Navient(NAVI) - 2022 Q3 - Quarterly Report

Forward-Looking and Cautionary Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties, advising readers to consult the 'Risk Factors' section - The report contains forward-looking statements based on management's current expectations, subject to various risks and uncertainties, with readers advised to review the 'Risk Factors' section[10][11] - Key risks encompass the continuing impacts of the COVID-19 pandemic, general economic conditions including persistent inflation, increased education loan defaults, funding costs, interest rate changes, and unanticipated repayment trends from new policies[10][14] Use of Non-GAAP Financial Measures Navient uses 'Core Earnings' and other non-GAAP financial measures to evaluate business segments, present financial results, and inform internal management decisions - Navient evaluates business segments and presents financial results using 'Core Earnings,' a non-GAAP financial measure, for internal management decisions and resource allocation[16] - Other non-GAAP measures include Adjusted Core Earnings, Tangible Equity, Adjusted Tangible Equity Ratio, Pro forma Adjusted Tangible Equity Ratio, Business Processing EBITDA, and Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans[17] Business Navient delivers technology-enabled education finance and business processing solutions, managing substantial FFELP and Private Education Loan portfolios while focusing on operational excellence and capital returns Overview and Fundamentals of Our Business Navient provides technology-enabled education finance and business processing solutions, managing significant FFELP and Private Education Loan portfolios with a focus on operational excellence and capital returns - Navient provides technology-enabled education finance and business processing solutions, delivering customer-focused, data-driven services to clients in education, healthcare, and government[19] Education Loan Portfolios (as of Q3 2022) | Portfolio Type | Balance ($ Billion) | Q3 2022 Originations ($ Million) | | :------------- | :------------------ | :------------------------------- | | FFELP Loans | $46.9 | N/A | | Private Education Loans | $19.2 | $447 | - Navient provides business processing solutions to approximately 500 public sector and healthcare organizations[22] - The company commits to superior operational performance, leveraging experience, data-driven insights, technology, and scale to simplify complex processes and enhance customer experience[23][25] Capital Return Highlights (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :-------------------------- | :------ | :------ | :----- | | Shares Repurchased (Million) | 6.3 | 7.0 | (0.7) | | Reduction in shares outstanding | 4% | 4% | 0% | | Total Repurchases ($ Million) | $95 | $150 | ($55) | | Dividends Paid ($ Million) | $22 | $26 | ($4) | | Total Capital Returned ($ Million) | $117 | $176 | ($59) | | Adjusted Tangible Equity Ratio | 7.8% | 6.4% | +1.4% | How We Organize Our Business Navient organizes its business into Federal Education Loans, Consumer Lending, Business Processing, and an 'Other' segment, each focusing on distinct financial services and client solutions - The Federal Education Loans segment owns and services FFELP Loans, generating revenue primarily through net interest income[33] - The Consumer Lending segment assists students and families with private education loans and refinancing products, generating revenue primarily through net interest income on its portfolio[34] - The Business Processing segment provides omnichannel contact center services, workflow processing, and revenue cycle optimization to government and healthcare clients[35] - The 'Other' segment encompasses the corporate liquidity portfolio, gains/losses on debt repurchases, and unallocated shared services expenses[35] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Navient's financial performance, highlighting a significant decline in GAAP and Core Earnings net income for Q3 2022 and a decrease in total education loan portfolios Selected Historical Financial Information and Ratios This section presents key historical financial data and ratios, showing a decline in GAAP and Core Earnings net income and diluted EPS for Q3 2022, alongside a decrease in total education loan portfolios Selected Financial Information (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change ($ Million) | Change (%) | | :---------------------------------- | :------ | :------ | :----------------- | :--------- | | GAAP Basis | | | | | | Net income | $105 | $173 | ($68) | (39)% | | Diluted EPS | $0.75 | $1.04 | ($0.29) | (28)% | | Weighted Average Shares (Million) | 141 | 167 | (26) | (16)% | | Return on assets | 0.57% | 0.86% | (0.29)% | (33.7)% | | Core Earnings Basis | | | | | | Net income | $87 | $149 | ($62) | (41.6)% | | Diluted EPS | $0.62 | $0.89 | ($0.27) | (30.3)% | | Adjusted diluted EPS | $0.75 | $0.92 | ($0.17) | (18.5)% | | Net interest margin, Federal Education Loans segment | 0.94% | 1.04% | (0.10)% | (9.6)% | | Net interest margin, Consumer Lending segment | 2.90% | 2.98% | (0.08)% | (2.7)% | | Return on assets | 0.47% | 0.73% | (0.26)% | (35.6)% | | Education Loan Portfolios (Ending, Net) | | | | | | FFELP Loans ($ Million) | $46,891 | $54,350 | ($7,459) | (13.7)% | | Private Education Loans ($ Million) | $19,151 | $20,018 | ($867) | (4.3)% | | Total Education Loans ($ Million) | $66,042 | $74,368 | ($8,326) | (11.2)% | The Quarter in Review This section reviews Q3 2022 performance, noting declines in GAAP and Core Earnings net income, segment-specific results, a 7.8% Adjusted Tangible Equity Ratio, and $95 million in share repurchases Q3 2022 vs Q3 2021 Net Income and EPS | Metric | Q3 2022 | Q3 2021 | Change ($ Million) | Change (%) | | :-------------------------- | :------ | :------ | :----------------- | :--------- | | GAAP Net Income | $105 | $173 | ($68) | (39)% | | GAAP Diluted EPS | $0.75 | $1.04 | ($0.29) | (28)% | | Core Earnings Net Income | $87 | $149 | ($62) | (41.6)% | | Core Earnings Diluted EPS | $0.62 | $0.89 | ($0.27) | (30.3)% | | Adjusted Diluted Core EPS | $0.75 | $0.92 | ($0.17) | (18.5)% | - Federal Education Loans segment net income was $94 million with a FFELP net interest margin of 0.94%[41] - Consumer Lending segment net income was $65 million, originating $447 million of Private Education Loans, with a delinquency rate of 4.4%[41] - Business Processing segment EBITDA was $13 million on $79 million revenue[41] - The Adjusted Tangible Equity Ratio was 7.8%; $95 million of common shares were repurchased, with $685 million common share repurchase authority remaining[41] Navient's Response to COVID-19 Navient prioritized employee safety and customer support during the COVID-19 pandemic, though its future impacts on business operations and financial condition remain uncertain - Navient prioritized employee safety and customer support in response to the COVID-19 pandemic[42] - The future direct and indirect impact of the pandemic on business operations, results, and financial condition remains uncertain, with potential adverse effects from deteriorating economic or public health conditions[42] Results of Operations Navient's GAAP net income significantly decreased in Q3 2022 due to lower net interest income, higher loan loss provisions, and reduced servicing revenue, partially offset by derivative gains and lower debt repurchase losses GAAP Income Statement Highlights (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Total interest income | $881 | $660 | $221 | 33% | | Total interest expense | $641 | $326 | $315 | 97% | | Net interest income | $240 | $334 | ($94) | (28)% | | Provisions for loan losses | $28 | $22 | $6 | 27% | | Net interest income after provisions | $212 | $312 | ($100) | (32)% | | Servicing revenue | $24 | $47 | ($23) | (49)% | | Asset recovery & business processing revenue | $80 | $135 | ($55) | (41)% | | Losses on debt repurchases | $0 | ($20) | $20 | (100)% | | Gains (losses) on derivative activities, net | $40 | ($5) | $45 | 900% | | Total other income | $150 | $160 | ($10) | (6)% | | Operating expenses | $194 | $248 | ($54) | (22)% | | Restructuring/other reorganization expenses | $21 | $0 | $21 | 100% | | Net income | $105 | $173 | ($68) | (39)% | | Diluted EPS | $0.75 | $1.04 | ($0.29) | (28)% | - Net interest income decreased by $94 million due to a decline in Floor Income on the FFELP portfolio, continued loan portfolio paydown, and $27 million of additional loan premium and deferred financing fee amortization from loan forgiveness plans[49] - Servicing revenue decreased $23 million primarily due to the transfer of the Department of Education (ED) servicing contract to a third party in October 2021[49] - Asset recovery and business processing revenue decreased $55 million, primarily from a $43 million decrease in the Business Processing segment due to the wind-down of pandemic-related contracts[49] - Operating expenses decreased $51 million, primarily related to the transfer of the ED servicing contract and the decline in Business Processing segment revenue[49] - Restructuring/other reorganization expenses increased by $21 million in Q3 2022, primarily due to severance-related costs and facility lease terminations[49] Segment Results This section details Navient's financial performance across its Federal Education Loans, Consumer Lending, Business Processing, and Other segments, analyzing Core Earnings, revenue, expenses, and profitability drivers Federal Education Loans Segment The Federal Education Loans segment reported $94 million net income in Q3 2022, a 23% decrease, driven by lower net interest income and servicing revenue, with the SDR Plan not materially impacting current results Federal Education Loans Segment Core Earnings (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :----------------- | :--------- | | Net income | $94 | $122 | ($28) | (23)% | | Net interest income | $120 | $151 | ($31) | (21)% | | Servicing revenue | $21 | $47 | ($26) | (55)% | | Asset recovery & business processing revenue | $1 | $13 | ($12) | (92)% | | Direct operating expenses | $25 | $53 | ($28) | (53)% | - Net interest income decreased primarily due to $27 million of additional loan premium and deferred financing fee amortization from Loan Forgiveness Plans and portfolio paydown[59] - Servicing revenue decreased $33 million primarily related to the transfer of the ED servicing contract to a third party in October 2021[59][67] FFELP Loan Performance Metrics (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :-------------------------------- | :------ | :------ | :----- | | Net interest margin | 0.94% | 1.04% | (0.10)% | | Net Charge-offs ($ Million) | $12 | $8 | $4 | | Net charge-off rate | 0.12% | 0.07% | +0.05% | | Delinquency rate (>90 days) | 10.1% | 4.3% | +5.8% | | Forbearance rate | 16.4% | 15.4% | +1.0% | | Ending FFELP Loans, Net ($ Billion) | $46.9 | $54.4 | ($7.5) | - The Student Debt Relief (SDR) Plan is not expected to materially impact Q3 accounting results, as privately held FFELP Loans do not qualify for forgiveness, and the consolidation application deadline has passed[75][76] Consumer Lending Segment The Consumer Lending segment's net income decreased 11% to $65 million in Q3 2022, driven by lower net interest income, significantly reduced private loan originations, and increased provisions for loan losses Consumer Lending Segment Core Earnings (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------------- | :------------------ | :------------------ | :----------------- | :--------- | | Net income | $65 | $73 | ($8) | (11)% | | Net interest income | $153 | $163 | ($10) | (6)% | | Provision for loan losses | $28 | $22 | $6 | 27% | | Direct operating expenses | $43 | $45 | ($2) | (4)% | - Private Education Loan originations decreased significantly to $447 million in Q3 2022 from $1.6 billion in Q3 2021, with refinance loan originations falling from $1.5 billion to $231 million[80] - Net interest income decreased primarily due to the increased proportion of higher quality, lower yielding Private Education Refinance Loans in the portfolio[80] - Provision for loan losses increased $6 million, including $15 million related to an increase in expected losses due to an anticipated deteriorating economy[80][85] Private Education Loan Performance Metrics (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :-------------------------------- | :------ | :------ | :----- | | Net interest margin | 2.90% | 2.98% | (0.08)% | | Net Charge-offs ($ Million) | $99 | $39 | $60 | | Net charge-off rate | 2.01% | 0.77% | +1.24% | | Delinquency rate (>90 days) | 2.0% | 1.1% | +0.9% | | Forbearance rate | 1.9% | 3.9% | (2.0)% | | Ending Private Education Loans, Net ($ Billion) | $19.2 | $20.0 | ($0.8) | Business Processing Segment The Business Processing segment's net income decreased 67% to $9 million in Q3 2022, with revenue declining $43 million primarily due to the wind-down of pandemic-related contracts Business Processing Segment Core Earnings (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :----------------- | :--------- | | Net income | $9 | $27 | ($18) | (67)% | | Business processing revenue | $79 | $122 | ($43) | (35)% | | Direct operating expenses | $67 | $87 | ($20) | (23)% | | EBITDA | $13 | $38 | ($25) | (66)% | | EBITDA margin | 16% | 31% | (15)% | (48.4)% | - Revenue decreased primarily due to an expected $51 million reduction from the wind-down of pandemic-related contracts, partially offset by an $8 million increase from traditional government and healthcare client services[93] Other Segment The Other segment reported an $81 million net loss in Q3 2022, primarily due to the negative carrying cost of the corporate liquidity portfolio and increased restructuring expenses Other Segment Core Earnings (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Net income (loss) | ($81) | ($73) | ($8) | 11% | | Net interest loss after provision for loan losses | ($26) | ($15) | ($11) | 73% | | Losses on debt repurchases | $0 | ($20) | $20 | (100)% | | Unallocated shared services expenses | $59 | $63 | ($4) | (6)% | | Restructuring/other reorganization expenses | $21 | $0 | $21 | 100% | - The net interest loss primarily results from the negative carrying cost of the corporate liquidity portfolio[96] - Restructuring/other reorganization expenses increased by $21 million in Q3 2022, primarily due to severance-related costs and facility lease terminations[100] Financial Condition This section details Navient's financial condition, focusing on education loan portfolio balances, activity, and credit performance metrics for FFELP and Private Education Loans, including delinquencies and allowance for loan losses Summary of Our Education Loan Portfolio As of September 30, 2022, Navient's total education loan portfolio, net of allowance for loan losses, was $66.042 billion, a decrease from $74.368 billion in September 2021 Ending Education Loan Balances, Net (as of Sep 30, 2022 vs. Sep 30, 2021) | Portfolio Type | Sep 30, 2022 ($ Million) | Sep 30, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | FFELP Loans, Net ($ Million) | $46,891 | $54,350 | ($7,459) | (13.7)% | | Private Education Loans, Net ($ Million) | $19,151 | $20,018 | ($867) | (4.3)% | | Total Education Loans, Net ($ Million) | $66,042 | $74,368 | ($8,326) | (11.2)% | Education Loan Activity For the nine months ended September 30, 2022, Navient's total education loan portfolio decreased by $6.77 billion due to refinancings, consolidations, and repayments, partially offset by originations Education Loan Activity (Nine Months Ended Sep 30, 2022) | Activity Type | Amount ($ Million) | | :------------------------------------ | :----------------- | | Beginning balance | $72,812 | | Acquisitions (originations & purchases) | $1,765 | | Capitalized interest & premium/discount amortization | $1,209 | | Refinancings & consolidations to third parties | ($4,088) | | Repayments & other | ($5,656) | | Ending balance | $66,042 | - Private Education Refinance Loan originations were $353 million for the nine months ended September 30, 2022, a significant decrease from $1.4 billion in the prior year[106] FFELP Loan Portfolio Performance As of September 30, 2022, the FFELP Loan portfolio totaled $47.124 billion, with significant increases in both overall and 90+ day delinquencies and a rise in loans in forbearance FFELP Loan Portfolio Performance (as of Sep 30, 2022 vs. Sep 30, 2021) | Metric | Sep 30, 2022 ($ Million) | Sep 30, 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------- | :--------- | | Total FFELP Loans ($ Million) | $47,124 | $54,619 | ($7,495) | (13.7)% | | Loans in Forbearance ($ Million) | $7,410 | $8,029 | ($619) | (7.7)% | | Loans in Repayment ($ Million) | $37,731 | $44,160 | ($6,429) | (14.6)% | | Delinquencies as % of loans in repayment | 18.6% | 8.5% | +10.1% | 118.8% | | Delinquencies >90 days as % of loans in repayment | 10.1% | 4.3% | +5.8% | 134.9% | | Forbearance rate (as % of repayment & forbearance) | 16.4% | 15.4% | +1.0% | 6.5% | Private Education Loan Portfolio Performance As of September 30, 2022, the Private Education Loan portfolio totaled $20.003 billion, experiencing increased delinquencies but a significant decrease in loans in forbearance Private Education Loan Portfolio Performance (as of Sep 30, 2022 vs. Sep 30, 2021) | Metric | Sep 30, 2022 ($ Million) | Sep 30, 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------- | :--------- | | Total Private Education Loans ($ Million) | $20,003 | $20,998 | ($995) | (4.7)% | | Loans in Forbearance ($ Million) | $371 | $814 | ($443) | (54.4)% | | Loans in Repayment ($ Million) | $19,284 | $19,795 | ($511) | (2.6)% | | Delinquencies as % of loans in repayment | 4.4% | 3.0% | +1.4% | 46.7% | | Delinquencies >90 days as % of loans in repayment | 2.0% | 1.1% | +0.9% | 81.8% | | Forbearance rate (as % of repayment & forbearance) | 1.9% | 3.9% | (2.0)% | (51.3)% | | Percentage of loans with a cosigner | 33% | 36% | (3)% | (8.3)% | Allowance for Loan Losses The total GAAP allowance for loan losses was $1.085 billion at September 30, 2022, with a $28 million provision and $141 million net charge-offs for Q3, and a significant increase in the Private Education Loan net charge-off rate Allowance for Loan Losses (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Beginning balance | $1,166 | $1,253 | ($87) | (6.9)% | | Total provision | $28 | $22 | $6 | 27.3% | | Net charge-offs | ($141) | ($63) | ($78) | 123.8% | | Allowance at end of period (GAAP) | $1,085 | $1,249 | ($164) | (13.1)% | | Private Education Loans Net charge-off rate (annualized) | 2.61% | 1.10% | +1.51% | 137.3% | - The net charge-off rate on defaulted Private Education Loans increased from 81.7% to 81.9% in Q3 2022, resulting in a $30 million reduction to the balance of expected future recoveries on previously fully charged-off loans[115] - The Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans (Non-GAAP) for Private Education Loans was $1.132 billion at September 30, 2022[114][183] Liquidity and Capital Resources Navient manages liquidity and capital to meet obligations, relying on diverse funding sources, including cash, unencumbered loan portfolios, operating cash flows, and securitization distributions, with capital market access influenced by credit ratings Funding and Liquidity Risk Management Navient manages liquidity risk by defining primary and secondary needs, funding through cash, unencumbered loan portfolios, and securitization distributions, with credit ratings significantly impacting capital market access - Navient's primary liquidity needs involve servicing debt and meeting operational cash requirements, while secondary needs include loan originations, acquisitions, dividends, and share repurchases[123] - Liquidity risk is the potential inability to meet obligations or invest in future growth at reasonable rates, influenced by access to capital markets and credit ratings[124] - Navient expects to fund its $1.3 billion short-term and $5.7 billion long-term senior unsecured notes through cash on hand, unencumbered loan portfolios, operating cash flows, and securitization trust distributions[126] - Navient repurchased $95 million of common stock in Q3 2022 and has $685 million of unused share repurchase authority as of September 30, 2022[127] Sources of Primary Liquidity As of September 30, 2022, Navient's total primary liquidity increased to $1.785 billion, comprising unrestricted cash, liquid investments, unencumbered FFELP Loans, and Private Education Refinance Loans Sources of Primary Liquidity (as of Sep 30, 2022 vs. Dec 31, 2021) | Metric | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------- | :--------- | | Total Unrestricted Cash and Liquid Investments ($ Million) | $1,364 | $905 | $459 | 50.7% | | Unencumbered FFELP Loans ($ Million) | $151 | $124 | $27 | 21.8% | | Unencumbered Private Education Refinance Loans ($ Million) | $270 | $383 | ($113) | (29.5)% | | Total | $1,785 | $1,412 | $373 | 26.4% | Sources of Additional Liquidity Navient holds $2.403 billion in additional borrowing capacity from secured credit facilities, alongside $4.3 billion in unencumbered tangible assets and $5.1 billion in encumbered net assets within securitization trusts Additional Borrowing Capacity from Secured Credit Facilities (as of Sep 30, 2022 vs. Sep 30, 2021) | Facility Type | Sep 30, 2022 ($ Million) | Sep 30, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | FFELP Loan ABCP Facilities ($ Million) | $200 | $184 | $16 | 8.7% | | Private Education Loan ABCP Facilities ($ Million) | $2,203 | $2,597 | ($394) | (15.2)% | | Total | $2,403 | $2,781 | ($378) | (13.6)% | - Total unencumbered tangible assets were $4.3 billion, of which $2.0 billion related to unencumbered education loans ($1.8 billion Private Education Loans and $151 million FFELP Loans)[131] - Navient had $5.1 billion of encumbered net assets (overcollateralization) in its various financing facilities[131] Borrowings As of September 30, 2022, Navient's total GAAP borrowings decreased to $69.675 billion, with unsecured debt at $7.008 billion and secured debt at $63.342 billion, while average borrowing rates increased Ending Borrowings (as of Sep 30, 2022 vs. Dec 31, 2021) | Borrowing Type | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | Unsecured Borrowings ($ Million) | $7,008 | $7,014 | ($6) | (0.1)% | | Secured Borrowings ($ Million) | $63,342 | $69,707 | ($6,365) | (9.1)% | | GAAP Basis Borrowings ($ Million) | $69,675 | $76,978 | ($7,303) | (9.5)% | Average Borrowing Rates (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 Rate | Q3 2021 Rate | Change | | :-------------------------- | :----------- | :----------- | :----- | | Senior unsecured debt | 6.08% | 4.38% | +1.70% | | FFELP Loan securitizations | 3.37% | 1.24% | +2.13% | | Private Education Loan securitizations | 2.70% | 2.34% | +0.36% | | Core Earnings basis borrowings | 3.52% | 1.75% | +1.77% | - FFELP Loan securitizations include $778 million of defaulted secured debt tranches that did not mature by their contractual dates but are expected to be paid in full between 2030 and 2035[309] Critical Accounting Policies and Estimates Navient's critical accounting policies are influenced by economic conditions, and while the current SDR Plan is not expected to materially impact Q3 2022 results, future changes could significantly affect prepayments, amortization, and goodwill impairment - Critical accounting estimates, including allowance for loan losses and goodwill impairment, consider the current and potential negative impact of historically high inflation and increased interest rates[137] - The SDR Plan is not expected to materially impact Q3 2022 accounting results, as privately held FFELP Loans do not qualify for debt forgiveness, and the consolidation application deadline has passed[140][142] - Future changes to the SDR Plan could materially impact Navient through increased prepayments, accelerating amortization of loan premiums ($419 million) and debt deferred financing fees ($328 million), and potential impairment of FFELP-related goodwill ($232 million)[141][145] Non-GAAP Financial Measures Navient uses various non-GAAP financial measures, including Core Earnings and Adjusted Core Earnings, to provide a clearer view of ongoing operations by adjusting GAAP results for derivative accounting, goodwill, and restructuring expenses - Core Earnings exclude periodic mark-to-market gains/losses on derivatives not qualifying for hedge accounting and the accounting for goodwill and acquired intangible assets, providing a useful basis to evaluate ongoing operations[150] - Adjusted Core Earnings further exclude restructuring and regulatory-related expenses to provide additional insights into performance[177] Core Earnings Adjustments to GAAP Net Income (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Core Earnings net income | $87 | $149 | ($62) | (41.6)% | | Net impact of derivative accounting | $33 | $30 | $3 | 10.0% | | Net impact of goodwill & acquired intangibles | ($10) | ($4) | ($6) | 150.0% | | Net income tax effect | ($5) | ($2) | ($3) | 150.0% | | Total Core Earnings adjustments to GAAP | $18 | $24 | ($6) | (25.0)% | | GAAP net income | $105 | $173 | ($68) | (39.3)% | - The Adjusted Tangible Equity Ratio (excluding the FFELP portfolio) was 7.8% as of September 30, 2022, up from 6.4% in September 2021[179] - EBITDA for the Business Processing segment was $13 million in Q3 2022, with an EBITDA margin of 16%[181] - The Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans for Private Education Loans was $1.132 billion at September 30, 2022, providing a more meaningful view of credit loss coverage on the non-charged-off portfolio[183][184] Legal Proceedings Navient faces various legal claims, lawsuits, and regulatory actions, including ongoing litigation with the CFPB and past settlements with State Attorneys General - Navient is subject to various legal claims, lawsuits, and regulatory actions, including class action lawsuits and inquiries from State Attorneys General and the CFPB[372][373] - The company reached tentative agreements to settle cases with 40 State Attorneys General in January 2022, resulting in total regulatory expenses of approximately $205 million (including $1.7 billion in loan cancellations and a $145 million payment to the states)[376] - The litigation involving the Company and the CFPB remains unresolved; Navient denies the allegations and is vigorously defending the case, whose outcome could have a material adverse impact[380] - Reserves for litigation and regulatory matters are established only when loss contingencies are both probable and estimable[390] Risk Factors This section outlines various risks, particularly focusing on how loan prepayments, influenced by market conditions and policy changes, can materially impact Navient's financial performance and future prospects - Prepayments on Navient's loans can materially impact profitability, results of operations, financial condition, cash flows, or future business prospects[188][189] - Prepayment rates are influenced by borrower activity, market conditions, interest rate movements, availability of alternative financings, and legislative, executive, and regulatory changes affecting the education loan market[189] - New policy initiatives, such as broad-based student loan forgiveness or programs encouraging consolidation into Direct Loans, could significantly increase prepayments on FFELP and Private Education Loans, leading to a material adverse impact[190] - If education loans within a securitization trust amortize faster than anticipated, net interest income and future cash flows may decrease; conversely, slower amortization can increase net interest income but risks an event of default if bonds are not repaid by their legal final maturity date[194] Quantitative and Qualitative Disclosures about Market Risk Navient is transitioning from LIBOR to SOFR for variable rate loans and manages market risk through asset-liability matching and derivatives, with interest rate changes impacting pre-tax net income - Navient is actively transitioning from LIBOR to SOFR, with all new variable rate Private Education Loans indexed to SOFR since December 2021[196] - The Adjustable Interest Rate (LIBOR) Act ensures that all USD LIBOR-indexed financial instruments will transition to SOFR by no later than June 30, 2023[197] Impact on Annual Earnings from 100 Basis Point Interest Rate Change (as of Sep 30, 2022) | Metric | Increase 100 Basis Points ($ Million) | Decrease 100 Basis Points ($ Million) | | :------------------------------------------ | :------------------------------------ | :------------------------------------ | | Change in pre-tax net income (before MTM) | $53 | ($38) | | Mark-to-market gains (losses) on derivatives | $22 | ($22) | | Increase (decrease) in income before taxes | $75 | ($60) | | Increase (decrease) in net income after taxes | $58 | ($46) | | Increase (decrease) in diluted EPS | $0.42 | ($0.34) | - Navient uses Floor Income Contracts, pay-fixed swaps, and fixed rate debt to economically hedge embedded floor income in FFELP loans, aiming to fix the relative spread between the asset rate and the variable rate liability[203] - The company's asset-liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or highly correlated interest rate characteristics[216] Unregistered Sales of Equity Securities and Use of Proceeds This section details Navient's common stock repurchases, including 6.3 million shares for $95 million in Q3 2022, with $685 million remaining in repurchase authority Common Stock Repurchases (Q3 2022) | Metric | Q3 2022 | | :------------------------------------------ | :------ | | Total Number of Shares Purchased (Million) | 6.3 | | Average Price Paid per Share | $15.19 | | Total Repurchases in Dollars ($ Million) | $95 | | Remaining Repurchase Authority ($ Million) | $685 | - The share repurchase program, authorizing up to $1 billion of common stock, was approved by the Board in December 2021[220] Controls and Procedures As of September 30, 2022, Navient's management concluded that the company's disclosure controls and procedures were effective - As of September 30, 2022, Navient's management concluded that the company's disclosure controls and procedures were effective[221] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2022[222] Exhibits The exhibits filed with the Form 10-Q include Sarbanes-Oxley Act certifications and various Inline XBRL documents for financial data - The exhibits filed with the Form 10-Q include certifications pursuant to the Sarbanes-Oxley Act (31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents for financial data[226] Financial Statements This section presents Navient's consolidated financial statements, including balance sheets, income statements, comprehensive income, changes in equity, cash flows, and detailed notes Consolidated Balance Sheets As of September 30, 2022, Navient's total assets decreased to $73.625 billion, total liabilities decreased to $70.652 billion, while total stockholders' equity increased to $2.973 billion Consolidated Balance Sheet Highlights (as of Sep 30, 2022 vs. Dec 31, 2021) | Metric | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :----------------------- | :----------------------- | :----------------- | :--------- | | Total Assets ($ Million) | $73,625 | $80,605 | ($6,980) | (8.7)% | | FFELP Loans, Net ($ Million) | $46,891 | $52,641 | ($5,750) | (10.9)% | | Private Education Loans, Net ($ Million) | $19,151 | $20,171 | ($1,020) | (5.1)% | | Total Liabilities ($ Million) | $70,652 | $77,997 | ($7,345) | (9.4)% | | Short-term Borrowings ($ Million) | $5,677 | $2,490 | $3,187 | 128.0% | | Long-term Borrowings ($ Million) | $63,998 | $74,488 | ($10,490) | (14.1)% | | Total Navient Corporation Stockholders' Equity ($ Million) | $2,973 | $2,597 | $376 | 14.5% | - Net assets of consolidated variable interest entities were $5.143 billion at September 30, 2022[229] Consolidated Statements of Income For Q3 2022, Navient reported $105 million net income ($0.75 diluted EPS), a decrease from Q3 2021, primarily due to lower net interest income and total other income, partially offset by reduced total expenses Consolidated Statements of Income (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Total interest income | $881 | $660 | $221 | 33.5% | | Total interest expense | $641 | $326 | $315 | 96.6% | | Net interest income | $240 | $334 | ($94) | (28.1)% | | Provisions for loan losses | $28 | $22 | $6 | 27.3% | | Total other income | $150 | $160 | ($10) | (6.3)% | | Total operating expenses | $194 | $248 | ($54) | (21.8)% | | Goodwill & acquired intangible asset impairment & amortization expense | $10 | $4 | $6 | 150.0% | | Restructuring/other reorganization expenses | $21 | $0 | $21 | 100.0% | | Net income | $105 | $173 | ($68) | (39.3)% | | Diluted earnings per common share | $0.75 | $1.04 | ($0.29) | (27.9)% | Consolidated Statements of Comprehensive Income For Q3 2022, Navient reported total comprehensive income of $159 million, a decrease from Q3 2021, comprising $105 million net income and $54 million net changes in cash flow hedges Consolidated Statements of Comprehensive Income (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Net income | $105 | $173 | ($68) | (39.3)% | | Net changes in cash flow hedges, net of taxes | $54 | $20 | $34 | 170.0% | | Total comprehensive income | $159 | $193 | ($34) | (17.6)% | Consolidated Statements of Changes in Stockholders' Equity Navient's total stockholders' equity increased to $2.973 billion at September 30, 2022, influenced by net income, other comprehensive income, dividends, stock-based compensation, and common stock repurchases Key Changes in Stockholders' Equity (Q3 2022) | Metric | Amount ($ Million) | | :------------------------------------------ | :----------------- | | Balance at June 30, 2022 | $2,927 | | Net income | $105 | | Other comprehensive income (loss), net of tax | $54 | | Cash dividends ($.16 per share) | ($22) | | Stock-based compensation expense | $4 | | Common stock repurchased | ($95) | | Balance at September 30, 2022 | $2,973 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash from operating activities significantly decreased to $98 million, while investing activities provided $6.812 billion, and financing activities used $6.576 billion, resulting in a $334 million increase in total cash Consolidated Statements of Cash Flows (Nine Months Ended Sep 30, 2022 vs. Sep 30, 2021) | Metric | 9M 2022 ($ Million) | 9M 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Net cash provided by operating activities | $98 | $534 | ($436) | (81.6)% | | Net cash provided by investing activities | $6,812 | $5,113 | $1,699 | 33.2% | | Net cash used in financing activities | ($6,576) | ($5,873) | ($703) | 12.0% | | Net increase (decrease) in cash, etc. | $334 | ($226) | $560 | 247.8% | | Cash, etc. at end of period | $3,912 | $3,311 | $601 | 18.1% | - Investing activities were significantly impacted by $8.488 billion in proceeds from payments on education loans[246] - Financing activities included $9.225 billion in repayments of borrowings collateralized by loans in trust and $315 million in common stock repurchases[246] Notes to Consolidated Financial Statements The notes to Navient's consolidated financial statements provide detailed disclosures on accounting policies, loan losses, borrowings, derivatives, equity, earnings per share, fair value, commitments, revenue, and segment reporting 1. Significant Accounting Policies Navient's unaudited consolidated financial statements adhere to GAAP, requiring management estimates, and a new ASU effective January 1, 2023, eliminates TDR recognition guidance while enhancing loan modification disclosures - The financial statements are prepared in accordance with GAAP for interim financial information, requiring management to make estimates and assumptions[250] - ASU No. 2022-02, effective January 1, 2023, eliminates TDR recognition guidance, requiring evaluation of modifications as new or continuing loans and enhancing disclosures for financially distressed borrowers[251] 2. Allowance for Loan Losses The allowance for loan losses was $1.085 billion in Q3 2022, with a $28 million provision and $141 million net charge-offs, and significant increases in Private Education Loan charge-off rates and overall delinquencies Allowance for Loan Losses (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :------------------------------------------ | :------------------ | :------------------ | :----------------- | :--------- | | Beginning balance | $1,166 | $1,253 | ($87) | (6.9)% | | Total provision | $28 | $22 | $6 | 27.3% | | Net charge-offs | ($141) | ($63) | ($78) | 123.8% | | Allowance at end of period | $1,085 | $1,249 | ($164) | (13.1)% | | Private Education Loans Net charge-off rate (annualized) | 2.61% | 1.10% | +1.51% | 137.3% | - The net charge-off rate on defaulted Private Education Loans increased from 81.7% to 81.9% in Q3 2022, resulting in a $30 million reduction to the balance of expected future recoveries[256] - The unpaid principal balance of TDR loans in an interest rate reduction program was $900 million as of September 30, 2022[275] FFELP Loan Delinquencies (as of Sep 30, 2022 vs. Sep 30, 2021) | Metric | Sep 30, 2022 | Sep 30, 2021 | Change | | :------------------------------------------ | :----------- | :----------- | :----- | | Delinquencies as % of loans in repayment | 18.6% | 8.5% | +10.1% | | Delinquencies >90 days as % of loans in repayment | 10.1% | 4.3% | +5.8% | Private Education Loan Delinquencies (as of Sep 30, 2022 vs. Sep 30, 2021) | Metric | Sep 30, 2022 | Sep 30, 2021 | Change | | :------------------------------------------ | :----------- | :----------- | :----- | | Delinquencies as % of loans in repayment | 4.4% | 3.0% | +1.4% | | Delinquencies >90 days as % of loans in repayment | 2.0% | 1.1% | +0.9% | 3. Borrowings Navient's total GAAP borrowings were $69.675 billion at September 30, 2022, consisting of $7.008 billion unsecured and $63.342 billion secured debt, including defaulted FFELP tranches expected to be paid by 2035 Total Borrowings (as of Sep 30, 2022 vs. Dec 31, 2021) | Borrowing Type | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | Unsecured Borrowings ($ Million) | $7,008 | $7,014 | ($6) | (0.1)% | | Secured Borrowings ($ Million) | $63,342 | $69,707 | ($6,365) | (9.1)% | | Total GAAP Basis Borrowings ($ Million) | $69,675 | $76,978 | ($7,303) | (9.5)% | - FFELP Loan securitizations include $778 million of defaulted secured debt tranches that did not mature by their contractual dates but are expected to be paid in full between 2030 and 2035[309] - Navient consolidated financing Variable Interest Entities (VIEs) as secured borrowings, with total debt outstanding of $62.875 billion at September 30, 2022[313][314] 4. Derivative Financial Instruments Navient uses various derivative instruments, including interest rate swaps and Floor Income Contracts, to manage risk, with net total derivatives having a fair value of ($360) million as of September 30, 2022 Fair Values of Derivative Instruments (as of Sep 30, 2022 vs. Dec 31, 2021) | Metric | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | Total Derivative Assets ($ Million) | $56 | $224 | ($168) | (75.0)% | | Total Derivative Liabilities ($ Million) | ($416) | ($260) | ($156) | 60.0% | | Net Total Derivatives ($ Million) | ($360) | ($36) | ($324) | 900.0% | Notional Values of Derivative Instruments (as of Sep 30, 2022 vs. Dec 31, 2021) | Metric | Sep 30, 2022 ($ Billion) | Dec 31, 2021 ($ Billion) | Change ($ Billion) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | Interest Rate Swaps ($ Billion) | $41.6 | $46.7 | ($5.1) | (10.9)% | | Floor Income Contracts ($ Billion) | $6.0 | $12.5 | ($6.5) | (52.0)% | | Cross-currency Interest Rate Swaps ($ Billion) | $1.9 | $2.1 | ($0.2) | (9.5)% | | Total Derivatives ($ Billion) | $49.5 | $61.3 | ($11.8) | (19.2)% | - Navient has fully collateralized its corporate derivative liability position (including accrued interest and net of premiums receivable) of $0.5 million with its counterparties at its current unsecured credit rating[332] 5. Other Assets Navient's total other assets decreased to $2.787 billion at September 30, 2022, primarily due to decreases in income tax assets, derivatives at fair value, and accounts receivable Other Assets (as of Sep 30, 2022 vs. Dec 31, 2021) | Asset Type | Sep 30, 2022 ($ Million) | Dec 31, 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :----------------------- | :----------------------- | :----------------- | :--------- | | Accrued Interest Receivable ($ Million) | $1,933 | $1,881 | $52 | 2.8% | | Income Tax Asset, Net ($ Million) | $145 | $369 | ($224) | (60.7)% | | Derivatives at Fair Value ($ Million) | $56 | $218 | ($162) | (74.3)% | | Accounts Receivable ($ Million) | $91 | $159 | ($68) | (42.8)% | | Total | $2,787 | $3,223 | ($436) | (13.5)% | 6. Stockholders' Equity Navient repurchased 6.3 million common shares for $95 million in Q3 2022, with $685 million remaining in repurchase authority, and paid $22 million in common stock dividends Common Stock Repurchases and Dividends (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :------------------------------------------ | :------ | :------ | :----- | | Common Stock Repurchased (Million Shares) | 6.3 | 7.0 | (0.7) | | Common Stock Repurchased (Dollars, $ Million) | $95 | $150 | ($55) | | Remaining Common Stock Repurchase Authority ($ Million) | $685 | $150 | $535 | | Dividends Paid ($ Million) | $22 | $26 | ($4) | | Dividends per share | $0.16 | $0.16 | $0.00 | 7. Earnings (Loss) per Common Share For Q3 2022, Navient reported basic and diluted earnings per common share of $0.75, a decrease from Q3 2021, with weighted average diluted shares decreasing to 141 million Earnings per Common Share (Q3 2022 vs. Q3 2021) | Metric | Q3 2022 | Q3 2021 | Change | | :------------------------------------------ | :------ | :------ | :----- | | Net Income ($ Million) | $105 | $173 | ($68) | | Weighted Average Shares (Basic, Million) | 139 | 165 | (26) | | Weighted Average Shares (Diluted, Million) | 141 | 167 | (26) | | Basic earnings per common share | $0.75 | $1.05 | ($0.30)| | Diluted earnings per common share | $0.75 | $1.04 | ($0.29)| 8. Fair Value Measurements Navient categorizes fair value estimates using a three-level framework, reporting $56 million in derivative assets and $416 million in derivative liabilities as of September 30, 2022, with no significant valuation changes or transfers - Fair value estimates are categorized based on a three-level hierarchical framework of price transparency[350] Fair Value Measurements on a Recurring Basis (as of Sep 30, 2022) | Instrument Type | Level 1 ($ Million) | Level 2 ($ Million) | Level 3 ($ Million) | Total ($ Million) | | :-------------------------- | :------------------ | :------------------ | :------------------ | :---------------- | | Derivative Assets | $0 | $56 | $0 | $56 | | Derivative Liabilities | $0 | ($7) | ($409) | ($416) | - There were no significant transfers of financial instruments between levels or changes in valuation methodology during the three and nine months ended September 30, 2022[351][355] - The change in mark-to-market gains/(losses) relating to Level 3 instruments still held at the reporting date was ($127) million for the three months ended September 30, 2022[362] 9. Commitments and Contingencies Navient is involved in various legal and regulatory matters, including ongoing CFPB litigation and an OIG audit, with reserves established only when losses are probable and estimable - Navient is defending against CFPB litigation, which could have a material adverse impact, despite settling with 40 State Attorneys General for $205 million (including $1.7 billion in loan cancellations and a $145 million payment to states)[376][380] - The company is appealing an OIG audit finding regarding Special Allowance Payments (SAP) and has established a reserve for this matter[387] - Reserves for litigation and regulatory matters are established only when losses are both probable and estimable[390] 10. Revenue from Contracts with Customers Accounted for in Accordance with ASC 606 Navient's revenue from contracts with customers (ASC 606) was $79 million in Q3 2022, a decrease from Q3 2021, primarily due to the wind-down of pandemic-related contracts, disaggregated by service and client type Revenue by Service Type (Q3 2022 vs. Q3 2021) | Service Type | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :----------------- | :--------- | | Government services | $47 | $75 | ($28) | (37.3)% | | Healthcare services | $32 | $47 | ($15) | (31.9)% | | Total | $79 | $127 | ($48) | (37.8)% | Revenue by Client Type (Q3 2022 vs. Q3 2021) | Client Type | Q3 2022 ($ Million) | Q3 2021 ($ Million) | Change ($ Million) | Change (%) | | :-------------------------- | :------------------ | :------------------ | :----------------- | :--------- | | Federal government | $2 | $4 | ($2) | (50.0)% | | State and local government | $27 | $56 | ($29) | (51.8)% | | Hospitals and other healthcare providers | $32 | $47 | ($15) | (31.9)% | | Total | $79 | $127 | ($48) | (37.8)% | 11. Segment Reporting Navient reports operations across four segments (