NAVIENT CORP quarterly report, Q2 FY2023

Navient Corporation: Q2 2023 Form 10-Q Summary

Business context and reporting period

Navient provides education-finance and business-processing services through Federal Education Loans, Consumer Lending, and Business Processing segments. The filing covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.

At June 30, 2023, Navient owned $40.9 billion of net FFELP Loans and $17.7 billion of net Private Education Loans.
Business Processing served approximately 500 public-sector and healthcare organizations.
Common shares outstanding were 121.6 million.

Financial performance and key metrics

Metric	Q2 2023	Q2 2022	Change
GAAP net income	$66 million	$180 million	Down 63%
Diluted EPS	$0.52	$1.22	Down $0.70
Core Earnings net income	$88 million	$134 million	Down 34%
Core diluted EPS	$0.70	$0.91	Down $0.21
Net interest income	$178 million	$321 million	Down 45%
Provision for loan losses	$11 million	$18 million	Down $7 million
Operating expenses	$182 million	$190 million	Down 4%
Restructuring expenses	$15 million	—	Primarily CEO-transition severance

For the six months ended June 30, 2023, GAAP net income was $177 million, or $1.39 diluted EPS, versus $435 million, or $2.90 diluted EPS, in the prior-year period. Core Earnings net income was $221 million versus $269 million.

Total interest income increased to $1.097 billion from $692 million, but total interest expense increased more sharply to $919 million from $371 million.
Net gains on derivative and hedging activities were $26 million in Q2 2023 versus $22 million in Q2 2022. Derivative mark-to-market results remain volatile and materially affect GAAP earnings.
Q2 net interest margins were 0.97% for Federal Education Loans and 2.97% for Consumer Lending, compared with 1.11% and 2.66%, respectively, in Q2 2022.
Business Processing revenue was $83 million, with $6 million of net income and $8 million of EBITDA. EBITDA margin was 10%, versus 16% in the prior-year quarter.

Cash flow, capital, debt and liquidity

Six-month operating cash flow was $244 million, compared with $30 million in the prior-year period.
Six-month investing cash flow was $3.674 billion, primarily reflecting $4.111 billion of education-loan payments less $438 million of originations and acquisitions.
Six-month financing cash flow was negative $5.457 billion, including $5.837 billion of secured-borrowing repayments, $1.002 billion of unsecured-note repayments, $165 million of share repurchases, and $40 million of dividends.
Total unrestricted cash and liquid investments were $1.317 billion. Primary liquidity, including unencumbered FFELP and Private Education Refinance Loans, totaled $1.431 billion.
Additional borrowing capacity under FFELP and Private Education Loan ABCP facilities was $2.011 billion.
Total GAAP borrowings were $61.774 billion, consisting of $6.509 billion of unsecured debt and $55.705 billion of secured borrowings.
Navient reported $1.2 billion of senior unsecured notes maturing within the next 12 months and $5.3 billion maturing from 2024 through 2043.
Three credit-rating agencies rated Navient’s long-term unsecured debt below investment grade.
The GAAP equity-to-asset ratio was 4.5%; the non-GAAP Adjusted Tangible Equity Ratio was 8.4%, compared with 7.5% at June 30, 2022.
Navient issued $500 million of unsecured debt and $718 million of asset-backed securities during the quarter.

Material changes versus the prior comparable period

GAAP earnings declined primarily because net interest income fell $143 million. Management attributed the decline to lower mark-to-market gains on fair-value hedges, portfolio paydowns, and higher interest rates.
Federal Education Loans segment net income fell to $76 million from $110 million. The portfolio declined to $40.9 billion net from $49.2 billion, while the segment’s net interest margin fell to 0.97%.
Federal Education Loan delinquencies greater than 90 days were 8.2% of loans in repayment, versus 7.4% in Q2 2022; forbearances rose to 16.0% from 13.1%.
Consumer Lending segment net income increased to $75 million from $71 million despite lower originations. Net interest margin improved to 2.97% from 2.66%, while the portfolio declined to $17.7 billion net from $19.7 billion.
Private Education Loan originations fell to $197 million from $420 million, primarily because higher interest rates reduced borrowers’ incentive to refinance. Refinance originations were $142 million versus $374 million.
Private Education Loan net charge-offs declined to $62 million from $70 million, and delinquencies greater than 90 days were 2.0% in both periods. Forbearances increased to 1.8% from 1.5%.
Business Processing revenue decreased 5% because pandemic-related contracts continued to wind down, partially offset by growth from traditional clients.
Average diluted shares declined 15% year over year due to share repurchases.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide a specific quantitative earnings or revenue forecast. Management stated that it expects to continue returning excess capital through dividends and share repurchases while maintaining appropriate leverage and market access.
The $1 billion share-repurchase program had $435 million remaining at June 30, 2023. Navient repurchased 4.9 million shares for $80 million in Q2 and paid $20 million of dividends.
The Supreme Court’s June 30, 2023 decision prevented implementation of the Student Debt Relief Plan; federal student-loan payments were expected to resume in October 2023. New income-driven repayment regulations may increase FFELP-borrower consolidation into the Direct Loan Program and could materially affect future results.
Navient adopted ASU 2022-02 on January 1, 2023. The adoption released $60 million of a previously recorded $77 million allowance component during the first six months, reducing Private Education Loan provisions.
LIBOR publication ceased on June 30, 2023. The company transitioned or plans to transition LIBOR-linked instruments to SOFR, including approximately $12 billion of debt in fair-value or cash-flow hedge relationships.
Risks include higher interest rates and inflation, funding costs and access, credit deterioration, liquidity and refinancing needs, interest-rate and derivative mismatch, regulatory oversight, litigation, cybersecurity, government-contracting exposure, and changes in student-loan policy.
The CFPB litigation remains unresolved. Management stated that a loss contingency is reasonably possible but that it cannot estimate the potential exposure; no reserve has been established. An adverse ruling could materially affect the company.
Navient reached an agreement in principle concerning certain bankruptcy-related private-loan claims. It recorded a $23 million provision in Q1 2023 and expects any cash settlement contribution, capped at $44 million, to be covered by insurance, subject to final documentation and court approval.
Certain FFELP secured debt tranches totaling $825 million had passed contractual maturity dates. The company expects those bonds to be paid in full between 2030 and 2035, with no change to principal owed or coupon accrual.

Most important facts for investors to verify

Reconcile GAAP earnings with Core Earnings, particularly the $22 million Q2 benefit from derivative and goodwill/intangible adjustments.
Assess whether higher funding costs, portfolio runoff, and interest-rate movements continue to pressure net interest income and margins.
Monitor FFELP delinquency and forbearance trends as federal payments resume and new repayment policies take effect.
Evaluate Private Education Loan credit performance, reserve coverage, charge-offs, and the effect of ASU 2022-02 releases.
Review liquidity sources and upcoming $1.2 billion of unsecured maturities in light of below-investment-grade ratings.
Track the CFPB litigation, bankruptcy settlement approval, related insurance recoveries, and other regulatory contingencies.
Confirm the operational and financial effects of the LIBOR-to-SOFR transition on loans, debt, derivatives, and securitizations.