Navient Corporation 10-Q Summary
Business context and reporting period
Navient filed its unaudited Form 10-Q for the three and nine months ended September 30, 2021. Its principal businesses were Federal Education Loans, Consumer Lending, and Business Processing. Navient owned or serviced approximately $54.4 billion of net FFELP Loans and $20.0 billion of net Private Education Loans and provided processing services to more than 500 government and healthcare clients.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| GAAP net income | $173 million | $207 million | $728 million | $227 million |
| Diluted EPS | $1.04 | $1.07 | $4.15 | $1.15 |
| Core Earnings net income | $149 million | $192 million | $618 million | $464 million |
| Core Earnings diluted EPS | $0.89 | $0.99 | $3.52 | $2.36 |
| Net interest income | $334 million | $336 million | $1.018 billion | $909 million |
| Net interest income after provisions | $312 million | $322 million | $1.084 billion | $756 million |
| Total other income | $160 million | $177 million | $641 million | $262 million |
| Operating expenses | $248 million | $232 million | $758 million | $695 million |
| Net cash from operating activities | Source text does not provide a quarterly value | Source text does not provide a quarterly value | $534 million | $816 million |
- Business Processing revenue increased 36% to $122 million in Q3 and 79% to $377 million for the nine months. Q3 EBITDA increased 65% to $38 million, with a 31% EBITDA margin versus 25%.
- Federal Education Loans Core Earnings declined 11% to $122 million in Q3 and 14% to $346 million for the nine months. The FFELP portfolio declined to $54.4 billion from $59.6 billion at September 30, 2020.
- Consumer Lending Core Earnings declined 34% to $73 million in Q3 but increased 60% to $404 million for the nine months, aided by loan-sale gains and lower year-to-date credit provisions.
- Consumer Lending originated $1.6 billion of Private Education Loans in Q3, including $1.489 billion of refinance loans.
- Q3 net interest margin was 1.04% for Federal Education Loans and 2.98% for Consumer Lending, compared with 1.03% and 3.24%, respectively, in the prior-year quarter.
- Total education loans, net, were $74.4 billion at September 30, 2021, down from $80.8 billion a year earlier and $79.4 billion at December 31, 2020.
- Total loan-loss reserves excluding expected future recoveries were $1.646 billion, including $1.377 billion for Private Education Loans and $269 million for FFELP Loans.
- Total assets were $81.9 billion and total equity was $2.734 billion at September 30, 2021.
Capital, debt, and liquidity
- Unsecured borrowings totaled $7.372 billion, including $903 million of short-term debt and $6.469 billion of long-term debt. Approximately $0.9 billion of senior unsecured notes mature within the following 12 months.
- Total GAAP borrowings were $78.410 billion, compared with $83.945 billion at December 31, 2020.
- Primary liquidity totaled $1.676 billion, comprising $1.050 billion of unrestricted cash and liquid investments, $106 million of unencumbered FFELP Loans, and $520 million of unencumbered Private Education Refinance Loans.
- Additional borrowing capacity under asset-backed commercial paper facilities was $2.781 billion, including $2.597 billion for Private Education Loans and $184 million for FFELP Loans.
- Operating cash flow for the first nine months was $534 million. Investing activities provided $5.113 billion, while financing activities used $5.873 billion. Cash, cash equivalents, and restricted cash totaled $3.311 billion at September 30, 2021.
- The Adjusted Tangible Equity Ratio was 6.4%, versus 5.0% at December 31, 2020; the pro forma ratio excluding cumulative derivative mark-to-market losses was 8.0%.
- Navient issued $2.0 billion of term asset-backed securities during Q3 and issued $500 million of unsecured debt during the first nine months.
- Navient repurchased $150 million of common stock in Q3 and paid $26 million of dividends. Remaining share-repurchase authorization was $150 million at quarter-end.
Material changes versus comparable periods
- Q3 GAAP net income decreased 16% to $173 million, while diluted EPS declined modestly from $1.07 to $1.04 because share repurchases reduced the diluted share count.
- Q3 Core Earnings declined 22% to $149 million, primarily because Federal Education Loans and Consumer Lending earnings fell. The nine-month GAAP increase was heavily influenced by derivative accounting gains and lower credit-loss provisions.
- For the nine months, derivative and hedging results improved from a $255 million loss in 2020 to a $21 million gain in 2021. The filing states that cumulative after-tax derivative mark-to-market losses reduced GAAP equity by approximately $417 million at September 30, 2021.
- Q3 included a $20 million pretax loss on repurchases of $757 million of unsecured debt. For the nine months, Navient repurchased $1.5 billion of debt at a $32 million loss.
- Private Education Loan delinquency greater than 30 days increased to 3.0% from 2.4% a year earlier, while FFELP delinquency declined to 8.5% from 9.3%.
- Navient completed the novation and transfer of its Department of Education servicing contract to a third party in October 2021. The contract covered approximately 5.6 million accounts and approximately 800 Navient employees were expected to transfer later in Q4.
Guidance, outlook, risks, and unusual items
- Management expected pandemic-related unemployment, contact-tracing, and vaccine-administration revenue to decline during the remainder of 2021, while core Business Processing activity was expected to improve toward pre-pandemic levels into 2022 if economic conditions continued to improve.
- Management expected Private Education Loan defaults to increase in 2022 as forbearance and other payment-relief and stimulus benefits ended. The allowance for loan losses was intended to capture expected effects, but the filing emphasizes continued uncertainty.
- Federal student-loan policy changes, including Public Service Loan Forgiveness changes, could accelerate consolidation of FFELP Loans into Direct Loans held by the Department of Education. Higher prepayments could reduce interest income, net interest margin, liquidity, and residual-interest values.
- COVID-19, economic conditions, borrower credit quality, funding costs, access to capital markets, credit ratings, interest-rate mismatches, derivatives, and the transition away from LIBOR remain significant risks.
- Navient reached tentative agreements to settle two securities-related class actions for $42.5 million. The company accrued the loss, but offsetting insurance reimbursements resulted in no net operating-expense impact. Court approval remained outstanding.
- Navient disclosed reasonably possible loss contingencies relating to CFPB and State Attorneys General litigation and stated that potential exposure could not currently be estimated and no reserves had been established for those matters. An adverse ruling could materially affect the company.
- The company continued to challenge a Department of Education decision concerning Special Allowance Payment billing practices. Management did not believe an adverse ruling would be material to the company as a whole at the filing date.
- Core Earnings, Adjusted Tangible Equity Ratio, pro forma Adjusted Tangible Equity Ratio, and Business Processing EBITDA are non-GAAP measures and are not substitutes for GAAP results.
Facts investors should verify
- Whether the Department of Education servicing-contract transfer and employee transition were completed as planned and how the transition affected recurring revenue and expenses.
- Trends in Private Education Loan delinquencies, defaults, charge-offs, forbearance, and allowance coverage after payment-relief programs ended.
- The sustainability of Business Processing revenue after pandemic-related state contracts declined.
- Near-term refinancing needs for the $0.9 billion of unsecured debt maturing within 12 months, including funding costs and credit-rating developments.
- The effect of future interest-rate movements and derivative mark-to-market volatility on GAAP earnings, equity, and liquidity.
- The status and potential financial exposure of CFPB, State Attorneys General, securities-litigation, and Department of Education proceedings.
- The extent to which loan prepayments, FFELP consolidations, refinancing, and loan sales reduce the earning-asset base and future net interest income.