we've bolstered our liquidity and accomplished a major structural reduction in fixed costs. This has put us in a much stronger position to compete in the areas that represent our future growth. In fact, we're already benefiting from this transformation, I'll highlight a few of these benefits a bit later in my remarks. As you have seen from the release, Navient second quarter core earnings were $0.29 a share. During the quarter, a few significant items affected the results.

We realized a gain on investment. This was partially offset by regulatory and restructuring expenses and an upfront expense from electing to call a trust. Net impact of those items was a benefit of about $0.04 per share. Excluding them, core EPS would have been $0.25 for the quarter, and that compares to core EPS of $0.20 in 2025. Steve will discuss these items when he takes you through the slide presentation, and he will also cover some adjustments to loss provisions in the private loan back book, which mostly offset each other in the quarter. There are a couple of trends in the second quarter that I think are worth highlighting, as they indicate that we're seeing the initial benefits from our strategic transformation program.

I also want to mention a change in capital allocation, which will support the acceleration and growth that we're experiencing. First thing I'd like to highlight is originations, which grew in both refinance and in-school products. Combined originations were up by more than 60% versus the same quarter of 2025 to $815 million in total. The second item, operating expenses, which were 18% lower than they were in Q2 of last year. The rapid growth in our private loan originations in the current quarter was principally due to increased demand for student loan refinancing. In the second half of this year, we expect also to have demand for our in-school products, which will increase significantly as well, partly due to seasonality and partly to changes in government policy and graduate education lending.

Looking a bit further ahead, as we complete the testing phase of our new personal loan products, we can foresee additional demand growth for them in 2027 and beyond. With respect to the capital allocation that I mentioned earlier, with this level of growth in originations, we think it now makes sense to consider redeploying some of the capital from our large portfolio of private legacy loans into the more strategically important product areas that we're now focusing on. Our legacy private loan portfolio is around $5.4 billion, and it's profitable. We don't make those type of loans anymore, so they really don't help us strategically, and their gradual decline in balances doesn't fit with our growth objectives.

At the end of Q2, we classified $528 million or just under 10% of these legacy loans as held for sale. We may consider reclassifying more of them in the future. The reclassification released $19 million in allowance for losses related to these loans, which we essentially reallocated back to the balance of the loan portfolio. We also made a change related to our in-school products, both graduate and undergraduate. Beginning in Q3, we'll be accounting for newly originated in-school loans at fair value. The loans we originated in Q2 and earlier are unaffected and will continue to be accounted for at amortized cost versus the reserve. Essentially all of these future originations are intended to be securitized or sold, we believe the fair value will represent the economic impact of these products on our financial position better.

Steve will be taking you through the slide presentations. At this point, I'll turn it over to you.

Thank you, Ed. I appreciate everyone joining us for today's call. In the second quarter, we delivered strong business performance and solid financial results and took steps to better position the company around today's lending products. I'll provide additional detail on the quarter starting with slide four. Core earnings per share were $0.29 for the quarter. Our results included several significant items: a $12 million realized gain on an investment, partially offset by a $3 million loss resulting from the call of a FFELP securitization trust, and $4 million of regulatory and restructuring expenses. In total, these items contributed a net $0.04 to second quarter results. We also recorded provision of $26 million in the quarter, which I'll cover in more detail when we review the allowance. Moving to slide five, Earnest continues to drive sustained demand and originations growth in our refinance products.

Rate check and origination volume were both up over 60% compared to a year ago. The $735 million of originations in the quarter brings year-to-date originations above $1.5 billion, keeping us on pace with our 2026 origination volume outlook. Credit quality also remains strong with weighted average FICO on new refinance originations at 774 and roughly 60% of our volume coming from borrowers with graduate degrees. In addition to improving operating leverage from higher volume, we also saw lower cost of acquisition year-over-year. Slide six covers in-school lending. We originated $80 million of volume in the quarter, up 40% from the same period last year. That momentum has continued in recent weeks with year-over-year growth rates continuing to build as we move through peak season and serve borrowers and schools in the expanded graduate school market.

Importantly, we are achieving this growth while also improving efficiency year-over-year. As Ed mentioned, we have elected the fair value option for in-school loans originated after June 30th, 2026. Under this accounting model, we will record these loans at fair value on our balance sheet with no CECL allowance or provision. Under the prior model, in-school originations in the back half of the year would have resulted in additional provision expense in 2026. The fair value option better aligns the accounting with how we manage and evaluate these loans while also removing that near-term provision impact. Slide seven summarizes our consumer lending segment results for the second quarter. Net income was $27 million compared with $26 million a year ago. These results included a $6 million year-over-year increase in expenses, primarily reflecting marketing and origination-related costs associated with higher volume.

Even with that higher spend, our lending efficiency metrics continue to improve as we scale and optimize our strategies. Turning to credit, private delinquency rates improved modestly in the second quarter. Private charge-off rates decreased from 1.9% in the first quarter to 1.8% in the second quarter. Delinquencies also improved, with 31-plus rates declining from 5.5%, 5.4%, and 91-plus rates declining from 2.5% to 2.4%. Let's move to slide eight and the allowance for loan losses. We recorded $26 million of provision in the second quarter, with $8 million related to FFELP and $18 million related to the private loan portfolio. The private provision had three components. First, we recorded $14 million of provision associated with second quarter originations. The second component relates to the $528 million of legacy loans that we classified as held for sale at the end of the second quarter.