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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)

(302) 283-8000

(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

 

The NASDAQ Global Select Market

Preferred Stock Purchase Rights

 

None

 

The NASDAQ Global Select Market

 

As of March 31, 2023, there were 126,464,845 shares of common stock outstanding.

 

 

 

 

img126564199_0.jpg 

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

3

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

6

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

25

 

 

Legal Proceedings

34

Risk Factors

34

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

40

Controls and Procedures

40

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:

•
the continuing impacts of the COVID-19 pandemic and related risks;
•
general economic conditions, including the potential impact of persistent inflation and increasing interest rates on Navient and its clients and customers and on the creditworthiness of third parties;
•
increased defaults on education loans held by us;
•
the cost and availability of funding in the capital markets;
•
changes in the general interest rate environment, including the availability of any relevant money-market index rate, including LIBOR, or the relationship between the relevant money-market index rate and the rate at which our assets are priced;
•
unanticipated repayment trends on education loans including prepayments or deferrals resulting from new interpretations of current laws, rules or regulations or future laws, executive orders or other policy initiatives which operate to encourage or require consolidation, abolish existing or create additional income-based repayment or debt forgiveness programs or establish other policies and programs which may increase the prepayment rates on education loans and accelerate repayment of the bonds in our securitization trusts;
•
our unhedged Floor Income is dependent on the future interest rate environment and therefore is variable;
•
a reduction in our credit ratings;
•
adverse market conditions or an inability to effectively manage our liquidity risk or access liquidity could negatively impact us;
•
the interest rate characteristics of our assets do not always match those of our funding arrangements;
•
our use of derivatives exposes us to credit and market risk;
•
our ability to continually and effectively align our cost structure with our business operations;
•
a failure or breach of our operating systems, infrastructure or information technology systems;
•
failure by any third party providing us material services or products or a breach or violation of law by one of these third parties;
•
changes to applicable laws, rules, regulations and government policies and expanded regulatory and governmental oversight;
•
our work with government clients exposes us to additional risks inherent in the government contracting environment;
•
shareholder activism;
•
shareholders’ percentage ownership in Navient may be diluted in the future;
•
reputational risk and social factors;
•
obligations owed to parties under various transaction agreements that were executed as part of the spin-off of Navient from SLM Corporation (the Spin-Off); and
•
acquisitions or strategic investments that we pursue.

 

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.

 

 

1

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.

 

2

Overview and Fundamentals of Our Business

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:

 

img126564199_1.jpg 

•
Federal Education Loans

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.

•
Consumer Lending

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.

•
Business Processing

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.

•
Delivering superior performance. Whether supporting student loan borrowers in successfully managing their loans, designing and implementing omnichannel contact center solutions for public sector agencies, generating additional revenue for hospitals and medical systems, or helping a state manage communications or recover revenue that funds essential services, Navient delivers value for our clients and customers.

We leverage our customer service expertise, data-driven insights, technology platforms, and scale to maximize value for our clients.

•
Scalable, data-driven solutions. Annually, we support tens of millions of people in conducting hundreds of millions of transactions and interactions. Our systems are built for scale and rapid implementation. We harness the power of data to build tailored programs with analytics that optimize our clients’ results.

 

 

 

3

•
Simplify complex processes. On our clients’ behalf, we help individuals successfully navigate a broad spectrum of complex transactions. Our people and platforms simplify complex programs to help customers and constituents achieve their goals.
•
Improving customer experience and success. We continually make enhancements to improve the customer experience, drawing from a variety of inputs including customer surveys, research panels, analysis of customer inquiries and activities, complaint data, and regulator commentary. Across our businesses, our customer-facing representatives are trained to provide empathetic, accurate support.
•
Commitment to compliance. We maintain a robust, multi-layered compliance management system and thoroughly understand and comply with applicable federal, state, and local laws. We use a “Three Lines of Defense” compliance framework, considered best practice by the U.S. Federal Financial Institutions Examination Council (FFIEC). This framework and other compliance protocols ensure we adhere to key industry laws and regulations including: Fair and Accurate Credit Transactions Act (FACTA); Fair Credit Reporting Act (FCRA); Fair Debt Collection Practices Act (FDCPA); Electronic Funds Transfer Act (EFTA); Equal Credit Opportunity Act (ECOA); Federal Information Security Management Act (FISMA); Gramm-Leach-Bliley Act (GLBA); Health Insurance Portability and Accountability Act (HIPAA); IRS Publication 1075; Servicemembers Civil Relief Act (SCRA); Military Lending Act (MLA); Telephone Consumer Protection Act (TCPA); Truth in Lending Act (TILA); Unfair, Deceptive, or Abusive Acts and Practices (UDAAP); state laws; and state and city licensing.
•
Corporate social responsibility. We are committed to contributing to the social and economic wellbeing of our communities; fostering the success of our customers; supporting a culture of integrity, inclusion and equality in our workforce; and embracing sustainable business practices. Navient has earned recognition from the Forum of Executive Women, Human Rights Campaign Foundation, and military publisher VIQTORY, among other organizations, for our continued commitment to fostering diversity. Our employees are active in our communities, through local and national organizations, including a national partnership with Boys & Girls Clubs of America.

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

 

 

3

%

 

 

3

%

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

%

 

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures.”
(2)
Capital Returned is defined as share repurchases and dividends paid.

 

4

How We Organize Our Business

We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business Processing.

img126564199_2.jpg 

 

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:

•
Government: We offer our solutions to federal agencies, state governments, tolling and parking authorities, and other public sector clients.
•
Healthcare: Our clients include hospitals, hospital systems, medical centers, large physician groups, other healthcare providers and public health departments.

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.

 

 

 

5

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Selected Historical Financial Information and Ratios

 

 

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

 

Weighted average shares used to compute diluted earnings per share

 

 

130

 

 

 

153

 

Net interest margin, Federal Education Loans segment

 

 

1.12

%

 

 

1.04

%

Net interest margin, Consumer Lending segment

 

 

3.12

%

 

 

2.80

%

Return on assets

 

 

.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

 

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

 

6

The Quarter in Review

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:

•
Net income of $87 million.
•
Net interest margin of 1.12%.

Consumer Lending segment:

•
Net income of $110 million.
•
Net interest margin of 3.12%.
•
Originated $168 million of Private Education Loans.

Business Processing segment:

•
Revenue of $72 million.
•
Net income of $4 million and EBITDA(1) of $5 million.

Capital, funding and liquidity:

•
GAAP equity-to-asset ratio of 4.4% and adjusted tangible equity ratio(1) of 8.5%.
•
Repurchased $85 million of common shares. $515 million common share repurchase authority remains outstanding.
•
Paid $21 million in common stock dividends.
•
Retired $1 billion of unsecured debt.

Expenses:

•
GAAP operating expenses of $185 million and Adjusted Core Earnings expenses(1) of $183 million.

 

 

 

 

 

 

(1)
Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

 

 

7

Results of Operations

GAAP Income Statements (Unaudited)

 

 

Three Months Ended March 31,

 

 

Increase
(Decrease)

 

(In millions, except per share data)

 

2023

 

 

2022

 

 

$

 

 

%

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

693

 

 

$

349

 

 

$

344

 

 

 

99

%

Private Education Loans

 

 

344

 

 

 

276

 

 

 

68

 

 

 

25

 

Cash and investments

 

 

34

 

 

 

1

 

 

 

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

 

 

 

18

 

 

 

(1

)

 

 

(6

)

Asset recovery and business processing
   revenue

 

 

72

 

 

 

97

 

 

 

(25

)

 

 

(26

)

Other income

 

 

7

 

 

 

10

 

 

 

(3

)

 

 

(30

)

Gains (losses) on derivative and hedging
   activities, net

 

 

(8

)

 

 

98

 

 

 

(106

)

 

 

(108

)

Total other income

 

 

88

 

 

 

223

 

 

 

(135

)

 

 

(61

)

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

   Operating expenses

 

 

185

 

 

 

205

 

 

 

(20

)

 

 

(10

)

   Goodwill and acquired intangible assets
      impairment and amortization expense

 

 

3

 

 

 

4

 

 

 

(1

)

 

 

(25

)

   Restructuring/other reorganization expenses

 

 

4

 

 

 

3

 

 

 

1

 

 

 

33

 

Total expenses

 

 

192

 

 

 

212

 

 

 

(20

)

 

 

(9

)

Income before income tax expense

 

 

144

 

 

 

332

 

 

 

(188

)

 

 

(57

)

Income tax expense

 

 

33

 

 

 

77

 

 

 

(44

)

 

 

(57

)

Net income

 

$

111

 

 

$

255

 

 

$

(144

)

 

 

(56

)%

Basic earnings per common share

 

$

.87

 

 

$

1.69

 

 

$

(.82

)

 

 

(49

)%

Diluted earnings per common share

 

$

.86

 

 

$

1.67

 

 

$

(.81

)

 

 

(49

)%

Dividends per common share

 

$

.16

 

 

$

.16

 

 

$

—

 

 

 

—

 

 

 

8

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:

•
Net interest income decreased by $103 million primarily as a result of a $47 million decrease in mark-to-market gains on fair value hedges recorded in interest expense, an increase in interest rates as well as the paydown of the FFELP and Private Education Loan portfolios. This was partially offset by an increase in the net interest margin primarily due to improved funding spreads.
•
Provisions for loan losses decreased $30 million from $16 million to $(14) million:
o
The provision for FFELP Loan losses increased $10 million from $0 to $10 million.
o
The provision for Private Education Loan losses decreased $40 million from $16 million to $(24) million.

 

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.

•
Asset recovery and business processing revenue decreased $25 million primarily as a result of the expected $37 million reduction in revenue from the wind-down of pandemic-related contracts, which was partially offset by a $15 million increase in revenue from services for our traditional services clients. The remaining $3 million decrease was related to revenue earned in our Federal Education Loan segment and was a result of exiting that business line in fourth-quarter 2022.
•
Net gains on derivative and hedging activities decreased $106 million. The primary factors affecting the change were interest rate fluctuations. Valuations of derivative instruments fluctuate based upon many factors including changes in interest rates and other market factors. As a result, net gains and losses on derivative and hedging activities may vary significantly in future periods.
•
Excluding net regulatory-related expenses of $2 million and $1 million in the first quarters of 2023 and 2022, respectively, operating expenses were $183 million and $204 million in the first quarters of 2023 and 2022, respectively. This $21 million decrease was primarily related to the decline in Business Processing pandemic-related revenue as well as a decline in overall servicing costs.

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

Segment Results

Federal Education Loans Segment

The following table presents Core Earnings results for our Federal Education Loans segment.

 

 

Three Months Ended March 31,

 

 

% Increase
(Decrease)

 

(Dollars in millions)

 

2023

 

 

2022

 

 

2023 vs. 2022

 

Interest income:

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

695

 

 

$

334

 

 

 

108

%

Cash and investments

 

 

20

 

 

 

—

 

 

 

100

 

Total interest income

 

 

715

 

 

 

334

 

 

 

114

 

Total interest expense

 

 

590

 

 

 

195

 

 

 

203

 

Net interest income

 

 

125

 

 

 

139

 

 

 

(10

)

Less: provision for loan losses

 

 

10

 

 

 

—

 

 

 

100

 

Net interest income after provision for
   loan losses

 

 

115

 

 

 

139

 

 

 

(17

)

Other income (loss):

 

 

 

 

 

 

 

 

 

Servicing revenue

 

 

14

 

 

 

15

 

 

 

(7

)

Asset recovery and business
   processing revenue

 

 

—

 

 

 

3

 

 

 

(100

)

Other income

 

 

5

 

 

 

11

 

 

 

(55

)

Total other income

 

 

19

 

 

 

29

 

 

 

(34

)

Direct operating expenses

 

 

20

 

 

 

28

 

 

 

(29

)

Income before income tax expense

 

 

114

 

 

 

140

 

 

 

(19

)

Income tax expense

 

 

27

 

 

 

33

 

 

 

(18

)

Net income

 

$

87

 

 

$

107

 

 

 

(19

)%

Comparison of First-Quarter 2023 Results with First-Quarter 2022

 

•
Net income was $87 million compared to $107 million.
•
Net interest income decreased $14 million primarily due to the paydown of the portfolio.
•
Provision for loan losses increased $10 million. The $10 million of provision for loan losses in the current period primarily was a result of the extension of the portfolio and the resulting increase in unamortized premium allocated to expected future defaults.
o
Net charge-offs were $18 million compared to $7 million.
o
Delinquencies greater than 90 days were $2.7 billion compared to $2.7 billion.
o
Forbearances were $6.8 billion compared to $6.3 billion.
•
Other revenue decreased $10 million due to a decrease in transition services as well as a decrease in asset recovery revenue.
•
Expenses were $8 million lower as a result of the paydown of the loan portfolio and the decrease in other revenue discussed above.

 

 

10

Key performance metrics are as follows:

 

 

Three Months Ended March 31,

 

(Dollars in millions)

 

2023

 

 

2022

 

Segment net interest margin

 

 

1.12

%

 

 

1.04

%

FFELP Loans:

 

 

 

 

 

 

      FFELP Loan spread

 

 

1.25

%

 

 

1.11

%

      Provision for loan losses

 

$

10

 

 

$

—

 

      Net charge-offs

 

$

18

 

 

$

7

 

      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

%

      Average FFELP Loans

 

$

43,263

 

 

$

52,258

 

      Ending FFELP Loans, net

 

$

42,148

 

 

$

51,013

 

 

 

 

 

 

 

 

(Dollars in billions)

 

 

 

 

 

 

Total federal loans serviced(1)

 

$

49

 

 

$

59

 

Net Interest Margin

The following table details the net interest margin.

 

 

Three Months Ended March 31,

 

 

 

2023

 

 

2022

 

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

)

FFELP Loan spread