Navient(NAVI) - 2022 Q1 - Quarterly Report

Forward-Looking and Cautionary Statements This section details forward-looking statements and inherent risks, advising readers to consult risk disclosures - This report contains forward-looking statements based on management's current expectations, which involve risks and uncertainties that could cause actual results to differ materially[10] - Readers are cautioned not to place undue reliance on forward-looking statements and are urged to review risk disclosures in this Form 10-Q and other SEC filings[11] - Key risks include impacts of the COVID-19 pandemic, economic conditions, increased loan defaults, funding costs, LIBOR transition, interest rate volatility, credit rating reductions, regulatory changes, and legal proceedings[14] Use of Non-GAAP Financial Measures Navient uses non-GAAP financial measures, including Core Earnings, to provide a clearer view of operational performance - Navient evaluates its business segments and presents financial results using 'Core Earnings,' a non-GAAP financial measure, in addition to GAAP[16] - Core Earnings is used internally for management decisions, resource allocation, and in presentations to credit rating agencies, lenders, and investors[16] - Other non-GAAP measures presented include Adjusted Core Earnings, Tangible Equity, Adjusted Tangible Equity Ratio, Pro forma Adjusted Tangible Equity Ratio, and EBITDA (for Business Processing segment)[17] Business This section outlines Navient's core business operations, encompassing education finance and business processing solutions Overview and Fundamentals of Our Business Navient provides technology-enabled education finance and business processing solutions, managing loan portfolios and serving diverse clients - Navient provides technology-enabled education finance and business processing solutions, focusing on data-driven services for education, healthcare, and government clients[19] - - Federal Education Loans: Owns a $51.0 billion portfolio of federally guaranteed FFELP Loans, providing servicing and asset recovery services[20] - Consumer Lending: Owns, services, and originates Private Education Loans, with a $20.1 billion portfolio. Originated $966 million in Private Education Loans in Q1 2022[21] - Business Processing: Provides solutions for over 600 public sector and healthcare organizations, leveraging technology, machine learning, and analytics[22] - The company reported strong Q1 2022 results, generating significant capital and expects to continue returning excess capital to shareholders through dividends and share repurchases[27][28] Capital Return and Adjusted Tangible Equity Ratio (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :-------------------------- | :------ | :------ | | Shares repurchased (millions) | 6.2 | 8.2 | | Reduction in shares outstanding | 3% | 4% | | Total repurchases (dollars) | $115 million | $100 million | | Dividends paid | $24 million | $29 million | | Total Capital Returned | $139 million | $129 million | | Adjusted Tangible Equity Ratio | 7.0% | 6.2% | How We Organize Our Business Navient structures operations into Federal Education Loans, Consumer Lending, Business Processing, and an 'Other' segment, each managed distinctly - Navient operates in three primary segments: Federal Education Loans, Consumer Lending, and Business Processing, plus an 'Other' segment[33] - - Federal Education Loans Segment: Focuses on owning, servicing, and asset recovery for FFELP Loans[34] - Consumer Lending Segment: Manages the ownership, origination, acquisition, and servicing of Private Education Loans, generating revenue primarily from net interest income[35][36] - Business Processing Segment: Provides business processing services to over 600 government and healthcare clients, including government and healthcare-specific solutions[37] - The 'Other' segment includes the corporate liquidity portfolio, debt repurchase gains/losses, unallocated shared services expenses (e.g., regulatory), and restructuring costs[37] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Navient's financial condition and operational results, covering key metrics and segment performance Selected Historical Financial Information and Ratios This section summarizes Navient's key financial metrics and loan portfolio balances for Q1 2022 versus Q1 2021, on GAAP and Core Earnings bases Selected Historical Financial Information and Ratios (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :------------------------------------- | :------ | :------ | | GAAP Basis | | | | Net income | $255 million | $370 million | | Diluted earnings per common share | $1.67 | $2.00 | | Weighted average shares (diluted) | 153 million | 185 million | | Return on assets | 1.34% | 1.78% | | Core Earnings Basis | | | | Net income | $135 million | $305 million | | Diluted earnings per common share | $0.88 | $1.65 | | Adjusted diluted earnings per common share | $0.90 | $1.71 | | Net interest margin, Federal Education Loans | 1.04% | 0.97% | | Net interest margin, Consumer Lending | 2.80% | 2.99% | | Return on assets | 0.71% | 1.46% | | Education Loan Portfolios (Ending) | | | | FFELP Loans, net | $51,013 million | $56,873 million | | Private Education Loans, net | $20,088 million | $19,742 million | | Total education loans, net | $71,101 million | $76,615 million | The Quarter in Review Navient reported lower Q1 2022 GAAP and Core Earnings net income, with varied segment performance and continued capital return Q1 2022 Financial Performance Overview | Metric | Q1 2022 | | :------------------------------------ | :------ | | GAAP Net income | $255 million | | GAAP Diluted EPS | $1.67 | | Core Earnings Net income | $135 million | | Core Earnings Diluted EPS | $0.88 | | Adjusted diluted Core Earnings per share | $0.90 | | Federal Education Loans net income | $107 million | | FFELP Loan delinquency rate | 13.5% | | Consumer Lending net income | $79 million | | Private Education Loan originations | $966 million | | Private Education Loan delinquency rate | 4.0% | | Business Processing EBITDA | $19 million | | Business Processing Revenue | $94 million | | Adjusted tangible equity ratio | 7.0% | | Common shares repurchased | $115 million | | Common stock dividends paid | $24 million | | Term ABS issued | $952 million | | Adjusted Core Earnings expenses | $204 million | Navient's Response to COVID-19 Navient prioritized employee and customer safety during COVID-19, but future impacts remain uncertain, with potential adverse effects - Navient prioritized employee safety and customer/community support during the COVID-19 pandemic[44] - The pandemic continued to affect business operations in 2021 and Q1 2022, with future impacts remaining uncertain[44] - Deteriorating economic conditions or worsening pandemic could adversely affect business, results of operations, and financial condition[44] Results of Operations Navient's Q1 2022 GAAP net income decreased by 31% due to higher loan loss provisions, lower net interest income, and reduced servicing revenue GAAP Income Statement Highlights (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | Change ($M) | Change (%) | | :------------------------------------------ | :----------- | :----------- | :---------- | :--------- | | Net income | $255 | $370 | $(115) | (31)% | | Diluted earnings per common share | $1.67 | $2.00 | $(0.33) | (17)% | | Total interest income | $626 | $692 | $(66) | (10)% | | Total interest expense | $289 | $329 | $(40) | (12)% | | Net interest income | $337 | $363 | $(26) | (7)% | | Provisions for loan losses | $16 | $(87) | $103 | (118)% | | Net interest income after provisions | $321 | $450 | $(129) | (29)% | | Servicing revenue | $18 | $53 | $(35) | (66)% | | Asset recovery and business processing revenue | $97 | $139 | $(42) | (30)% | | Gains on sales of loans | $0 | $76 | $(76) | (100)% | | Gains (losses) on derivative and hedging activities, net | $98 | $36 | $62 | 172% | | Total operating expenses | $205 | $259 | $(54) | (21)% | | Restructuring/other reorganization expenses | $3 | $6 | $(3) | (50)% | - The $103 million increase in provision for loan losses was primarily due to loan originations in Q1 2022, contrasting with a $102 million reversal of allowance for loan losses in Q1 2021 related to loan sales[47][49] - Average outstanding diluted shares decreased by 32 million (17%) due to share repurchases of 6.2 million shares in Q1 2022 and 8.2 million in Q1 2021[48] Segment Results Navient's Core Earnings segment results show varied performance, with declining net income in Federal Education Loans and Consumer Lending, and reduced Business Processing revenue Federal Education Loans Segment The Federal Education Loans segment experienced a net income decrease due to portfolio paydown and reduced servicing and asset recovery revenue Federal Education Loans Segment Core Earnings (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Net income | $107 | $112 | (4)% | | Net interest income | $139 | $144 | (3)% | | Servicing revenue | $15 | $52 | (71)% | | Asset recovery and business processing revenue | $3 | $14 | (79)% | | Other income | $11 | $0 | 100% | | Direct operating expenses | $28 | $63 | (56)% | - Net interest income decreased primarily due to the natural paydown of the portfolio[53] - Other revenue decreased $37 million primarily due to the transfer of the ED servicing contract to a third party in October 2021[61] - Expenses were $35 million lower primarily as a result of the decrease in servicing and asset recovery revenue[65] Federal Education Loans Key Performance Metrics (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :------------------------------------ | :------ | :------ | | Segment net interest margin | 1.04% | 0.97% | | FFELP Loan spread | 1.11% | 1.03% | | Charge-offs | $7 million | $6 million | | Charge-off rate | 0.07% | 0.06% | | Greater than 30-days delinquency rate | 13.5% | 8.3% | | Greater than 90-days delinquency rate | 6.4% | 3.5% | | Forbearance rate | 12.9% | 15.5% | | Ending FFELP Loans, net | $51,013 million | $56,873 million | | Number of accounts serviced for ED | 0 million | 5.6 million | - Education loans eligible to earn Floor Income after rebates and economically hedged decreased to $14.1 billion at March 31, 2022, from $17.0 billion at March 31, 2021[59] Consumer Lending Segment The Consumer Lending segment's net income significantly declined due to the absence of prior year loan sale gains and increased loan loss provisions Consumer Lending Segment Core Earnings (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Net income | $79 | $234 | (66)% | | Private Education Loan originations | $966 | $1,700 | (43)% | | Net interest income | $152 | $169 | (10)% | | Provision for loan losses | $16 | $(87) | 118% | | Gains on sales of loans | $0 | $89 | (100)% | | Direct operating expenses | $35 | $41 | (15)% | - The $155 million decrease in net income was primarily due to the absence of $1.6 billion in loan sales in Q1 2021 (which generated $89 million in gains and a $102 million allowance reversal) and an increase in loan loss provisions[70] - Net interest income decreased due to the natural paydown of the non-refinance loan portfolio and Q1 2021 loan sales, partially offset by growth in the Private Education Refinance Loan portfolio[70] - Provision for loan losses increased $103 million, with Q1 2022 provision primarily related to loan originations, while Q1 2021 included a $102 million reversal from loan sales[75] Consumer Lending Key Performance Metrics (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :------------------------------------ | :------ | :------ | | Segment net interest margin | 2.80% | 2.99% | | Private Education Loan spread | 2.97% | 3.21% | | Charge-offs | $69 million | $35 million | | Charge-off rate | 1.38% | 0.68% | | Greater than 30-days delinquency rate | 4.0% | 2.3% | | Greater than 90-days delinquency rate | 1.6% | 0.9% | | Forbearance rate | 2.0% | 3.9% | | Ending Private Education Loans, net | $20,088 million | $19,742 million | | Ending Private Education Refinance Loans | $9,995 million | $7,882 million | | Private Education Refinance Loan originations | $941 million | $1,671 million | Business Processing Segment The Business Processing segment saw reduced revenue and EBITDA primarily due to the expected winddown of pandemic-related contracts Business Processing Segment Core Earnings (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Net income | $14 | $26 | (46)% | | Business processing revenue | $94 | $125 | (25)% | | Direct operating expenses | $76 | $91 | (16)% | | EBITDA | $19 | $36 | (47)% | | EBITDA margin | 20% | 29% | | - Revenue decreased primarily due to the expected winddown of pandemic-related contracts, partially offset by revenue from traditional government and healthcare services clients[82] Other Segment The 'Other' segment's net loss improved slightly due to a smaller corporate liquidity portfolio and lower cost of funds Other Segment Core Earnings (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Net income (loss) | $(65) | $(67) | (3)% | | Net interest loss after provision for loan losses | $(15) | $(18) | (17)% | | Unallocated shared services expenses | $66 | $64 | 3% | | Restructuring/other reorganization expenses | $3 | $6 | (50)% | - The decrease in net interest loss was primarily due to a smaller corporate liquidity portfolio and a decrease in the cost of funds[85] - Unallocated shared services expenses, adjusted for regulatory-related expenses, increased $9 million, primarily due to a $10 million insurance reimbursement in the prior year[86] - Restructuring/other reorganization expenses were primarily due to facility lease terminations and severance-related costs[88] Financial Condition This section reviews Navient's education loan portfolio balances and credit performance, noting a decrease in total loans, increasing delinquencies, and generally decreasing forbearance rates Summary of Our Education Loan Portfolio This section summarizes Navient's education loan portfolio, detailing the composition and balances of FFELP and Private Education Loans Ending Education Loan Balances, Net (March 31, 2022 vs. December 31, 2021 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | March 31, 2021 ($M) | | :-------------------------- | :------------------ | :--------------------- | :------------------ | | FFELP Loans, net | $51,013 | $52,641 | $56,873 | | Private Education Loans, net | $20,088 | $20,171 | $19,742 | | Total education loans, net | $71,101 | $72,812 | $76,615 | | % of total FFELP Loans | 72% | 72% | 74% | | % of total Private Education Loans | 28% | 28% | 26% | - As of March 31, 2022, FFELP Loans comprised 72% of the total education loan portfolio, while Private Education Loans comprised 28%[91] Education Loan Activity This section outlines Navient's education loan activity, including acquisitions, refinancings, loan sales, and repayments, impacting ending balances Education Loan Activity (Q1 2022 vs. Q1 2021) | Activity | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Beginning balance | $72,812 | $79,363 | | Acquisitions (originations and purchases) | $1,091 | $1,734 | | Refinancings and consolidations to third parties | $(1,153) | $(819) | | Loan sales | $0 | $(1,465) | | Repayments and other | $(2,055) | $(2,644) | | Ending balance | $71,101 | $76,615 | - Private Education Refinance Loan originations were $218 million in Q1 2022, down from $593 million in Q1 2021[94] FFELP Loan Portfolio Performance This section details the performance of the FFELP loan portfolio, highlighting changes in repayment status, delinquencies, and forbearance rates FFELP Loan Portfolio Performance (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | Total FFELP Loans | $51,268 | $57,155 | | Loans in-school/grace/deferment | $2,232 | $2,781 | | Loans in forbearance | $6,312 | $8,452 | | Loans in repayment | $42,724 | $45,922 | | Delinquencies as % of FFELP Loans in repayment | 13.5% | 8.3% | | FFELP Loans in forbearance as % of loans in repayment and forbearance | 12.9% | 15.5% | | Loans delinquent greater than 90 days | $2,740 | $1,605 | - FFELP Loan delinquencies (greater than 30 days) as a percentage of loans in repayment increased significantly from 8.3% to 13.5% year-over-year[96] Private Education Loan Portfolio Performance This section details the performance of the Private Education Loan portfolio, highlighting changes in repayment status, delinquencies, and forbearance rates Private Education Loan Portfolio Performance (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | Total Private Education Loans | $21,052 | $20,734 | | Loans in-school/grace/deferment | $377 | $457 | | Loans in forbearance | $418 | $797 | | Loans in repayment | $20,257 | $19,480 | | Delinquencies as % of Private Education Loans in repayment | 4.0% | 2.3% | | Loans in forbearance as % of loans in repayment and forbearance | 2.0% | 3.9% | | Loans delinquent greater than 90 days | $314 | $181 | | Percentage of Private Education Loans with a cosigner | 34% | 40% | - Private Education Loan delinquencies (greater than 30 days) as a percentage of loans in repayment increased from 2.3% to 4.0% year-over-year[99] - The unpaid principal balance of Troubled Debt Restructuring (TDR) loans in an interest rate reduction program was $838 million at March 31, 2022[218] Allowance for Loan Losses This section details the allowance for loan losses, including provisions, charge-offs, and ending balances for FFELP and Private Education Loans Allowance for Loan Losses Activity (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Allowance at beginning of period | $1,271 | $1,377 | | Total provision | $16 | $(87) | | Charge-offs | $(76) | $(41) | | Allowance at end of period | $1,219 | $1,274 | | FFELP Loans allowance at end of period | $255 | $282 | | Private Education Loans allowance at end of period | $964 | $992 | | Charge-offs as % of average loans in repayment (annualized) - FFELP | 0.07% | 0.06% | | Charge-offs as % of average loans in repayment (annualized) - Private | 1.38% | 0.68% | | Allowance coverage of charge-offs (annualized) - FFELP | 8.8 | 10.7 | | Allowance coverage of charge-offs (annualized) - Private | 4.6 | 10.2 | - The $103 million increase in total provision for loan losses was primarily due to loan originations in Q1 2022, compared to a $102 million reversal of allowance in Q1 2021 related to Private Education Loan sales[103] Liquidity and Capital Resources Navient manages liquidity through diverse funding sources, with primary and additional liquidity decreasing, and unsecured debt totaling $7.1 billion, influenced by credit ratings Funding and Liquidity Risk Management This section defines liquidity and liquidity risk, outlining Navient's unsecured debt and diverse funding sources, impacted by credit ratings - Liquidity is defined as cash and high-quality liquid assets to meet debt servicing and operational cash requirements[107] - Liquidity risk is the potential inability to meet obligations without unacceptable losses or to invest in future growth at reasonable market rates[108] - Unsecured debt totaled $7.1 billion at March 31, 2022, with $1.0 billion maturing in the next 12 months[109][110] - The company's long-term unsecured debt is rated below investment grade by three credit rating agencies, which can impact funding cost and availability[109] - Funding sources include cash, unencumbered loan portfolios, operating cash flows, securitization trust overcollateralization, secured credit facilities, term ABS, and unsecured debt[110] Sources of Primary Liquidity This section details Navient's primary liquidity sources, including cash, liquid investments, and unencumbered loan portfolios Sources of Primary Liquidity (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | Total unrestricted cash and liquid investments | $708 | $1,497 | | Unencumbered FFELP Loans | $222 | $259 | | Unencumbered Private Education Refinance Loans | $232 | $936 | | Total | $1,162 | $2,692 | Sources of Additional Liquidity This section outlines Navient's additional liquidity sources, primarily from FFELP and Private Education Loan ABCP facilities Sources of Additional Liquidity (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | FFELP Loan ABCP facilities | $352 | $826 | | Private Education Loan ABCP facilities | $2,137 | $2,844 | | Total | $2,489 | $3,670 | - At March 31, 2022, Navient had $4.0 billion of unencumbered tangible assets, including $2.1 billion in unencumbered education loans ($1.9 billion Private Education Loans and $222 million FFELP Loans)[116] - The company also had $5.7 billion of encumbered net assets (overcollateralization) in its various financing facilities[116] Total Tangible Equity (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($B) | December 31, 2021 ($B) | | :------------------------------------ | :------------------ | :--------------------- | | Total Tangible Equity | $2.1 | $1.9 | Borrowings This section presents Navient's ending and average borrowings, categorized as unsecured and secured, along with their average interest rates Ending Borrowings (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | Unsecured borrowings | $7,017 | $7,014 | | Secured borrowings | $67,719 | $69,707 | | GAAP basis borrowings | $74,627 | $76,978 | Average Borrowings and Rates (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 Avg. Balance ($M) | Q1 2022 Avg. Rate | Q1 2021 Avg. Balance ($M) | Q1 2021 Avg. Rate | | :------------------------------------ | :------------------------ | :---------------- | :------------------------ | :---------------- | | Unsecured borrowings | $7,015 | 4.30% | $8,675 | 4.60% | | Secured borrowings | $68,645 | 1.54% | $73,858 | 1.56% | | GAAP basis borrowings | $75,660 | 1.55% | $82,533 | 1.61% | Critical Accounting Policies and Estimates Navient's critical accounting policies cover loan losses, goodwill impairment, and premium/discount amortization, with management monitoring inflation and geopolitical impacts - Key critical accounting policies include allowance for loan losses, goodwill impairment assessment, and premium and discount amortization[120] - Management considered the potential negative impact of high inflation and the war in Ukraine in Q1 2022, concluding no material impact at this time[120] - These factors will continue to be monitored and assessed during 2022[120] Non-GAAP Financial Measures Navient uses non-GAAP financial measures like Core Earnings, Adjusted Tangible Equity Ratio, and EBITDA to provide a clearer view of operational performance, adjusting for volatile GAAP items Core Earnings Core Earnings is a non-GAAP measure used internally for segment evaluation and resource allocation, adjusting GAAP for derivative mark-to-market and intangible asset accounting - Core Earnings is a non-GAAP measure used internally to evaluate business segments and allocate resources, adjusting GAAP for derivative mark-to-market gains/losses and goodwill/acquired intangible asset accounting[122][124] Core Earnings Net Income and Adjustments to GAAP (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Core Earnings net income | $135 | $305 | | Net impact of derivative accounting | $159 | $91 | | Net impact of goodwill and acquired intangible assets | $(4) | $(5) | | Net income tax effect | $(35) | $(21) | | Total Core Earnings adjustments to GAAP | $120 | $65 | | GAAP net income | $255 | $370 | - Derivative accounting adjustments primarily relate to mark-to-market valuations on derivatives that do not qualify for hedge accounting or result in ineffectiveness, such as Floor Income Contracts and basis swaps[131][132][133][135] Cumulative Impact of Derivative Accounting on GAAP Equity (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | Beginning impact of derivative accounting on GAAP equity | $(299) | $(616) | | Net impact of net mark-to-market gains (losses) under derivative accounting | $236 | $117 | | Ending impact of derivative accounting on GAAP equity | $(63) | $(499) | Total Hedged Floor Income, Net of Tax (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 ($M) | March 31, 2021 ($M) | | :------------------------------------ | :------------------ | :------------------ | | Total hedged Floor Income, net of tax | $289 | $364 | Adjusted Tangible Equity Ratio The Adjusted Tangible Equity Ratio measures Navient's Tangible Equity to tangible assets, excluding the FFELP portfolio for enhanced investor usefulness - The Adjusted Tangible Equity Ratio measures the ratio of Navient's Tangible Equity to its tangible assets, excluding the FFELP portfolio to enhance usefulness for investors and capital allocation decisions[149] Adjusted Tangible Equity Ratio (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 | March 31, 2021 | | :------------------------------------ | :------------- | :------------- | | Navient Corporation's stockholders' equity | $2,824 million | $2,723 million | | Tangible Equity | $2,102 million | $1,992 million | | Adjusted Tangible Equity | $1,847 million | $1,708 million | | Adjusted tangible assets | $26,423 million | $27,353 million | | Adjusted Tangible Equity Ratio | 7.0% | 6.2% | | Pro forma Adjusted Tangible Equity Ratio | 7.2% | 8.1% | Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA) EBITDA measures the operating performance of the Business Processing segment, used by management and equity investors - EBITDA measures the operating performance of the Business Processing segment and is used by management and equity investors[151] Business Processing Segment EBITDA (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Pre-tax income | $18 | $34 | | Depreciation and amortization expense | $1 | $2 | | EBITDA | $19 | $36 | | Total revenue | $94 | $125 | | EBITDA margin | 20% | 29% | Legal Proceedings This section refers to Note 9 for a detailed discussion of Navient's legal matters and commitments as of March 31, 2022 - For a discussion of legal matters as of March 31, 2022, refer to "Note 9 – Commitments and Contingencies" in the consolidated financial statements[153] Risk Factors This section advises considering risk factors from the Annual Report on Form 10-K, supplemented by information in this Quarterly Report - Risk factors disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, should be considered, along with information in this Quarterly Report[154] Quantitative and Qualitative Disclosures about Market Risk This section discusses Navient's exposure to market risks, including interest rate sensitivity and the ongoing LIBOR transition LIBOR Transition Navient is preparing for the LIBOR to SOFR transition by June 30, 2023, with new loans indexed to SOFR and the LIBOR Act mandating SOFR replacement for certain contracts - Navient is working towards an orderly transition from one-month and three-month LIBOR to an alternative benchmark rate, primarily SOFR, by June 30, 2023[156][157] - All new variable rate Private Education Loans issued since December 2021 are indexed to SOFR, and the company ceased entering new LIBOR-indexed contracts as of December 31, 2021[157] - The Adjustable Interest Rate (LIBOR) Act, signed on March 15, 2022, mandates that for contracts without specific fallback provisions (including FFELP Loans), a SOFR-based benchmark will automatically replace USD LIBOR after June 30, 2023[158] Interest Rate Sensitivity Analysis Navient's interest rate risk management aims to limit short-term rate impacts, with a 100 basis point increase potentially raising Q1 2022 net income by $52 million - Interest rate risk management seeks to limit the impact of short-term interest rate movements on results of operations and financial position[161] Impact on Annual Earnings from Hypothetical 100 Basis Point Interest Rate Change (As of March 31, 2022) | Metric | Interest Rates Increase 100 Basis Points ($M) | Interest Rates Decrease 100 Basis Points ($M) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Change in pre-tax net income (before MTM) | $25 | $4 | | Mark-to-market gains (losses) on derivatives | $43 | $(63) | | Increase (decrease) in income before taxes | $68 | $(59) | | Increase (decrease) in net income after taxes | $52 | $(45) | | Increase (decrease) in diluted earnings per common share | $0.35 | $(0.30) | - The change in pre-tax net income is primarily due to unhedged FFELP Loans in a fixed-rate mode funded with variable-rate debt, and variable-rate assets funded with fixed-rate liabilities[165] - Mark-to-market gains (losses) on derivative and hedging activities are primarily related to derivatives that do not qualify for hedge accounting, such as those used to economically hedge Floor Income and fixed-rate Private Education Refinance loans[166] Asset and Liability Funding Gap Navient analyzes its asset and liability funding gap on GAAP and Core Earnings bases to understand interest rate risk exposure, revealing significant funding gaps for LIBOR and fixed-rate assets - The funding gap represents exposure to interest rate risk in the form of basis risk and repricing risk, where different indices may reset at different frequencies or not move in the same direction/magnitude[169] GAAP Basis Asset and Liability Funding Gap (As of March 31, 2022) | Index | Assets ($B) | Funding ($B) | Gap ($B) | | :---------------- | :---------- | :----------- | :--------- | | 3-month LIBOR (quarterly) | $0.3 | $22.2 | $(21.9) | | 1-month LIBOR (monthly) | $3.4 | $29.8 | $(26.4) | | 1-month LIBOR (daily) | $48.2 | $0.0 | $48.2 | | Fixed Rate | $13.4 | $21.6 | $(8.2) | Core Earnings Basis Asset and Liability Funding Gap (As of March 31, 2022) | Index | Assets ($B) | Funding ($B) | Gap ($B) | | :---------------- | :---------- | :----------- | :--------- | | 3-month LIBOR (quarterly) | $0.3 | $4.2 | $(3.9) | | 1-month LIBOR (monthly) | $3.4 | $46.4 | $(43.0) | | 1-month LIBOR (daily) | $48.2 | $0.0 | $48.2 | | Fixed Rate | $13.3 | $22.9 | $(9.6) | - Navient's asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or highly correlated interest rate characteristics[178] Unregistered Sales of Equity Securities and Use of Proceeds This section details common stock repurchases and the use of proceeds, including the multi-year share repurchase program Common Stock Repurchases (Q1 2022) | Period | Total Number of Shares Purchased (millions) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (millions) | Approximate Dollar Value of Shares That May Yet Be Purchased Under Publicly Announced Plans or Programs ($M) | | :-------------------------- | :------------------------------------------ | :--------------------------- | :--------------------------------------------------------------------------------------- | :---------------------------------------------------------------------------------------------------------- | | January 1 — January 31, 2022 | 2.0 | $20.03 | 1.9 | $963 | | February 1 — February 28, 2022 | 3.5 | $18.12 | 2.7 | $913 | | March 1 — March 31, 2022 | 1.9 | $17.00 | 1.6 | $885 | | Total first-quarter 2022 | 7.4 | $18.33 | 6.2 | | - In December 2021, the Board approved a $1 billion multi-year share repurchase program, with $885 million remaining authorization as of March 31, 2022[182] - The total shares purchased include shares under the repurchase program and shares tendered to satisfy stock option exercise prices and tax withholding obligations for employee stock-based compensation plans[181] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes in internal control - Management, with the participation of Principal Executive and Financial Officers, concluded that disclosure controls and procedures were effective as of March 31, 2022[183] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2022[184] Exhibits This section lists various exhibits filed with the report, including agreements and certifications required by regulatory acts - - 10.1†* Form of Navient Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Agreement[187] - 31.1* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[187] - 31.2* Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002[187] - 32.1** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002[188] - 32.2** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002[188] - 101.INS* Inline XBRL Instance Document[188] - 104 Cover Page Interactive Data File (formatted as Inline XBRL)[188] Financial Statements This section presents Navient's consolidated financial statements, including balance sheets, income statements, and cash flow highlights Consolidated Balance Sheets Highlights (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | FFELP Loans, net | $51,013 | $52,641 | | Private Education Loans, net | $20,088 | $20,171 | | Total assets | $78,158 | $80,605 | | Short-term borrowings | $3,802 | $2,490 | | Long-term borrowings | $70,825 | $74,488 | | Total liabilities | $75,328 | $77,997 | | Total Navient Corporation stockholders' equity | $2,824 | $2,597 | Consolidated Statements of Income Highlights (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Total interest income | $626 | $692 | | Total interest expense | $289 | $329 | | Net interest income | $337 | $363 | | Provisions for loan losses | $16 | $(87) | | Total other income | $223 | $304 | | Total expenses | $212 | $270 | | Net income | $255 | $370 | | Diluted earnings per common share | $1.67 | $2.00 | | Dividends per common share | $0.16 | $0.16 | Consolidated Statements of Cash Flows Highlights (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Net cash (used in) provided by operating activities | $(109) | $179 | | Net cash provided by investing activities | $1,751 | $2,885 | | Net cash used in financing activities | $(2,006) | $(2,499) | | Net (decrease) increase in cash, cash equivalents, restricted cash | $(364) | $565 | | Cash, cash equivalents, restricted cash at end of period | $3,214 | $4,102 | Notes to Consolidated Financial Statements This section provides detailed notes to Navient's consolidated financial statements, explaining significant accounting policies and specific financial items Note 1. Significant Accounting Policies This note outlines Navient's significant accounting policies, including the basis of presentation for interim financial statements and the assessment of a new ASU on troubled debt restructurings - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information, requiring management to make estimates and assumptions[205] - Operating results for Q1 2022 are not necessarily indicative of results for the full year or any other period[205] - ASU No. 2022-02, effective January 1, 2023, eliminates TDR recognition/measurement guidance and enhances disclosure requirements for certain loan modifications; the company is assessing its impact[206] Note 2. Allowance for Loan Losses This note details the allowance for loan losses, which decreased to $1.219 billion, with a significant increase in Q1 2022 provision due to originations and credit quality indicators presented Allowance for Loan Losses Metrics (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Allowance at beginning of period | $1,271 | $1,377 | | Total provision | $16 | $(87) | | Charge-offs | $(76) | $(41) | | Allowance at end of period | $1,219 | $1,274 | | FFELP Loans allowance at end of period | $255 | $282 | | Private Education Loans allowance at end of period | $964 | $992 | | Charge-offs as % of average loans in repayment (annualized) - FFELP | 0.07% | 0.06% | | Charge-offs as % of average loans in repayment (annualized) - Private | 1.38% | 0.68% | - The unpaid principal balance of Troubled Debt Restructuring (TDR) loans in an interest rate reduction program was $838 million at March 31, 2022[218] Troubled Debt Restructurings (TDRs) Activity (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Modified loans | $55 | $40 | | Charge-offs | $56 | $26 | | Payment default | $9 | $5 | FFELP Loan Delinquencies (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 | March 31, 2021 | | :------------------------------------ | :------------- | :------------- | | Delinquencies as % of FFELP Loans in repayment | 13.5% | 8.3% | | Loans delinquent greater than 90 days | 6.4% | 3.5% | | Loans in forbearance as % of loans in repayment and forbearance | 12.9% | 15.5% | Private Education Loan Delinquencies (March 31, 2022 vs. March 31, 2021) | Metric | March 31, 2022 | March 31, 2021 | | :------------------------------------ | :------------- | :------------- | | Delinquencies as % of Private Education Loans in repayment | 4.0% | 2.3% | | Loans delinquent greater than 90 days | 1.6% | 0.9% | | Loans in forbearance as % of loans in repayment and forbearance | 2.0% | 3.9% | | Percentage of Private Education Loans with a cosigner | 34% | 40% | Note 3. Borrowings Navient's total GAAP borrowings decreased to $74.627 billion, primarily due to reduced FFELP Loan securitizations, with details on assets securing debt for consolidated VIEs Ending Borrowings (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | Unsecured borrowings | $7,017 | $7,014 | | Secured borrowings | $67,719 | $69,707 | | GAAP basis borrowings | $74,627 | $76,978 | - Secured borrowings include $49.622 billion in FFELP Loan securitizations and $14.553 billion in Private Education Loan securitizations at March 31, 2022[247] - As of March 31, 2022, $683 million in FFELP secured debt tranches were in maturity date default, with full payment expected between 2029 and 2035[249] Secured Borrowings from Consolidated VIEs (March 31, 2022) | Metric | Debt Outstanding ($M) | Carrying Amount of Assets Securing Debt Outstanding ($M) | | :------------------------------------ | :-------------------- | :------------------------------------------------------- | | FFELP Loan securitizations | $49,622 | $53,419 | | Private Education Loan securitizations | $14,553 | $16,123 | | FFELP Loan ABCP facilities | $764 | $795 | | Private Education Loan ABCP facilities | $2,576 | $2,866 | | Total before hedge accounting adjustments | $67,515 | $73,203 | Note 4. Derivative Financial Instruments This note summarizes Navient's derivative instruments, including fair values, notional amounts, and their impact on financial statements, noting collateralization and net positive exposure Fair Values of Derivative Instruments (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | Total derivative assets | $151 | $224 | | Total derivative liabilities | $(239) | $(260) | | Net total derivatives | $(88) | $(36) | Notional Values of Derivative Instruments (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($B) | December 31, 2021 ($B) | | :------------------------------------ | :------------------ | :--------------------- | | Interest rate swaps | $44.4 | $46.7 | | Floor Income Contracts | $8.1 | $12.5 | | Cross-currency interest rate swaps | $2.0 | $2.1 | | Total derivatives | $54.5 | $61.3 | Mark-to-Market Impact of Derivatives on Statements of Income (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Total fair value hedges | $41 | $45 | | Total trading derivatives | $98 | $36 | | Mark-to-market gains (losses) recognized | $139 | $81 | - Navient's corporate derivatives liability position of $24 million was fully collateralized at March 31, 2022, at its current unsecured credit rating[271] - Net positive exposure related to Navient Corporation derivatives was $15 million at March 31, 2022[271][272] Note 5. Other Assets This note breaks down Navient's other assets, totaling $2.911 billion, with accrued interest receivable and benefit/insurance-related investments as major components Other Assets Breakdown (March 31, 2022 vs. December 31, 2021) | Metric | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | Accrued interest receivable | $1,834 | $1,881 | | Benefit and insurance-related investments | $456 | $462 | | Income tax asset, net | $255 | $369 | | Derivatives at fair value | $151 | $218 | | Accounts receivable | $109 | $159 | | Fixed assets | $91 | $95 | | Other | $15 | $39 | | Total | $2,911 | $3,223 | Note 6. Stockholders' Equity This note details changes in Navient's stockholders' equity, including common share repurchases of 6.2 million shares for $115 million and dividends paid Common Share Activity (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :------------------------------------ | :------ | :------ | | Common stock repurchased (millions of shares) | 6.2 | 8.2 | | Common stock repurchased (in dollars) | $115 million | $100 million | | Average purchase price per share | $18.41 | $12.23 | | Remaining common stock repurchase authority | $885 million | $500 million | | Shares repurchased related to employee stock-based compensation plans (millions) | 1.1 | 2.2 | | Common shares issued (millions) | 2.4 | 3.6 | | Dividends paid | $24 million | $29 million | | Dividends per share | $0.16 | $0.16 | - The remaining common stock repurchase authority was $885 million as of March 31, 2022, from a $1 billion multi-year program approved in December 2021[277] Note 7. Earnings (Loss) per Common Share This note reconciles basic and diluted earnings per common share (EPS) calculations for Q1 2022, based on weighted average shares outstanding and anti-dilutive exclusions Earnings Per Common Share (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 | Q1 2021 | | :------------------------------------ | :------ | :------ | | Net income | $255 million | $370 million | | Weighted average shares used to compute basic EPS (millions) | 151 | 183 | | Basic earnings per common share | $1.69 | $2.02 | | Weighted average shares used to compute diluted EPS (millions) | 153 | 185 | | Diluted earnings per common share | $1.67 | $2.00 | - Securities covering approximately 0 million shares in Q1 2022 (compared to 2 million in Q1 2021) were anti-dilutive and excluded from the diluted EPS computation[284] Note 8. Fair Value Measurements This note describes Navient's fair value estimates, categorized by a three-level hierarchical framework, detailing derivative assets and liabilities with no significant valuation changes - Navient categorizes fair value estimates based on a three-level hierarchical framework of price transparency[285] Fair Value Measurements of Derivative Instruments (March 31, 2022) | Metric | Level 1 ($M) | Level 2 ($M) | Level 3 ($M) | Total ($M) | | :------------------------------------ | :----------- | :----------- | :----------- | :--------- | | Total derivative assets | $0 | $150 | $1 | $151 | | Total derivative liabilities | $0 | $(9) | $(230) | $(239) | - The change in balance sheet carrying value for Level 3 financial instruments (derivative liabilities) was $(229) million at March 31, 2022, primarily from cross-currency interest rate swaps[295] Fair Value of Earning Assets and Interest-Bearing Liabilities (March 31, 2022) | Metric | Fair Value ($M) | Carrying Value ($M) | Difference ($M) | | :------------------------------------ | :-------------- | :------------------ | :-------------- | | FFELP Loans | $50,375 | $51,013 | $(638) | | Private Education Loans | $20,213 | $20,088 | $125 | | Total earning assets | $74,012 | $74,525 | $(513) | | Total interest-bearing liabilities | $73,328 | $74,627 | $1,299 | Note 9. Commitments and Contingencies Navient faces various legal proceedings, including a $1.7 billion settlement with State Attorneys General, ongoing CFPB litigation, and an OIG audit regarding Special Allowance Payments - Navient is subject to various claims, lawsuits, and regulatory actions alleging violations of state or federal consumer protection laws[302][306] - In January 2022, Navient settled with 40 State Attorneys General, agreeing to cancel approximately $1.7 billion in private education loans (resulting in a $50 million expense for expected future recoveries) and make a one-time payment of $145 million to the states[309] - Total regulatory expenses of approximately $205 million related to the State Attorneys General settlement were recognized in Q4 2021[309] - Litigation with the Consumer Financial Protection Bureau (CFPB) remains ongoing, with Navient vigorously defending against allegations; an adverse ruling could have a material adverse impact[310] - An OIG audit regarding Special Allowance Payments (SAP) resulted in an administrative law judge's decision affirmed by the Acting Secretary of Education, which Navient is challenging in federal court; a reserve was established for this matter[315] Note 10. Revenue from Contracts with Customers Accounted for in Accordance with ASC 606 This note disaggregates Navient's revenue from customer contracts under ASC 606 by service and client type, showing a decrease in Q1 2022 primarily from government and healthcare services Revenue by Service Type (Q1 2022 vs. Q1 2021) | Service Type | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Federal Education Loan asset recovery services | $1 | $5 | | Government services | $49 | $63 | | Healthcare services | $45 | $62 | | Total Revenue | $95 | $130 | Revenue by Client Type (Q1 2022 vs. Q1 2021) | Client Type | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Federal government | $2 | $9 | | Guarantor agencies | $1 | $4 | | State and local government | $33 | $42 | | Tolling authorities | $14 | $13 | | Hospitals and other healthcare providers | $45 | $62 | | Total Revenue | $95 | $130 | - Net accounts receivable related to these contracts was $90 million as of March 31, 2022[325] Note 11. Segment Reporting This note provides detailed financial information for Navient's four operating segments, with profitability measured by Core Earnings net income, and reconciles segment results to GAAP - Navient monitors and assesses operations based on four reportable operating segments: Federal Education Loans, Consumer Lending, Business Processing, and Other[327] - Profitability of operating segments is measured based on Core Earnings net income, which adjusts GAAP financial results for derivative mark-to-market gains/losses and goodwill/acquired intangible assets[328][343][345] Total Assets by Segment (March 31, 2022 vs. December 31, 2021) | Segment | March 31, 2022 ($M) | December 31, 2021 ($M) | | :------------------------------------ | :------------------ | :--------------------- | | Federal Education Loans | $54,900 | $56,895 | | Consumer Lending | $21,582 | $21,810 | | Business Processing | $402 | $397 | | Other | $1,300 | $1,500 | Core Earnings Net Income by Segment (Q1 2022) | Segment | Net Income (Loss) ($M) | | :------------------------------------ | :--------------------- | | Federal Education Loans | $107 | | Consumer Lending | $79 | | Business Processing | $14 | | Other | $(65) | | Total Core Earnings Net Income | $135 | Summary of Core Earnings Adjustments to GAAP (Q1 2022 vs. Q1 2021) | Metric | Q1 2022 ($M) | Q1 2021 ($M) | | :------------------------------------ | :----------- | :----------- | | Core Earnings net income | $135 | $305 | | Net impact of derivative accounting | $159 | $91 | | Net impact of goodwill and acquired intangible assets | $(4) | $(5) | | Net tax effect | $(35) | $(21) | | Total Core Earnings adjustments to GAAP | $120 | $65 | | GAAP net income | $255 | $370 | Signatures This section confirms the report was signed by Navient Corporation's Chief Financial Officer on April 27, 2022 - The report was signed on behalf of Navient Corporation by Joe Fisher, Chief Financial Officer (Principal Financial and Accounting Officer), on April 27, 2022[358] Appendix A – Form 10-Q Cross-Reference Index Appendix A provides a cross-reference index to the traditional SEC Form 10-Q format, indicating page numbers for various items - Appendix A provides a cross-reference index to the traditional SEC Form 10-Q format, indicating the page numbers for various items within Navient's customized report structure[7][360]