Navient(NAVI) - 2022 Q2 - Quarterly Report

Business Navient's core business encompasses federal and private education loan management, alongside business processing solutions Overview and Fundamentals of Our Business Navient operates in three main areas: Federal Education Loans, Consumer Lending, and Business Processing - Navient's business is composed of three core areas: Federal Education Loans, Consumer Lending, and Business Processing solutions[19] Loan Portfolio Overview (as of Q2 2022) | Loan Type | Portfolio Size | Key Activities | | :--- | :--- | :--- | | Federal Education Loans (FFELP) | $49.2 billion | Servicing and asset recovery | | Consumer Lending (Private) | $19.7 billion | Owning, servicing, and originating. Originated $420 million in Q2 2022 | - The Business Processing segment provides solutions for over 600 public sector and healthcare organizations, focusing on omnichannel communication, machine learning, and secure cloud computing[22] Capital Return Summary (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Shares Repurchased (millions) | 6.9 | 11.8 | | Total Repurchases | $105 million | $200 million | | Dividends Paid | $23 million | $27 million | | Total Capital Returned | $128 million | $227 million | | Adjusted Tangible Equity Ratio | 7.5% | 6.3% | - As of June 30, 2022, $780 million remained under the company's $1 billion share repurchase authorization approved in December 2021[30] How We Organize Our Business Navient's operations are structured into three primary segments: Federal Education Loans, Consumer Lending, and Business Processing - The company operates through three main segments: Federal Education Loans, Consumer Lending, and Business Processing[33] - Federal Education Loans: Owns, services, and performs asset recovery on a portfolio of FFELP Loans[34] - Consumer Lending: Owns, originates, acquires, and services private education loans, including refinance and in-school loans[35] - Business Processing: Provides services to government and healthcare clients, including revenue cycle outsourcing and support for state agencies and municipalities[36] - Other: Includes the corporate liquidity portfolio, debt repurchase gains/losses, and unallocated corporate expenses[37] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive analysis of Navient's financial performance, condition, and liquidity, including segment results Selected Historical Financial Information and Ratios This section provides a comparative overview of key financial metrics on both GAAP and Core Earnings bases GAAP Basis Financial Highlights | Metric (in millions, except per share) | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $180 | $185 | $435 | $555 | | Diluted EPS | $1.22 | $1.05 | $2.90 | $3.08 | Core Earnings Basis Financial Highlights | Metric (in millions, except per share) | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $134 | $165 | $269 | $469 | | Diluted EPS | $0.91 | $0.94 | $1.79 | $2.61 | Education Loan Portfolio (Net, End of Period) | Portfolio (in millions) | June 30, 2022 | June 30, 2021 | | :--- | :--- | :--- | | FFELP Loans | $49,214 | $55,550 | | Private Education Loans | $19,668 | $19,725 | | Total Education Loans | $68,882 | $75,275 | The Quarter in Review Navient reported Q2 2022 GAAP net income of $180 million and Core Earnings net income of $134 million, highlighting key operational achievements Q2 2022 vs Q2 2021 Performance Summary | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | GAAP Net Income | $180M | $185M | | GAAP Diluted EPS | $1.22 | $1.05 | | Core Earnings Net Income | $134M | $165M | | Core Earnings Diluted EPS | $0.91 | $0.94 | - Key operational highlights for Q2 2022 include: - Federal Education Loans: Net interest margin of 1.11% - Consumer Lending: Originated $420 million of Private Education Loans - Business Processing: Generated EBITDA of $14 million - Capital Return: Repurchased $105 million of common shares and paid $23 million in dividends[42] Navient's Response to COVID-19 The company acknowledges the ongoing and unpredictable impact of the COVID-19 pandemic on its business operations - The COVID-19 pandemic continues to be dynamic and unpredictable, affecting business operations throughout 2021 and the first half of 2022[43] - The future direct and indirect impact of the pandemic on the company's business, results, and financial condition remains uncertain, with potential for adverse effects if economic conditions deteriorate or the pandemic worsens[43] Results of Operations This section details the company's GAAP financial performance, comparing Q2 and YTD 2022 results against prior periods Comparison of Second-Quarter 2022 Results with Second-Quarter 2021 GAAP net income was $180 million in Q2 2022, slightly down from $185 million in Q2 2021 - Servicing revenue decreased by $33 million, primarily due to the transfer of the Department of Education (ED) servicing contract in October 2021[48] - Asset recovery and business processing revenue fell by $54 million, mainly from a $43 million decrease in the Business Processing segment as pandemic-related contracts wound down[48] - Operating expenses decreased by $56 million (excluding regulatory expenses), largely related to the transfer of the Department of Education (ED) servicing contract and lower Business Processing segment revenue[48] - Provision for loan losses increased by $19 million, from a negative provision of $(1) million in Q2 2021 to a provision of $18 million in Q2 2022[46][48] - Average outstanding diluted shares decreased by 16% year-over-year due to share repurchases, contributing to the rise in diluted EPS despite a slight drop in net income[47] Comparison of Six Months Ended June 30, 2022 Results with Six Months Ended June 30, 2021 GAAP net income for the first six months of 2022 was $435 million, down from $555 million in the prior-year period - Net interest income decreased by $27 million, impacted by the natural paydown of loan portfolios and the $1.6 billion private loan sale in Q1 2021[51] - Provision for loan losses increased by $122 million year-over-year. The 2021 period included a significant reversal of allowance related to a $1.6 billion loan sale[49][51] - Gains on sales of loans decreased by $78 million, as there were no loan sales in the first half of 2022, compared to a large sale in Q1 2021[51] - Operating expenses (excluding regulatory costs) decreased by $102 million, mainly due to the transfer of the Department of Education (ED) servicing contract and lower Business Processing revenue[51] Segment Results This section provides a detailed performance analysis of Navient's four operating segments on a Core Earnings basis Federal Education Loans Segment The Federal Education Loans segment reported Q2 2022 Core Earnings net income of $110 million, slightly down from $113 million Federal Education Loans Segment Performance (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income (Core) | $110M | $113M | | Net Interest Margin | 1.11% | 0.97% | | >30-day Delinquency Rate | 15.9% | 8.3% | | Charge-off Rate | 0.09% | 0.04% | | Ending FFELP Loans, net | $49.2B | $55.6B | - Servicing revenue decreased by $33 million due to the transfer of the Department of Education (ED) servicing contract in October 2021. Servicing revenue from this contract was $0 in Q2 2022 compared to $34 million in Q2 2021[63][64] - The portfolio of education loans eligible to earn unhedged Floor Income was $13.8 billion as of June 30, 2022, down from $15.9 billion a year prior[61] Consumer Lending Segment The Consumer Lending segment generated Q2 2022 Core Earnings net income of $71 million, down from $96 million Consumer Lending Segment Performance (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income (Core) | $71M | $96M | | Private Education Loan Originations | $420M | $1.3B | | Net Interest Margin | 2.66% | 2.95% | | Provision for Loan Losses | $18M | $(1)M | | >90-day Delinquency Rate | 2.0% | 1.0% | | Charge-off Rate | 1.40% | 0.71% | - The provision for loan losses increased by $19 million, with the current period including $11 million for increased expected losses on the overall portfolio as loans returned to repayment after pandemic relief[72][77] - The net interest margin decreased from 2.95% to 2.66% year-over-year, primarily because the higher-quality, lower-yielding refinance loan portfolio now constitutes a larger percentage of the total portfolio[72][75] Business Processing Segment The Business Processing segment reported Q2 2022 Core Earnings net income of $10 million, significantly down from $29 million Business Processing Segment Performance (Q2 2022 vs Q2 2021) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Income (Core) | $10M | $29M | | Total Revenue | $87M | $130M | | EBITDA | $14M | $40M | | EBITDA Margin | 16% | 30% | - The $43 million revenue decrease was primarily driven by the expected wind-down of pandemic-related contracts, which accounted for a $46 million reduction[84] Other Segment The Other segment recorded a Q2 2022 Core Earnings net loss of $57 million, an improvement from a $73 million loss - The net loss narrowed to $57 million from $73 million in the prior-year quarter[86] - Losses on debt repurchases decreased by $12 million, as there were no repurchases in Q2 2022 compared to $692 million of debt repurchased at a loss in Q2 2021[88] - Unallocated shared services expenses, excluding regulatory costs, decreased by $4 million from the year-ago quarter[89] Financial Condition This section details the composition and performance of Navient's education loan portfolio Summary of Our Education Loan Portfolio As of June 30, 2022, Navient's total net education loan portfolio was $68.9 billion, comprising FFELP and Private Education Loans Ending Education Loan Balances, Net (in millions) | Loan Type | June 30, 2022 | Dec 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | FFELP Loans | $49,214 | $52,641 | $55,550 | | Private Education Loans | $19,668 | $20,171 | $19,725 | | Total Portfolio | $68,882 | $72,812 | $75,275 | - In Q2 2022, the company originated and purchased $425 million in Private Education Loans, while repayments and consolidations across the entire portfolio totaled approximately $3.0 billion[97] FFELP Loan Portfolio Performance As of June 30, 2022, 83.2% of the FFELP portfolio was in repayment FFELP Loan Performance Metrics | Metric | June 30, 2022 | June 30, 2021 | | :--- | :--- | :--- | | % of Loans in Repayment | 83.2% | 82.1% | | Delinquency % of Loans in Repayment | 15.9% | 8.3% | | Forbearance % of Loans in Repayment & Forbearance | 13.1% | 13.9% | Private Education Loan Portfolio Performance As of June 30, 2022, 96.8% of the Private Education Loan portfolio was in repayment Private Education Loan Performance Metrics | Metric | June 30, 2022 | June 30, 2021 | | :--- | :--- | :--- | | % of Loans in Repayment | 96.8% | 95.1% | | Delinquency % of Loans in Repayment | 4.1% | 2.6% | | Forbearance % of Loans in Repayment & Forbearance | 1.5% | 3.0% | Allowance for Loan Losses The total provision for loan losses for Q2 2022 was $18 million, primarily for the Private Education Loan portfolio Allowance for Loan Losses Activity (Q2 2022 vs Q2 2021) | Metric (in millions) | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Total Provision | $18 | $(1) | | Total Charge-offs | $80 | $40 | | Allowance at End of Period | $1,166 | $1,253 | - For Private Education Loans, the charge-off rate (annualized) increased to 1.40% in Q2 2022 from 0.71% in Q2 2021[106] Liquidity and Capital Resources Navient maintains a strong liquidity position to service debt and fund operations Sources of Primary Liquidity (Ending Balances, in millions) | Source | June 30, 2022 | Dec 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total unrestricted cash and liquid investments | $976 | $905 | $1,453 | | Unencumbered FFELP Loans | $89 | $124 | $309 | | Unencumbered Private Education Refinance Loans | $42 | $383 | $574 | | Total | $1,107 | $1,412 | $2,336 | - Additional liquidity is available through secured credit facilities, with total available capacity of $2.37 billion as of June 30, 2022[122][123] - The company has $7.0 billion in total unsecured debt as of June 30, 2022, with $1.0 billion maturing in the next 12 months[117][118][127] Total Borrowings (Ending Balances, in millions) | Borrowing Type | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Unsecured Borrowings | $7,005 | $7,014 | | Secured Borrowings | $65,703 | $69,707 | | Total GAAP Borrowings | $72,347 | $76,978 | Critical Accounting Policies and Estimates Management confirms critical accounting policies are consistent with the 2021 Form 10-K, with no material Q2 2022 economic impact - The company's critical accounting policies remain consistent with its 2021 Form 10-K[128] - Management assessed the potential negative economic impacts from inflation, interest rates, and the war in Ukraine on its critical accounting policies and concluded there was no material impact in Q2 2022[128] Non-GAAP Financial Measures Navient utilizes non-GAAP financial measures like Core Earnings, Adjusted Tangible Equity Ratio, and EBITDA to evaluate its business - The company uses non-GAAP measures, primarily 'Core Earnings', to manage its business segments and evaluate performance internally[130] - Core Earnings adjusts GAAP results by excluding: 1. Mark-to-market gains/losses from derivative instruments that do not qualify for hedge accounting 2. The accounting impact of goodwill and acquired intangible assets (impairment and amortization)[132] Reconciliation of Core Earnings to GAAP Net Income (Q2 2022) | Description (in millions) | Amount | | :--- | :--- | | Core Earnings net income | $134 | | Net impact of derivative accounting | $72 | | Net impact of goodwill and acquired intangible assets | $(3) | | Net income tax effect | $(23) | | GAAP net income | $180 | Adjusted Tangible Equity Ratio Calculation | Metric | June 30, 2022 | June 30, 2021 | | :--- | :--- | :--- | | Adjusted Tangible Equity | $1,963M | $1,697M | | Adjusted Tangible Assets | $26,133M | $27,072M | | Adjusted Tangible Equity Ratio | 7.5% | 6.3% | Legal Proceedings Navient is involved in various legal proceedings and regulatory matters - In January 2022, Navient settled with 40 State Attorneys General, agreeing to cancel approximately $1.7 billion in defaulted private education loan balances and pay $145 million to the states[342] - The settlement with the State Attorneys General does not resolve the ongoing litigation with the Consumer Financial Protection Bureau (CFPB)[342] - The company believes the CFPB's allegations are false but acknowledges a loss is reasonably possible. However, it cannot estimate a range of potential exposure and has not established reserves for this matter[345] Risk Factors This section updates and restates key risk factors from the 2021 Form 10-K - Loan prepayment rates pose a material risk, as they can be significantly influenced by government actions such as debt forgiveness programs, which could adversely impact profitability[167][168][169] - Changes in interest rates and capital market volatility affect funding costs and availability. Rising rates and inflation may also negatively impact demand for Private Education Loans[175] - The company faces significant risks from breaches of its information technology systems, including unauthorized access and cyber-attacks, which could lead to financial losses and reputational damage[176] - Persistent inflation, as experienced in the first half of 2022, could significantly increase ongoing operating costs and reduce net income[179] Quantitative and Qualitative Disclosures about Market Risk This section details Navient's management of market risks, primarily interest rate risk and the LIBOR transition - The company is managing the transition from LIBOR to SOFR, which will be completed by June 30, 2023, aided by the federal Adjustable Interest Rate (LIBOR) Act[181][183] Interest Rate Sensitivity Analysis on Annual Earnings (as of June 30, 2022) | Scenario | Impact on Pre-Tax Income | Impact on Net Income After Taxes | | :--- | :--- | :--- | | +100 Basis Points | +$50 million | +$39 million | | -100 Basis Points | -$40 million | -$31 million | - The company's asset and liability management strategy aims to match floating-rate assets with floating-rate debt to minimize interest rate sensitivity, though some basis and repricing risk exists due to different indices and reset frequencies[194][203] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, Navient repurchased 6.9 million shares for $105 million, with $780 million remaining under authorization Share Repurchases (Q2 2022) | Metric | Value | | :--- | :--- | | Total Shares Purchased | 6.9 million | | Average Price Paid per Share | $15.26 | | Total Cost | $105 million | | Remaining Authority (as of June 30, 2022) | $780 million | Controls and Procedures Management evaluated the company's disclosure controls and procedures as of June 30, 2022, concluding they were effective - As of June 30, 2022, management concluded that the company's disclosure controls and procedures were effective[208] - No material changes occurred in the company's internal control over financial reporting during the fiscal quarter ended June 30, 2022[209] Financial Statements This section presents Navient's consolidated financial statements, including balance sheets, income statements, and cash flows Consolidated Balance Sheets The Consolidated Balance Sheets present the company's financial position as of June 30, 2022, compared to December 31, 2021 Consolidated Balance Sheet Summary (in millions) | Account | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $76,065 | $80,605 | | Total Liabilities | $73,138 | $77,997 | | Total Stockholders' Equity | $2,927 | $2,597 | Consolidated Statements of Income The Consolidated Statements of Income detail the company's revenues, expenses, and profitability for the three and six months ended June 30 Consolidated Income Statement Summary (in millions) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $321 | $322 | $658 | $685 | | Total Other Income | $134 | $176 | $357 | $480 | | Total Expenses | $193 | $259 | $405 | $528 | | Net Income | $180 | $185 | $435 | $555 | Consolidated Statements of Comprehensive Income This statement reconciles net income to total comprehensive income Comprehensive Income Summary (in millions) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $180 | $185 | $435 | $555 | | Net changes in cash flow hedges | $49 | $17 | $163 | $65 | | Total Comprehensive Income | $229 | $202 | $598 | $620 | Consolidated Statements of Changes in Stockholders' Equity These statements detail changes in stockholders' equity during the reported periods, reflecting net income, dividends, and share repurchases - For the six months ended June 30, 2022, stockholders' equity increased from $2.608 billion to $2.927 billion. Key activities included $435 million in net income, $220 million in common stock repurchases, and $47 million in common dividends paid[231] Consolidated Statements of Cash Flows This statement outlines the sources and uses of cash from operating, investing, and financing activities Cash Flow Summary (Six Months Ended June 30, in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $30 | $333 | | Net Cash from Investing Activities | $3,956 | $4,219 | | Net Cash from Financing Activities | $(4,128) | $(4,327) | | Net Change in Cash | $(142) | $225 | Notes to Consolidated Financial Statements The notes provide detailed disclosures supporting the consolidated financial statements, covering loan losses, borrowings, and segment reporting