Navient Corporation 10-Q Summary: Second Quarter 2021
Business context and reporting period
Navient provides education-loan ownership, servicing and asset-recovery services, private education lending, and business-processing solutions for government and healthcare clients. The filing covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
- Federal Education Loans: $55.6 billion of net FFELP Loans and servicing for approximately 5.6 million Department of Education customer accounts.
- Consumer Lending: $19.7 billion of net Private Education Loans; $1.3 billion of private refinance originations in the second quarter.
- Business Processing: services for more than 500 government and healthcare clients.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| GAAP net income | $185 million | $125 million | $555 million | $19 million |
| Diluted EPS | $1.05 | $0.64 | $3.08 | $0.10 |
| Total interest income | $661 million | $819 million | $1.352 billion | $1.807 billion |
| Interest expense | $339 million | $519 million | $667 million | $1.234 billion |
| Net interest income | $322 million | $300 million | $685 million | $573 million |
| Provision for loan losses | $(1) million | $44 million | $(88) million | $139 million |
| Net interest income after provisions | $323 million | $256 million | $773 million | $434 million |
| Operating expenses | $252 million | $213 million | $510 million | $463 million |
Core Earnings, a non-GAAP measure, were $165 million, or $0.94 per diluted share, in the second quarter and $469 million, or $2.61 per diluted share, for the six months. Adjusted diluted Core Earnings per share were $0.98 in the quarter and $2.71 year to date, compared with $0.91 and $1.41, respectively, in the prior-year periods.
- Federal Education Loans Core Earnings declined 23% year over year to $113 million in the quarter. Segment net interest margin was 0.97%, compared with 1.07%.
- Consumer Lending Core Earnings increased 10% to $96 million. Segment net interest margin was 2.95%, compared with 3.20%.
- Business Processing Core Earnings increased to $29 million from $6 million. Revenue increased 103% to $130 million, and EBITDA increased to $40 million from $8 million; EBITDA margin was 30%, compared with 13%.
Cash flow, capital, debt and liquidity
- Operating cash flow for the six months was $333 million, compared with $595 million in 2020.
- Investing activities provided $4.219 billion, including $5.643 billion of loan repayments and $1.588 billion of loan-sale proceeds.
- Financing activities used $4.327 billion, including $300 million of share repurchases, $56 million of dividends, $782 million of unsecured-note repayments and $2.201 billion of net ABCP repayments.
- Unrestricted cash and liquid investments totaled $1.453 billion; primary liquidity totaled $2.336 billion, including unencumbered FFELP and Private Education Refinance Loans.
- Additional borrowing capacity under ABCP facilities was $2.935 billion.
- Total GAAP borrowings were $79.882 billion, including $8.123 billion of unsecured debt and $71.255 billion of secured borrowings. Three rating agencies rated Navient’s long-term unsecured debt below investment grade.
- The Adjusted Tangible Equity Ratio increased to 6.3% from 3.6% at June 30, 2020; the pro forma ratio, excluding cumulative derivative mark-to-market losses, was 8.0%.
- Navient issued $2.1 billion of term ABS, retired $692 million of unsecured debt during the quarter, and retired an additional $750 million of debt in July 2021. Approximately $1.6 billion of senior unsecured notes were scheduled to mature within 12 months as of June 30, 2021, including the July retirement.
Material changes versus the prior comparable period
- GAAP earnings improved substantially, partly because 2020 included significant derivative mark-to-market losses. Derivative accounting increased GAAP net income by $20 million in Q2 2021 versus reducing it by $54 million in Q2 2020; the six-month impact was positive $86 million versus negative $253 million.
- Net interest income increased despite lower interest income because interest expense declined more rapidly, supported by lower funding costs, fair-value hedge effects and the private refinance portfolio.
- Loan-loss provisions reversed in 2021 as economic forecasts improved and allowances were released in connection with loan sales. The filing cautions that this benefit may not recur.
- Total net education loans declined to $75.275 billion from $82.383 billion at June 30, 2020, primarily from portfolio runoff and loan sales.
- FFELP delinquency over 30 days increased to 8.3% from 8.2%, while FFELP forbearance declined to 13.9% from 26.6%.
- Private Education Loan delinquency over 30 days increased to 2.6% from 2.0%, while forbearance declined to 3.0% from 8.4%.
- Private Education Loan charge-offs declined to $35 million from $48 million in the quarter. The allowance, excluding expected future recoveries on charged-off loans, was $1.687 billion, or 6.8% of ending Private Education Loans.
- Navient repurchased 11.8 million shares for $200 million in the quarter and paid $27 million of dividends. Remaining repurchase authorization was $300 million.
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 defaults to begin increasing in 2022 as the delayed effects of borrower forbearance emerge; the allowance incorporates expected future losses.
- Business Processing revenue from unemployment, contact-tracing and vaccine-administration contracts was expected to decline during the remainder of 2021, while core business revenue was expected to improve toward pre-COVID levels into 2022 if the economy continued to recover.
- COVID-19 remained a significant uncertainty, including the effects of Delta or other variants, the expiration of federal payment relief for Department of Education-owned loans on September 30, 2021, and the end of other stimulus programs.
- Legal and regulatory proceedings included actions by the CFPB and multiple state attorneys general, securities litigation and consumer-protection claims. For several matters, the company stated that a loss was reasonably possible but that the timing and potential exposure could not be estimated; no reserves had been established for those matters.
- The company continued to challenge an Education Department decision involving Special Allowance Payment billing practices. Management stated that it did not currently expect a material company-wide effect from an adverse ruling.
- Interest-rate, funding, credit-rating, derivative, LIBOR-transition, prepayment and liquidity risks could materially affect earnings and access to capital. A hypothetical 100-basis-point rate increase was estimated to increase after-tax earnings by $62 million, while a decrease was estimated to reduce after-tax earnings by $103 million, including derivative mark-to-market effects.
- GAAP equity remained affected by cumulative after-tax derivative mark-to-market losses of approximately $459 million, which management expects to reverse as the derivatives mature. Core Earnings and adjusted capital ratios are non-GAAP measures and are not substitutes for GAAP results.
Most important facts for an investor to verify
- Whether private-loan delinquencies and defaults increase after federal and pandemic-related payment relief expires.
- The sustainability of negative or unusually low loan-loss provisions and the adequacy of the $1.687 billion private-loan allowance.
- Near-term refinancing and repayment capacity for unsecured debt, including the remaining maturities through 2029 and the company’s below-investment-grade ratings.
- The extent to which Business Processing earnings depend on temporary COVID-related government contracts.
- The reconciliation between GAAP earnings and Core Earnings, particularly the $121 million year-to-date derivative-accounting adjustment.
- Potential financial exposure from CFPB, state attorney general, securities and other legal proceedings, for which the filing does not provide a clear range of possible loss.
- The continuation of share repurchases and dividends relative to liquidity, capital ratios and debt-retirement needs.