NAVIENT CORP annual report, FY2021

Navient Corporation 2021 Form 10-K Summary

Business Context and Reporting Period

Navient filed an annual report for the fiscal year ended December 31, 2021, with comparisons primarily to 2020. The company operates three primary business segments: Federal Education Loans, Consumer Lending, and Business Processing. It owned $52.6 billion of net FFELP loans and $20.2 billion of net Private Education Loans at year-end, and provided processing services to more than 600 government and healthcare clients.

The FFELP portfolio is being wound down because new FFELP originations ended in 2010. Approximately 95% of Navient-held FFELP loans were funded with non-recourse, long-term securitization debt. The company originated $6.0 billion of Private Education Loans during 2021.

Financial Performance and Key Metrics

Metric	2021	2020	Change
GAAP net income	$717 million	$412 million	Up 74%
Diluted EPS	$4.18	$2.12	Up 97%
Core Earnings net income	$551 million	$631 million	Down 13%
Adjusted Core Earnings diluted EPS	$4.45	$3.40	Up 31%
Net interest income	$1.332 billion	$1.252 billion	Up 6%
Net interest income after loan-loss provisions	$1.393 billion	$1.097 billion	Up 27%
Operating expenses	$1.207 billion	$964 million	Up 25%
Return on assets	0.88%	0.47%	Improved
Return on common equity	27%	17%	Improved

GAAP earnings benefited materially from a $235 million after-tax-adjustment-equivalent net impact from derivative accounting, compared with a $265 million negative impact in 2020. Core Earnings exclude much of this derivative volatility and goodwill/intangible accounting.

Federal Education Loans Core Earnings declined 15% to $454 million. Segment net interest margin was 0.99%, unchanged from 2020.
Consumer Lending Core Earnings increased 37% to $492 million. Segment net interest margin declined to 2.92% from 3.20%, partly because refinance loans represented a larger share of the portfolio.
Business Processing revenue increased 61% to $488 million; EBITDA increased 139% to $136 million, and the EBITDA margin increased to 28% from 19%.
Total education loans, net, declined to $72.8 billion from $79.4 billion, reflecting repayments, refinancings, loan sales, and the runoff of FFELP assets.

Cash Flow, Debt, Liquidity, and Capital

Cash provided by operating activities was $702 million, compared with $987 million in 2020.
Investing activities provided $6.673 billion, principally from $11.137 billion of education-loan principal collections, partially offset by $6.104 billion of loan acquisitions and originations.
Financing activities used $7.334 billion, including $11.163 billion of collateralized-loan borrowings repaid, $2.702 billion of unsecured notes repaid, $600 million of share repurchases, and $107 million of dividends.
Unrestricted cash and liquid investments were $905 million at year-end, compared with $1.183 billion in 2020. Primary liquidity totaled $1.412 billion, including unencumbered FFELP and Private Education Refinance Loans.
Additional secured-facility capacity was $2.781 billion, including $546 million for FFELP loans and approximately $2.235 billion for Private Education Loans.
Total GAAP borrowings were $76.978 billion, down from $83.945 billion. Senior unsecured debt was $7.014 billion, and three rating agencies rated the long-term unsecured debt below investment grade.
Management expects to fund approximately $7.0 billion of senior unsecured debt maturities from 2023 through 2043 through cash, operating cash flow, loan repayments, securitization-trust cash flows, secured facilities, ABS issuance, and potential additional unsecured debt.
The adjusted tangible equity ratio improved to 5.9% from 5.0%. Navient repurchased $600 million of common stock, paid $107 million of dividends, and received authorization for an additional $1 billion share-repurchase program, all unused at December 31, 2021.

Material Changes Versus the Prior Comparable Period

Navient transferred its servicing contract for 5.6 million Department of Education-owned accounts to a third party on October 6, 2021. The contract had represented approximately 6% of annual revenue. Approximately 700 employees transferred to the third party, and Navient will provide transition services into 2022.
Private Education Loan originations increased approximately 30% to $6.0 billion, while approximately $1.6 billion of Private Education Loans were sold, producing a $78 million GAAP gain on sale.
Business Processing expanded sharply through pandemic-related unemployment, contact-tracing, vaccine-administration, and other government contracts. Management stated that some pandemic-related revenue has begun to decline but may create follow-on opportunities.
FFELP delinquency over 30 days increased to 10.6% from 9.2%; Private Education Loan delinquency over 30 days increased to 3.2% from 2.6%. Both were described as below pre-pandemic levels.
Private Education Loan forbearances declined to $535 million, or 2.6% of the portfolio, from $844 million, or 3.9%.
Navient repurchased $2.6 billion of unsecured debt at a $73 million pretax loss, compared with $768 million repurchased at a $6 million loss in 2020.
The company recorded $26 million of restructuring and reorganization expense, compared with $9 million in 2020, and $30 million of goodwill and acquired-intangible impairment and amortization expense.

Guidance, Outlook, Risks, and Unusual Items

The filing does not provide formal numerical earnings guidance. Management expects the FFELP portfolio to continue generating cash flow while declining over time, with a remaining weighted-average life of approximately seven years. It expects continued opportunities in Private Education Loan originations, Business Processing, organic growth, and acquisitions, while returning excess capital through dividends and share repurchases.

Regulatory settlement: In January 2022, Navient entered agreements with 40 State Attorneys General. The company recognized $205 million of 2021 regulatory expense, consisting of approximately $145 million of cash payments and approximately $50 million related to forgiveness of certain charged-off private-loan balances. The settlement covers approximately 66,000 borrowers with aggregate outstanding balances of approximately $1.7 billion but does not resolve the CFPB litigation.
CFPB litigation: The company states that a reasonably possible loss contingency remains, but that it cannot estimate the timing or potential exposure. No additional reserve was established for this matter.
Credit performance: Management expects defaults may increase in 2022 as forbearance effects unwind and payment-relief and stimulus programs end. Total reserves excluding expected future recoveries were $1.6 billion at year-end, equal to 6.3% of the Private Education Loan portfolio and 0.5% of the FFELP portfolio.
LIBOR transition: Approximately $172 billion of financial instruments referenced one-month or three-month USD LIBOR at year-end, including approximately $110 billion maturing after June 30, 2023. Some instruments lack clear fallback provisions, and certain ABS and FFELP Special Allowance Payment provisions may be difficult to amend.
Debt maturity issue: Three FFELP secured debt tranches totaling $416 million experienced contractual maturity-date defaults during 2021. Management expects the bonds to be paid in full between 2029 and 2035, with no change to principal or coupon, but no revised contractual maturity date was established.
Interest-rate and derivative risk: A 100-basis-point increase in rates was estimated to increase annual after-tax earnings by $59 million, while a 100-basis-point decrease was estimated to reduce earnings by $49 million. Actual results may differ because of basis risk, prepayments, derivative valuations, and Floor Income.
COVID-19: Approximately 85% of the workforce remained remote at year-end. Management reported no material disruption to operations but cautioned that future variants, economic deterioration, borrower defaults, and funding-market volatility could materially affect results.
Accounting estimates: The allowance for Private Education Loan losses was a critical audit matter. Results remain sensitive to economic forecasts, prepayment assumptions, recoveries, default rates, and qualitative adjustments.

Most Important Facts for Investors to Verify

Reconcile GAAP net income of $717 million with Core Earnings of $551 million and isolate the effect of derivative mark-to-market gains, regulatory expenses, loan-sale gains, and debt-repurchase losses.
Monitor post-forbearance delinquency, charge-off, and recovery trends, particularly for Private Education Loans and loans modified as troubled debt restructurings.
Assess liquidity against the timing and refinancing requirements of unsecured and secured debt maturities, including the $7.0 billion of projected 2022 secured-borrowing paydowns and $7.0 billion of senior unsecured maturities through 2043.
Track the CFPB litigation, State Attorneys General settlement implementation, other regulatory investigations, and any potential indemnification obligations related to the SLM spin-off.
Evaluate the sustainability of pandemic-related Business Processing revenue and the company’s ability to replace declining FFELP earnings.
Verify progress, costs, and legal exposure associated with the LIBOR-to-SOFR transition, including instruments maturing after June 30, 2023.
Consider the effect of continued share repurchases on leverage, tangible equity, liquidity, and future per-share results.