NAVIENT CORP quarterly report, Q1 FY2021

Navient Corporation 10-Q Summary

Business Context and Reporting Period

Navient Corporation filed its quarterly report for the three months ended March 31, 2021. The company provides education loan management and business processing services for education, healthcare, and government clients. Its reportable segments are Federal Education Loans, Consumer Lending, Business Processing, and Other.

Federal Education Loans: $56.9 billion of net FFELP Loans and servicing of approximately 5.6 million Department of Education customer accounts.
Consumer Lending: $19.7 billion of net Private Education Loans; $1.7 billion of first-quarter refinance originations.
Business Processing: Services for more than 500 government and healthcare clients.

Key Financial Metrics

Metric	Q1 2021	Q1 2020	Change
GAAP net income	$370 million	$(106) million	Turned profitable
Diluted EPS	$2.00	$(0.53)	Improved $2.53
Core Earnings net income	$305 million	$93 million	+228%
Adjusted diluted Core EPS	$1.71	$0.51	+235%
Net interest income	$363 million	$273 million	+33%
Net interest income after loan-loss provisions	$450 million	$178 million	+153%
Total other income	$304 million	$(48) million	Improved $352 million
Total expenses	$270 million	$261 million	+3%
Operating cash flow	$179 million	$453 million	Down $274 million

Interest income declined 30% to $692 million, but interest expense declined 54% to $329 million, reflecting lower funding costs and reduced debt balances. The provision for loan losses was a benefit of $87 million in Q1 2021 versus a $95 million provision in Q1 2020, primarily because of a $102 million allowance reversal associated with Private Education Loan sales.

Federal Education Loans Core Earnings: $112 million versus $119 million; net interest margin increased to 0.97% from 0.81%.
Consumer Lending Core Earnings: $234 million versus $54 million; net interest margin declined to 2.99% from 3.31%.
Business Processing Core Earnings: $26 million versus $2 million; revenue increased 119% to $125 million and EBITDA increased to $36 million from $4 million. EBITDA margin was 29% versus 7%.
Other segment Core loss improved to $67 million from $82 million.
Total net education loans declined to $76.6 billion from $84.8 billion at March 31, 2020 and $79.4 billion at December 31, 2020.
Allowance for loan losses was $1.274 billion, or $1.728 billion excluding expected future recoveries on charged-off loans.

Material Changes Versus Prior Comparable Period

GAAP earnings benefited from a $259 million year-over-year improvement in net derivative and hedging gains, which increased to $36 million from a $223 million loss.
Consumer Lending sold approximately $1.6 billion of Private Education Loans, generating $89 million of gains and a $102 million allowance reversal.
Private Education Loan delinquencies greater than 30 days declined to 2.3% from 3.6%; FFELP delinquencies declined to 8.3% from 10.5%.
Private Education Loan charge-offs declined to $35 million from $68 million.
Business Processing revenue increased $68 million, primarily from contracts supporting unemployment benefits, contact tracing, and vaccine administration.
Federal Education Loan asset recovery revenue declined as the Department of Education asset recovery contract wound down.
Operating expenses increased $8 million on a GAAP basis, while adjusted Core Earnings expenses increased $7 million to $251 million.
Average diluted shares declined to 185 million from 200 million, reflecting share repurchases.

Capital, Debt, Liquidity, and Cash Flow

Total assets were $85.0 billion and total equity was $2.7 billion at March 31, 2021.
Total borrowings were $81.4 billion, including $8.8 billion of unsecured debt and $72.2 billion of secured borrowings.
Unsecured debt was below investment grade according to three credit rating agencies.
Primary liquidity was $2.692 billion, including $1.497 billion of unrestricted cash and liquid investments, $259 million of unencumbered FFELP Loans, and $936 million of unencumbered Private Education Refinance Loans.
Additional borrowing capacity under asset-backed commercial paper facilities was $3.670 billion.
Adjusted Tangible Equity Ratio was 6.2%; the pro forma ratio excluding cumulative derivative mark-to-market losses was 8.1%.
Cumulative after-tax derivative mark-to-market losses reduced GAAP equity by approximately $499 million at March 31, 2021.
Navient issued $2.8 billion of term ABS and $500 million of unsecured debt during the quarter.
The company repurchased 8.2 million shares for $100 million and paid $29 million of common dividends. Remaining repurchase authorization was $500 million.
On April 5, 2021, Navient retired $627 million of unsecured debt scheduled to mature in 2021.

Guidance, Outlook, Risks, and Unusual Items

Management expected 2021 Private Education Loan originations to exceed 2020 levels if economic conditions continued to improve.
Management expected Business Processing revenue from CARES Act unemployment contracts, contact tracing, and vaccine administration to decline as the economy recovered, while core business revenue was expected to improve toward pre-pandemic levels.
Management expected capital levels to continue rebuilding during 2021 and expected to continue returning excess capital through dividends and share repurchases, subject to capital allocation and market conditions.
Management expected Private Education Loan defaults to increase in 2021 and 2022 because forbearance delays the timing of defaults; reserves were intended to capture expected losses.
COVID-19 remained a significant uncertainty. Approximately 85% of employees continued working from home at quarter-end, but operations and customer servicing had not been materially disrupted.
Major risks include borrower defaults, funding availability and cost, below-investment-grade credit ratings, liquidity and interest-rate mismatches, derivative and counterparty exposure, prepayment rates, LIBOR transition, regulatory changes, litigation, technology failures, and government contracting risks.
Navient disclosed approximately $200 billion of financial instruments indexed to LIBOR as of December 31, 2021 in the filing’s risk-factor discussion. Many instruments lacked clear transition provisions, creating potential risks to funding costs, net interest margin, asset values, and financial results.
Significant legal and regulatory matters include CFPB and state attorney general actions, securities class actions, consumer protection claims, and an Education Department Special Allowance Payments audit. For several matters, the company stated that potential exposure could not be estimated and that no reserves had been established.
First-quarter results included material nonrecurring or volatile items: loan-sale gains, allowance reversals, derivative mark-to-market gains, and COVID-related Business Processing revenue.

Important Facts for Investors to Verify

Reconcile GAAP net income of $370 million with Core Earnings of $305 million, including the $65 million after-tax impact of derivative and acquired-intangible adjustments.
Assess the sustainability of earnings excluding the $89 million loan-sale gain, $102 million allowance reversal, and volatile derivative gains.
Monitor the timing and severity of post-forbearance defaults, particularly in the Private Education Loan portfolio.
Verify refinancing and other short-term debt maturities, including the $627 million repayment completed in April 2021.
Evaluate liquidity relative to $1.4 billion of unsecured notes maturing within the short term and the company’s below-investment-grade ratings.
Track the phaseout of COVID-related Business Processing contracts and the recovery of core government and healthcare activity.
Review the potential financial impact of CFPB, state attorney general, securities litigation, and Education Department proceedings, for which the filing does not provide a clear maximum exposure.
Monitor LIBOR replacement provisions across the company’s loan, ABS, debt, and derivative portfolios.