Navient Corporation 10-Q Summary — Q3 2022
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 nine months ended September 30, 2022, compared primarily with the corresponding 2021 periods.
- Federal Education Loans: $46.9 billion of net FFELP Loans and $54 billion of FFELP loans serviced at September 30, 2022.
- Consumer Lending: $19.2 billion of net Private Education Loans, including $9.8 billion of refinance loans.
- Business Processing: services for approximately 500 public-sector and healthcare organizations.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| GAAP net income | $105 million | $173 million | Down 39% |
| Diluted EPS | $0.75 | $1.04 | Down $0.29 |
| Core Earnings net income | $87 million | $149 million | Down 42% |
| Net interest income | $240 million | $334 million | Down 28% |
| Provision for loan losses | $28 million | $22 million | Up $6 million |
| Operating expenses | $194 million | $248 million | Down 22% |
| Adjusted Core Earnings expenses | $191 million | $242 million | Down $51 million |
For the nine months ended September 30, 2022, GAAP net income was $540 million, or $3.67 diluted EPS, compared with $728 million, or $4.15 diluted EPS, in 2021. Net interest income was $898 million versus $1.018 billion, while provisions for loan losses were $62 million versus a $66 million provision reversal in 2021.
- Federal Education Loans segment net income was $94 million, compared with $122 million. Its net interest margin was 0.94%, versus 1.04%.
- Consumer Lending segment net income was $65 million, compared with $73 million. Its net interest margin was 2.90%, versus 2.98%.
- Business Processing revenue was $79 million, compared with $122 million; EBITDA was $13 million, compared with $38 million, and EBITDA margin was 16%, versus 31%.
- Private Education Loan originations were $447 million, including $231 million of refinance loans and $216 million of in-school loans.
Cash flow, balance sheet, debt and liquidity
- Cash provided by operating activities for the first nine months was $98 million, compared with $534 million in 2021.
- Cash provided by investing activities was $6.812 billion, primarily reflecting $8.488 billion of education-loan repayments less $1.765 billion of originations and acquisitions.
- Financing activities used $6.576 billion, including $9.225 billion of repayments of borrowings collateralized by loans in trust, $315 million of share repurchases, and $69 million of dividends.
- Total cash, cash equivalents and restricted cash increased to $3.912 billion from $3.311 billion at September 30, 2021.
- Unrestricted cash and liquid investments were $1.364 billion. Primary liquidity, including unencumbered FFELP and Private Education Refinance Loans, totaled $1.785 billion.
- Additional borrowing capacity under FFELP and Private Education Loan ABCP facilities was $2.403 billion.
- Total GAAP borrowings were $69.675 billion, including $7.008 billion of unsecured debt and $63.342 billion of secured borrowings. Senior unsecured debt included $1.3 billion maturing within 12 months.
- Three credit rating agencies rated Navient’s long-term unsecured debt below investment grade. Management expects to fund near-term maturities through cash, operating cash flow, loan repayments, securitization-trust distributions, unencumbered assets, secured facilities, and potential capital-market transactions.
- Adjusted Tangible Equity Ratio was 7.8%, compared with 6.4% at September 30, 2021. Stockholders’ equity was $2.973 billion.
Material changes versus the prior comparable period
- Higher interest expense and reduced Floor Income, along with portfolio paydowns and additional amortization associated with loan-forgiveness-related consolidations, reduced net interest income.
- Federal Education Loan servicing revenue declined following the transfer of the Department of Education servicing contract to a third party in October 2021.
- Business Processing revenue declined as pandemic-related contracts wound down; traditional government and healthcare revenue partially offset the decline.
- Operating expenses fell primarily because of the servicing-contract transfer and lower Business Processing activity.
- There were no debt repurchases in Q3 2022, compared with $757 million repurchased at a $20 million loss in Q3 2021. There were also no loan sales in 2022, compared with approximately $1.6 billion of Private Education Loan sales in 2021.
- Share repurchases were $95 million in Q3 2022 and $315 million for the first nine months, compared with $150 million and $450 million, respectively, in 2021. The remaining authorization was $685 million.
Credit performance, outlook and risks
- FFELP Loans greater than 90 days delinquent were $3.8 billion, or 10.1% of loans in repayment, versus $1.9 billion and 4.3% a year earlier. FFELP forbearances were $7.4 billion, or 16.4% of loans in repayment and forbearance.
- Private Education Loans greater than 90 days delinquent were $394 million, or 2.0% of loans in repayment, versus $216 million and 1.1%. The Private Education Loan delinquency rate remained below pre-pandemic levels according to management, while net charge-offs increased.
- Q3 provisions included $13 million related to Private Education Loan originations and $15 million for anticipated economic deterioration. The filing cites inflation, higher interest rates, and deteriorating economic conditions as key assumptions affecting loss estimates.
- The Student Debt Relief Plan was not expected to have a material Q3 accounting impact because privately held FFELP Loans did not directly qualify and eligible borrowers generally had to apply to consolidate by September 29, 2022. Navient estimated approximately $600 million of its FFELP portfolio was subject to applications made before that deadline.
- Future changes to debt relief, consolidation eligibility, repayment programs, or related litigation could materially accelerate FFELP prepayments, reduce net interest income, and accelerate recognition of loan-premium and deferred-financing-fee amortization.
- The company expects to continue returning excess capital through dividends and share repurchases, subject to liquidity, capital adequacy, credit ratings, and market conditions.
- Material risks include credit losses, funding availability and cost, below-investment-grade ratings, interest-rate and basis risk, derivative valuation volatility, liquidity needs, regulatory and legal proceedings, technology and third-party service failures, and the transition from LIBOR to SOFR by June 30, 2023.
- Navient disclosed that the CFPB litigation and other consumer-protection proceedings could have a material adverse effect, but the timing and potential loss range could not be estimated and no reserves were established for those matters.
- The filing disclosed $778 million of defaulted FFELP secured debt tranches that had not matured by their contractual maturity dates; management expected payment in full between 2030 and 2035.
Important facts for investors to verify
- Reconcile GAAP earnings with Core Earnings and assess the recurring versus volatile effects of derivative accounting, goodwill and restructuring adjustments.
- Monitor FFELP delinquencies, forbearances, consolidation activity, prepayment rates, and the ultimate effect of federal debt-relief policies.
- Evaluate Private Education Loan charge-offs, delinquency trends, allowance coverage, and the $280 million of expected future recoveries on previously charged-off loans.
- Assess liquidity available to meet the $1.3 billion of senior unsecured debt maturities within the next 12 months and the company’s access to capital markets.
- Review the sustainability of dividends and share repurchases given cash flow of $98 million from operations during the first nine months and the company’s below-investment-grade ratings.
- Follow the CFPB litigation, regulatory matters, indemnification claims, and potential unreserved losses.
- Confirm the operational and financial effects of the Department of Education servicing-contract transfer and the continued wind-down of pandemic-related Business Processing contracts.