Prepared remarks
Good day, and welcome to the Navient Second Quarter 2026 Earnings Conference Call. This call is being recorded. Operator provided instructions. At this time, I will turn the call over to Roger Yankoupe, Navient's Treasurer and Head of Investor Relations. Please go ahead.
Hello. Good afternoon, and welcome to Navient's earnings call for the second quarter of 2026. Joining me today are Ed Bramson, Navient's 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. And I will now turn the call over to Ed.
Thank you, Roger, and thank you to everyone for joining the call today. Before turning to the results themselves, I want to express our thanks to David Yowan, our predecessor 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 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, and I'll highlight a few of these benefits later in my remarks. As you have seen from the release, Navient's 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 the upfront expense from electing to call a FFELP securitization trust. The net impact of those items was a benefit of about $0.04 per share. So 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 in 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 was 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 in 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 is profitable. But we don't make those type of loans anymore, so they really don't help us strategically and the gradual decline in balances doesn't fit with our growth objectives. As a result, at the end of Q2, we classified $528 million or just under 10% of these legacy loans as held for sale, and we may consider reclassifying more of them in the future. The reclassification resulted in the release of at least $19 million of allowance for losses related to these loans, which we've essentially reallocated back to the balance of the loan portfolio. We've also made a change that relates to our in-school products, both graduate and undergraduate. Beginning in Q3, we will 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 less the CECL reserve. Since 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 measure. Steve will be taking you through the slide presentation. 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 4. 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 5. Earnest continues to drive sustained demand and originations growth in our refinance product. 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 6 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 30, 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 7 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 rate 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% to 5.4% and 91-plus rates declining from 2.5% to 2.4%. Let's move to Slide 8 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, consistent with our broader effort to align the balance sheet with today's lending products. We recognized a $19 million provision benefit from releasing the allowance associated with those loans. The third component is a $23 million reserve build on the remaining private portfolio. While private credit performance continued to improve in the second quarter, the pace of improvement moderated as the quarter progressed. Given those trends and the broader macroeconomic environment, the build reflects our current view of lifetime loss expectations across the remaining private portfolio as we continue to monitor performance. Slide 9 summarizes the results of our Federal Education Loan segment. Net income was $26 million compared with $30 million a year ago. As expected, net interest income and operating expenses both declined as the FFELP portfolio continued to pay down. Second quarter results also reflect the acceleration of $3 million of interest expense from the call of a securitization trust. While that reduced earnings in the quarter, the trust call is expected to lower interest expense in future periods and provide additional liquidity. FFELP credit trends continue to normalize as disaster forbearance-related activity subsided. FFELP charge-off rates improved from 29 basis points in the first quarter to 18 basis points in the second quarter, and 91-plus delinquency rates declined to 8.0%, which is 50 basis points better than last quarter and more than 200 basis points lower than the year ago quarter. Expense results are on Slide 10. Total expenses in the second quarter were $85 million compared with $100 million in the second quarter of 2025. Year-to-date operating expenses, excluding regulatory and restructuring expenses were $167 million. We remain on pace for our full year operating expense outlook of $350 million or lower. Capital and financing activity are highlighted on Slide 11. During the quarter, we completed our first in-school securitization of the year and our second refinance loan securitization. We continue to see strong investor demand for our recently originated refinance and in-school loans, and we are achieving attractive pricing and advance rates on these securitizations. We also issued $500 million of unsecured debt while retiring approximately $500 million of unsecured bonds at maturity. We continue to have ample capacity to invest in attractive loan originations while maintaining balance sheet flexibility. In the second quarter, we returned $17 million to shareholders through dividends and share repurchases. In summary, the second quarter continued our solid start to the year and reflected the progress we are making in positioning the company around today's lending products and future growth. The fair value option for new in-school originations and the held-for-sale classification of a portion of the legacy private portfolio both support that strategic direction. We enter the back half of the year with strong lending activity and are encouraged about both our sustained refinance growth and our ability to compete in the expanded graduate in-school lending market. We remain focused on executing with discipline as we build from that position. Before we move to Q&A, I want to thank the Navient team for their continued focus and contributions throughout the quarter. We appreciate your time, and we'll now open the call for questions.
Questions and answers
Operator provided instructions. We'll take our first question from Bill Ryan with Seaport Research Partners.
Also glad to see you adopt fair value accounting. I know we've had discussions about that over the past year. If you can talk about the fair value side looking forward in terms of your loan sales and if you're talking about doing some loan sales through ABS, some to investors and maybe some on the balance sheet, could you give us some idea of what the mix you anticipate will look like going forward? And as it relates to the fair value accounting itself, what the initial economics might look like relative to where the CECL charge is today on the loans?
Yes. I'll cover the back half of that first. In terms of the economics from the adoption of the fair value option, the way to look at that for our in-school product, given our lending mix over the past six to twelve months between graduate and undergraduate and the overall mix of the loans that we've been generating, we've been at a net reserve rate in the low to mid-3% range. So when you think about the provision, that's the reserve rate applied against volume expectations. Our expectations for the full year on the in-school side were for 50% growth, and that was on a base of $401 million from last year. So if you look at that, that would put it just above $600 million for the year. We've done $120 million through the first half of the year. So around $480 million or so of originations would be in our outlook, which is still on track, and you can use that along with the net reserve rate in order to estimate the impact above and beyond what our original outlook was for EPS for the year.
Okay. And just quickly on that question on the initial fair value mark, obviously, the CECL is going away. Will the initial fair value mark be in positive territory? I assume it is given the duration of the loans?
Yes, we feel good about the valuation. Of course, the exact number of the valuation will depend upon the loans that we're generating as we speak here in the third quarter. So it's to be determined in terms of exactly where that comes out. We'll be looking forward to providing that information when we close out the third quarter and share results on the next call.
Okay. And then going back to the first part of that question: the thought process between what you might be securitizing versus loan sales versus retaining on the balance sheet? Will the securitization structures change in any way to be off balance sheet or will they still be on balance sheet?
I think our expectation would be similar or the same structure in terms of securitizations and how we structure them on balance sheet. In terms of how much we would be retaining on our balance sheet versus selling or securitizing, that depends on the general economics of the deals in question and what we see on a deal-by-deal basis. We have experience across all of those different options. So there's not a change in direction right now, but we remain open to whatever avenue makes the most economic and strategic sense for us.
Just to add to that, specifically with relation to in-school, the volumes we've had have been relatively small. So your options on what to do with them are somewhat limited. That's why sales via ABS is our approach currently. As you start to get more volume, you might start to look to do complete sales. For right now, I would look at it as essentially all going to be securitized in the short run.
Operator provided instructions. We'll take our next question from Moshe Orenbuch with TD Cowen.
I was hoping we could get a little more detail on that $23 million reserve increase in the private loan portfolio. Is that primarily on the newer loans that you've been making? Is it on the older legacy loans that you just took a $19 million release on? Which ones are those?
Yes, it's a mix, but primarily on the legacy private loans. When Ed referred to the $5.5 billion balance representing our legacy portfolio, that's where the bulk of the adjustment is. The way we're thinking about that $23 million is that charge-offs and delinquency rates in the quarter, while they improved, the pace of improvement moderated as the quarter progressed. We saw a lot of improvement from fourth quarter to first quarter and some improvement in early second quarter, but that started flattening. In light of that, it made sense for us to address the uncertainty by booking this additional reserve build. It primarily relates to the legacy portfolio.
So they improved but not as much as you expected, is that what you're saying?
That's exactly right. We're operating at a level that is somewhat elevated compared to longer-term historical norms. We expect continued improvement, which will put us more in line with those historical norms. The pace of improvement during the quarter was a bit shy of what we expected, so we provided accordingly.
But the loans that you chose to classify as held for sale, you picked those to be better than the ones that are still on the balance sheet. Is that a fair understanding?
I'd say not really. It's a discrete portfolio within that legacy portfolio that we are evaluating and have the intent to sell. When we made that determination, the reserve gets released for that portfolio, while the reserve build is for the remainder of the portfolio. So they're independent items, although both relate to the legacy loan portfolio in general.
An additional point is that a lot of the overall portfolio is securitized, and some of that has a risk retention requirement that makes it more difficult to sell. This particular portfolio did not have that, so that's a reason for selecting it.
Got it. And then as we think about the refinance market and your cost of funds, interest rates have been rising somewhat. As you think about the second half of the year, you mentioned demand is strong. How should we think about the spread on those loans?
It's not an ideal period for spreads at the moment because rates are higher. However, we're gaining share and want to continue doing that. Net interest margin isn't the same as you get on other products, but losses are lower on these loans as well. We're thinking the second half will probably be similar to the first half overall.
Got it. And given these changes, more originations and other things going on, I noticed that buyback was relatively low in Q2. Should we think about that level for the back half of the year, or is there something unusual in Q2?
I'll let Steve take the finance detail, but two points: first, if you're going to grow at the rates we're growing, you need to think about how to provide capital. Second, for a large part of the quarter, we're buying under a 10b5-1 plan. If you set the numbers where we did, we may not buy shares under that plan. So I wouldn't read too much into this quarter.
We have a $100 million authorization for the year, and I believe around $75 million to $76 million remaining. The second quarter was certainly lower than the first quarter on repurchases. We have capacity to do more share repurchases as conditions warrant in the back half of the year.
Operator provided instructions. We have a follow-up from Bill Ryan with Seaport Research Partners.
Just a couple of follow-ups. On the $23 million on the private portfolio legacy portfolio, do you feel based on what you know today that you're fully trued up on the reserve level on the private portfolio? Second, could you talk about what you expect your capital requirements to be in terms of your adjusted tangible equity ratio going forward?
On the loan loss reserve, we go through a thorough process every quarter evaluating trends, portfolio composition, macroeconomics, et cetera. We feel good about where we ended up at the quarter, but there's always uncertainty, and we'll continue to evaluate the reserve as we move into the third and fourth quarters. Regarding the adjusted tangible equity ratio, you can see we went up slightly from about 8.9% to 9% during the quarter. We've been managing that at a level of 8% or above. So being in that 8% to 9% range is a reasonable expectation going forward.
It appears we have no further questions at this time. I will turn the floor back to Roger Yankoupe for closing remarks.
Thanks. Thank you for joining today's call and for your continued interest in Navient. If you have any follow-up questions, please contact me or Mike Andrews. We look forward to speaking with you again next quarter. Thank you.
This concludes today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.