UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36228
Navient Corporation
(Exact name of registrant as specified in its charter)
Delaware
46-4054283
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
123 Justison Street, Wilmington, Delaware 19801
(302) 283-8000
(Address of principal executive offices)
(Telephone Number)
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
☒
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common stock, par value $.01 per share
NAVI
The NASDAQ Global Select Market
6% Senior Notes due December 15, 2043
JSM
Preferred Stock Purchase Rights
None
As of March 31, 2023, there were 126,464,845 shares of common stock outstanding.
TABLE OF CONTENTS
Organization of Our Form 10-Q
The order and presentation of content in our Form 10-Q differs from the traditional Securities and Exchange Commission (SEC) Form 10-Q format. Our format is designed to improve readability and to better present how we organize and manage our business. See Appendix A, "Form 10-Q Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-Q format.
Page
Number
Forward-Looking and Cautionary Statements
1
Use of Non-GAAP Financial Measures
2
Business
3
Overview and Fundamentals of Our Business
How We Organize Our Business
5
Management’s Discussion and Analysis of Financial Condition and Results of Operations
6
Selected Historical Financial Information and Ratios
The Quarter in Review
7
Results of Operations
8
Segment Results
10
Financial Condition
18
Liquidity and Capital Resources
22
Critical Accounting Policies and Estimates
25
Non-GAAP Financial Measures
Legal Proceedings
34
Risk Factors
Quantitative and Qualitative Disclosures about Market Risk
35
Unregistered Sales of Equity Securities and Use of Proceeds
40
Controls and Procedures
Exhibits
41
Financial Statements
42
Signatures
76
Appendix A – Form 10-Q Cross-Reference Index
77
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking” statements and other information that is based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,” “could,” “should,” “goals,” or “target.” Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties are discussed more fully under the section titled “Risk Factors” and include, but are not limited to the following:
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business.
The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect and actual results could differ materially. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake any obligation to update or revise these forward-looking statements except as required by law.
Through this discussion and analysis, we intend to provide the reader with some 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.
USE OF NON-GAAP FINANCIAL MEASURES
We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present our financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings, which is a non-GAAP financial measure. 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 is our measure of profit or loss for our segments, we are required by GAAP to provide Core Earnings disclosures in the notes to our consolidated financial statements for our business segments.
In addition to Core Earnings, we present the following other non-GAAP financial measures: Adjusted Core Earnings, Tangible Equity, Adjusted Tangible Equity Ratio, Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA) (for the Business Processing segment), and Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans. Definitions for the non-GAAP financial measures and reconciliations are provided below, except that reconciliations of forward-looking non-GAAP financial measures are not provided because the company is unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of certain items, including, but not limited to, the impact of any mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.
Navient (Nasdaq: NAVI) provides technology-enabled education finance and business processing solutions that simplify complex programs and help millions of people achieve success. Our customer-focused, data-driven services deliver exceptional results for clients in education, health care and government. Learn more at navient.com.
With a focus on data-driven insights, service, compliance and innovative support, Navient’s business consists of:
We own a portfolio of $42.1 billion of federally guaranteed Federal Family Education Loan Program (FFELP) Loans. As a servicer on our own portfolio and for third parties, we deploy data-driven approaches to support the success of our customers. Our flexible and scalable infrastructure manages large volumes of complex transactions, simplifying the customer experience and continually improving efficiency.
We help students and families succeed through the college journey with innovative planning tools, student loans and refinancing products. Our $18.3 billion Private Education Loan portfolio demonstrates high customer success rates. In the first quarter of 2023, we originated $168 million of Private Education Loans.
We leverage our loan servicing expertise to provide business processing solutions for approximately 500 public sector and healthcare organizations, and their tens of millions of clients, patients, and constituents. Our suite of omnichannel customer experience, digital processing and revenue cycle solutions enables our clients to deliver better results for the people they serve.
Superior Operational Performance with a Strong Customer Service and Compliance Commitment
We help our customers — both individuals and institutions — navigate the path to financial success through proactive, data-driven, simplified service and innovative solutions.
We leverage our customer service expertise, data-driven insights, technology platforms, and scale to maximize value for our clients.
Navient is committed to a sustainable future. We leverage technology that minimizes energy use in our office buildings and promote widespread adoption of “paperless” digital customer communications. Navient prioritizes the usage of power-saving features to our buildings to reduce energy usage. Energy efficiency and reducing CO2 and CO2 equivalents are among the many factors considered in our growth and real estate decisions.
Strong Financial Performance Resulting in a Strong Capital Return
Our first-quarter 2023 results continue to demonstrate the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments.
Our significant earnings generate significant capital which allows for a strong capital return to our investors. Navient expects to continue to return excess capital to shareholders through dividends and share repurchases in accordance with our capital allocation policy.
By optimizing capital adequacy and allocating capital to highly accretive opportunities, including organic growth and acquisitions, we remain well positioned to pay dividends and repurchase stock, while maintaining appropriate leverage that supports our credit ratings and ensures ongoing access to capital markets.
In December 2021, our Board approved a share repurchase program authorizing the purchase of up to $1 billion of the Company’s outstanding common stock. At March 31, 2023, $515 million remained in share repurchase authorization.
To inform our capital allocation decisions, we use the Adjusted Tangible Equity Ratio(1) in addition to other metrics. Our Adjusted Tangible Equity Ratio(1) was 8.5% as of March 31, 2023.
(Dollars and shares in millions)
Q1-23
Q1-22
Shares repurchased
4.9
6.2
Reduction in shares outstanding
%
Total repurchases in dollars
$
85
115
Dividends paid
21
24
Total Capital Returned(2)
106
139
Adjusted Tangible Equity Ratio(1)
8.5
7.0
4
We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business Processing.
Federal Education Loans Segment
Navient owns FFELP Loans and performs servicing on this portfolio. We also service FFELP Loans owned by other institutions. Our servicing quality, data-driven strategies and omnichannel education about federal repayment options translate into positive results for the millions of borrowers we serve. We generate revenue primarily through net interest income on our FFELP Loans and servicing-related fee income.
Consumer Lending Segment
Navient owns, originates and services in-school and refinance Private Education Loans. "In-school" Private Education Loans are loans originally made to borrowers while they are attending school whereas "Refinance" Private Education Loans are loans where a borrower has refinanced their education loans. We generate revenue primarily through net interest income on our Private Education Loan portfolio.
Navient helps students and families through the going-to and paying-for-college journey. Our digital tools empower people to find grants and scholarships, compare financial aid offers and complete the FAFSA. Our Private Education Loans offer easy-to-understand payment options. After graduation, we offer student loan refinancing to help people simplify their repayment and earn a better rate. We believe our 50 years of experience, product design, digital marketing strategies, and origination and servicing platform provide a unique competitive advantage. We see meaningful growth opportunities in originating Private Education Loans, generating attractive long-term, risk-adjusted returns.
Business Processing Segment
Navient provides business processing solutions such as omnichannel contact center services, workflow processing, and revenue cycle optimization. We leverage the same expertise and intelligent tools we use to deliver successful results for portfolios we own. Our support enables our clients to ensure better constituent outcomes, meet rapidly changing needs, improve technology, reduce operating expenses, manage risk and optimize revenue opportunities. Our clients include:
Other Segment
This segment consists of our corporate liquidity portfolio, gains and losses incurred on the repurchase of debt, unallocated expenses of shared services (which includes regulatory expenses) and restructuring/other reorganization expenses.
Three Months Ended March 31,
(In millions, except per share data)
2023
2022
GAAP Basis
Net income
111
255
Diluted earnings per common share
.86
1.67
Weighted average shares used to compute diluted earnings per share
130
153
Return on assets
.68
1.34
Core Earnings Basis(1)
Net income(1)
133
135
Diluted earnings per common share(1)
1.02
.88
Adjusted diluted earnings per common share(1)
1.06
.90
Net interest margin, Federal Education Loans segment
1.12
1.04
Net interest margin, Consumer Lending segment
3.12
2.80
.82
.71
Education Loan Portfolios
Ending FFELP Loans, net
42,148
51,013
Ending Private Education Loans, net
18,275
20,088
Ending total education loans, net
60,423
71,101
Average FFELP Loans
43,263
52,258
Average Private Education Loans
19,289
21,157
Average total education loans
62,552
73,415
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.
First-quarter 2023 GAAP net income was $111 million ($0.86 diluted earnings per share), compared with $255 million ($1.67 diluted Core Earnings per share) for the year-ago quarter. See “Results of Operations – GAAP Comparison of First-Quarter 2023 Results with First-Quarter 2022" for a discussion of the primary contributors to the change in GAAP earnings between periods.
First-quarter 2023 Core Earnings net income was $133 million ($1.02 diluted Core Earnings per share), compared with $135 million ($0.88 diluted Core Earnings per share) for the year-ago quarter. First-quarter 2023 and 2022 adjusted diluted Core Earnings(1) per share were $1.06 and $0.90, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.
Financial highlights of first-quarter 2023 include:
Federal Education Loans segment:
Consumer Lending segment:
Business Processing segment:
Capital, funding and liquidity:
Expenses:
GAAP Income Statements (Unaudited)
Increase(Decrease)
Interest income
FFELP Loans
693
349
344
99
Private Education Loans
276
68
Cash and investments
33
3,300
Total interest income
1,071
626
445
71
Total interest expense
837
289
548
190
Net interest income
234
337
(103
)
(31
Less: provisions for loan losses
(14
16
(30
(188
Net interest income after provisions for loan losses
248
321
(73
(23
Other income (loss):
Servicing revenue
17
(1
(6
Asset recovery and business processing revenue
72
97
(25
(26
Other income
(3
Gains (losses) on derivative and hedging activities, net
(8
98
(106
(108
Total other income
88
223
(135
(61
Operating expenses
185
205
(20
(10
Goodwill and acquired intangible assets impairment and amortization expense
Restructuring/other reorganization expenses
Total expenses
192
212
(9
Income before income tax expense
144
332
(57
Income tax expense
(44
(144
(56
)%
Basic earnings per common share
.87
1.69
(.82
(49
(.81
Dividends per common share
.16
—
GAAP Comparison of First-Quarter 2023 Results with First-Quarter 2022
For the three months ended March 31, 2023, net income was $111 million, or $0.86 diluted earnings per common share, compared with net income of $255 million, or $1.67 diluted earnings per common share, for the year-ago period.
The primary contributors to the change in net income are as follows:
The FFELP Loan provision for loan losses of $10 million in the current period was primarily a result of the extension of the portfolio and the resulting increase in unamortized premium allocated to expected future defaults.
The Private Education Loan provision for loan losses of $(24) million in the current period included $(52) million in connection with the adoption of a new accounting standard (ASU 2022-02), $5 million in connection with loan originations and $23 million in connection with the resolution of certain private legacy loans in bankruptcy. The provision of $16 million in the year-ago quarter included $11 million in connection with loan originations and $5 million related to a reserve build.
We adopted ASU No. 2022-02, “Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures” on January 1, 2023. This new ASU eliminates the troubled debt restructurings (TDRs) recognition and measurement guidance. Prior to adopting this new guidance, as it relates to interest rate concessions granted as part of our Private Education Loan modification program, a discounted cash flow model was used to calculate the amount of interest forgiven for loans that were in the program and the present value of that interest rate concession was included as a part of the allowance for loan loss. This new guidance no longer allows the measurement and recognition of this element of our allowance for loan loss for new modifications that occur subsequent to January 1, 2023. As of December 31, 2022, the allowance for loan loss included $77 million related to this interest rate concession component of the allowance for loan loss. We elected to adopt this amendment using a prospective transition method which results in the $77 million releasing in 2023 and 2024 as the borrowers exit their current modification programs. $52 million of the $77 million was released in the first quarter of 2023.
We repurchased 4.9 million and 6.2 million shares of our common stock during the first quarters of 2023 and 2022, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 23 million common shares (or 15%) from the year-ago period.
9
The following table presents Core Earnings results for our Federal Education Loans segment.
% Increase(Decrease)
(Dollars in millions)
2023 vs. 2022
Interest income:
695
334
108
20
100
715
114
590
195
203
125
Less: provision for loan losses
Net interest income after provision for loan losses
(17
14
15
(7
(100
11
(55
19
29
(34
Direct operating expenses
28
(29
140
(19
27
(18
87
107
Comparison of First-Quarter 2023 Results with First-Quarter 2022
Key performance metrics are as follows:
Segment net interest margin
FFELP Loans:
FFELP Loan spread
1.25
1.11
Provision for loan losses
Net charge-offs
Net charge-off rate
.22
.07
Greater than 30-days delinquency rate
14.4
13.5
Greater than 90-days delinquency rate
7.9
6.4
Forbearance rate
16.9
12.9
(Dollars in billions)
Total federal loans serviced(1)
49
59
Net Interest Margin
The following table details the net interest margin.
FFELP Loan yield
6.07
2.10
Floor Income
.45
.49
FFELP Loan net yield
6.52
2.59
FFELP Loan cost of funds
(5.27
(1.48
Other interest-earning asset spread impact
(.13
(.07
Net interest margin(1)
Other interest-earning assets
1,972
1,930
Total FFELP Loan interest-earning assets
45,235
54,188
As of March 31, 2023, our FFELP Loan portfolio totaled $42.1 billion, comprised of $15.2 billion of FFELP Stafford Loans and $26.9 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of March 31, 2023 was 7 years and 8 years, respectively, assuming a Constant Prepayment Rate (CPR) of 8% and 5%, respectively.
The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2023 and 2022, based on interest rates as of those dates.
March 31, 2023
March 31, 2022
Education loans eligible to earn Floor Income
41.8
50.7
Less: post-March 31, 2006 disbursed loans required to rebate Floor Income
(19.9
(23.6
Less: economically hedged Floor Income
(9.1
(13.0
Education loans eligible to earn Floor Income after rebates and economically hedged
12.8
14.1
Education loans earning Floor Income
5.6
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 April 1, 2023 to December 31, 2027.
April 1, 2023toDecember 31, 2023
2024
2025
2026
2027
Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged
6.3
2.0
1.0
.3
Asset Recovery and Business Processing Revenue
Asset recovery and business processing revenue decreased $3 million as a result of exiting the FFELP asset recovery business in the fourth quarter of 2022.
Other Income
Other income decreased $6 million primarily related to lower contract-exit transition services.
Operating Expenses
Operating expenses for the Federal Education Loans segment primarily include costs incurred to perform servicing on our FFELP Loan portfolio and federal education loans held by other institutions. Expenses were $8 million lower primarily as a result of the paydown of the loan portfolio and the decrease in other income discussed above.
12
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. As the SDR Plan is currently configured, privately held FFELP Loans, 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 heard 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 and 2023 results related to the SDR Plan as currently:
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.
13
The following table presents Core Earnings results for our Consumer Lending segment.
500
350
277
26
Interest expense
197
58
152
(24
(250
177
136
30
37
143
104
38
32
110
79
39
Private Education Loans (including Refinance Loans):
Private Education Loan spread
3.28
2.97
Net charge-offs(1)
75
69
Net charge-off rate(1)
1.63
1.38
4.5
4.0
1.6
1.9
Private Education Refinance Loans:
Greater than 90-day delinquency rate
.1
Average balance of Private Education Refinance Loans
9,521
10,084
Ending balance of Private Education Refinance Loans
9,274
9,995
Private Education Refinance Loan originations
941
Private Education Loan yield
7.24
5.28
Private Education Loan cost of funds
(3.96
(2.31
(.16
(.17
625
732
Total Private Education Loan interest-earning assets
19,914
21,889
The increase in the net interest margin from the prior year is primarily a result of an increase in the net interest margin on the refinance portfolio due to an improvement in the cost of funds.
As of March 31, 2023, our Private Education Loan portfolio totaled $18.3 billion, comprised of $9.3 billion of refinance loans and $9.0 billion of non-refinance loans. The weighted-average life of these portfolios as of March 31, 2023 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 decreased $40 million. The provision for loan losses of $(24) million in the current period included $(52) million in connection with the adoption of a new accounting standard (ASU 2022-02), $5 million in connection with loan originations and $23 million in connection with the resolution of certain private legacy loans in bankruptcy. The provision of $16 million in the year-ago quarter included $11 million in connection with loan originations and $5 million related to a reserve build.
See "Note 1 — Significant Accounting Policies" for further discussion and detail on the adoption of ASU 2022-22.
Operating expenses for our consumer lending segment include costs to originate, acquire, service and collect on our consumer loan portfolio. Operating expenses increased $2 million.
The following table presents Core Earnings results for our Business Processing segment.
Business processing revenue
94
67
(12
(72
(75
(71
Revenue from government services
Revenue from healthcare services
45
Total fee revenue
EBITDA(1)
EBITDA margin(1)
The following table presents Core Earnings results for our Other segment.
Net interest loss after provision for loan losses
(15
Other income (loss)
300
Unallocated shared services expenses:
Unallocated information technology costs
Unallocated corporate costs
Total unallocated shared services expenses
61
66
65
Loss before income tax benefit
(88
(85
Income tax benefit
Net income (loss)
(68
(65
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.
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 decreased $6 million from the year-ago quarter. Adjusted expenses exclude $2 million and $1 million, respectively, of regulatory-related expenses in the first quarters of 2023 and 2022.
See “Note 9 – Commitments and Contingencies” 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 the first quarters of 2023 and 2022, the Company incurred $4 million and $3 million, respectively, of restructuring/other reorganization expenses primarily due to facility exit and severance-related costs.
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
FFELPStafford andOther
FFELPConsolidationLoans
TotalFFELPLoans
PrivateEducationLoans
TotalPortfolio
Total education loan portfolio:
In-school(1)
73
Grace, repayment and other(2)
15,339
27,008
42,347
18,908
61,255
Total
15,354
42,362
18,981
61,343
Allowance for loan losses
(155
(59
(214
(706
(920
Total education loan portfolio
15,199
26,949
% of total FFELP
36
64
% of total
70
December 31, 2022
54
15,834
27,897
43,731
19,471
63,202
15,850
43,747
19,525
63,272
(159
(63
(222
(800
(1,022
15,691
27,834
43,525
18,725
62,250
17,983
33,264
51,247
21,012
72,259
18,004
51,268
21,052
72,320
(176
(79
(255
(964
(1,219
17,828
33,185
47
Education Loan Activity
Three Months Ended March 31, 2023
Beginning balance
Acquisitions (originations and purchases)(1)
274
Capitalized interest and premium/discount amortization
146
163
309
358
Refinancings and consolidations to third parties
(252
(435
(687
(759
Repayments and other
(386
(613
(999
(701
(1,700
Ending balance
Three Months Ended March 31, 2022
18,219
34,422
52,641
20,171
72,812
1,090
1,091
170
183
353
53
406
(245
(686
(931
(1,153
(316
(735
(1,051
(1,004
(2,055
FFELP Loan Portfolio Performance
Balance
Loans in-school/grace/deferment(1)
1,778
1,772
2,232
Loans in forbearance(2)
6,844
7,603
6,312
Loans in repayment and percentage of each status:
Loans current
28,886
85.6
29,004
84.4
36,948
86.5
Loans delinquent 31-60 days(3)
1,270
3.8
1,247
3.6
1,888
4.4
Loans delinquent 61-90 days(3)
902
2.7
833
2.4
1,148
Loans delinquent greater than 90 days(3)
2,682
3,288
9.6
2,740
Total FFELP Loans in repayment
33,740
34,372
42,724
Total FFELP Loans
FFELP Loan allowance for losses
FFELP Loans, net
Percentage of FFELP Loans in repayment
79.6
78.6
83.3
Delinquencies as a percentage of FFELP Loans in repayment
15.6
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance
18.1
Private Education Loan Portfolio Performance
369
354
377
401
418
17,439
95.5
17,838
95.0
19,447
96.0
290
335
1.8
1.4
165
.9
186
206
364
411
2.2
314
Total Private Education Loans in repayment
18,258
18,770
20,257
Total Private Education Loans
Private Education Loan allowance for losses
Private Education Loans, net
Percentage of Private Education Loans in repayment
96.2
96.1
Delinquencies as a percentage of Private Education Loans in repayment
5.0
Loans in forbearance as a percentage of loans in repayment and forbearance
2.1
Percentage of Private Education Loans with a cosigner(4)
Allowance for Loan Losses
Allowance at beginning of period
222
800
1,022
262
1,009
1,271
Total provision
Charge-offs:
Gross charge-offs
(81
Expected future recoveries on current period gross charge-offs
(93
(69
(76
Decrease in expected future recoveries on charged- off loans(2)
Allowance at end of period (GAAP)
214
706
920
964
1,219
Plus: expected future recoveries on previously fully charged-off loans(2)
268
Allowance at end of period excluding expected future recoveries on previously fully charged-off loans (Non-GAAP Financial Measure)(3)
974
1,188
1,285
1,540
Net charge-offs as a percentage of average loans in repayment (annualized)
Allowance coverage of charge-offs (annualized)(3)
2.9
3.2
(Non-GAAP)
8.8
4.6
Allowance as a percentage of the ending total loan balance(3)
.5
5.1
6.1
Allowance as a percentage of ending loans in repayment(3)
.6
5.4
Ending total loans
Average loans in repayment
34,305
18,552
43,125
20,387
Ending loans in repayment
Beginning of period expected future recoveries on previously fully charged-off loans
329
Expected future recoveries of current period defaults
Recoveries (cash collected)
(13
Charge-offs (as a result of lower recovery expectations)
(5
End of period expected future recoveries on previously fully charged-off loans
Change in balance during period
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 $6.0 billion at March 31, 2023. 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 $1.1 billion of senior unsecured notes that mature in the short term (i.e., over the next 12 months) and the remaining $4.9 billion of senior unsecured notes that mature in the long term (from 2024 to 2043 with 77% 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 purchased 4.9 million shares of common stock for $85 million in the first quarter of 2023 and have $515 million of unused share repurchase authority as of March 31, 2023.
Sources of Primary Liquidity
Ending Balances:
Total unrestricted cash and liquid investments
570
1,535
708
Unencumbered FFELP Loans
62
Unencumbered Private Education Refinance Loans
55
232
669
1,658
1,162
Three Months Ended
Average Balances:
825
1,517
874
343
976
1,970
1,394
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.
Ending Balances
FFELP Loan ABCP facilities
57
101
352
Private Education Loan ABCP facilities
1,028
1,248
2,137
1,085
1,349
2,489
Average Balances
193
382
1,141
1,556
2,239
1,749
2,621
At March 31, 2023, we had a total of $3.0 billion of unencumbered tangible assets inclusive of those listed in the table above as sources of primary liquidity. Total unencumbered education loans comprised $1.5 billion principal of our unencumbered tangible assets of which $1.5 billion and $62 million related to Private Education Loans and FFELP Loans, respectively. In addition, as of March 31, 2023, we had $5.4 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 $0.6 billion outstanding as of March 31, 2023. 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.
23
The following table reconciles encumbered and unencumbered assets and their net impact on total Tangible Equity.
Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans
3.7
Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans
1.7
1.5
Tangible unencumbered assets(1)
3.0
4.1
Senior unsecured debt
(6.0
(7.0
Mark-to-market on unsecured hedged debt(2)
.2
Other liabilities, net
(.3
Total Tangible Equity (1)
2.3
Borrowings
ShortTerm
LongTerm
Unsecured borrowings:
1,149
4,864
6,013
1,301
5,711
7,012
Total unsecured borrowings
Secured borrowings:
FFELP Loan securitizations
40,275
40,343
42,675
42,751
Private Education Loan securitizations
648
12,187
12,835
725
12,744
13,469
887
428
1,315
923
386
1,309
2,917
2,734
Other
105
121
Total secured borrowings
4,625
52,890
57,515
4,579
55,805
60,384
Core Earnings basis borrowings(1)
5,774
57,754
63,528
5,880
61,516
67,396
Adjustment for GAAP accounting treatment
(21
(366
(387
(490
(500
GAAP basis borrowings
5,753
57,388
63,141
5,870
61,026
66,896
AverageBalance
AverageRate
6,279
8.14
7,015
4.30
41,377
5.15
50,553
1.31
13,172
3.25
14,653
2.29
1,288
5.90
692
1.57
2,828
6.25
2,496
1.90
5.03
251
.67
58,773
4.79
68,645
1.54
65,052
5.11
75,660
1.79
.11
(.24
5.22
1.55
Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). A discussion of our critical accounting policies, which includes the allowance for loan losses, goodwill impairment assessment, premium and discount amortization, and the impact of the SDR Plan on our accounting policies and estimates, can be found in our 2022 Form 10-K.
In addition to financial results reported on a GAAP basis, Navient also provides certain performance measures which are non-GAAP financial measures. We present the following non-GAAP financial measures: (1) Core Earnings (as well as Adjusted Core Earnings), (2) Tangible Equity (as well as the Adjusted Tangible Equity Ratio), (3) EBITDA for the Business Processing segment, and (4) Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans. Definitions for the non-GAAP financial measures and reconciliations are provided below, except that reconciliations of forward-looking non-GAAP financial measures are not provided because the company is unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of certain items, including, but not limited to, the impact of any mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks.
1. Core Earnings
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 refer to 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.
Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed below, that can create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the two items we remove to result in our Core Earnings presentations are:
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.
The following tables show our consolidated GAAP results, Core Earnings results (including for each reportable segment) along with the adjustments made to the income/expense items to reconcile the consolidated GAAP results to the Core Earnings results as required by GAAP and reported in “Note 12 — Segment Reporting.”
Adjustments
Reportable Segments
TotalGAAP
Reclassi-fications
Additions/(Subtractions)
TotalAdjustments (1)
TotalCoreEarnings
Federal Education Loans
Consumer Lending
Business Processing
Education loans
1,037
Net interest income (loss)
253
Net interest income (loss) after provisions for loan losses
Total other income (loss)
96
124
Unallocated shared services expenses
Goodwill and acquired intangible asset impairment and amortization
189
Income (loss) before income tax expense (benefit)
174
Income tax expense (benefit)(2)
Net Impact ofDerivativeAccounting
Net Impact ofGoodwill andAcquiredIntangibles
Total Core Earnings adjustments to GAAP
Income tax expense (benefit)
(42
(117
(98
(4
208
(35
(120
The following discussion summarizes the differences between GAAP and Core Earnings net income and details eachspecific adjustment required to reconcile our GAAP earnings to our Core Earnings segment presentation.
GAAP net income
Core Earnings adjustments to GAAP:
Net impact of derivative accounting
Net impact of goodwill and acquired intangible assets
Net income tax effect
Core Earnings net income
(1) Derivative Accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic mark-to-market gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. Under GAAP, for our derivatives that are held to maturity, the mark-to-market gain or loss over the life of the contract will equal $0 except for Floor Income Contracts, where the mark-to-market gain will equal the amount for which we originally sold the contract. In our Core Earnings presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.
The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. The gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” and interest expense (for qualifying fair value hedges) are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts, basis swaps and at times, certain other LIBOR swaps do not qualify for hedge accounting treatment and the stand-alone derivative is adjusted to fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item.
Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the education loans underlying the Floor Income embedded in those education loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the education loans. Under derivative accounting treatment, the upfront contractual payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the fair value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income paid to the counterparties to vary. This is economically offset by the change in the amount of Floor Income earned on the underlying education loans but that offsetting change in fair value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of Core Earnings, we have removed the mark-to-market gains and losses related to these contracts and added back the amortization of the net contractual premiums received on the Floor Income Contracts. The amortization of the net contractual premiums received on the Floor Income Contracts for Core Earnings is reflected in education loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.
Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our education loan assets that are primarily indexed to LIBOR or Prime. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn interest at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.
The table below quantifies the adjustments for derivative accounting between GAAP and Core Earnings net income.
Core Earnings derivative adjustments:
(Gains) losses on derivative and hedging activities, net, included in other income
Plus: (Gains) losses on fair value hedging activity included in interest expense
(41
Total (gains) losses in GAAP net income
(139
Plus: Reclassification of settlement income (expense) on derivative and hedging activities, net(1)
Mark-to-market (gains) losses on derivative and hedging activities, net(2)
(158
Amortization of net premiums on Floor Income Contracts in net interest income for Core Earnings
Other derivative accounting adjustments(3)
Total net impact of derivative accounting
Reclassification of settlements on derivative and hedging activities:
Net settlement expense on Floor Income Contracts reclassified to net interest income
Net settlement income (expense) on interest rate swaps reclassified to net interest income
Total reclassifications of settlement income (expense) on derivative and hedging activities
Fair value hedges
Foreign currency hedges
(16
Floor Income Contracts
Basis swaps
(2
Other - LIBOR swaps
(60
Total mark-to-market (gains) losses on derivative and hedging activities, net
Cumulative Impact of Derivative Accounting under GAAP compared to Core Earnings
As of March 31, 2023, derivative accounting has increased GAAP equity by approximately $81 million as a result of cumulative net mark-to-market gains (after tax) recognized under GAAP, but not in Core Earnings. The following table rolls forward the cumulative impact to GAAP equity due to these after-tax mark-to-market net gains and losses related to derivative accounting.
Beginning impact of derivative accounting on GAAP equity
122
(299
Net impact of net mark-to-market gains (losses) under derivative accounting(1)
236
Ending impact of derivative accounting on GAAP equity
81
Total pre-tax net impact of derivative accounting recognized in net income(2)
(27
159
Tax and other impacts of derivative accounting adjustments
(37
Change in mark-to-market gains (losses) on derivatives, net of tax recognized in other comprehensive income
Net impact of net mark-to-market gains (losses) under derivative accounting
Hedging Embedded Floor Income
We use Floor Income Contracts, pay-fixed swaps and fixed rate debt to economically hedge embedded Floor Income in our FFELP Loans. Historically, we have used these instruments on a periodic basis and depending upon market conditions and pricing, we may enter into additional hedges in the future. Under GAAP, the Floor Income Contracts do not qualify for hedge accounting and the pay-fixed swaps are accounted for as cash flow hedges. The table below shows the amount of hedged Floor Income that will be recognized in Core Earnings in future periods based on these hedge strategies.
Total hedged Floor Income, net of tax(1)(2)
166
(2) Goodwill and Acquired Intangible Assets: Our Core Earnings exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.
Core Earnings goodwill and acquired intangible asset adjustments
Adjusted Core Earnings
Adjusted Core Earnings net income and Adjusted Core Earnings operating expenses exclude restructuring and regulatory-related expenses. Management excludes these expenses as Adjusted Core Earnings is one of the measures we review internally when making management decisions regarding our performance and how we allocate resources, as this presentation is a useful basis for management and investors to further analyze Core Earnings. We also refer to this information in our presentations with credit rating agencies, lenders and investors.
The following table summarizes these expenses which are excluded:
Regulatory-related expenses
31
2. Tangible Equity and Adjusted Tangible Equity Ratio
Adjusted Tangible Equity Ratio measures the ratio of Navient’s Tangible Equity to its tangible assets. We adjust this ratio to exclude the assets and equity associated with our FFELP Loan portfolio because FFELP Loans are no longer originated and the FFELP Loan portfolio bears a 3% maximum loss exposure under the terms of the federal guaranty. Management believes that excluding this portfolio from the ratio enhances its usefulness to investors. Management uses this ratio, in addition to other metrics, for analysis and decision making related to capital allocation decisions. The Adjusted Tangible Equity Ratio is calculated as:
Navient Corporation's stockholders' equity
2,958
2,824
Less: Goodwill and acquired intangible assets
703
722
Tangible Equity
2,255
2,102
Less: Equity held for FFELP Loans
211
Adjusted Tangible Equity
2,044
1,847
Divided by:
Total assets
66,913
78,158
Less:
Goodwill and acquired intangible assets
Adjusted tangible assets
24,062
26,423
Adjusted Tangible Equity Ratio
3. Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA)
This measures the operating performance of the Business Processing segment and is used by management and equity investors to monitor operating performance and determine the value of those businesses. EBITDA for the Business Processing segment is calculated as:
Pre-tax income
Plus:
Depreciation and amortization expense(1)
EBITDA
Total revenue
EBITDA margin
4. Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off
Loans
The allowance for loan losses on the Private Education Loan portfolio used for the three credit metrics below excludes the expected future recoveries on previously fully charged-off loans to better reflect the current expected credit losses remaining in connection with the loans on balance sheet that have not charged off. That is, as of March 31, 2023, the $974 million Private Education Loan allowance for loan losses excluding expected future recoveries on previously fully charged-off loans represents the current expected credit losses that remain in connection with the $18,275 million Private Education Loan portfolio. The $268 million of expected future recoveries on previously fully charged-off loans, which is collected over an average 15-year period, mechanically is a reduction to the overall allowance for loan losses. However, it is not related to the $18,275 million Private Education Loan portfolio on our balance sheet and, as a result, management excludes this impact to the allowance to better evaluate and assess our overall credit loss coverage on the Private Education Loan portfolio. We believe this provides a more meaningful and holistic view of the available credit loss coverage on our non-charged-off Private Education Loan portfolio. We believe this information is useful to our investors, lenders and rating agencies.
Allowance for Loan Losses Metrics – Private Education Loans
Plus: expected future recoveries on previously fully charged-off loans
Allowance at end of period excluding expected future recoveries on previously fully charged-off loans (Non-GAAP Financial Measure)
Allowance coverage of charge-offs (annualized):
GAAP
3.4
Adjustment(1)
1.2
Non-GAAP Financial Measure(1)
Allowance as a percentage of the ending total loan balance:
Allowance as a percentage of the ending loans in repayment:
3.9
4.8
For a discussion of legal matters as of March 31, 2023, please refer to “Note 9 – Commitments and Contingencies” to our consolidated financial statements included in this report, which is incorporated into this item by reference.
The risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Form 10-K”) should be considered together with information included in this Quarterly Report on Form 10-Q. These are not the only risks to which we are exposed. The following information amends and restates in their entirety the previously disclosed risk factors in our Form 10-K relating to adverse market conditions and potential inability to manage our liquidity risk or access liquidity and credit risk related to use of our derivatives. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our Form 10-K.
Adverse market conditions or an inability to effectively manage our liquidity risk or access liquidity could negatively impact our ability to meet our liquidity and funding needs, which could materially and adversely impact our results of operations, cash flow or financial condition.
We must effectively manage our liquidity risk. We require liquidity and the ability to access funds held at banks and other financial institutions to meet cash requirements such as day-to-day operating expenses, origination of loans, required payments of principal and interest on borrowings, and distributions to shareholders. We expect to fund our ongoing liquidity needs, including the repayment of $6.0 billion of senior unsecured notes that mature in 2023 to 2043, primarily through our current cash, investments and unencumbered FFELP Loan and Private Education Refinance Loan portfolios, 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 may maintain too much liquidity, which can be costly, or may be too illiquid or may be unable to access funds held at banks and other financial institutions due to such banks or financial institutions entering receivership or becoming insolvent, which could result in financial distress during times of financial stress or capital market disruptions.
Our use of derivatives to manage interest rate and foreign currency sensitivity exposes us to credit and market risk that could have a material adverse effect on our earnings and liquidity.
We strive to maintain an overall strategy that uses derivatives to minimize the economic effect of interest rate and/or foreign currency changes. However, developing an effective strategy for dealing with these movements is complex, and no strategy can completely avoid the risks associated with these fluctuations. For example, our education loan portfolio is subject to prepayment risk that could result in being under- or over-hedged, which could result in material losses. As a result, there can be no assurance that hedging activities using derivatives will effectively manage our interest rate or foreign currency sensitivity, have the desired beneficial impact on our results of operations or financial condition or not adversely impact our liquidity.
Our use of derivatives also exposes us to market risk and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. Our Floor Income Contracts and basis swaps we use to manage earnings variability caused by different reset characteristics on interest-earning assets and interest-bearing liabilities do not qualify for hedge accounting treatment. Therefore, the change in fair value, called the “mark-to-market,” of these derivative instruments is included in our statement of income without a corresponding mark-to-market of the economically hedged item. A decline in the fair value of these derivatives could have a material adverse effect on our reported earnings. In addition, a change in the mark-to-market value of these instruments may cause us to have to post more collateral to our counterparty or to a clearing house. If these values change significantly, the increased collateral posting requirement could have a material adverse impact on our liquidity.
Credit risk is the risk that a counterparty, for a period of time or indefinitely, will not perform its obligations under a contract or is not permitted to perform its obligations under a contract due to the counterparty entering receivership or becoming insolvent. Credit risk is limited to the loss of the fair value gain in a derivative that the counterparty or clearinghouse owes or will owe in the future to us. If a counterparty or clearinghouse fails to perform its obligations, we could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, we might not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment.
Our securitization trusts, which we consolidate on our balance sheet, had $1.7 billion of Euro denominated bonds outstanding as of March 31, 2023. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with highly rated counterparties. A failure by a swap counterparty to perform its obligations could, if the swap has a positive fair value to us and was not adequately collateralized, materially and adversely affect our earnings.
LIBOR Transition
We continue to work internally as well as with external parties to ensure an orderly transition from one-month and three-month LIBOR to an alternative benchmark rate by the June 30, 2023 transition date. We have established an internal LIBOR transition team whose purpose is to assess impacts, recommend plans and coordinate transition efforts among different business areas. Executive management and the LIBOR transition team provide quarterly reports to our Board of Directors. We have also established internal LIBOR working groups comprised of members from different business areas who meet regularly to assess specific business-level impacts and to implement operational changes necessary to effectuate a successful transition from LIBOR. In addition to our enterprise-wide efforts, we engage with market participants, industry groups and regulators, including the Alternative Reference Rates Committee (the ARRC), to develop plans and documentation to facilitate the transition to an alternative benchmark rate.
We continue to work to align with the ARRC’s recommended best practices for completing the transition from LIBOR. All our new variable rate Private Education Loans issued since December 2021 are indexed to SOFR. Also, as of December 31, 2021, we have ceased entering into any other new contracts that are indexed to LIBOR and, where practicable, have engaged with counterparties to modify certain existing contracts to transition the existing reference rate from LIBOR to SOFR. With respect to our legacy variable rate Private Education Loans and other financial contracts that reference USD LIBOR and contain fallbacks provisions that clearly specify a method for the transition from LIBOR, we plan to transition such loans using such existing fallbacks. We have engaged with our IT vendors and impacted internal work groups to prepare and update our systems, procedures and processes to transition LIBOR-indexed contracts to SOFR. With respect to our financial instruments that do not include fallback provisions that clearly specify a method for the transition from LIBOR to an alternative benchmark rate, where practicable and commercially reasonable, we have made efforts to engage with customers, counterparties and investors to modify such instruments. Due to stringent noteholder consent requirements, it may be impracticable or impossible to modify certain financial instruments like certain of our ABS. Further, the SAP formula for our FFELP Loans, which is indexed to one-month LIBOR, cannot be modified without legislative action. Thus, in such instances, we will need to rely on federal legislation to transition to SOFR.
On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act) was signed into law. The LIBOR Act provides that for contracts that contain no fallback provision or contain fallback provisions that do not identify a specific USD LIBOR benchmark replacement (including the SAP formula for FFELP Loans), a benchmark replacement based on SOFR, as recommended by the Federal Reserve Bank of New York, will automatically replace the USD LIBOR benchmark in the contract after June 30, 2023. On December 16, 2022, the Federal Reserve Bank of New York adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023. Following the enactment and implementation of the LIBOR Act, all of our financial instruments which are currently indexed to USD LIBOR will transition to SOFR by no later than June 30, 2023. Specifically, after June 30, 2023, the SAP formula for FFELP Loans will transition to 30-day Average SOFR and our LIBOR-indexed FFELP ABS contracts that are subject to the LIBOR Act will transition to 30-day or 90-day Average SOFR. Our LIBOR-indexed Private Education Loan ABS contracts that are subject to the LIBOR Act will transition to 1-month or 3-month Term SOFR. Similarly, our LIBOR-indexed Private Education Loans will transition to 1-month or 3-month Term SOFR. Our LIBOR-indexed derivatives will transition to the Fallback Rate (SOFR) as defined in the ISDA 2020 IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association, Inc. on October 23, 2020.
For a discussion of the risks related to the LIBOR transition, see “Risk Factors – Market, Funding & Liquidity Risk – The transition away from the LIBOR reference rate to the Secured Overnight Financing Rate (SOFR) may create uncertainty in the capital markets and may negatively impact the value of existing LIBOR based financial instruments and our financial results and business” in our Form 10-K.
Interest Rate Sensitivity Analysis
Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at March 31, 2023 and 2022, based upon a sensitivity analysis performed by management assuming a hypothetical increase and decrease in market interest rates of 100 basis points. The earnings sensitivities assume an immediate increase and decrease in market interest rates of 100 basis points and are applied only to financial assets and liabilities, including hedging instruments, that existed at the balance sheet date and do not take into account any new assets, liabilities or hedging instruments that may arise over the next 12 months.
As of March 31, 2023
As of March 31, 2022
Impact on Annual Earnings If:
Interest Rates
(Dollars in millions, except per share amounts)
Increase100 BasisPoints
Decrease100 BasisPoints
Effect on Earnings:
Change in pre-tax net income before mark-to -market gains (losses) on derivative and hedging activities
Mark-to-market gains (losses) on derivative and hedging activities
(33
43
Increase (decrease) in income before taxes
Increase (decrease) in net income after taxes
(45
52
Increase (decrease) in diluted earnings per common share
.43
(.36
.35
(.30
At March 31, 2023
Interest Rates:
Change fromIncrease of100 BasisPoints
Change fromDecrease of100 BasisPoints
Fair Value
Effect on Fair Values:
Assets
Education Loans
57,500
148
Other earning assets
2,931
Other assets
3,559
(11
Total assets gain/(loss)
63,990
137
Liabilities
Interest-bearing liabilities
60,019
264
Other liabilities
814
(115
Total liabilities (gain)/loss
60,833
(124
149
At December 31, 2022
59,306
120
4,974
3,571
67,851
91
63,531
272
922
(134
64,453
(125
138
A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate education loan portfolio with floating rate debt and our fixed rate education loan portfolio with fixed rate debt although we can have a mismatch at times. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets. In addition, due to the ability of some FFELP Loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the education loan earns at the fixed borrower rate and the funding remains floating. We use Floor Income Contracts, pay-fixed swaps and fixed rate debt to economically hedge embedded Floor Income in our FFELP loans. Historically, we have used these instruments on a periodic basis and depending upon market conditions and pricing, we may enter into additional hedges in the future. The result of these hedging transactions is to fix the relative spread between the education loan asset rate and the variable rate liability.
In the preceding tables, under the scenario where interest rates increase or decrease by 100 basis points, the change in pre-tax net income before the mark-to-market gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged FFELP Loans being in a fixed-rate mode due to Floor Income, while being funded with variable rate debt in low interest rate environments; (ii) certain FFELP fixed rate loans becoming variable interest rate loans when variable interest rates rise above a certain level (Special Allowance Payment of “SAP”). When these loans are funded with fixed rate debt (as we do for a portion of the portfolio to economically hedge Floor Income) we earn additional interest income when earning the higher variable rate that is in effect; and (iii) a portion of our variable rate assets being funded with fixed rate liabilities. Item (i) will generally cause income to decrease when interest rates increase and income to increase when interest rates decrease. Item (ii) and (iii) have the opposite effect. The changes due to the interest rate scenarios in the current period are primarily a result of item (ii) having a more significant impact than item (i) as a result of interest rates being significantly higher compared to the prior period. The changes in the prior period are a result of item (i) having a more significant impact than item (ii) primarily as a result of interest rates being significantly lower at that time. In addition, item (iii) had more of an impact in the prior period due to a higher balance of variable rate assets being funded with fixed rate liabilities.
In the preceding tables, under the scenario where interest rates increase or decrease by 100 basis points, the change in mark-to-market gains (losses) on derivative and hedging activities in both periods is primarily due to (i) the notional amount and remaining term of our derivative portfolio and related hedged debt and (ii) the interest rate environment. In both periods, the mark-to-market gains (losses) are primarily related to derivatives that don’t qualify for hedge accounting that are used to economically hedge Floor Income as well as the origination of fixed rate Private Education Refinance loans. As a result of not qualifying for hedge accounting, there is not an offsetting mark- to-market of the hedged item in this analysis. The mark-to-market gains (losses) where interest rates increase and decrease 100 basis points are lower in 2023 than 2022 primarily as a result of 2023's higher interest rate environment's impact on derivatives used to hedge Floor Income and a decline in the notional amount of derivatives outstanding in connection with the decrease in the education loan portfolio over that time period.
In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to USD LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest-bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross-currency interest rate swaps in other assets or other liabilities. In certain economic environments, volatility in the spread between spot and forward foreign exchange rates has resulted in mark-to-market impacts to current period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero. Navient has not issued foreign currency denominated debt since 2008.
Asset and Liability Funding Gap
The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2023. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.
Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (Core Earnings basis). Accordingly, we are also presenting the asset and liability funding gap on a Core Earnings basis in the table that follows the GAAP presentation.
GAAP Basis:
Index(Dollars in billions)
Frequency ofVariableResets
Funding(1)
FundingGap
3-month Treasury bill
weekly
annual
Prime
quarterly
monthly
3-month LIBOR
17.2
(17.0
1-month LIBOR
2.6
24.8
(22.2
daily
39.7
SOFR(2)
various
.7
(.6
Non-Discrete reset(2)(3)
(4.6
Non-Discrete reset(4)
daily/weekly
Fixed Rate(5)
13.6
19.5
(5.9
66.9
Core Earnings Basis:
34.3
(31.7
13.7
21.1
(7.4
67.0
We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. Interest earned on our FFELP Loans is primarily indexed to daily one-month LIBOR and our cost of funds is primarily indexed to rates other than daily one-month LIBOR. A source of variability in FFELP net interest income could also be Floor Income we earn on certain FFELP Loans. Pursuant to the terms of the FFELP, certain FFELP Loans can earn interest at the stated fixed rate of interest as underlying debt interest rate expense remains variable. We refer to this additional spread income as “Floor Income.” Floor Income can be volatile since it is dependent on interest rate levels. We frequently hedge this volatility to lock in the value of the Floor Income over the term of the contract. Interest earned on our Private Education Refinance Loans is generally fixed rate with the related cost of funds generally fixed rate as well. Interest earned on the remaining Private Education Loans is generally indexed to either one-month Prime or LIBOR rates and our cost of funds is primarily indexed to one-month or three-month LIBOR. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in prior years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.
Share Repurchases
The following table provides information relating to our purchases of shares of our common stock in the three months ended March 31, 2023.
Total Numberof SharesPurchased(1)
Average PricePaid perShare
Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs(2)
Approximate DollarValue of SharesThat May Yet BePurchased UnderPublicly AnnouncedPlans orPrograms(2)
Period:
January 1 — January 31, 2023
17.58
573
February 1 — February 28, 2023
18.68
547
March 1 — March 31, 2023
16.53
515
Total first-quarter 2023
5.5
17.52
Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive and Principal Financial Officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2023. Based on this evaluation, our Principal Executive and Principal Financial Officers concluded that, as of March 31, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Principal Executive and Principal Financial Officers as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
10.1†*
Form of Navient Corporation 2014 Omnibus Incentive Plan Performance Stock Unit Agreement.
31.1*
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
32.1**
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
101.INS*
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
† Management Contract or Compensatory Plan or Arrangement
* Filed herewith
** Furnished herewith
NAVIENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)
FFELP Loans (net of allowance for losses of $214 and $222, respectively)
Private Education Loans (net of allowance for losses of $706 and $800, respectively)
Investments
Held-to-maturity
60
Total investments
167
Cash and cash equivalents
Restricted cash and cash equivalents
2,208
3,272
Goodwill and acquired intangible assets, net
705
2,856
2,866
70,795
Short-term borrowings
Long-term borrowings
Total liabilities
63,955
67,818
Commitments and contingencies
Equity
Series A Junior Participating Preferred Stock, par value $0.20 per share; 2 million shares authorized at December 31, 2021; no shares issued or outstanding
Common stock, par value $0.01 per share, 1.125 billion shares authorized: 464 million and 461 million shares issued, respectively
Additional paid-in capital
3,335
3,313
Accumulated other comprehensive income (net of tax expense of $22 and $29, respectively)
Retained earnings
4,490
Total Navient Corporation stockholders’ equity before treasury stock
7,984
7,894
Less: Common stock held in treasury at cost: 337 million and 331 million shares, respectively
(5,026
(4,917
Total Navient Corporation stockholders’ equity
2,977
Noncontrolling interest
Total equity
Total liabilities and equity
Supplemental information — assets and liabilities of consolidated variable interest entities:
42,086
43,465
16,822
17,207
Restricted cash
2,180
3,233
Other assets, net
1,534
1,356
4,520
4,458
52,714
55,598
Net assets of consolidated variable interest entities
5,388
5,205
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Salaries and benefits
Other operating expenses
80
Total operating expenses
Goodwill and acquired intangible asset impairment and amortization expense
Average common shares outstanding
129
151
Average common and common equivalent shares outstanding
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net changes in cash flow hedges, net of taxes(1)
Total comprehensive income
90
44
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except share and per share amounts)
Accumulated
Common Stock Shares
Additional
Common
Paid-In
Comprehensive
Retained
Treasury
Stockholders'
Noncontrolling
Issued
Outstanding
Stock
Capital
Income (Loss)
Earnings
Interest
Balance at December 31, 2021
458,629,384
(304,886,613
153,742,771
3,282
(133
3,939
(4,495
2,597
2,608
Comprehensive income (loss):
Other comprehensive income (loss),net of tax
Total comprehensive income (loss)
Cash dividends:
Common stock ($.16 per share)
Dividend equivalent units related to employee stock-based compensation plans
Issuance of common shares
2,359,901
Stock-based compensation expense
Common stock repurchased
(6,247,437
Shares repurchased related to employee stock-based compensation plans
(1,110,584
Net activity in noncontrolling interest
Balance at March 31, 2022
460,989,285
(312,244,634
148,744,651
3,302
4,167
(4,630
2,830
Balance at December 31, 2022
461,087,590
(330,878,152
130,209,438
2,420,932
(4,888,812
(1,276,713
Balance at March 31, 2023
463,508,522
(337,043,677
126,464,845
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Mark-to-market (gains) losses on derivative and hedging activities, net
(314
Provisions for loan losses
(Increase) decrease in accrued interest receivable
48
Decrease in accrued interest payable
Decrease in other assets
Decrease in other liabilities
(286
Total adjustments
(364
Net cash provided by (used in) operating activities
145
(109
Cash flows from investing activities
Education loans originated and acquired
(274
(1,091
Proceeds from payments on education loans
2,118
2,789
Other investing activities, net
Net cash provided by investing activities
1,848
1,751
Cash flows from financing activities
Borrowings collateralized by loans in trust - issued
995
Borrowings collateralized by loans in trust - repaid
(3,047
(3,296
Asset-backed commercial paper conduits, net
391
Long-term unsecured notes repaid
(1,001
Other financing activities, net
Common dividends paid
Net cash used in financing activities
(4,022
(2,006
Net decrease in cash, cash equivalents, restricted cash and restricted cash equivalents
(2,029
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
4,807
3,578
Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
2,778
3,214
Supplemental disclosure of cash flow information:
Cash disbursements made (refunds received) for:
Interest paid
845
Income taxes paid
Income taxes refunds received
Reconciliation of the Consolidated Statements of Cash Flows to the Consolidated Balance Sheets:
Restricted cash and restricted cash equivalents
2,506
Total cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2023 and for the three months ended
March 31, 2023 and 2022 is unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited, consolidated financial statements of Navient have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of Navient and its majority-owned and controlled subsidiaries and those Variable Interest Entities (VIEs) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2022 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the 2022 Form 10-K). Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2022 Form 10-K.
Recently Issued Accounting Pronouncements
Effective in 2020 and Forward
Rate Reform
In March 2020 (and as amended in December 2022), the FASB issued ASU No. 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides optional temporary relief for companies who are preparing for the discontinuation of interest rates indexed to the London Interbank Offered Rate (LIBOR). The ASU provides companies with guidance in the form of expedients and exceptions related to contract modifications and hedge accounting to ease the burden of and simplify the accounting associated with transitioning away from LIBOR. Modifications of qualifying contracts are accounted for as the continuation of an existing contract rather than as a new contract. Modifications of qualifying hedging relationships will not require discontinuation of the existing hedge accounting relationships. One-month and three-month LIBOR will be discontinued after June 30, 2023. Our instruments that are indexed to one-month and three-month LIBOR will be indexed to SOFR after that date. There is $13 billion of debt as of March 31, 2023, that is in either a fair value or cash flow hedge relationship using LIBOR swaps. We will use the hedge accounting expedients in this ASU when those swaps transition to SOFR. As a result, these hedges will not result in the discontinuation of the existing hedge accounting relationships.
1. Significant Accounting Policies (Continued)
Troubled Debt Restructurings
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures,” which eliminates the troubled debt restructurings (TDRs) recognition and measurement guidance and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. The ASU also enhances the disclosure requirements for certain modifications of receivables made to borrowers experiencing financial difficulty. This guidance was effective on January 1, 2023. Prior to adopting this new guidance on January 1, 2023, as it relates to interest rate concessions granted as part of our Private Education Loan modification program, a discounted cash flow model was used to calculate the amount of interest forgiven for loans that were in the program and the present value of that interest rate concession was included as a part of the allowance for loan loss. This new guidance no longer requires the measurement and recognition of this element of our allowance for loan loss for new modifications that occur subsequent to January 1, 2023. As of December 31, 2022, the allowance for loan loss included $77 million related to this interest rate concession component of the allowance for loan loss. We elected to adopt this amendment using a prospective transition method which results in the $77 million releasing in 2023 and 2024 as the borrowers exit their current modification programs. $52 million of the $77 million was released in first-quarter 2023.
2. Allowance for Loan Losses
Allowance for Loan Losses Roll Forward
Decrease in expected future recoveries on previously fully charged-off loans(2)
Allowance at end of period
2. Allowance for Loan Losses (Continued)
Key Credit Quality Indicators
We assess and determine the collectability of our education loan portfolios by evaluating certain risk characteristics we refer to as key credit quality indicators. Key credit quality indicators are incorporated into the allowance for loan losses calculation.
FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default. The key credit quality indicators are loan status and loan type.
FFELP Loan Delinquencies
Loan type:
Change
Stafford Loans
13,592
15,975
(2,383
Consolidation Loans
24,697
30,665
(5,968
Rehab Loans
4,073
4,628
(555
Total loans, gross
(8,906
50
The key credit quality indicators are credit scores (FICO scores), loan status, loan seasoning, certain loan modifications, the existence of a cosigner and school type. The FICO score is the higher of the borrower or co-borrower score and is updated at least every six months while school type is assessed at origination. The other Private Education Loan key quality indicators are updated quarterly.
Private Education Loan Credit Quality Indicators by Origination Year
2021
2020
2019
Prior
% of Total
Credit Quality Indicators
FICO Scores:
640 and above
1,761
4,368
1,438
1,353
8,133
17,220
Below 640
92
1,559
1,801
4,460
1,462
1,396
9,692
Loan Status:
In-school/grace/ deferment/forbearance
498
723
Current/90 days or less delinquent
161
1,729
4,360
1,432
1,359
8,853
17,894
Greater than 90 days delinquent
341
Seasoning(1):
1-12 payments
1,386
1,715
13-24 payments
362
4,084
86
4,587
25-36 payments
242
1,251
157
1,756
37-48 payments
155
1,190
1,617
More than 48 payments
8,884
8,937
Loans in-school/ grace/deferment
Certain Loan Modifications(2):
Modified
89
6,492
Non-Modified
1,787
4,371
1,424
1,324
3,413
12,489
Cosigners:
With cosigner(3)
103
5,894
6,256
Without cosigner
1,612
4,357
1,436
1,387
3,798
12,725
School Type:
Not-for-profit
158
1,704
4,202
1,397
1,300
8,150
16,911
For-profit
258
1,542
2,070
Total loans, net
1Q-23 Net Charge-Offs
51
2018
948
5,037
1,783
1,683
9,314
19,391
1,661
956
5,081
1,799
1,720
647
10,849
654
795
951
5,015
1,684
632
9,889
19,943
95
306
4,740
5,852
1,555
134
2,108
201
1,507
225
1,979
545
982
9,719
9,754
287
6,998
7,093
5,072
1,784
1,677
619
3,851
13,959
6,994
7,144
945
4,984
1,768
1,709
3,855
13,908
893
4,786
1,719
1,602
595
9,048
18,643
63
295
118
2,409
Private Education Loan Delinquencies
Total loans in repayment
Total loans
Allowance for losses
Loans, net
Percentage of loans in repayment
Delinquencies as a percentage of loans in repayment
Loan Modifications to Borrowers Experiencing Financial Difficulty
We adjust the terms of Private Education Loans for certain borrowers when we believe such changes will help our customers better manage their student loan obligations, achieve better outcomes and increase the collectability of the loans. These changes generally take the form of a temporary interest rate reduction, a temporary forbearance of payments, a temporary interest only payment, and a temporary interest rate reduction with a permanent extension of the loan term. The effect of most modifications of loans made to borrowers who are experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance. The model design predicts borrowers that will have financial difficulty in the future and require loan modification and increased life of loan default risk.
Under our current forbearance practices, temporary hardship forbearance of payments generally cannot exceed 12 months over the life of the loan. However, exceptions can be made in cases where borrowers have shown the ability to make a substantial number of monthly principal and interest payments and in those cases borrowers can be granted up to 24 months of hardship forbearance over the life of the loan. We offer other administrative forbearances (e.g., death and disability, bankruptcy, military service, and disaster forbearance) that are either required by law (such as the Servicemembers Civil Relief Act) or are considered separate from our active loss mitigation programs and therefore are not considered to be loan modifications requiring disclosure under ASU No. 2022-02.
FFELP loans are at least 97 percent guaranteed as to their principal and accrued interest by the federal government in the event of default and, therefore, we do not deem FFELP loans as nonperforming from a credit risk perspective at any point in their life cycle prior to claim payment and continue to accrue interest on those loans through the date of claim. Further, FFELP loan modification events are either legal entitlements subject to regulatory-driven eligibility criteria or addressed in the promissory note terms, so we do not consider these events as a component of our loan modification programs.
The following table shows the amortized cost basis as of March 31, 2023 of the loans to borrowers experiencing financial difficulty that were modified in first-quarter 2023.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Interest Rate Reductions(1)
More Than an Insignificant Payment Delay (2)
Combination Rate Reduction and Term Extension
Loan Type
Amortized Cost
% of Loan Type
611
275
For those loans modified in first-quarter 2023, the following table shows the impact of such modification.
Interest Rate Reductions
More Than an Insignificant Payment Delay
Reduced the weighted average contractual rate from 12.9% to 4.9%
Added an average 6 months to the remaining life of the loans
Added an average 8 years to the remaining life of the loans and reduced the weighted average contractual rate from 12.5% to 5.1%.
The following table provides the amount of loans whose borrowers were experiencing financial difficulty, were modified during first-quarter 2023 and subsequently had a payment default in first-quarter 2023. We define payment default as 60 days past due for purposes of this disclosure. We closely monitor performance of the loans to borrowers experiencing financial difficulty that are modified to understand the effectiveness of the modification efforts.
Modified Loans (Amortized Cost)
Payment Default (Par)
Private Education Loans(1)
The following table provides the performance and related loan status as of March 31, 2023 of loans that were modified in first-quarter 2023.
Loan Type:
Status
Payment status (Amortized Cost)
Loans in School/Deferment
Loans in Forbearance
891
Loans delinquent 31 - 60 days
Loans delinquent 61 - 90 days
Loans delinquent greater than 90 days
Total Modified Loans
932
Prior to our adoption of ASU 2022-02 on January 1, 2023, we accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. Certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan were classified as TDRs.
The following table provides the amount of loans modified in the period presented that resulted in a TDR. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure.
Modified loans
Charge-offs
56
Payment default
3. Borrowings
The following table summarizes our borrowings.
Senior unsecured debt(1)
FFELP Loan securitizations(2)(3)
Private Education Loan securitizations(4)
Other(5)
Total before hedge accounting adjustments
Hedge accounting adjustments
3. Borrowings (Continued)
Variable Interest Entities
We consolidated the following financing VIEs as of March 31, 2023 and December 31, 2022, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.
Debt Outstanding
Carrying Amount of Assets SecuringDebt Outstanding
Cash
OtherAssets
Secured Borrowings — VIEs:
40,755
1,578
43,945
13,609
396
14,102
1,331
1,412
3,213
3,390
57,410
58,908
62,849
(227
57,234
62,622
2,705
1,544
46,397
14,168
367
14,640
1,317
1,400
3,039
3,080
60,263
60,672
65,517
(207
(256
60,056
65,261
4. Derivative Financial Instruments
Summary of Derivative Financial Statement Impact
The following tables summarize the fair values and notional amounts of all derivative instruments and their impact on net income and other comprehensive income.
Impact of Derivatives on Balance Sheet
Cash Flow
Fair Value(3)
Hedged RiskExposure
Mar 31, 2023
Dec 31, 2022
Fair Values(1)
Derivative Assets:
Interest rate swaps
Interest rate
Cross-currency interest rate swaps
Foreign currency andinterest rate
Total derivative assets(2)
Derivative Liabilities:
(224
(253
Total derivative liabilities(2)
(258
Net total derivatives
(152
(200
(154
(202
Other Assets
Other Liabilities
(Dollar in millions)
Gross position
Impact of master netting agreements
Derivative values with impact of master netting agreements (as carried on balance sheet)
Cash collateral (held) pledged
(80
Net position
(196
As of December 31, 2022
Carrying Value
Hedge Basis Adjustments
1,126
1,289
5,374
(370
6,188
(494
4. Derivative Financial Instruments (Continued)
The above fair values include adjustments when necessary for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the asset position at March, 31, 2023 and December 31, 2022 by $5 million and $6 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at March 31, 2023 and December 31, 2022 by $1 million and $1 million, respectively.
Notional Values:
8.3
5.2
13.3
17.4
24.9
31.9
6.0
Total derivatives
6.9
8.0
19.3
23.4
32.6
Mark-to-Market Impact of Derivatives on Statements of Income
Total Gains (Losses)
Fair Value Hedges:
Interest Rate Swaps
Gains (losses) recognized in net income on derivatives
78
(288
Gains (losses) recognized in net income on hedged items
(82
313
Net fair value hedge ineffectiveness gains (losses)
Cross currency interest rate swaps
(36
Total fair value hedges(1)(2)
Cash Flow Hedges:
Total cash flow hedges(2)
Trading:
Floor income contracts
Total trading derivatives(3)
Mark-to-market gains (losses) recognized
Impact of Derivatives on Other Comprehensive Income (Equity)
Total gains (losses) on cash flow hedges
93
Reclassification adjustments for derivative (gains) losses included in net income (interest expense)(1)
Net changes in cash flow hedges, net of tax
Collateral
The following table details collateral held and pledged related to derivative exposure between us and our derivative counterparties:
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)
Securities at fair value — corporate derivatives (not recorded in financial statements)(1)
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)
Total collateral held
Derivative asset at fair value including accrued interest
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)
Total collateral pledged
Derivative liability at fair value including accrued interest and premium receivable
235
266
Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $0 with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.
The table below highlights credit exposure related to our derivative counterparties at March 31, 2023.
CorporateContracts
SecuritizationTrustContracts
Exposure, net of collateral
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3
5. Other Assets
The following table provides the detail of our other assets.
Accrued interest receivable
2,043
2,031
Benefit and insurance-related investments
454
452
Income tax asset, net
132
Derivatives at fair value
Accounts receivable
83
Fixed assets
74
6. Stockholders’ Equity
The following table summarizes common share repurchases, issuances and dividends paid.
(Dollars and shares in millions, except per share amounts)
Common stock repurchased(1)
Common stock repurchased (in dollars)(1)
Average purchase price per share(1)
17.40
18.41
Remaining common stock repurchase authority(1)
885
Shares repurchased related to employee stock-based compensation plans(2)
1.3
1.1
Average purchase price per share(2)
18.44
17.92
Common shares issued(3)
Dividends per share
The closing price of our common stock on March 31, 2023 was $15.99.
7. Earnings (Loss) per Common Share
Basic earnings (loss) per common share (EPS) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations on a GAAP basis follows.
Numerator:
Denominator:
Weighted average shares used to compute basic EPS
Effect of dilutive securities:
Dilutive effect of stock options, restricted stock, restricted stock units, performance stock units, and Employee Stock Purchase Plan (ESPP)(1)
Dilutive potential common shares(2)
Weighted average shares used to compute diluted EPS
8. Fair Value Measurements
We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. The fair value of the items discussed below are separately disclosed in this footnote.
During the three months ended March 31, 2023, there were no significant transfers of financial instruments between levels, or changes in our methodology used to value our financial instruments.
The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis. During the first quarters of 2023 and 2022, there were no significant transfers of financial instruments between levels.
Fair Value Measurements on a Recurring Basis
Level 1
Level 2
Level 3
Derivative instruments:(1)
Liabilities(3)
Derivative instruments(1)
8. Fair Value Measurements (Continued)
The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.
Derivative instruments
InterestRate Swaps
CrossCurrencyInterestRate Swaps
TotalDerivativeInstruments
Balance, beginning of period
(190
(194
Total gains/(losses):
Included in earnings(1)
(40
Included in other comprehensive income
Settlements
Transfers in and/or out of level 3
Balance, end of period
(226
(229
Change in mark-to- market gains/(losses) relating to instruments still held at the reporting date(2)
The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.
Fair Value at March 31, 2023
ValuationTechnique
Input
Range and WeightedAverage
Derivatives
Prime/LIBOR basis swaps
Discounted cash flow
Constant Prepayment Rate
10%
Bid/ask adjustment todiscount rate
.08%
5%
The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.
FairValue
CarryingValue
Difference
Earning assets
39,970
(2,178
41,426
(2,099
17,530
(745
17,880
(845
Total earning assets
60,431
63,354
(2,923
64,280
67,224
(2,944
5,758
5,879
54,261
3,127
57,652
3,374
Total interest-bearing liabilities
3,122
3,365
Derivative financial instruments
Excess of net asset fair value over carrying value
199
421
9. Commitments, Contingencies and Guarantees
We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations, except as otherwise disclosed. Most of these matters are claims including individual and class action lawsuits against our servicing or business processing subsidiaries alleging the violation of state or federal laws in connection with servicing or collection activities on their education loans and other debts.
In the ordinary course of our business, the Company and our subsidiaries and affiliates receive information and document requests and investigative demands from various entities including State Attorneys General, U.S. Attorneys, legislative committees, individual members of Congress and administrative agencies. These requests may be informational, regulatory or enforcement in nature and may relate to our business practices, the industries in which we operate, or companies with whom we conduct business. Generally, our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.
The number of these inquiries and the volume of related information demands continue to increase and therefore continue to increase the time, costs and resources we must dedicate to timely respond to these requests and may, depending on their outcome, result in payments of restitution, fines and penalties.
Certain Cases
In January 2017, the Consumer Financial Protection Bureau (the CFPB) and Attorneys General for the State of Illinois and the State of Washington initiated civil actions naming Navient Corporation and several of its subsidiaries as defendants alleging violations of certain Federal and State consumer protection statutes, including the CFPA, FCRA, FDCPA and various state consumer protection laws. The Attorneys General for the States of Pennsylvania, California, Mississippi, and New Jersey also initiated actions against the Company and certain subsidiaries alleging violations of various state and federal consumer protection laws based upon similar alleged acts or failures to act. In addition to these matters, a number of lawsuits have been filed by nongovernmental parties or, in the future, may be filed by additional governmental or nongovernmental parties seeking damages or other remedies related to similar issues raised by the CFPB and the State Attorneys General. In January 2022, we entered into a series of Consent Judgment and Orders (the “Agreements”) with 40 State Attorneys General to resolve all matters in dispute related to the State Attorneys General cases as well as the related investigations, subpoenas, civil investigative demands and inquiries from various other state regulators. These Agreements do not resolve the litigation involving the Company and the CFPB.
As the Company has previously stated, we believe the allegations in the CFPB suit are false and that they improperly seek to impose penalties on Navient based on new, previously unannounced servicing standards applied retroactively against only one servicer. We therefore have denied these allegations and are vigorously defending against the allegations in that case. At this point in time, it is reasonably possible that a loss contingency exists; however, the Company is unable to anticipate the timing of a resolution or the impact that an adverse ruling in the CFPB case 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 this matter and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.
On April 12, 2023, the Company reached an agreement in principle (“Settlement”) with certain plaintiffs for a nationwide settlement of claims raised in the following bankruptcy adversary actions: Coyle v. Navient Solutions, LLC, No. 22-80018 (Bankr. W.D. Mich.); Homaidan v. SLM Corp., No. 1:17-ap-01085 (Bankr. E.D.N.Y.); Mazloom v. Navient Solutions, LLC, No. 20-80033-6 (Bankr. N.D.N.Y.); and Woodard v. Navient Solutions, LLC, No. 08-81442 (Bankr. D. Neb.) collectively referred to as the “Bankruptcy Cases.” This settlement in principle is subject, among other things, to final documentation and final court approval. Under the Settlement, Navient will forego the collection of defined balances for borrowers or co-borrowers of certain private loans — all of which were originated prior to our company separation — who have received a discharge in bankruptcy during the periods covered by the agreements. As a result, we recorded $23 million additional private loan provision for loan losses in the first quarter of 2023 related to the estimated future charge offs that are expected to occur. The Company has also agreed to fund settlement funds. It anticipates that any cash contribution it will be required to make to these funds will not exceed $44 million in the aggregate and will be fully covered by insurance. The net impact to operating expense for this element of the settlement for the first quarter of 2023 was $0 due to the accrual of the offsetting insurance reimbursements.
9. Commitments, Contingencies and Guarantees (Continued)
Regulatory Matters
The Company has been named as defendant in a number of putative class action cases alleging violations of various state and federal consumer protection laws including the Telephone Consumer Protection Act (TCPA), the Consumer Financial Protection Act of 2010 (CFPA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), in adversarial proceedings under the U.S. Bankruptcy Code, and various state consumer protection laws. At this point in time, the Company is unable to anticipate the timing of a resolution or the impact that these legal proceedings 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.
In addition, Navient and its subsidiaries are subject to examination or regulation by various federal regulatory, state licensing or other regulatory agencies as part of its ordinary course of business including the SEC, CFPB, FFIEC and ED. Items or matters similar to or different from those described above may arise during the course of those examinations. We also routinely receive inquiries or requests from various regulatory entities or bodies or government agencies concerning our business or our assets. Generally, the Company endeavors to cooperate with each such inquiry or request. The Company has received separate CIDs or subpoenas from multiple State Attorneys General, including for the District of Columbia, Kansas, Oregon, Colorado, New Jersey, New York and Indiana that are similar to the CIDs or subpoenas that preceded the lawsuits referenced above. Those CIDs and subpoenas have been resolved as part of the Company’s settlement with the State Attorneys General. Nevertheless, we have and, in the future, may receive additional CIDs or subpoenas and other inquiries from these or other Attorneys General with respect to similar or different matters.
Under the terms of the Separation and Distribution Agreement between the Company and SLM BankCo, Navient agreed to indemnify SLM BankCo for claims, actions, damages, losses or expenses that may arise from the conduct of activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in that agreement. Also, as part of the Separation and Distribution Agreement, SLM BankCo agreed to indemnify Navient for certain claims, actions, damages, losses or expenses subject to the terms, conditions and limitations set forth in that agreement. As a result, subject to the terms, conditions and limitations set forth in that agreement, Navient agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank from liabilities arising out of the regulatory matters and CFPB and State Attorneys General lawsuits mentioned above. In addition, we asserted various claims for indemnification against Sallie Mae and Sallie Mae Bank for such specifically excluded items arising out of the CFPB and the State Attorneys General lawsuits if and to the extent any indemnified liabilities exist now or in the future. Navient has no reserves related to indemnification matters with SLM BankCo as of March 31, 2023.
Contingencies
In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries. We and our subsidiaries are also subject to potential unasserted claims by third parties.
In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.
We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.
In view of the inherent difficulty of predicting the outcome of litigation and regulatory matters, we may not be able to predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties, if any, related to each pending matter may be.
Based on current knowledge, reserves have been established for certain litigation, regulatory matters, and unasserted contract claims where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows, except as otherwise disclosed.
10. Revenue from Contracts with Customers Accounted for in Accordance with ASC 606
The following tables illustrate the disaggregation of revenue from contracts accounted for under ASC 606 with customers according to service type and client type by reportable operating segment.
Revenue by Service Type
Total Revenue
Federal Education Loan asset recovery services
Government services
Healthcare services
Revenue by Client Type
Federal government
Guarantor agencies
Other institutions
State and local government
Tolling authorities
Hospitals and other healthcare providers
As of March 31, 2023 and March 31, 2022, there was $68 million and $90 million respectively, of net accounts receivable related to these contracts. Navient had no material contract assets or contract liabilities.
11. Segment Reporting
We monitor and assess our ongoing operations and results based on the following four reportable operating segments: Federal Education Loans, Consumer Lending, Business Processing and Other.
These segments meet the quantitative thresholds for reportable operating segments. Accordingly, the results of operations of these reportable operating segments are presented separately. The underlying operating segments are used by the Company’s chief operating decision maker to manage the business, review operating performance and allocate resources, and qualify to be aggregated as part of the primary reportable operating segments. As discussed further below, we measure the profitability of our operating segments based on Core Earnings net income. Accordingly, information regarding our reportable operating segments net income is provided on a Core Earnings basis.
The following table includes asset information for our Federal Education Loans segment.
Cash and investments(1)
1,650
2,746
2,133
2,229
45,931
48,500
Navient helps students and families through the going-to and paying-for-college journey. Our digital tools empower people to find grants and scholarships, compare financial aid offers and complete the FAFSA. Our Private Education Loans offer easy-to-understand payment options. After graduation, we offer student loan refinancing to help people simplify their repayment and earn a better rate. We believe our 50 years of experience, product design, digital marketing strategies, and origination and servicing platform provide a unique competitive advantage.
The following table includes asset information for our Consumer Lending segment.
635
617
558
453
19,468
19,795
11. Segment Reporting (Continued)
At March 31, 2023 and December 31, 2022, the Business Processing segment had total assets of $379 million and $390 million, respectively.
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.
At March 31, 2023 and December 31, 2022, the Other segment had total assets of $1.1 billion and $2.1 billion, respectively.
Measure of Profitability
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 refer to 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 Core Earnings disclosure in the notes to our consolidated financial statements for our business segments.
Segment Results and Reconciliations to GAAP
Summary of Core Earnings Adjustments to GAAP
Net impact of derivative accounting(1)
Net impact of goodwill and acquired intangible assets(2)
Net tax effect(3)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
(Registrant)
By:
/s/ JOE FISHER
Joe Fisher
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: April 26, 2023
APPENDIX A
form 10-Q cross-reference index
Part I. Financial Information
Item 1.
42-75
Item 2.
6-33
Item 3.
35-39
Item 4.
Part II. Other Information
34, 66
Item 1A.
Defaults Upon Senior Securities
Not Applicable
Mine Safety Disclosures
Item 5.
Other Information
Item 6.