Navient Corporation 10-Q Summary
Business context and reporting period
Navient provides education-loan ownership, origination, servicing and asset-recovery services, plus business-processing services for government and healthcare clients. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared primarily with the three months ended March 31, 2019. The filing was signed May 1, 2020.
At March 31, 2020, Navient owned $84.8 billion of education loans, including $62.5 billion of FFELP Loans and $22.3 billion of Private Education Loans, serviced more than $300 billion of education loans, and served more than 500 non-education government and healthcare clients.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / prior period |
|---|---|---|
| Total interest income | $987 million | $1.234 billion |
| Net interest income | $273 million | $285 million |
| Provision for loan losses | $95 million | $76 million |
| Net interest income after provisions | $178 million | $209 million |
| Other income/(loss) | $(48) million | $219 million |
| Operating expenses | $251 million | $256 million |
| GAAP net income/(loss) | $(106) million | $128 million |
| Diluted EPS | $(0.53) | $0.52 |
| Core Earnings, non-GAAP | $93 million | $136 million |
| Core Earnings diluted EPS | $0.46 | $0.55 |
| GAAP consolidated net interest margin | 1.20% | 1.17% |
| Federal Education Loans segment margin, GAAP | 0.76% | 0.76% |
| Consumer Lending segment margin, GAAP | 3.34% | 3.28% |
| Business Processing EBITDA | $4 million | $14 million |
| Business Processing EBITDA margin | 7% | 21% |
Cash provided by operating activities was $453 million, compared with $188 million in Q1 2019. Investing activities provided $985 million, while financing activities used $1.451 billion. Cash, cash equivalents and restricted cash totaled $3.768 billion at March 31, 2020, including $1.084 billion of unrestricted cash and cash equivalents.
Total borrowings were $89.749 billion, consisting of $8.452 billion of short-term borrowings and $81.297 billion of long-term borrowings. Senior unsecured debt totaled approximately $9.5 billion, and $1.1 billion of senior unsecured notes was scheduled to mature within the following 12 months. Primary liquidity sources totaled $1.720 billion, including $1.084 billion of unrestricted cash and liquid investments, $209 million of unencumbered FFELP Loans and $427 million of unencumbered Private Education Refinance Loans.
Total assets were $93.245 billion and total equity was $2.048 billion at March 31, 2020. Navient Corporation stockholders’ equity was $2.035 billion. The adjusted tangible equity ratio, a non-GAAP measure, was 3.2%, compared with 7.7% at March 31, 2019.
Material changes versus comparable periods
- GAAP results shifted from $128 million of net income to a $106 million net loss, primarily because derivative and hedging losses increased to $223 million from a $7 million gain. The filing attributes the losses principally to sharply lower interest rates and mark-to-market losses on derivatives hedging FFELP Loan floor income.
- Core Earnings declined to $93 million from $136 million, reflecting higher loan-loss provisions, lower Federal Education Loans earnings and weaker Business Processing results.
- Total interest income decreased 20%, driven by the natural paydown of FFELP and non-refinance Private Education Loan portfolios and lower cash and investment yields. Interest expense decreased 25%, partly offsetting the decline.
- Provision for loan losses increased 25% to $95 million, including $89 million for Private Education Loans. The increase primarily reflected higher expected losses associated with COVID-19 and forecasted economic conditions.
- On January 1, 2020, Navient adopted CECL. The allowance for loan losses increased by $802 million for the non-PCD portfolio and equity was reduced by $620 million after tax. The ending allowance was $1.394 billion, or $1.965 billion excluding $571 million of expected future recoveries on charged-off Private Education Loans.
- FFELP Loans, net, declined to $62.492 billion from $69.908 billion at March 31, 2019. Private Education Loans, net, increased to $22.338 billion from $22.141 billion.
- Private Education Refinance Loan originations increased 92% to $1.890 billion from $984 million. Management subsequently reduced marketing and tightened credit in response to market uncertainty, and expects future originations to decline.
- Business Processing revenue decreased 16% to $57 million, and EBITDA fell 71% to $4 million. Contract terminations and expirations, COVID-19-related volume declines and one-time efficiency initiative costs were cited as primary factors.
- Navient repurchased 23.0 million shares for $335 million, compared with 9.4 million shares for $107 million in Q1 2019. It paid $31 million of dividends, or $0.16 per share. Remaining repurchase authorization was $665 million at quarter-end.
COVID-19, outlook and management commentary
- Navient moved approximately 90% of its workforce to work-from-home arrangements and reported that operations, financial close processes and controls remained effective as of the filing date.
- The CARES Act required suspension of payments and interest accrual on ED-owned loans through September 30, 2020. Private Education Loan forbearance increased to $1.583 billion, or 6.9% of the portfolio, at March 31, 2020, versus $575 million, or 2.5%, a year earlier; management reported $2.8 billion as of April 15, 2020.
- Management expected defaults in both Private Education and FFELP portfolios to be lower in 2020 than in 2019 because of increased payment-relief usage, but warned that defaults could rise in 2021 and 2022 as forbearance ends and the economic effects of COVID-19 emerge.
- Management reported $1.7 billion of primary liquidity, including $1.1 billion of cash, and stated that cash flow from loan portfolios and service contracts remained strong. It expected no need to issue additional unsecured or ABS debt during the remainder of 2020, although ABCP and other facilities maturing in 2020 might require refinancing at higher costs.
- Q1 financing included $1.9 billion of Private Education Loan ABS and $700 million of unsecured debt. On April 1, 2020, Navient extended an FFELP ABCP facility to 2022 and increased capacity in a Private Education Refinance Loan ABCP facility from $2.0 billion to $2.6 billion.
- Management expected the adjusted tangible equity ratio to rebuild during 2020, but acknowledged that CECL adoption, share repurchases and derivative mark-to-market losses had reduced capital.
- Goodwill was assessed for a COVID-19-related triggering event; management concluded that a triggering event had not occurred as of March 31, 2020. A significantly worse economic downturn could result in future goodwill impairment or additional loan-loss provisions.
Risks, contingencies and unusual items
- Primary risks include the severity and duration of COVID-19, borrower unemployment and defaults, increased forbearance, higher funding costs, reduced capital-market access, credit-rating downgrades, interest-rate and basis risk, derivative collateral requirements, cybersecurity and operational disruptions, and evolving student-loan regulation.
- Three credit-rating agencies rated Navient’s long-term unsecured debt below investment grade. Financing availability and pricing remain sensitive to market conditions, credit ratings and collateral requirements.
- Navient faces CFPB and state Attorneys General litigation and investigations alleging violations of consumer-protection and servicing laws, as well as securities class actions and other claims. For several matters, the company stated that timing and potential exposure cannot be estimated, no reserves have been established, and an adverse ruling could materially affect the company.
- Navient is appealing an Education Department administrative ruling concerning Special Allowance Payments. A reserve was established in 2014, and management did not expect an adverse ruling to have a material company-wide effect at the filing date.
- Derivative accounting produced a $394 million after-tax decrease in equity during Q1 2020, and cumulative derivative accounting effects had reduced GAAP equity by approximately $629 million at March 31, 2020. These effects are expected to reverse over time as derivatives expire, but future mark-to-market results may remain volatile.
Important facts for investors to verify
- Whether COVID-19-related forbearance converts into higher defaults, charge-offs and CECL provisions after relief periods end.
- The sufficiency and accessibility of the reported $1.720 billion of primary liquidity, including the refinancing of facilities maturing in 2020 and the $1.1 billion of senior unsecured debt due within 12 months.
- Changes in funding costs, credit ratings, ABS and ABCP market access, and derivative collateral requirements.
- Whether private-loan originations, credit tightening and lower marketing activity materially reduce future Consumer Lending growth and earnings.
- The sustainability of dividends and share repurchases given the 3.2% adjusted tangible equity ratio and reduced GAAP equity.
- Developments in CFPB, state Attorneys General, securities litigation and Education Department proceedings, including potential settlements, penalties, indemnification claims or reserve requirements.
- The comparability of Core Earnings with GAAP results, since Core Earnings exclude certain derivative mark-to-market effects and goodwill and acquired-intangible accounting and are not defined by GAAP.