Navient Corporation — 2020 Q3 Form 10-Q Summary
Business context and reporting period
Navient is an education-loan owner, originator and servicer, and provides business-processing services to government and healthcare clients. The filing covers the three and nine months ended September 30, 2020; financial statements are unaudited and presented under U.S. GAAP.
- Reportable segments: Federal Education Loans, Consumer Lending, Business Processing and Other.
- Education loans, net, totaled $80.8 billion: $59.6 billion of FFELP Loans and $21.3 billion of Private Education Loans.
- Navient serviced more than $300 billion of education loans and served more than 500 non-education government and healthcare clients.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total interest income | $761 million | $1,166 million | $2,567 million | $3,605 million |
| Net interest income | $336 million | $312 million | $909 million | $891 million |
| Provision for loan losses | $14 million | $64 million | $153 million | $208 million |
| Net interest income after provisions | $322 million | $248 million | $756 million | $683 million |
| Total other income | $177 million | $196 million | $262 million | $637 million |
| Net income | $207 million | $145 million | $227 million | $425 million |
| Diluted EPS | $1.07 | $0.63 | $1.15 | $1.79 |
| Core Earnings net income | $192 million | $142 million | $464 million | $454 million |
- Q3 GAAP net income increased 43%, while nine-month net income declined 47%, primarily because of significant derivative mark-to-market losses and the absence of prior-year loan-sale and debt-repurchase gains.
- Q3 consolidated GAAP net interest margin was 1.52%, compared with 1.32% in the prior-year quarter. Federal Education Loans segment GAAP margin was 1.04%; Consumer Lending segment GAAP margin was 3.36%.
- Q3 Business Processing revenue was $90 million, up 36%; segment EBITDA was $23 million, up 77%, producing a 25% EBITDA margin versus 20%.
- Q3 revenue from contracts with customers was $108 million, compared with $99 million; nine-month revenue was $281 million, compared with $297 million.
Cash flow, debt and liquidity
- Nine-month net cash provided by operating activities was $816 million, compared with $831 million in 2019.
- Nine-month investing cash flow was $4.9 billion, primarily reflecting $8.5 billion of loan repayments and $3.5 billion of loan acquisitions and originations.
- Nine-month financing cash flow used was $5.3 billion, including $8.9 billion of borrowings repaid, $400 million of share repurchases and $93 million of dividends.
- At September 30, 2020, cash and cash equivalents were $1.8 billion; total cash, cash equivalents and restricted cash were $4.2 billion.
- Total borrowings were $86.2 billion, including $7.1 billion short-term and $79.1 billion long-term. Unsecured senior debt totaled $9.5 billion; secured borrowings totaled $76.3 billion.
- Primary liquidity was $2.5 billion, consisting of $1.8 billion of unrestricted cash and liquid investments, $332 million of unencumbered FFELP Loans and $415 million of unencumbered Private Education Refinance Loans. Additional facility capacity included $2.2 billion for Private Education Loans and $122 million for FFELP Loans.
- Management identified $1.8 billion of senior unsecured notes maturing in the following 12 months. Three credit-rating agencies rated Navient’s long-term unsecured debt below investment grade.
Material changes versus comparable periods
- FFELP Loans, net, declined to $59.6 billion from $66.1 billion at September 30, 2019; Private Education Loans, net, declined to $21.3 billion from $21.8 billion.
- Interest income decreased 35% for the first nine months because of lower rates and the natural paydown of loan portfolios, but interest expense decreased 39%, allowing net interest income to rise modestly.
- Provision expense declined 26% for the first nine months; however, the company recorded significant expected-loss reserves under the new CECL standard.
- Q3 Private Education Loan originations were $1.3 billion, down from $1.4 billion, reflecting reduced marketing during COVID-19 uncertainty. Nine-month originations were $3.4 billion, up 5%.
- Q3 share repurchases were $65 million; nine-month repurchases were $400 million. Remaining authorization was $600 million. Dividends remained $0.16 per share in Q3.
- Common shares outstanding declined to 186.3 million at September 30, 2020 from 221.0 million at September 30, 2019, primarily due to repurchases.
Accounting, outlook, risks and unusual items
- Navient adopted CECL on January 1, 2020. The adoption increased the allowance for loan losses by $802 million for the non-PCD portfolio and reduced equity by $620 million. The allowance at September 30 was $1.388 billion; including expected future recoveries on charged-off private loans, reserves were $1.891 billion.
- COVID-19 relief activity materially affected loan performance. At September 30, FFELP forbearance was 14.3% and Private Education Loan forbearance was 4.0%; both had declined substantially from Q2 peaks. Management expects 2020 defaults to be lower than 2019 but expects some COVID-related defaults in 2021 and 2022.
- Management stated that it did not expect to need additional unsecured or ABS issuance for the remainder of 2020, although it could issue debt opportunistically. Financing costs remained elevated but had declined from Q2 peaks.
- The adjusted tangible equity ratio was 4.1%, versus 7.6% at December 31, 2019; the pro forma ratio excluding cumulative derivative mark-to-market losses was 6.4%. Derivative accounting reduced GAAP equity by approximately $657 million after tax at September 30.
- Management concluded that COVID-19 had not triggered goodwill impairment as of September 30, but materially worse economic conditions could cause future impairment or additional loan-loss provisions.
- Navient issued $1.6 billion of Private Education Loan ABS and $771 million of FFELP ABS during Q3.
- Material legal and regulatory proceedings include CFPB and multiple state attorneys general actions alleging consumer-protection violations. The company stated that potential exposure cannot currently be estimated, no reserves have been established for these matters, and an adverse outcome could materially affect results, liquidity or cash flow.
- The Department of Education servicing contract was scheduled to continue through December 2020, with two six-month extensions available. The filing states that future procurement timing and terms were uncertain.
- Navient had not concluded whether to apply optional accounting relief related to the transition away from LIBOR.
Most important facts for investors to verify
- Whether COVID-19-related borrower relief expirations lead to higher delinquencies, charge-offs and CECL provisions in 2021 and beyond.
- The company’s ability to refinance or repay the $1.8 billion of senior unsecured notes maturing within 12 months while maintaining liquidity and below-investment-grade funding access.
- The sustainability of the 4.1% adjusted tangible equity ratio, including the effects of share repurchases, dividends, CECL and derivative valuations.
- The timing and economics of Department of Education servicing procurements and any impact on servicing revenue and scale.
- Potential financial exposure from CFPB, state attorney general, securities and other litigation, for which the filing provides no clear loss range or reserve.
- The comparability of Core Earnings, adjusted tangible equity and EBITDA with GAAP results; these are non-GAAP measures and exclude or adjust for material derivative and intangible-asset effects.