NAVIENT CORP (NAVI) FY 2022 MD&A

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and “Risk Factors” in this Annual Report on Form 10-K.

The objective of this discussion and analysis is to allow investors to view the company from management’s perspective. Accordingly, we provide the reader with 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. The discussion that follows is primarily focused on 2022 versus 2021 results. Discussion and analysis of 2021 results compared to 2020 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on February 25, 2022.

Selected Historical Financial Information and Ratios

(1)
Regulatory expenses are excluded from Adjusted Core Earnings(2) expenses, and for 2021 included $170 million, on an after-tax basis, related to the resolution of previously disclosed litigation. See “Results of Operations – GAAP Comparison of 2022 Results with 2021” for further details. This expense equaled $0.99 per share for 2021.

(2)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures – Core Earnings.”

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The Year 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.

2022 GAAP net income was $645 million ($4.49 diluted earnings per share), compared with $717 million ($4.18 diluted earnings per share) in the prior year. See “Results of Operations – Comparison of 2022 Results with 2021” for a discussion of the primary contributors to the change in GAAP earnings between periods.

2022 Core Earnings net income was $458 million ($3.19 diluted Core Earnings per share), compared with $551 million ($3.21 diluted Core Earnings per share) for 2021. Full-year 2022 and 2021 adjusted diluted Core Earnings(1) per share were $3.43 and $4.45, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.

The business environment ended 2022 very differently than it started. Inflation pressured operating expenses, rising interest rates and CARES Act extensions significantly reduced demand for student loan refinancing, and various loan forgiveness proposals and programs created uncertainty. In addition, we saw a decline in forecasted economic conditions which is expected to continue through 2023 and possibly further.

A strength of our franchise is our ability to adjust to both expected and unexpected events and deliver for our customers and investors. For example, in 2022 we:

•
Grew in-school originations 52%

•
Leveraged our Business Processing relationships to win new business

•
Adjusted our Refinance Loan marketing spend to reflect reduced demand due to higher rates and the continuation of interest free federal loans

•
Implemented hedging strategies and efficient funding programs that mitigated the impact of rising interest rates to our net interest margins

•
Successfully reduced operating expense in a high inflationary environment

•
Returned significant capital to our shareholders

•
Strengthened our capital significantly

•
Continued to simplify and de-risk our business

These results demonstrate our ability to deliver strong financial performance even in disruptive economic environments. Navient is focused on delivering exceptional results by executing our strategy: delivering on our growth potential, maximizing our loan portfolio cash flows, continuously improving our operating efficiency and prudent and consistent capital management.

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Financial highlights of 2022 include:

Federal Education Loans segment:

•
Net income of $407 million.

•
Net interest margin of 1.01%.

Consumer Lending segment:

•
Net income of $300 million.

•
Net interest margin of 2.81%.

•
Originated $2.0 billion of Private Education Loans.

Business Processing segment:

•
EBITDA(1) of $53 million.

•
Revenue of $330 million.

Capital, funding and liquidity:

•
Adjusted tangible equity ratio(1) of 7.7%.

•
Repurchased $400 million of common shares. $600 million common share repurchase authority remains outstanding.

•
Paid $91 million in common stock dividends.

•
Issued $1.7 billion in term ABS.

Expenses:

•
Adjusted Core Earnings expenses(1) of $769 million, down $205 million from $974 million in the prior year.

Navient’s Response to COVID-19

Since its emergence in early 2020, the impacts of COVID-19 have been dynamic and unpredictable. In response to COVID-19, we prioritized the safety of our employees and business partners, while continually striving to support the needs of our customers and communities. During 2021 and 2022, the COVID-19 pandemic and long-lasting changes it has produced have continued to affect our business operations. The future direct and indirect impact of the pandemic on our businesses, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if public health worsened due to various factors, such conditions could have an adverse effect on our businesses and results of operations and could adversely affect our financial condition.

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Results of Operations

GAAP Income Statements

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GAAP Comparison of 2022 Results with 2021

For the year ended December 31, 2022, net income was $645 million, or $4.49 diluted earnings per common share, compared with net income of $717 million, or $4.18 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 $211 million primarily as a result of the paydown of the FFELP and Private Education in-school loan portfolios and an increase in interest rates. This was partially offset by an increase in net interest income from the Private Education Refinance Loan portfolio as a result of increases in both the portfolio size (average balance) and net interest margin.

•
Provisions for loan losses increased $140 million from $(61) million to $79 million:

o
The provision for FFELP Loan losses remained unchanged at $0.

o
The provision for Private Education Loan losses increased $140 million from $(61) million to $79 million.

The Private Education Loan provision for loan losses of $79 million in the current period included $34 million of provision in connection with loan originations and $45 million related to a reserve build in connection with a decline in forecasted economic conditions. The negative provision of $(61) million in the year-ago period was related to the reversal of both $107 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans discussed below and $18 million related to a reserve release, partially offset by $64 million of provision related to loan originations.

•
Servicing revenue decreased $91 million primarily related to the transfer of the ED servicing contract to a third party in October 2021.

•
Asset recovery and business processing revenue decreased $203 million primarily as a result of a $158 million decrease in revenue earned in our Business Processing segment due to the expected $183 million reduction in revenue from the wind-down of pandemic-related contracts, which was partially offset by a $25 million increase in revenue from services for our traditional services clients. The remaining $45 million decrease was related to revenue earned in our Federal Education Loan segment and was due to the CARES Act’s impact on collection activities.

•
Gains on sales of loans decreased $78 million in connection with the sale of approximately $1.6 billion of Private Education Loans in 2021. There were no such sales in the current period.

•
Losses on debt repurchases decreased $73 million. We repurchased $2.6 billion of debt at a $73 million loss in the year-ago period. There were no debt repurchases in the current period.

•
Net gains on derivative and hedging activities increased $107 million. The primary factors affecting the change were 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.

•
Excluding net regulatory-related expenses of $7 million and $233 million in 2022 and 2021, respectively, operating expenses were $769 million and $974 million in 2022 and 2021, respectively. This $205 million decrease was primarily related to the transfer of the ED servicing contract and the decline in Business Processing segment pandemic-related revenue. Included in 2021 regulatory expenses was $205 million related to the resolution of previously disclosed litigation.

•
During 2022 and 2021, the Company incurred $36 million and $26 million, respectively, of restructuring/other reorganization expenses, primarily due to severance-related costs, facility lease terminations and the impairment of a facility held for sale. Expense in 2022 primarily relates to severance in connection with the Company’s decision to exit (primarily the FFELP asset recovery business) and consolidate certain business lines and other efficiency initiatives. Expense in 2021 primarily relates to facility lease terminations and the impairment of a facility that was subsequently sold as the Company reduced and consolidated its facility footprint to become more efficient.

We repurchased 24.8 million and 34.4 million shares of our common stock during 2022 and 2021, respectively. As a result, our average outstanding diluted shares decreased by 28 million common shares (or 16%) from the year-ago period.

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Segment Results

Federal Education Loans Segment

The following table presents Core Earnings results for our Federal Education Loans segment.

Highlights of 2022 vs. 2021

•
Net income was $407 million compared to $454 million.

•
Net interest income decreased $56 million primarily due to the paydown of the portfolio as well as an increase in interest rates. Approximately half of the paydown of the portfolio was the result of borrowers consolidating their loans with ED as part of the Public Services Loan Forgiveness Program.

•
Provision for loan losses remained at $0.

o
Net charge-offs were $40 million compared to $26 million.

o
Delinquencies greater than 90 days were $3.3 billion compared to $2.1 billion.

o
Forbearances were $7.6 billion compared to $6.3 billion.

•
Other revenue decreased $136 million primarily related to the transfer of the ED servicing contract to a third party in October 2021 as well as a decrease in asset recovery revenue.

•
Expenses were $117 million lower as a result of the paydown of the loan portfolio and the decrease in other revenue discussed above.

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Key performance metrics are as follows:

(1)
Closed on the novation and transfer of our ED servicing contract to a third party in October 2021. As of year-end 2022, we serviced $51 billion in FFELP (federally guaranteed) loans.

Net Interest Margin

The following table details the net interest margin.

(1)
The average balances of the interest-earning assets for the respective periods are:

As of December 31, 2022, our FFELP Loan portfolio totaled $43.5 billion, comprised of $15.7 billion of FFELP Stafford Loans and $27.8 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of December 31, 2022 was 7 years and 8 years, respectively, assuming a Constant Prepayment Rate (CPR) of 8% and 5%, respectively.

Floor Income

The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn Floor Income after December 31, 2022 and 2021, based on interest rates as of those dates.

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period January 1, 2023 to December 31, 2027.

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Servicing Revenue

Servicing revenue decreased $97 million primarily related to the transfer of the ED servicing contract to a third party in October 2021. To aid in the transition, Navient provided limited services in 2022 to the third party through a transition services agreement. As part of the transaction, approximately 700 Navient employees were transferred to the third party. This transaction provided a seamless transition for millions of borrowers ensuring the ongoing servicing capacity for ED through the knowledge transfer and ongoing employment of 700 employees. Additional benefits to Navient of this transaction are the simplification of our business, reducing our overall risk profile and avoiding significant severance expense.

Third-party loan servicing fees in 2022 and 2021 included $0 and $104 million, respectively, of servicing revenue related to the ED servicing contract.

Asset Recovery and Business Processing Revenue

Asset recovery and business processing revenue decreased $45 million primarily as a result of COVID-19 and the CARES Act's impact on certain collection and processing activities (temporary stoppage or other restrictions on certain activities).

Operating Expenses

Operating expenses for the Federal Education Loans segment primarily include costs incurred to perform servicing and asset recovery activities on our FFELP Loan portfolio and federal education loans held by other institutions. Expenses were $117 million lower, primarily as a result of the decrease in servicing and asset recovery revenue discussed above.

Federal Loan Forgiveness

On August 24, 2022, the Biden-Harris Administration announced its Student Debt Relief (SDR) Plan. The SDR Plan provides up to $20,000 in one-time debt relief to income-qualified recipients with ED held student loans and initially extended the repayment pause on ED held loans through December 31, 2022. This repayment pause has been further extended as detailed below. Privately held FFELP Loans themselves, like ours, do not qualify for debt forgiveness.

Following the initial announcement of the SDR Plan, ED provided more specific guidance on debt relief through its studentaid.gov website on September 29, 2022. Following publication of the SDR Plan, a number of states and private organizations initiated legal challenges to the SDR Plan in various courts throughout the country, which ultimately resulted in the implementation of the SDR Plan being disallowed. The Biden-Harris Administration and ED subsequently appealed both cases to the Supreme Court of the United States which has agreed to hear the cases on February 28, 2023, and a ruling is expected prior to the end of the Supreme Court's current term. If the SDR Plan has not been implemented and the litigation is not resolved by June 30, 2023, payments are scheduled to resume 60 days after that date. While the current version of the SDR Plan provides that borrowers with federal student loans not held by ED cannot obtain one-time debt relief by consolidating those loans into Direct Loans, ED states that they are assessing whether there are alternative pathways to provide relief to borrowers with federal student loans not held by ED, including FFELP Loans.

We estimate that borrowers with approximately $600 million of FFELP Loans (1% of the FFELP portfolio’s average 2022 balance) had consolidated their loans with ED prior to the deadline to qualify for debt relief established by the SDR Plan.

As a result, there was not a material impact on the Company’s accounting and related 2022 results related to the SDR Plan as currently:

1.
Privately held FFELP Loans themselves, like ours, do not qualify for debt forgiveness, and

2.
ED required FFELP borrowers to apply to consolidate their loans into the Direct Loan program prior to September 29, 2022, to qualify for their loan forgiveness.

As a result, at this time we do not expect there to be incremental consolidation activity in the future related to potential loan forgiveness under the SDR Plan.

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Consumer Lending Segment

The following table presents Core Earnings results for our Consumer Lending segment.

Highlights of 2022 vs. 2021

•
Originated $2.0 billion of Private Education Loans compared to $6.0 billion.

o
Refinance Loan originations were $1.7 billion compared to $5.8 billion. The decrease in originations is primarily the result of borrowers with fixed interest rate loans having less of an incentive to refinance in light of the significant increase in interest rates that occurred in 2022.

o
In-school loan originations increased 52% to $322 million compared to $212 million.

•
Net income was $300 million compared to $492 million.

•
Net interest income decreased $48 million primarily due to the paydown of the in-school loan portfolio. This was partially offset by an increase in the net interest margin on the Refinance Loan portfolio.

•
Provision for loan losses increased $140 million. The provision for loan losses of $79 million in the current period included $34 million of provision in connection with loan originations and $45 million related to a reserve build in connection with a decline in forecasted economic conditions. The negative provision of $(61) million in the year-ago period was related to the reversal of both $107 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans and $18 million related to a reserve release, partially offset by $64 million of provision related to loan originations. The increases in charge-offs and delinquencies detailed below are primarily the result of loans that were experiencing repayment difficulties pre-COVID returning to repayment after pandemic relief.

o
Excluding the $30 million and $16 million, respectively, of charge-offs on the expected future recoveries of previously fully charged-off loans, net charge-offs were $313 million compared with $153 million.

o
Private Education Loan delinquencies greater than 90 days: $411 million, up $114 million from $297 million.

o
Private Education Loan forbearances: $401 million, down $134 million from $535 million.

•
Gains on sales of loans decreased $91 million in connection with the sale of approximately $1.6 billion of Private Education Loans in 2021. There were no such sales in the current year.

•
Expenses decreased $14 million primarily due to a decline in servicing expense.

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Key performance metrics are as follows:

(1)
Excludes $30 million, $16 million and $23 million of charge-offs on the expected future recoveries of previously fully charged-off loans in 2022, 2021 and 2020, respectively, as a result of increasing the net charge-off rate on defaulted loans.

Net Interest Margin

The following table details the net interest margin.

(1)
The average balances of the interest-earning assets for the respective periods are:

The decrease in the net interest margin from the prior years is primarily due to the increase in the relative proportion of the higher quality, lower yielding Private Education refinance loan portfolio compared to the non-refinance portfolio.

As of December 31, 2022, our Private Education Loan portfolio totaled $18.7 billion, comprised of $9.5 billion of refinance loans and $9.2 billion of in-school loans. The weighted-average life of this portfolio as of December 31, 2022 was 4 years and 5 years, respectively, assuming a Constant Prepayment Rate (CPR) of 15% and 10%, respectively.

Provision for Loan Losses

The provision for Private Education Loan losses increased $140 million. The provision for loan losses of $79 million in the current period included $34 million of provision in connection with loan originations and $45 million related to a reserve build in connection with a decline in forecasted economic conditions. The negative provision of $(61) million in 2021 was related to the reversal of both $107 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans and $18 million related to a reserve release, partially offset by $64 million of provision related to loan originations.

Gains on Sales of Loans

Gains on sales of loans in 2022 decreased $91 million in connection with the sale of $1.6 billion of Private Education Loans in 2021. There were no such sales in 2022.

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Operating Expenses

Operating expenses for our consumer lending segment include costs to originate, acquire, service and collect on our consumer loan portfolio. Operating expenses decreased $14 million primarily due to a decline in servicing expense.

Business Processing Segment

The following table presents Core Earnings results for our Business Processing segment.

Highlights of 2022 vs. 2021

•
Net income was $40 million compared to $99 million.

•
Revenue decreased $158 million due to the expected $183 million reduction in revenue from the wind-down of pandemic-related contracts, which was partially offset by a $25 million increase in revenue from services for our traditional government and healthcare services clients.

•
EBITDA(1) was $53 million, down $83 million, or 61%. The decrease in EBITDA(1) was primarily the result of the revenue decrease discussed above.

Key performance metrics are as follows:

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Other Segment

The following table presents Core Earnings results for our Other segment.

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses is due to the negative carrying cost of our corporate liquidity portfolio. The amount of the net interest loss is primarily a result of the size of the liquidity portfolio as well as the cost of funds of the debt funding the corporate liquidity portfolio.

Losses on Debt Repurchases

Losses on debt repurchases decreased $73 million. We repurchased $2.6 billion of debt at a $73 million loss in 2021. There were no debt repurchases in 2022.

Unallocated Shared Services Expenses

Unallocated shared services expenses are comprised of costs primarily related to information technology costs related to infrastructure and operations, stock-based compensation expense, accounting, finance, legal, compliance and risk management, regulatory-related expenses, human resources, certain executive management and the board of directors. Regulatory-related expenses include actual settlement amounts as well as third-party professional fees we incur in connection with such regulatory matters and are presented net of any insurance reimbursements for covered costs related to such matters. On an adjusted basis, expenses increased $6 million from the prior year. Adjusted expenses exclude $7 million and $233 million, respectively, of regulatory-related expenses in 2022 and 2021.

Included in 2021 regulatory expenses was $205 million related to the resolution of previously disclosed litigation. See “Note 12 – Commitments, Contingencies and Guarantees” for further discussion.

See “Note 12 – Commitments, Contingencies and Guarantees” for a discussion of legal and regulatory matters where it is reasonably possible that a loss contingency exists. The Company is unable to anticipate the timing of a resolution or the impact that these matters may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.

Restructuring/Other Reorganization Expenses

During 2022 and 2021, the Company incurred $36 million and $26 million, respectively, of restructuring/other reorganization expenses, primarily due to severance-related costs, facility lease terminations and the impairment of a facility held for sale. Expense in 2022 primarily relates to severance in connection with the Company's decision to exit (primarily the FFELP asset recovery business) and consolidate certain business lines and other efficiency initiatives. Expense in 2021 primarily relates to facility lease terminations and the impairment of a facility that was subsequently sold as the Company reduced and consolidated its facility footprint to become more efficient.

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Financial Condition

This section provides information regarding the balances, activity and credit performance metrics of our education loan portfolio.

Summary of our Education Loan Portfolio

Ending Education Loan Balances, net

(1)
Loans for customers still attending school and are not yet required to make payments on the loan.

(2)
Includes loans in deferment or forbearance.

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Education Loan Activity

(1)
Includes the origination of $390 million, $1.7 billion and $1.0 billion of Private Education Refinance Loans in 2022, 2021 and 2020, respectively, that refinanced FFELP and Private Education Loans that were on our balance sheet.

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FFELP Loan Portfolio Performance

(1)
Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

(2)
Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors such as disaster relief, including COVID-19 relief programs.

(3)
The period of delinquency is based on the number of days scheduled payments are contractually past due.

Private Education Loan Portfolio Performance

(1)
Loans for customers who are attending school or are in other permitted educational activities and are not yet required to make payments on their loans, e.g., internship periods, as well as loans for customers who have requested and qualify for other permitted program deferments such as various military eligible deferments.

(2)
Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief, including COVID-19 relief programs, consistent with established loan program servicing policies and procedures.

(3)
The period of delinquency is based on the number of days scheduled payments are contractually past due.

(4)
Excluding Private Education Refinance Loans, which do not have a cosigner, the cosigner rate was 65% for all periods presented.

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Allowance for Loan Losses

(1)
Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off.

(2)
An increase in the net charge-off rate on defaulted Private Education Loans in 2022 resulted in a $30 million reduction in the balance of expected future recoveries on previously fully charged-off loans.

(3)
At the end of each month, for Private Education Loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans:

(4)
For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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(1)
In connection with the sale of approximately $1.6 billion of Private Education Loans in 2021.

(2)
Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off.

(3)
An increase in the net charge-off rate on defaulted Private Education Loans in 2021 resulted in a $16 million reduction in the balance of expected future recoveries on previously fully charged-off loans.

(4)
At the end of each month, for Private Education Loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans:

(5)
For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

(6)
See “Results of Operations – GAAP Comparison of 2022 Results with 2021” for further details.

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(1)
For a further discussion of our adoption of CECL, see “Note 2 – Significant Accounting Policies.”

(2)
Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off.

(3)
An increase in the net charge-off rate on defaulted Private Education Loans in 2020 resulted in a $23 million reduction in the balance of expected future recoveries on previously fully charged-off loans.

(4)
At the end of each month, for Private Education Loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans.

(5)
For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates primarily on our Federal Education Loans and Consumer Lending segments. Our Business Processing and Other segments require minimal liquidity and funding.

We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for running the operations of our businesses (including derivative collateral requirements) throughout market cycles, including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include the origination of Private Education Loans, acquisitions of Private Education Loan and FFELP Loan portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of our common stock. To achieve these objectives, we analyze and monitor our liquidity needs and maintain excess liquidity and access to diverse funding sources including the issuance of unsecured debt and the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.

We define our liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses or to invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risk relates to our ability to service our debt, meet our other business obligations and to continue to grow our business. The ability to access the capital markets is impacted by general market and economic conditions, our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

Credit ratings and outlooks are opinions subject to ongoing review by the rating agencies and may change, from time to time, based on our financial performance, industry and market dynamics and other factors. Other factors that influence our credit ratings include the rating agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions. We have unsecured debt totaling $7.0 billion at December 31, 2022. Three credit rating agencies currently rate our long-term unsecured debt at below investment grade.

We expect to fund our ongoing liquidity needs, including the repayment of $1.3 billion of senior unsecured notes that mature in the short term (i.e., over the next 12 months) and the remaining $5.7 billion of senior unsecured notes that mature in the long term (from 2023 to 2043 with 80% maturing by 2029), through a number of sources. These sources include our cash on hand, unencumbered FFELP Loan and Private Education Refinance Loan portfolios (see “Sources of Primary Liquidity” below), the predictable operating cash flows provided by operating activities, the repayment of principal on unencumbered education loan assets, and the distribution of overcollateralization from our securitization trusts. We may also, depending on market conditions and availability, draw down on our secured FFELP Loan and Private Education Loan facilities, issue term ABS, enter into additional Private Education Loan ABS repurchase facilities, or issue additional unsecured debt.

We originate Private Education Loans (a portion of which is obtained through a forward purchase agreement). We also have purchased and may purchase, in future periods, Private Education Loan and FFELP Loan portfolios from third parties. Loan originations and purchases are part of our ongoing liquidity needs. We repurchased 24.8 million shares of common stock for $400 million in 2022 and have $600 million of unused share repurchase authority as of December 31, 2022.

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Sources of Primary Liquidity

Sources of Additional Liquidity

Liquidity may also be available under our secured credit facilities. Maximum borrowing capacity under the FFELP Loan and Private Education Loan asset-backed commercial paper (ABCP) facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered loans. The following tables detail the additional borrowing capacity of these facilities with maturity dates ranging from June 2023 to April 2024.

At December 31, 2022, we had a total of $4.1 billion of unencumbered tangible assets inclusive of those listed in the table above as sources of primary liquidity. Total unencumbered education loans comprised $1.6 billion principal of our unencumbered tangible assets of which $1.5 billion and $68 million related to Private Education Loans and FFELP Loans, respectively. In addition, as of December 31, 2022, we had $5.2 billion of encumbered net assets (i.e., overcollateralization) in our various financing facilities (consolidated variable interest entities). Our secured financing facilities include Private Education Loan ABS Repurchase Facilities, which had $0.7 billion outstanding as of December 31, 2022. These repurchase facilities are collateralized by the net assets in previously issued Private Education Loan ABS trusts and have had a cost of funds lower than that of a new unsecured debt issuance.

The following table reconciles encumbered and unencumbered assets and their net impact on total Tangible Equity.

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

(2)
At December 31, 2022 and 2021, there were $(285) million and $324 million, respectively, of net gains (losses) on derivatives hedging this debt in unencumbered assets, which partially offset these gains (losses).

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Borrowings

Ending Balances