Good day and welcome to the Navient First Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this call may be recorded. I would like to turn the call over to Jen Earyes, Vice President of Investor Relations. Please go ahead.

Hello, good morning, and welcome to Navient's earnings call for the first quarter of 2024. With me today are David Yowan, Navient CEO, and Joe Fisher, Navient CFO. After their prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, 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 this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. 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, adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures, and the reconciliation of core earnings to GAAP results can be found beginning on Page 15 of Navient's first quarter 2024 earnings release, which is posted on our website. Thank you. And I now will turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. Let me begin by providing an update on our progress against the 3 strategic actions we announced in January. We've begun to implement these actions and have made significant progress in a short period of time to deliver on the overall expense reductions, within the timelines we described during our Q4 earnings call. As a reminder, the 3 strategic actions we're pursuing are, 1, adopting a variable cost outsourced servicing model, 2, exploring strategic options for the business processing division, including divestiture, and 3, streamlining shared services infrastructure and corporate footprint. These actions are intended to significantly reduce the expense base and simplify the company. They should increase the amount of net cash flows from our loan portfolios and increase the visibility in returns around growth initiatives. First, we've begun to implement a variable costs servicing model to an outsourcing relationship with MOHELA. We have identified and notified nearly 900 colleagues, who will be transferred to MOHELA. These include frontline servicing colleagues, as well as colleagues in shared service and corporate functions. We expect these employee transitions to begin during the current quarter and to finish up in July. We're also well underway on plans to transfer several proprietary and customized technology tools and solutions to MOHELA. These add-on systems will maintain automations and other efficiencies. Fortunately, since MOHELA uses the same third-party loan servicing platform as Navient, there's no need for a loan system conversion, which helps ensure borrowers will have a seamless servicing experience during the transition. We've prepared a multi-stage communication strategy designed to educate borrowers in advance of the transition and to help them know what to expect when the shift occurs this fall. We're on track to reach…

Thank you, Dave, and everyone on today's call for your interest in Navient. During my prepared remarks, I will review the first quarter results for 2024 and provide updated guidance underlying our outlook for the remainder of the year. In the first quarter, we reported GAAP EPS of $0.64. On a core basis, we delivered first quarter EPS of $0.47. The $0.47 includes a $0.16 reduction to EPS related to significant items in the quarter. The first of these items relates to an increase in our accrual by $12 million in connection with the CFPB litigation as we continue to explore a solution that is acceptable to all stakeholders. The second of these items is associated with changes in federal student loan policy that were effective in the second half of last year, which continue to drive elevated prepayments within our FFELP portfolio. I'll provide additional detail on the Federal Education Loan segment on Slides 5 and 6. Our original guidance for net interest margin of low 70s included the higher rate environment that we experienced in corresponding decline in floor income and assumed a return to more normalized prepayment rates. As expected, the decline in floor hedges reduced FFELP NIM by 17 basis points compared to the fourth quarter. We do not anticipate earning a significant amount of floor income in the current rate environment. From a credit perspective, compared to the prior year, our greater than 90-day delinquency rates improved to 6.6% from 7.9%. The charge-off rate improved to 13 basis points from 22 basis points, and forbearances improved to 16% from 16.9%. We encourage borrowers who are experiencing or have historically experienced difficulty repaying their loans to take advantage of the recent programs and policy actions. In order to take advantage of the majority of these programs,…

[Operator Instructions] Our first question comes from Sanjay Sakhrani with KBW.

This is actually Steven Kwok filling in for Sanjay. The first question I just had was around the updated guidance. You mentioned that the FFELP NIM was the primary driver. Can you just walk us through what the updated NIM expectations are? And how we should think about the trajectory for the remainder of the year?

So the way I think about it is we provided a updated guidance at the beginning of the year of low 70s. The primary driver of this quarter's miss is the just pre-pay -- the extended programs that we've seen and policy changes that have occurred that have led to elevated prepayments. We are expecting that to continue throughout the remainder of the year. That'll create what I would do as a 15 basis point drag. And that's where that low or that mid to low 50s comes in. And that is primarily driven from non-cash items, such as deferred financing fees, as well as the accelerated premiums. So I would just assume that that is fairly stable throughout the remainder of the year. And if there's changes in that policy, that could certainly impact different quarters, but we're assuming a straight line from this first quarter all the way to the end of the year.

That's definitely very helpful. And then just an update around the recent developments related to the CFPB matters, if you could provide some additional colors, given that the last couple of quarters you've been taking in an accrual for it.

Yes, Steven. It's David Yowan. Those that accrual this quarter, the $12 million, which approximates $0.08, just reflects the developments in the discussions that we're having with the CFPB. We've not gone any farther than that, and I'm not going to go any farther than that at this time.

[Operator Instructions] Our next question comes from Melissa Wedel with JPMorgan.

I'm Melissa on for Rick today. I wanted to better understand any potential impact on NIM. I think you covered it well on the FFELP side, the impact of the prepayment activity. Should we be thinking about the consumer lending NIM as being relatively unaffected? Because that is sort of focused on the FFELP program in particular. So should the low 300 bp NIM on consumer lending kind of hold in place versus what we talked about last quarter?

That's correct. We did not change our guidance as it related to the consumer lending NIM. And we would assume that that remains in the low 300s throughout the remainder of the year.

Okay. Thanks for confirming that. And then on the business processing side, guidance was for high teens EBITDA margin at 11% in the first quarter, that assumes a pretty steady ramp through the remainder of the year. How are you thinking about that? Is there any seasonality we should be factoring in?

There is some seasonality in the first quarter. As we saw, if you look at a year ago, we were at 7%. This quarter, we are at 11% EBITDA margins. That typically kicks up in the remainder of the year, and we would assume that occurs here as well. That's primarily driven just by compensation timing. We also saw a little bit of lag billing revenue on the health care side. And so we would anticipate that those EBITDA margins would increase throughout the year as it -- versus the first quarter.

Okay. But high teens for the full year still stands?

That is still our target, yes.

There are no further questions at this time. I'd like to turn the call back over to Jen Earyes for closing remarks.

Thanks, Michelle. For everybody on the call, if you have any follow-up questions, please just contact me. We'd like to thank everyone for joining on today's call. This concludes today's call.

Thank you for your participation. You may now disconnect. Everyone, have a great day.