NAVIENT CORP quarterly report, Q2 FY2022

Navient Corporation 10-Q Summary: Second Quarter 2022

Business context and reporting period

Navient provides education finance, loan servicing and asset recovery, and technology-enabled business processing services for government and healthcare clients. The filing covers the quarter and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods. Primary segments were Federal Education Loans, Consumer Lending, Business Processing and Other.

Federal Education Loans: $49.2 billion of FFELP Loans, substantially federally guaranteed, and $57 billion of FFELP loans serviced at June 30, 2022.
Consumer Lending: $19.7 billion of Private Education Loans, including $9.9 billion of refinance loans; $420 million of private loan originations in the quarter.
Business Processing: services for more than 600 government and healthcare clients.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
GAAP net income	$180 million	$185 million	$435 million	$555 million
Diluted EPS	$1.22	$1.05	$2.90	$3.08
Core Earnings net income	$134 million	$165 million	$269 million	$469 million
Net interest income	$321 million	$322 million	$658 million	$685 million
Provision for loan losses	$18 million	$(1) million	$34 million	$(88) million
Total other income	$134 million	$176 million	$357 million	$480 million
Total expenses	$193 million	$259 million	$405 million	$528 million

FFELP net interest margin was 1.11% in Q2 and 1.08% for the six months, compared with 0.97% in both 2021 periods.
Private Education Loan net interest margin was 2.66% in Q2 and 2.73% for the six months, down from 2.95% and 2.97%, respectively.
Business Processing revenue was $87 million in Q2 and $181 million for the six months. EBITDA was $14 million and $33 million, with EBITDA margins of 16% and 18%, respectively.
Operating cash flow was $30 million for the six months, down from $333 million in 2021. Investing cash flow was $3.956 billion, principally reflecting $5.416 billion of loan payments less $1.516 billion of originations and acquisitions. Financing cash flow was $(4.128) billion.
Total assets were $76.1 billion at June 30, 2022, including $68.9 billion of net education loans. Stockholders’ equity was $2.927 billion.

Debt, liquidity and capital allocation

GAAP borrowings totaled $72.3 billion, comprising $7.0 billion of unsecured borrowings and $65.7 billion of secured borrowings. Short-term borrowings were $4.6 billion and long-term borrowings were $67.7 billion.
Approximately $1.0 billion of senior unsecured notes mature within the following 12 months; the remaining $6.0 billion mature from 2023 through 2043, with 81% due by 2029.
Unrestricted cash and liquid investments were $976 million. Primary liquidity, including unencumbered FFELP and private refinance loans, totaled $1.107 billion. Additional borrowing capacity under ABCP facilities was $2.369 billion.
The adjusted tangible equity ratio was 7.5%, compared with 6.3% at June 30, 2021. Pro forma adjusted tangible equity ratio was 7.4%.
Navient issued $715 million of term ABS during the quarter, repurchased $105 million of common stock and paid $23 million of dividends. The remaining share repurchase authorization was $780 million.

Material changes versus prior comparable periods

Q2 GAAP net income declined 3%, while six-month net income declined 22%. Q2 diluted EPS increased because average diluted shares fell 16%; six-month EPS declined 6%.
Private Education Loan provisions increased to $18 million in Q2 from a $1 million benefit, reflecting $7 million associated with originations and $11 million for higher expected portfolio losses. The six-month provision was $34 million versus an $88 million benefit in 2021, which had included a $107 million allowance reversal tied to a prior loan sale.
Servicing revenue fell $33 million in Q2 and $66 million for the six months after Navient transferred the servicing contract for 5.6 million Department of Education-owned accounts to a third party in October 2021.
Business Processing revenue declined 33% in Q2 and 29% for the six months as pandemic-related contracts wound down. Segment net income fell 66% and 56%, respectively.
Operating expenses declined 25% in Q2 and 23% for the six months, primarily due to the Department of Education contract transfer and lower Business Processing activity.
Derivative and hedging gains were $22 million in Q2 and $120 million for the six months, compared with losses of $10 million and gains of $26 million in 2021. These results are volatile and materially affected GAAP earnings.
Total net education loans declined to $68.9 billion from $75.3 billion at June 30, 2021, primarily due to portfolio paydowns, refinancings and the absence of comparable 2021 loan sales.

Credit trends, outlook and risks

Private Education Loan delinquencies greater than 30 days rose to 4.1% from 2.6% and delinquencies greater than 90 days rose to 2.0% from 1.0%. Private loan charge-offs increased to $70 million from $35 million in Q2. Management stated that deterioration was expected as borrowers returned to repayment after pandemic relief.
FFELP delinquencies greater than 30 days increased to 15.9% of loans in repayment from 8.3%; greater-than-90-day delinquencies increased to 7.4% from 3.8%. FFELP loans are substantially insured and guaranteed, and the segment recorded no provision for loan losses.
Management expects to continue returning excess capital through dividends and share repurchases while maintaining leverage and capital adequacy. The filing does not provide quantitative earnings guidance.
Management noted uncertainty from inflation, rising interest rates, the war in Ukraine, COVID-19, funding-market volatility, credit ratings and loan prepayments. Prepayments could accelerate because of refinancing, consolidation, loan forgiveness or other government policies, reducing future interest income and securitization cash flows.
The company is transitioning LIBOR-linked contracts to SOFR by June 30, 2023. New variable-rate private loans issued since December 2021 are indexed to SOFR; certain FFELP pricing mechanics and ABS instruments may require statutory or consent-based transition mechanisms.
Navient disclosed $661 million of defaulted FFELP secured debt tranches that had not matured by their contractual maturity dates. The company expects repayment between 2029 and 2036, with no reported change to principal owed or coupon.
The CFPB litigation remains unresolved. Navient states that a loss contingency is reasonably possible but cannot estimate the timing or potential exposure; no reserve has been established. Separately, settlements with 40 state attorneys general require cancellation of approximately $1.7 billion of charged-off private loan balances for approximately 66,000 borrowers and a one-time payment of approximately $145 million to the states. The company recorded approximately $205 million of related regulatory expense in 2021.
Management reported effective disclosure controls as of June 30, 2022 and no material change in internal control over financial reporting.

Most important facts for investors to verify

Whether private-loan delinquencies, charge-offs and provisions continue to rise as repayment normalizes.
The refinancing plan and available liquidity for the $1.0 billion of unsecured notes maturing within 12 months, particularly given below-investment-grade unsecured ratings.
The sustainability of earnings excluding volatile derivative mark-to-market gains and the comparability of non-GAAP Core Earnings with GAAP results.
The pace of FFELP and private-loan portfolio paydowns, consolidations, prepayments and any federal loan-forgiveness or repayment-policy changes.
The financial and regulatory consequences of the unresolved CFPB litigation and other legal proceedings for which the filing provides no estimated exposure.
The effect of Business Processing contract wind-downs, inflation and higher funding costs on margins and operating expenses.
Progress and costs associated with the LIBOR-to-SOFR transition and any related basis or repricing risk.