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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-36228
Navient Corporation
(Exact name of registrant as specified in its charter)
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Delaware |
46-4054283 |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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13865 Sunrise Valley Drive, Herndon, Virginia 20171 |
(703) 810-3000 |
(Address of principal executive offices) |
(Telephone Number) |
(703) 810-3000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act.
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common stock, par value $.01 per share |
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NAVI |
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The NASDAQ Global Select Market |
6% Senior Notes due December 15, 2043 |
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JSM |
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The NASDAQ Global Select Market |
Preferred Stock Purchase Rights |
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None |
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The NASDAQ Global Select Market |
As of September 30, 2024, there were 107,363,480 shares of common stock outstanding.
TABLE OF CONTENTS
Organization of Our Form 10-Q
The order and presentation of content in our Quarterly Report on Form 10-Q (Form 10-Q) differs from the traditional Securities and Exchange Commission (SEC) Form 10-Q format. Our format is designed to improve readability and to better present how we organize and manage our business. See Appendix A, "Form 10-Q Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-Q format.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Form 10-Q contains “forward-looking” statements and other information that is based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,” “could,” “should,” “goals,” or “target.” Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties are discussed more fully under the section titled “Risk Factors” and include, but are not limited to the following:
•general economic conditions, including the potential impact of inflation and interest rates on Navient and its clients and customers and on the creditworthiness of third parties;
•increased defaults on education loans held by us;
•unanticipated repayment trends on education loans including prepayments or deferrals resulting from new interpretations or the timing of the execution and implementation of current laws, rules or regulations or future laws, executive orders or other policy initiatives that operate to encourage or require consolidation, abolish existing or create additional income-based repayment or debt forgiveness programs or establish other policies and programs or extensions of previously announced deadlines which may increase or decrease the prepayment rates on education loans and accelerate or slow down the repayment of the bonds in our securitization trusts;
•a reduction in our credit ratings;
•changes to applicable laws, rules, regulations and government policies and expanded regulatory and governmental oversight;
•changes in the general interest rate environment, including the availability of any relevant money-market index rate or the relationship between the relevant money-market index rate and the rate at which our assets are priced;
•the interest rate characteristics of our assets do not always match those of our funding arrangements;
•adverse market conditions or an inability to effectively manage our liquidity risk or access liquidity could negatively impact us;
•the cost and availability of funding in the capital markets;
•our ability to earn Floor Income and our ability to enter into hedges relative to that Floor Income are dependent on the future interest rate environment and therefore is variable;
•our use of derivatives exposes us to credit and market risk;
•our ability to continually and effectively align our cost structure with our business operations;
•a failure or breach of our operating systems, infrastructure or information technology systems;
•failure by any third party providing us material services or products or a breach or violation of law by one of these third parties;
•our work with government clients exposes us to additional risks inherent in the government contracting environment;
•acquisitions, strategic initiatives and investments or divestitures that we pursue;
•shareholder activism; and
•reputational risk and social factors.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business.
The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect and actual results could differ materially. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake any obligation to update or revise these forward-looking statements except as required by law.
Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.
USE OF NON-GAAP FINANCIAL MEASURES
We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present our financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings, which is a non-GAAP financial measure. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation is our measure of profit or loss for our segments, we are required by GAAP to provide Core Earnings disclosures in the notes to our consolidated financial statements for our business segments.
In addition to Core Earnings, we present the following other non-GAAP financial measures: Tangible Equity, Adjusted Tangible Equity Ratio, Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA) (for the Business Processing segment), and Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans. Definitions for the non-GAAP financial measures and reconciliations are provided below, except that reconciliations of forward-looking non-GAAP financial measures are not provided because the Company is unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of certain items, including, but not limited to, the impact of any mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.
Business
Overview and Fundamentals of Our Business
Navient (Nasdaq: NAVI) provides technology-enabled education finance and business processing solutions that simplify complex programs and help millions of people achieve success. Our customer-focused, data-driven services deliver exceptional results for clients in education and government. Learn more at navient.com.
With a focus on data-driven insights, service, compliance and innovative support, Navient’s business consists of:
We own and manage a portfolio of $31.5 billion of federally guaranteed Federal Family Education Loan Program (FFELP) Loans. We support the success of our customers and ensure a compliant, efficient customer experience.
We own and manage a portfolio of $16.0 billion of Private Education Loans. Through our Earnest brand we also refinance and originate Private Education Loans. We help students and families succeed through the college journey with innovative planning tools, student loans and refinancing products through our Earnest brand. In the third quarter of 2024, we originated approximately $500 million of Private Education Loans.
We leverage our loan servicing expertise to provide business processing solutions for approximately 450 public sector organizations, and their millions of clients and constituents. Our suite of omnichannel customer experience, digital processing and revenue cycle solutions enables our clients to deliver better results for the people they serve. Our healthcare services business was sold on September 19, 2024. See "Recent Business Developments" for more detail.
Superior Performance with Deep Experience in Customer Service and Compliance Commitment
We help our customers — both individuals and institutions — navigate the path to financial success through proactive, data-driven, simplified service and innovative solutions.
•Delivering superior performance. Whether supporting student loan borrowers in successfully managing their loans, designing and implementing omnichannel contact center solutions for public sector agencies, or helping a state manage communications or recover revenue that funds essential services, Navient delivers value for our clients and customers.
•Scalable, data-driven solutions. Annually, we support tens of millions of people in conducting hundreds of millions of transactions and interactions. Our systems are built for scale and rapid implementation. We harness the power of data to build tailored programs with analytics that optimize our clients’ results.
•Simplify complex processes. On our clients’ behalf, we help individuals successfully navigate a broad spectrum of complex transactions. Our people and platforms simplify complex programs to help customers and constituents achieve their goals.
•Commitment to compliance. We maintain a robust, multi-layered compliance management system and thoroughly understand and comply with applicable federal, state, and local laws. We follow the industry-leading “Three Lines Model” compliance framework. This framework and other compliance protocols ensure we adhere to key industry laws and regulations including but not limited to: Fair and Accurate Credit Transactions Act (FACTA); Fair Credit Reporting Act (FCRA); Fair Debt Collection Practices Act (FDCPA); Electronic Funds Transfer Act (EFTA); Equal Credit Opportunity Act (ECOA); Gramm-Leach-Bliley Act (GLBA); Health Insurance Portability and Accountability Act (HIPAA); IRS Publication 1075; Servicemembers Civil Relief Act (SCRA); Military Lending Act (MLA); Telephone Consumer Protection Act (TCPA); Truth in Lending Act (TILA); Unfair, Deceptive, or Abusive Acts and Practices (UDAAP); state laws; and state and city licensing.
•Corporate social responsibility. We are committed to contributing to the social and economic well being of our communities; fostering the success of our customers; supporting a culture of integrity, inclusion and equality in our workforce; and embracing sustainable business practices. Navient has earned recognition from a variety of leading organizations for our continued commitment to fostering diversity. Our employees are engaged in our communities through company-sponsored volunteering and philanthropic programs.
Navient is committed to a sustainable future. We leverage technologies that minimize energy use in our office buildings and promote widespread adoption of “paperless” digital customer communications. Navient prioritizes the usage of power-saving features to our buildings to reduce energy usage. Energy efficiency and reducing carbon dioxide (CO2) and CO2 equivalents are among the many factors considered in our real estate decisions.
Maximizing Cash Flows from Loan Portfolios and Maintaining a Strong Balance Sheet
Our third-quarter 2024 results continue to demonstrate the strength of our balance sheet, credit risk management and underwriting of high-quality private education loans with attractive economics.
Our business generates significant capital which allows for a strong capital return to our investors. Navient expects to continue to return excess capital to shareholders through dividends and share repurchases in accordance with our capital allocation policy.
By optimizing capital adequacy and allocating capital to highly accretive opportunities, including organic growth and acquisitions, we remain well positioned to pay dividends and repurchase stock, while maintaining appropriate leverage that supports our credit ratings and ensures ongoing access to capital markets.
In December 2021, our Board of Directors approved a share repurchase program authorizing the purchase of up to $1 billion of the Company’s outstanding common stock. At September 30, 2024, $176 million remained in share repurchase authorization.
To inform our capital allocation decisions, we use the Adjusted Tangible Equity Ratio(1) in addition to other metrics. Our GAAP equity-to-asset ratio was 5.0% and our Adjusted Tangible Equity Ratio(1) was 9.8% as of September 30, 2024.
|
|
|
|
|
|
|
|
|
(Dollars and shares in millions) |
|
Q3-24 |
|
|
Q3-23 |
|
Shares repurchased |
|
|
2.1 |
|
|
|
4.2 |
|
Reduction in shares outstanding |
|
|
2 |
% |
|
|
3 |
% |
Total repurchases in dollars |
|
$ |
33 |
|
|
$ |
75 |
|
Dividends paid |
|
$ |
17 |
|
|
$ |
19 |
|
Total Capital Returned(2) |
|
$ |
50 |
|
|
$ |
94 |
|
GAAP equity-to-asset ratio |
|
|
5.0 |
% |
|
|
4.6 |
% |
Adjusted Tangible Equity Ratio(1) |
|
|
9.8 |
% |
|
|
8.7 |
% |
(1)Item is a non-GAAP financial measure. For a description and reconciliation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”
(2)Capital Returned is defined as share repurchases and dividends paid.
Recent Business Developments
On January 30, 2024, as a result of an in-depth review of our business, Navient announced strategic actions to simplify our company, reduce our expense base, and enhance our flexibility. We have made substantial progress on these actions as follows:
•Adopt a variable, outsourced servicing model. Navient entered into an outsourcing agreement in May 2024 that transitions our student loan servicing to MOHELA, a leading provider of student loan servicing for government and commercial enterprises. This transaction is intended to create a variable cost structure for the servicing of our student loan portfolios and provides attractive unit economics across a wide range of servicing volume scenarios. As part of the agreement, as of July 1, 2024, MOHELA began servicing our portfolio with nearly 900 employees transferring to MOHELA. In October 2024, we largely completed the borrower transition after a multi-stage communication strategy which was designed to educate borrowers in advance of the transition. Borrowers will continue to use the same account numbers, phone numbers, payment plans, and other details. Navient and MOHELA use the same third-party loan servicing technology platform, so a loan system conversion is not required. Navient will oversee the high service level standards contained in the servicing agreement.
•Explore strategic options for the business processing segment, including potential divestment. Navient previously launched a process to explore divesting our business processing segment. Through various subsidiary brands, this segment provides high-quality business processing services to a variety of government clients, including toll-road authorities, state revenue divisions, and federal agencies. In conjunction with the decision to outsource student loan servicing, exploring options for the business processing segment increases the opportunities for shared cost reduction. On September 19, 2024, Navient completed the sale of its equity interests in Xtend, which comprised the Company's healthcare services business in its Business Processing segment, to CorroHealth for $369 million resulting in a $219 million gain on sale. Navient continues to explore various divestiture options for its Government Services business.
•Streamline shared services infrastructure and corporate footprint. As we implement the above actions, we are also reshaping our shared services functions and corporate footprint to align with the needs of a more focused, flexible and streamlined company. The $35 million of restructuring and other reorganization charges recognized in 2024 (the vast majority of which relates to severance in connection with job abolishments) reflects the progress made to date in connection with this effort.
We continue to expect to be largely complete with these strategic actions by the end of 2025.
How We Organize Our Business
We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business Processing.
Federal Education Loans Segment
Navient owns and manages FFELP Loans and is the master servicer on this portfolio. Our long history of servicing quality, data-driven strategies and omnichannel education about federal repayment options translate into positive results for the millions of borrowers we serve. We generate revenue primarily through net interest income on our FFELP Loans.
Consumer Lending Segment
Navient owns and manages Private Education Loans and is the master servicer for these portfolios. Through our Earnest brand, we also refinance and originate in-school Private Education Loans. "Refinance" Private Education Loans are loans where a borrower has refinanced their education loans, and "In-school" Private Education Loans are loans originally made to borrowers while they are attending school. We generate revenue primarily through net interest income on our Private Education Loan portfolio.
Through our Earnest brand, we help students and families on the planning and paying for college journey. Our digital tools empower people to find scholarships and compare financial aid offers. We believe our 50 years of experience, product design, digital marketing strategies, and origination and servicing expertise provide a unique competitive advantage. We see meaningful growth opportunities in originating Private Education Loans, generating attractive long-term, risk-adjusted returns.
Business Processing Segment
Navient provides business processing solutions such as omnichannel contact center services, workflow processing, and revenue cycle optimization. We leverage the same expertise and intelligent tools we use to deliver successful results for portfolios we own. Our support enables our clients to ensure better constituent outcomes, meet rapidly changing needs, improve technology, reduce operating expenses, manage risk and optimize revenue opportunities. Our clients include:
•Government: We offer our solutions to federal agencies, state governments, tolling and parking authorities, and other public sector clients.
•Healthcare: This business was sold on September 19, 2024. See "Recent Business Developments" for more detail.
Other Segment
This segment consists of our corporate liquidity portfolio, gains and losses incurred on the repurchase of debt, unallocated expenses of shared services (which includes regulatory expenses) and restructuring/other reorganization expenses.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Historical Financial Information and Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
(In millions, except per share data) |
|
2024 |
|
|
2023 |
|
|
2024 |
|
|
2023 |
|
GAAP Basis |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(2 |
) |
|
$ |
79 |
|
|
$ |
107 |
|
|
$ |
256 |
|
Diluted earnings (loss) per common share |
|
$ |
(.02 |
) |
|
$ |
.65 |
|
|
$ |
.95 |
|
|
$ |
2.04 |
|
Weighted average shares used to compute diluted
earnings per share |
|
|
108 |
|
|
|
121 |
|
|
|
112 |
|
|
|
125 |
|
Return on assets |
|
|
(.02 |
)% |
|
|
.51 |
% |
|
|
.26 |
% |
|
|
.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Earnings Basis(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income(1) |
|
$ |
160 |
|
|
$ |
57 |
|
|
$ |
246 |
|
|
$ |
278 |
|
Diluted earnings per common share(1) |
|
$ |
1.45 |
|
|
$ |
.47 |
|
|
$ |
2.20 |
|
|
$ |
2.22 |
|
Weighted average shares used to compute diluted
earnings per share |
|
|
110 |
|
|
|
121 |
|
|
|
112 |
|
|
|
125 |
|
Net interest margin, Federal Education Loans segment |
|
|
.46 |
% |
|
|
1.52 |
% |
|
|
.46 |
% |
|
|
1.20 |
% |
Net interest margin, Consumer Lending segment |
|
|
2.84 |
% |
|
|
3.17 |
% |
|
|
2.91 |
% |
|
|
3.09 |
% |
Return on assets |
|
|
1.21 |
% |
|
|
.37 |
% |
|
|
.59 |
% |
|
|
.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Education Loan Portfolios |
|
|
|
|
|
|
|
|
|
|
|
|
Ending FFELP Loans, net |
|
$ |
31,522 |
|
|
$ |
39,581 |
|
|
$ |
31,522 |
|
|
$ |
39,581 |
|
Ending Private Education Loans, net |
|
|
16,005 |
|
|
|
17,333 |
|
|
|
16,005 |
|
|
|
17,333 |
|
Ending total education loans, net |
|
$ |
47,527 |
|
|
$ |
56,914 |
|
|
$ |
47,527 |
|
|
$ |
56,914 |
|
Average FFELP Loans |
|
$ |
32,373 |
|
|
$ |
40,554 |
|
|
$ |
34,749 |
|
|
$ |
41,886 |
|
Average Private Education Loans |
|
|
16,587 |
|
|
|
18,165 |
|
|
|
16,968 |
|
|
|
18,710 |
|
Average total education loans |
|
$ |
48,960 |
|
|
$ |
58,719 |
|
|
$ |
51,717 |
|
|
$ |
60,596 |
|
(1)Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures — Core Earnings.”
The Quarter in Review
We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide certain Core Earnings disclosures in the notes to our consolidated financial statements for our business segments. See “Non-GAAP Financial Measures — Core Earnings” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.
Third-quarter 2024 GAAP net loss was $2 million ($0.02 diluted loss per share), compared with $79 million net income ($0.65 diluted earnings per share) in the year-ago quarter. See “Results of Operations – GAAP Comparison of Third-Quarter 2024 Results with Third-Quarter 2023" for a discussion of the primary contributors to the change in GAAP earnings between periods. Goodwill and acquired intangible asset impairment of $138 million related to the Government Services business was recognized in the current quarter. This is the primary difference between GAAP and Core Earnings as Core Earnings exclude all goodwill and acquired intangible asset impairment and amortization expense.
Third-quarter 2024 Core Earnings net income was $160 million ($1.45 diluted Core Earnings per share), compared with $57 million ($0.47 diluted Core Earnings per share) in the year-ago quarter. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.
GAAP and Core Earnings results included a net increase to pre-tax income of $166 million ($1.17 diluted earnings per share) comprised of the following items:
•A gain of $219 million ($1.54 diluted earnings per share) from the sale of Xtend Healthcare, our healthcare services business.
•$21 million ($0.15 diluted loss per share) of provision for loan losses related to lowering the expected recovery rate on defaulted Private Education Loans.
•$18 million ($0.12 diluted loss per share) of restructuring expenses and $14 million ($0.10 diluted loss per share) of regulatory-related expenses, primarily related to the settlement agreement with the CFPB in September, eliminating the overhang of a contingent liability.
Financial highlights of third-quarter 2024 include:
Federal Education Loans segment:
•Net income of $27 million.
•Net interest margin of 0.46%.
•FFELP Loan prepayments of $1.0 billion compared to $2.5 billion, $1.6 billion and $600 million in second-quarter 2024, first-quarter 2024 and third-quarter 2023, respectively.
Consumer Lending segment:
•Net income of $27 million.
•Net interest margin of 2.84%.
•Originated $500 million of Private Education Loans, up 31% from $382 million in the year-ago quarter.
Business Processing segment:
•Fee revenue of $70 million.
•Completed the sale of our healthcare services business for $369 million cash on September 19, 2024, at a gain of $219 million. Continuing to explore divestiture options for the remaining government services businesses within the Business Processing division.
•Net income of $178 million and EBITDA(1) of $233 million.
Capital, funding and liquidity:
•GAAP equity-to-asset ratio of 5.0% and adjusted tangible equity ratio(1) of 9.8%.
•Repurchased $33 million of common shares. $176 million common share repurchase authority remains outstanding.
•Paid $17 million in common stock dividends.
Operating Expenses:
•Operating expenses of $170 million, excluding $14 million of regulatory-related expenses.
(1)Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”
Results of Operations
GAAP Income Statements (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Increase
(Decrease) |
|
|
Nine Months Ended September 30, |
|
|
Increase
(Decrease) |
|
(In millions, except per share data) |
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
|
2024 |
|
|
2023 |
|
|
$ |
|
|
% |
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFELP Loans |
|
$ |
591 |
|
|
$ |
778 |
|
|
$ |
(187 |
) |
|
|
(24 |
)% |
|
$ |
1,861 |
|
|
$ |
2,191 |
|
|
$ |
(330 |
) |
|
|
(15 |
)% |
Private Education Loans |
|
|
314 |
|
|
|
351 |
|
|
|
(37 |
) |
|
|
(11 |
) |
|
|
958 |
|
|
|
1,036 |
|
|
|
(78 |
) |
|
|
(8 |
) |
Cash and investments |
|
|
43 |
|
|
|
41 |
|
|
|
2 |
|
|
|
5 |
|
|
|
129 |
|
|
|
111 |
|
|
|
18 |
|
|
|
16 |
|
Total interest income |
|
|
948 |
|
|
|
1,170 |
|
|
|
(222 |
) |
|
|
(19 |
) |
|
|
2,948 |
|
|
|
3,338 |
|
|
|
(390 |
) |
|
|
(12 |
) |
Total interest expense |
|
|
828 |
|
|
|
879 |
|
|
|
(51 |
) |
|
|
(6 |
) |
|
|
2,547 |
|
|
|
2,636 |
|
|
|
(89 |
) |
|
|
(3 |
) |
Net interest income |
|
|
120 |
|
|
|
291 |
|
|
|
(171 |
) |
|
|
(59 |
) |
|
|
401 |
|
|
|
702 |
|
|
|
(301 |
) |
|
|
(43 |
) |
Less: provisions for loan losses |
|
|
42 |
|
|
|
72 |
|
|
|
(30 |
) |
|
|
(42 |
) |
|
|
68 |
|
|
|
68 |
|
|
|
— |
|
|
|
— |
|
Net interest income after
provisions for loan losses |
|
|
78 |
|
|
|
219 |
|
|
|
(141 |
) |
|
|
(64 |
) |
|
|
333 |
|
|
|
634 |
|
|
|
(301 |
) |
|
|
(47 |
) |
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Servicing revenue |
|
|
13 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
(13 |
) |
|
|
48 |
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
Asset recovery and business
processing revenue |
|
|
70 |
|
|
|
85 |
|
|
|
(15 |
) |
|
|
(18 |
) |
|
|
228 |
|
|
|
240 |
|
|
|
(12 |
) |
|
|
(5 |
) |
Other income |
|
|
10 |
|
|
|
5 |
|
|
|
5 |
|
|
|
100 |
|
|
|
22 |
|
|
|
15 |
|
|
|
7 |
|
|
|
47 |
|
Gain on sale of subsidiary |
|
|
219 |
|
|
|
— |
|
|
|
219 |
|
|
|
100 |
|
|
|
219 |
|
|
|
— |
|
|
|
219 |
|
|
|
100 |
|
Gains (losses) on derivative and
hedging activities, net |
|
|
(36 |
) |
|
|
26 |
|
|
|
(62 |
) |
|
|
(238 |
) |
|
|
11 |
|
|
|
44 |
|
|
|
(33 |
) |
|
|
(75 |
) |
Total other income |
|
|
276 |
|
|
|
131 |
|
|
|
145 |
|
|
|
111 |
|
|
|
528 |
|
|
|
347 |
|
|
|
181 |
|
|
|
52 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
184 |
|
|
|
233 |
|
|
|
(49 |
) |
|
|
(21 |
) |
|
|
533 |
|
|
|
601 |
|
|
|
(68 |
) |
|
|
(11 |
) |
Goodwill and acquired intangible
assets impairment and
amortization expense |
|
|
140 |
|
|
|
3 |
|
|
|
137 |
|
|
|
4,567 |
|
|
|
145 |
|
|
|
8 |
|
|
|
137 |
|
|
|
1,713 |
|
Restructuring/other
reorganization expenses |
|
|
18 |
|
|
|
4 |
|
|
|
14 |
|
|
|
350 |
|
|
|
35 |
|
|
|
23 |
|
|
|
12 |
|
|
|
52 |
|
Total expenses |
|
|
342 |
|
|
|
240 |
|
|
|
102 |
|
|
|
43 |
|
|
|
713 |
|
|
|
632 |
|
|
|
81 |
|
|
|
13 |
|
Income before income tax expense |
|
|
12 |
|
|
|
110 |
|
|
|
(98 |
) |
|
|
(89 |
) |
|
|
148 |
|
|
|
349 |
|
|
|
(201 |
) |
|
|
(58 |
) |
Income tax expense |
|
|
14 |
|
|
|
31 |
|
|
|
(17 |
) |
|
|
(55 |
) |
|
|
41 |
|
|
|
93 |
|
|
|
(52 |
) |
|
|
(56 |
) |
Net income (loss) |
|
$ |
(2 |
) |
|
$ |
79 |
|
|
$ |
(81 |
) |
|
|
(103 |
)% |
|
$ |
107 |
|
|
$ |
256 |
|
|
$ |
(149 |
) |
|
|
(58 |
)% |
Basic earnings (loss) per
common share |
|
$ |
(.02 |
) |
|
$ |
.66 |
|
|
$ |
(.68 |
) |
|
|
(103 |
)% |
|
$ |
.97 |
|
|
$ |
2.06 |
|
|
$ |
(1.09 |
) |
|
|
(53 |
)% |
Diluted earnings (loss) per
common share |
|
$ |
(.02 |
) |
|
$ |
.65 |
|
|
$ |
(.67 |
) |
|
|
(103 |
)% |
|
$ |
.95 |
|
|
$ |
2.04 |
|
|
$ |
(1.09 |
) |
|
|
(53 |
)% |
Dividends per common share |
|
$ |
.16 |
|
|
$ |
.16 |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
.48 |
|
|
$ |
.48 |
|
|
$ |
— |
|
|
|
— |
|
GAAP Comparison of Third-Quarter 2024 Results with Third-Quarter 2023
For the three months ended September 30, 2024, net loss was $2 million, or $0.02 diluted loss per common share, compared with net income of $79 million, or $0.65 diluted earnings per common share, for the year-ago period.
The primary contributors to the change in net income are as follows:
•Net interest income decreased by $171 million primarily as a result of the year-ago quarter having a $48 million benefit related to a decrease in the speed of loan premium amortization in connection with the continued extension of a portion of the FFELP Loan portfolio. In addition, the paydown of the FFELP and Private Education Loan portfolios, the maturity of Floor Income hedges related to the FFELP Loan portfolio, the impact of increasing interest rates on the different index resets for the FFELP Loan assets and debt, and a $29 million decrease in mark-to-market gains on fair value hedges recorded in interest expense contributed to the decrease in net interest income.
•Provisions for loan losses decreased $30 million from $72 million to $42 million:
oThe provision for FFELP Loan losses decreased $41 million from $36 million to $(5) million.
oThe provision for Private Education Loan losses increased $11 million from $36 million to $47 million.
The provision for FFELP Loan losses of $(5) million in the current period was the result of relatively stable credit trends and elevated prepayment activity over the prior year. The $36 million of provision in the year-ago quarter was primarily a result of the continued extension of a portion of the FFELP Loan portfolio and the resulting increase in both the expected future defaults and the premium allocated to all expected future defaults.
The provision for Private Education Loan losses of $47 million in the current period included $21 million related to changes in the net charge-off rates on defaulted loans, $15 million in connection with loan originations and $11 million related to a general reserve build. The provision of $36 million in the year-ago period included $29 million related to changes in the net charge-off rates on defaulted loans and $12 million in connection with loan originations, partially offset by a $5 million reserve release.
•A gain of $219 million was recognized in the current quarter from the sale of 100% of our equity interests for $369 million cash, on September 19, 2024, of Xtend Healthcare, our healthcare services business.
•Asset recovery and business processing revenue decreased $15 million primarily as a result of a decrease in our government services revenue related to congressional funding not being approved to continue performing services under a particular contract.
•Net gains on derivative and hedging activities decreased $62 million, primarily due to interest rate fluctuations. Valuations of derivative instruments fluctuate based upon many factors including changes in interest rates and other market factors. As a result, net gains and losses on derivative and hedging activities may vary significantly in future periods.
•Operating expenses decreased $49 million, primarily due to a $33 million decrease in regulatory expense. In the current period there was $18 million of regulatory-related expense recorded in connection with the $120 million settlement agreement entered into with the CFPB in September. The year-ago period had $45 million of regulatory expense related to the same matter. In addition, there was a decline in the business processing segment expenses as a result of the government services contract discussed above.
•Goodwill and acquired intangible asset impairment and amortization expense increased by $137 million as a result of a $138 million impairment recognized in the current quarter related to our government services business. The impairment was recognized primarily as a result of being informed in September that a contract that represents a significant portion of Government Services net income ($6 million and $18 million of revenue in the three and nine months ended September 30, 2024, respectively) would not be renewed in 2025. In addition, a federal program which is a significant part of a Government Services contract remained unfunded during the third quarter. There has been increased uncertainty as to when or if there will be congressional approval to fund this program which would result in the resumption of services provided by Government Services under this contract.
•Restructuring and other reorganization expenses increased $14 million primarily due to an increase in severance-related costs. The current quarter’s restructuring and other reorganization expenses of $18 million included $13 million of severance-related costs in connection with the various strategic initiatives being implemented to simplify the company, reduce our expense base and enhance our flexibility.
•The effective income tax rates for the current and year-ago quarters were 120% and 28%, respectively. The movement in the effective income tax rate was primarily driven by the settlement with the CFPB in the current quarter of which a portion was not deductible for tax and the impact of a portion of the goodwill impairment recorded in the current quarter not being deductible.
We repurchased 2.1 million and 4.2 million shares of our common stock during the third quarters of 2024 and 2023, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 13 million common shares (or 11%) from the year-ago period.
GAAP Comparison of Nine Months Ended September 30, 2024 Results with Nine Months Ended September 30, 2023
For the nine months ended September 30, 2024, net income was $107 million, or $0.95 diluted earnings per common share, compared with net income of $256 million, or $2.04 diluted earnings per common share, for the year-ago period.
The primary contributors to the change in net income are as follows:
•Net interest income decreased by $301 million primarily as a result of the paydown of the FFELP and Private Education Loan portfolios. In particular, the FFELP Loan portfolio experienced a $3.1 billion increase in prepayments ($5.0 billion in the current period compared with $1.9 billion in the year-ago period), primarily as a result of the Department of Education's proposed debt relief regulations. The current period’s increase in prepayments resulted in the write-off of an additional $35 million of loan premium compared to the year-ago period. Additionally, the year-ago period had a $48 million benefit related to a decrease in the speed of loan premium amortization in connection with the continued extension of a portion of the FFELP Loan portfolio. These two items resulted in premium amortization being $83 million higher in the current period compared to the prior period. There was also a decrease in net interest income due to the maturity of Floor Income hedges related to the FFELP Loan portfolio as well as the impact of increasing interest rates on the different index resets for the FFELP Loan assets and debt. These decreases were partially offset by an $18 million decrease in mark-to-market losses on fair value hedges recorded in interest expense.
•Provisions for loan losses remained unchanged at $68 million:
oThe provision for FFELP Loan losses decreased $57 million from $51 million to $(6) million.
oThe provision for Private Education Loan losses increased $57 million from $17 million to $74 million.
The provision for FFELP Loan losses of $(6) million in the current period was the result of relatively stable credit trends and elevated prepayment activity over the prior year. See the three-month discussion of results above for the driver of the prior period’s provision being significantly higher than the current period.
The provision for Private Education Loan losses of $74 million in the current period included $21 million related to changes in the net charge-off rates on defaulted loans, $26 million in connection with loan originations and $27 million related to a general reserve build. The provision of $17 million in the year-ago period included $29 million related to changes in the net charge-off rates on defaulted loans, $21 million in connection with loan originations, $23 million in connection with the resolution of certain private legacy loans in bankruptcy in the first quarter of 2023 and $7 million related to a reserve build, which was partially offset by a $63 million reduction in connection with the adoption of a new accounting standard (ASU 2022-02).
•A gain of $219 million was recognized in the current period from the sale of 100% of our equity interests for $369 million cash, on September 19, 2024, of Xtend Healthcare, our healthcare services business.
•Asset recovery and business processing revenue decreased $12 million primarily as a result of a decrease in our government services revenue related to congressional funding not being approved to continue performing services under a particular contract.
•Net gains on derivative and hedging activities decreased $33 million, primarily due to interest rate fluctuations. Valuations of derivative instruments fluctuate based upon many factors including changes in interest rates and other market factors. As a result, net gains and losses on derivative and hedging activities may vary significantly in future periods.
•Operating expenses decreased $68 million primarily due to a decrease in the business processing segment expenses as a result of the government services contract discussed above, as well as several efficiency initiatives recently implemented and the year-ago period having elevated upfront start-up costs on new contracts. In addition there was lower in-school loan marketing spend as a result of improved marketing efficiencies and a reduction in regulatory expenses.
•Goodwill and acquired intangible asset impairment and amortization expense increased by $137 million as a result of a $138 million impairment recognized in the current period related to our government services business. See the three-month discussion of results above for further detail.
•Restructuring and other reorganization expenses increased $12 million due to an increase in severance-related costs. The current period’s restructuring and other reorganization expenses of $35 million included $25 million of severance-related costs in connection with the various strategic initiatives being implemented to simplify the company, reduce our expense base and enhance our flexibility.
We repurchased 7.2 million and 13.9 million shares of our common stock during the nine months ended September 30, 2024 and September 30, 2023, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 13 million common shares (or 10%) from the year-ago period.
Segment Results
Federal Education Loans Segment
The following table presents Core Earnings results for our Federal Education Loans segment.
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Three Months Ended September 30, |
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% Increase
(Decrease) |
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Nine Months Ended September 30, |
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% Increase
(Decrease) |
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(Dollars in millions) |
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2024 |
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2023 |
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2024 vs. 2023 |
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2024 |
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2023 |
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2024 vs. 2023 |
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Interest income: |
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FFELP Loans |
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$ |
591 |
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$ |
778 |
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(24 |
)% |
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$ |
1,861 |
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$ |
2,194 |
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(15 |
)% |
Cash and investments |
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25 |
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19 |
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