Navient Corporation 2020 Form 10-K Summary
Business context and reporting period
Navient filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed February 26, 2021. The company provides education loan management and business processing services for education, healthcare and government clients. Its primary segments are Federal Education Loans, Consumer Lending, Business Processing and Other.
- Federal Education Loans: $58.3 billion of net FFELP loans and servicing for approximately 5.6 million Department of Education customers.
- Consumer Lending: $21.1 billion of net private education loans, including $8.2 billion of private refinance loans.
- Business Processing: services for more than 500 government and healthcare clients.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| GAAP net income | $412 million | $597 million | Down 31% |
| Diluted GAAP EPS | $2.12 | $2.56 | Down 17% |
| Core Earnings net income | $631 million | $607 million | Up 4% |
| Adjusted diluted Core Earnings EPS | $3.40 | $2.64 | Up 29% |
| Net interest income | $1.252 billion | $1.185 billion | Up 6% |
| Provision for loan losses | $155 million | $258 million | Down 40% |
| Operating expenses | $964 million | $984 million | Down 2% |
| Cash flow from operating activities | $987 million | $1.019 billion | Down 3% |
| Total assets | $87.412 billion | $94.903 billion | Down 8% |
| Total borrowings | $83.945 billion | $90.198 billion | Down 7% |
| Navient stockholders’ equity | $2.433 billion | $3.336 billion | Down 27% |
- GAAP net interest margin was 0.98% for Federal Education Loans and 3.29% for Consumer Lending. Core Earnings margins were 0.99% and 3.20%, respectively.
- Business Processing revenue increased 18% to $304 million; EBITDA increased 16% to $57 million, with a 19% EBITDA margin.
- Private Education Loan originations were $4.6 billion, compared with $4.9 billion in 2019. Management reduced marketing and tightened credit during the second quarter in response to COVID-19 uncertainty.
- Primary liquidity was $1.665 billion at year-end, including $1.183 billion of unrestricted cash and liquid investments. Additional funding capacity was approximately $506 million for FFELP Loans and $2.221 billion for Private Education Loans.
- Adjusted Tangible Equity Ratio was 5.0%, compared with 7.6% at December 31, 2019; the pro forma ratio excluding cumulative derivative mark-to-market losses was 7.1%.
- The company paid $123 million of dividends and repurchased $400 million of common stock, or 30.6 million shares. Approximately $600 million remained under the repurchase authorization.
Material changes versus the prior comparable period
- GAAP earnings declined primarily because derivative and hedging activities produced a $256 million loss in 2020 versus a $22 million gain in 2019. Cumulative after-tax derivative mark-to-market losses reduced GAAP equity by approximately $616 million at year-end, although management expects those losses to reverse as contracts mature.
- Core Earnings increased despite the GAAP decline, supported by higher net interest income, lower loan-loss provisions and lower operating expenses.
- Federal Education Loans Core Earnings increased 2% to $537 million. The portfolio continued to run off, with net FFELP loans declining from $64.6 billion to $58.3 billion. The greater-than-30-day delinquency rate improved from 11.7% to 9.2%, while the forbearance rate increased from 12.2% to 13.8%.
- Consumer Lending Core Earnings increased 14% to $360 million. Private Education Loan delinquencies declined from 4.6% to 2.6%, and charge-offs declined to $184 million from $364 million. Forbearances increased from $604 million to $844 million.
- Adoption of CECL on January 1, 2020 increased the allowance for loan losses and reduced equity by $620 million. The year-end allowance was $1.377 billion, or $1.856 billion excluding expected future recoveries on charged-off loans.
- Total education loans, net, declined from $86.8 billion to $79.4 billion, reflecting portfolio repayments, refinancing and consolidation activity.
- The company retired $1.8 billion of senior unsecured debt, including $768 million scheduled to mature in 2021, and issued $700 million of unsecured debt, $6.3 billion of Private Education Loan ABS and $1.5 billion of FFELP ABS.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2021 private refinance loan originations to exceed 2020 levels if economic conditions continued to improve.
- Business Processing revenue from CARES Act unemployment-benefit contracts and contact-tracing services was expected to decline in 2021 as the economy recovered, while core business activity was expected to improve toward pre-COVID-19 levels.
- Management expected capital ratios to rebuild during 2021 and believed ABS and unsecured debt markets remained viable funding sources, although financing costs could remain elevated.
- The Department of Education contract servicing approximately 5.6 million customers ran through June 2021, with one six-month extension option and potential additional extensions through 2023 under the Consolidated Appropriations Act, 2021. The timing and terms of future procurement or extensions were uncertain.
- COVID-19 relief and forbearance reduced reported delinquencies but may delay defaults into 2021 and 2022. Management stated that materially worse economic conditions could require additional loan-loss provisions.
- Key risks include private-loan credit losses, funding costs and availability, below-investment-grade unsecured debt ratings, liquidity requirements, interest-rate and basis risk, derivative valuation volatility, prepayment speeds, LIBOR transition, operational and cybersecurity failures, regulatory changes and government-contracting risks.
- Navient faced CFPB and multiple State Attorneys General lawsuits alleging consumer-protection violations. The filing stated that potential losses were reasonably possible but that timing and exposure could not be estimated; no reserves had been established for those matters.
- The filing identified ongoing securities litigation, consumer-protection claims and regulatory inquiries. An adverse ruling could materially affect results, liquidity or financial condition.
- The company recorded $9 million of restructuring and reorganization expenses and $33 million of net regulatory-related expenses in 2020. Goodwill was tested during 2020 and no impairment was recorded.
Most important facts for an investor to verify
- Whether post-forbearance delinquency, default and charge-off trends validate the $1.856 billion allowance for expected credit losses.
- The sustainability of Core Earnings after excluding $265 million of net derivative-accounting effects and $22 million of acquired-intangible amortization and impairment.
- Refinancing capacity and maturity timing for $0.7 billion of near-term senior unsecured debt and substantial secured borrowings.
- The status and economics of the Department of Education servicing contract and potential replacement procurement.
- Developments, reserves and potential financial exposure in the CFPB, State Attorneys General and other legal proceedings.
- Progress on replacing LIBOR across approximately $200 billion of indexed financial instruments.
- Whether continued portfolio runoff, prepayments and refinancing reduce future Federal Education Loan earnings and cash flow faster than expected.