Navient Corporation 10-Q Summary
Business Context and Reporting Period
Navient provides education-finance and business-processing services through Federal Education Loans, Consumer Lending, and Business Processing segments. The filing covers the unaudited quarter ended March 31, 2022, with comparison to the quarter ended March 31, 2021.
- Federal Education Loans: $51.0 billion of net FFELP loans owned and $59 billion of federally guaranteed loans serviced at March 31, 2022.
- Consumer Lending: $20.1 billion of net private education loans; $966 million originated during the quarter.
- Business Processing: services provided to more than 600 government and healthcare organizations.
Financial Performance and Key Metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| GAAP net income | $255 million | $370 million | Down 31% |
| Diluted EPS | $1.67 | $2.00 | Down 17% |
| Core Earnings net income | $135 million | $305 million | Down 56% |
| Adjusted diluted Core EPS | $0.90 | $1.71 | Down 47% |
| Total interest income | $626 million | $692 million | Down 10% |
| Net interest income | $337 million | $363 million | Down 7% |
| Net interest income after provisions | $321 million | $450 million | Down 29% |
| Total other income | $223 million | $304 million | Down 27% |
| Total expenses | $212 million | $270 million | Down 21% |
| Return on assets, GAAP | 1.34% | 1.78% | Down 44 basis points |
- GAAP net income included $139 million of net derivative gains and $4 million of goodwill and acquired-intangible amortization or impairment. Core Earnings exclude the relevant derivative-accounting volatility and acquired-intangible effects.
- Federal Education Loans segment net income was $107 million, compared with $112 million. Segment net interest margin increased to 1.04% from 0.97%.
- Consumer Lending segment net income was $79 million, compared with $234 million. The segment net interest margin declined to 2.80% from 2.99%.
- Business Processing revenue was $94 million, compared with $125 million; EBITDA was $19 million, compared with $36 million, and EBITDA margin declined to 20% from 29%.
- Ending net education loan balances were $71.1 billion, down from $72.8 billion at December 31, 2021 and $76.6 billion at March 31, 2021.
- Allowance for loan losses was $1.2 billion at March 31, 2022, including $255 million for FFELP loans and $964 million for private education loans.
Cash Flow, Debt, Liquidity, and Capital
- Net cash used in operating activities was $109 million, compared with $179 million of cash provided in Q1 2021.
- Net cash provided by investing activities was $1.75 billion, including $2.79 billion of education-loan payments and $1.09 billion of originations and acquisitions.
- Net cash used in financing activities was $2.01 billion, including $3.30 billion of secured-borrowing repayments, $115 million of share repurchases, and $24 million of dividends.
- Total cash, cash equivalents, and restricted cash declined to $3.21 billion from $4.10 billion at March 31, 2021. Unrestricted cash and liquid investments were $708 million.
- Total borrowings were $74.6 billion at March 31, 2022, consisting of $7.0 billion of unsecured debt and $67.7 billion of secured borrowings.
- Approximately $1.0 billion of senior unsecured notes mature within the following 12 months; $6.1 billion mature from 2023 through 2043, with 81% of that amount due by 2029.
- Additional borrowing capacity under FFELP and private-education-loan ABCP facilities was $2.5 billion at quarter-end.
- Adjusted Tangible Equity Ratio was 7.0%, compared with 6.2% a year earlier; the pro forma ratio excluding cumulative derivative-accounting losses was 7.2%.
- Navient issued $952 million of term asset-backed securities during the quarter and repurchased 6.2 million common shares for $115 million. The remaining share-repurchase authorization was $885 million.
Material Changes Versus the Prior Comparable Period
- Profitability declined primarily because Q1 2021 benefited from a $1.6 billion private education-loan sale, generating $76 million of GAAP loan-sale gains and an $87 million negative provision for loan losses. No comparable sale occurred in Q1 2022.
- Servicing revenue fell $35 million, primarily because Navient transferred the Department of Education servicing contract covering 5.6 million accounts to a third party in October 2021. Transition-services revenue partly offset the reduction.
- Business Processing revenue declined as pandemic-related unemployment-benefit, contact-tracing, and vaccine-administration contracts wound down.
- Operating expenses declined $54 million, reflecting the Department of Education contract transfer and lower Business Processing activity.
- Private-loan credit performance weakened as borrowers returned to repayment: delinquencies over 30 days increased to 4.0% from 2.3%, delinquencies over 90 days increased to 1.6% from 0.9%, and charge-offs increased to $69 million from $35 million.
- FFELP delinquencies over 30 days increased to 13.5% from 8.3%, while forbearance declined to 12.9% from 15.5%.
- Common shares used for diluted EPS declined to 153 million from 185 million, primarily due to share repurchases.
Guidance, Outlook, Risks, and Unusual Items
- Management expects to continue returning excess capital through dividends and share repurchases while maintaining capital adequacy, leverage, credit ratings, and capital-market access. The filing does not provide quantitative earnings guidance.
- Management noted uncertainty regarding the end of payment-relief and stimulus programs, future private-loan credit losses, economic conditions, inflation, COVID-19 effects, and the war in Ukraine. The filing states that inflation and the war in Ukraine had no material impact on critical accounting policies at quarter-end, but both remain subject to monitoring.
- The company’s unsecured debt is rated below investment grade by three rating agencies, creating funding-cost, liquidity, and collateral risks.
- Navient is transitioning USD LIBOR-linked instruments to SOFR by June 30, 2023. The LIBOR Act enacted in March 2022 provides a statutory replacement mechanism for contracts lacking effective fallback provisions.
- Derivative valuations produced significant GAAP volatility. Derivative accounting increased Q1 2022 GAAP income by $159 million relative to Core Earnings, while cumulative derivative-accounting effects reduced GAAP equity by approximately $63 million at quarter-end.
- In January 2022, Navient entered agreements with 40 state attorneys general. The company expects to cancel approximately $1.7 billion of qualifying charged-off private-loan balances for approximately 66,000 borrowers and made or expects to make a one-time payment of approximately $145 million to the states. Approximately $205 million of related regulatory expense was recognized in Q4 2021.
- The CFPB litigation remains unresolved. Navient states that a potential loss is reasonably possible but that the timing and amount cannot be estimated; no reserve has been established for the potential exposure described in the filing.
- The filing identifies risks from loan defaults, funding availability, credit ratings, liquidity, interest-rate and basis mismatches, derivatives, technology and cybersecurity, regulation, government contracting, litigation, reputational issues, and shareholder activism.
Important Facts for Investors to Verify
- Whether private-loan delinquencies and charge-offs stabilize or continue rising after pandemic payment relief ends.
- The adequacy of the $964 million private-education-loan allowance, including expected future recoveries on charged-off loans.
- Navient’s ability to refinance or repay the $1.0 billion of senior unsecured notes maturing within 12 months while maintaining access to secured and unsecured funding.
- The sustainability of capital returns given $708 million of unrestricted cash, below-investment-grade unsecured ratings, and the $885 million remaining repurchase authorization.
- The continuing effects of the Department of Education servicing-contract transfer and the winddown of pandemic-related Business Processing contracts.
- The ultimate financial and regulatory impact of the unresolved CFPB litigation and other consumer-protection matters.
- The reconciliation between GAAP earnings and Core Earnings, particularly the $159 million derivative-accounting adjustment in Q1 2022.
- The effect of the LIBOR-to-SOFR transition on FFELP loan economics, securitizations, derivatives, and funding costs.