NAVIENT CORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended September 30, 2021

or

For the transition period from                  to                 

Commission File Number: 001-36228

Navient Corporation

(Exact name of registrant as specified in its charter)

(302) 283-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑        No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☑        No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐        No  ☑

Securities registered pursuant to Section 12(b) of the Act.

As of September 30, 2021, there were 161,172,372 shares of common stock outstanding.

TABLE OF CONTENTS

Organization of Our Form 10-Q

The order and presentation of content in our Form 10-Q differs from the traditional Securities and Exchange Commission (SEC) Form 10-Q format. Our format is designed to improve readability and to better present how we organize and manage our business. See Appendix A, "Form 10-Q Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-Q format.

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking” statements and other information that is based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,” “could,” “should,” “goals,” or “target.” Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties are discussed more fully under the section titled “Risk Factors” in our 2020 Annual Report on Form 10-K (the 2020 Form 10-K) and include, but are not limited to the following:  

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business.  

The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect and actual results could differ materially. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake any obligation to update or revise these forward-looking statements except as required by law.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

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USE OF NON-GAAP FINANCIAL MEASURES

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings, which is a non-GAAP financial measure. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings disclosures in the notes to our consolidated financial statements for our business segments.

In addition to Core Earnings, we present the following non-GAAP financial measures: Tangible Equity, Adjusted Tangible Equity Ratio, Pro forma Adjusted Tangible Equity Ratio, and Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA) (for the Business Processing segment). See “Management’s Discussion and Analysis – Non-GAAP Financial Measures” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.

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Overview and Fundamentals of Our Business

Navient is a leading provider of education loan management and business processing solutions for education, healthcare, and government clients at the federal, state, and local levels. We help our clients and millions of Americans achieve success through technology-enabled financing, services and support.  

With a focus on data-driven insights, service, compliance and innovative support, Navient’s business consists of:

We own a portfolio of $54.4 billion of federally guaranteed Federal Family Education Loan Program (FFELP) Loans. We service and provide asset recovery services on this portfolio and for third parties, deploying data-driven approaches to support the success of our customers. Our flexible and scalable infrastructure manages large volumes of complex transactions with continued customer experience and efficiency improvements.

We own, service and originate Private Education Loans that enable students to pursue higher education and economic opportunities. Our $20.0 billion private loan portfolio demonstrates high customer success rates. Our loan origination business assists borrowers in refinancing their education loan debt and supports students and families in financing their higher education. In third-quarter 2021, we originated $1.6 billion in Private Education Loans.

We provide business processing solutions to a variety of public sector and health care organizations. We support over 500 clients – and their millions of clients, patients, and citizens – through a suite of solutions that leverages our scale, technology and customer experience expertise. Our data driven solutions enable our clients to focus on their missions and optimize their cash flow, and they enable individuals to successfully navigate complex programs, transactions, and decisions.

Superior Operational Performance with a Strong Customer Service and Compliance Commitment

We help our customers — both individuals and institutions — navigate the path to financial success through proactive service and innovative solutions.

We leverage our multichannel communication platform, predictive analytics, and decades of insight to stay in touch with borrowers and address challenges that may arise. As the COVID-19 pandemic hit, we quickly implemented payment relief options for millions of borrowers.

In our Business Processing segment, using cloud-based solutions, we rapidly staffed, trained, and activated several call centers of thousands of remote staff for states needing urgent support during the COVID-19 pandemic.

Across all our businesses, we use real-time dashboards and data visualization tools to monitor performance metrics and identify, track, and address trends and opportunities.

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For example, our staff and systems strive to streamline and simplify the student loan repayment process, so borrowers can more easily understand their available choices and make informed decisions for their situation. We simplified the government’s process for enrolling in federal income-driven repayment plans by creating an agent-assisted e-sign enrollment process, greatly increasing completion.

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Federal loan borrowers serviced by Navient were on average 34% less likely to default than their peers serviced elsewhere, based on analysis of Cohort Default Rates released 2015 through 2020. During the COVID-19 pandemic, we quickly and accurately delivered assistance to student loan borrowers. We are consistently a top performer in our asset recovery business and deliver superior service to our public and private sector clients. We regularly leverage data-driven insights, scale, technology and customer service to deliver value to our clients.

Our Business Processing segment regularly outperforms our clients’ expectations and the results delivered by our competition. For example:

Strong Financial Performance Resulting in a Strong Capital Return

Our third-quarter 2021 results continue to build upon our previous year’s results demonstrating the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments. Adjusted Core Earnings⁽¹⁾ per share grew 50% on a year-to-date basis compared to the year-ago period.  

Our significant earnings generate significant capital which results in a strong capital return to our investors. Navient expects to continue to return excess capital to shareholders through dividends and share repurchases in accordance with our capital allocation policy.

By optimizing capital adequacy and allocating capital to highly accretive opportunities, including organic growth and acquisitions, we remain well positioned to pay dividends and repurchase stock, while maintaining appropriate leverage that supports our credit ratings and ensures ongoing access to capital markets.

At September 30, 2021, $150 million remained in share repurchase authorization.

To inform our capital allocation decisions, we use the Adjusted Tangible Equity Ratio, in addition to other metrics. As anticipated, the implementation of ASU No. 2016-13, “Financial Instruments – Credit Losses” (CECL), on January 1, 2020, reduced our capital ratios, which we have rebuilt during 2020 and 2021. In addition, our GAAP equity was reduced in 2020 as a result of the net mark-to-market losses related to derivative accounting primarily due to the significant decline in interest rates. Our Adjusted Tangible Equity Ratio⁽¹⁾ was 6.4% as of September 30, 2021.  In addition, our Pro forma Adjusted Tangible Equity Ratio⁽¹⁾ at September 30, 2021, which excludes the cumulative net mark-to-market losses related to derivative accounting that will reverse to zero as the contracts mature, was 8.0%.

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How We Organize Our Business

We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business Processing.  

Federal Education Loans Segment

In this segment, Navient owns FFELP Loans and performs servicing and asset recovery services on this portfolio. We also service and perform asset recovery services on federal education loans owned by other institutions. Our servicing quality, data-driven strategies, and multichannel education about federal repayment options translate into positive results for the millions of borrowers we serve.

Consumer Lending Segment

In this segment, Navient owns, originates, acquires and services high-quality Refinance and In-School private education loans. We believe our more than 45 years of experience, product design, digital marketing strategies, and origination and servicing platform provide a unique competitive advantage. We see meaningful growth opportunities in originating Private Education Loans to financially responsible consumers, generating attractive long-term risk adjusted returns.  

Business Processing Segment

In this segment, Navient performs business processing services for over 500 government and healthcare clients.

Other Segment

Our Other segment consists of our corporate liquidity portfolio, gains and losses incurred on the repurchase of debt, unallocated expenses of shared services and restructuring/other reorganization expenses.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

Selected Historical Financial Information and Ratios

⁽¹⁾   Item is a non-GAAP financial measure. For a description and reconciliation, see the section titled “Non-GAAP Financial Measures – Core Earnings.”

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The Quarter in Review

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide certain Core Earnings disclosures in the notes to our consolidated financial statements for our business segments. See “Non-GAAP Financial Measures — Core Earnings” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.

Third-quarter 2021 GAAP net income was $173 million ($1.04 diluted earnings per share), compared with $207 million ($1.07 diluted Core Earnings per share) for the year-ago quarter. See “Results of Operations – Comparison of Third-Quarter 2021 Results with Third-Quarter 2020” for a discussion of the primary contributors to the change in GAAP earnings between periods.

Third-quarter 2021 Core Earnings net income was $149 million ($0.89 diluted Core Earnings per share), compared with $192 million ($0.99 diluted Core Earnings per share) for the year-ago quarter. Third-quarter 2021 and 2020 adjusted diluted Core Earnings⁽¹⁾ per share were $0.92 and $1.03, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.

Financial highlights of third-quarter 2021 versus third-quarter 2020 include:

Federal Education Loans segment:

Consumer Lending segment:

Business Processing segment:

Capital, funding and liquidity:

Expenses:

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Navient’s Response to COVID-19

The World Health Organization first declared the COVID-19 outbreak a pandemic on March 13, 2020 by which time the economic impact of the crisis was beginning to take hold, impacting the global economy and our results of operations. The COVID-19 pandemic was subsequently declared a national emergency. In response to the COVID-19 pandemic, many state, local, and foreign governments put in place quarantines, executive orders, shelter-in-place orders, and restrictions in order to control the spread of the disease. Such orders or restrictions resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events. They also led to a general decline in economic activity and consumer confidence and increases in job losses and unemployment. While certain COVID-19 vaccines have been approved and have become widely available for use in the United States, there are many parts of the country where the vaccination rate is significantly below 50%. As a result, although the economy has improved since the pandemic began, it is still uncertain when or if normal pre-pandemic economic activity and business operations will resume and what effect the Delta or other variants will have on the global economy. In this section, we will highlight our response to the global pandemic and its continuing impact on our business and operations. We suggest that the information below should be read in conjunction with our risk factors included in “Risk Factors — The Impact of COVID-19 and Related Risk” in our 2020 Form 10-K.  

Our Team Members

As this crisis evolved, we took early action to protect the health and safety of our employees. We expanded our work-from-home capabilities and implemented best practices in our facilities with regard to safety and hygiene to protect those who were unable to work remotely. We were able to quickly and successfully enable 90% of our team to work from home. As of September 30, 2021, approximately 85% of our team remains on work-from-home status. As a result of these steps, the pandemic has not adversely affected our ability to maintain our operations or service our customers and borrowers. We currently anticipate that some of our team members will begin returning to the office later this year. As we plan for the return to office process, it is likely to take place in stages and we anticipate that the environment may require a continuation of various safety protocols.

Customers and Education Loan Performance

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. In compliance with the CARES Act and through subsequent legislative and executive actions, we have placed all loans owned by ED into forbearance and suspended payments and interest accrual until January 31, 2022. While the CARES Act applies only to loans owned by ED, our FFELP and Private Education Loan portfolios have also been impacted by the pandemic and we have offered COVID-19 relief options such as the use of forbearance to those borrowers. Private Education Loans in forbearance decreased to $814 million or 3.9% of the portfolio at September 30, 2021, after peaking at $3.4 billion or 14.7% during the second quarter of 2020. This compared to $604 million or 2.7% of the portfolio at December 31, 2019, prior to the impact of COVID-19. Despite the COVID-19 crisis, we have seen most borrowers continue to make payments according to their payment plans. And while forbearance rates are slightly higher today than they were pre-pandemic, the balance of loans delinquent has declined – our Private Education Loan delinquency rate declined from 4.6% at December 31, 2019 to 3.0% as of September 30, 2021. Our Private Education Loan charge-offs declined 49% to $184 million for the full year of 2020 compared with $364 million in full year 2019. This decline was due to the strength of the economy heading into March 2020 as well as a result of the COVID-19 forbearance granted to borrowers. We see this continued decline with charge-offs of $39 million in third-quarter 2021 compared to $40 million in the year-ago quarter. We do expect defaults to begin to increase in 2022 given the default timing impact of the use of forbearance and the end of various payment relief and stimulus benefits recently, and in the future, which our allowance for loan losses captures. Our total reserves were $1.65 billion (excluding the expected future recoveries on charged-off loans) at September 30, 2021, which represent reserves equal to 6.6% of our Private Education Loans and 0.5% of our FFELP Loan portfolio. While we are paying close attention to the needs of our customers, it is too early to know the full impact of this crisis or the path and timing of the recovery.

In the first quarter of 2020, our Private Education Refinance Loan originations of $1.9 billion represented a 92% increase over the year-ago quarter. With the onset of the crisis in March 2020, we reduced our marketing efforts and tightened credit until we had greater visibility into the uncertainty and volatility in the capital markets and the overall economic outlook. This resulted in second-quarter 2020 originations of $238 million. With improved visibility in both credit and funding costs, we restarted marketing efforts in the third quarter of 2020 and increased third-quarter and fourth-quarter originations to $1.3 billion and $1.1 billion, respectively. Total originations were $4.6 billion in 2020 compared to $4.9 billion in 2019. First-quarter, second-quarter and third-quarter 2021 Private Education Refinance Loan originations were $1.7 billion, $1.3 billion and $1.5 billion, respectively.

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Clients and Business Processing Segment Performance

In our Business Processing Segment (BPS), EBITDA⁽¹⁾ increased to $38 million from $23 million in the year-ago quarter. This increase is a result of being able to transition hundreds of our experienced BPS colleagues and adapt our technology enabled solutions to support state clients working to help residents access unemployment benefits implemented in the CARES Act, as well as to perform contact tracing and vaccine administration services. These new services have generated revenue in 2020 and the first nine months of 2021 that more than offset the negative revenue impact BPS is experiencing as a result of COVID-19 which includes lower transaction-related placements in both government services and health care revenue cycle management. For the remainder of 2021 we expect the revenue from the unemployment contracts related to the CARES Act and contact tracing and vaccine administration contracts to decline as the economy recovers and the need decreases. We also expect revenue from the core parts of the business to continue to improve into 2022 to pre-COVID-19 levels if the economy continues to improve.

Liquidity, Financings and Capital

The impact of the COVID-19 crisis on the capital markets was significant during the early part of the crisis, decreasing the number of transactions brought to market and increasing the pricing of those that were successfully marketed. However, in the second half of 2020 the capital markets began to improve with ready access to the markets, albeit at a higher cost than pre-COVID-19 levels. In the first nine months of 2021, we issued $500 million of unsecured debt and $7.5 billion of ABS below pre-COVID-19 cost of funds levels. Throughout the crisis we have maintained a strong liquidity position. As of September 30, 2021, we had $1.7 billion of primary sources of liquidity, $1.1 billion of which was cash. We also had, as of September 30, 2021, additional capacity in our funding facilities of $2.6 billion for Private Education Loans and $184 million for FFELP Loans. In addition, cash flow from our loan portfolio and services contracts remains strong as our very seasoned loan portfolio experiences lower levels of stress.

We ended the quarter with an Adjusted Tangible Equity Ratio⁽¹⁾ of 6.4% compared to 5.0% as of December 31,2020. In 2020, our GAAP equity was reduced due to the implementation of CECL on January 1, 2020 as well as a result of the net mark-to-market losses related to derivative accounting as a result of the significant decrease in interest rates.  These mark-to-market losses recognized under GAAP cumulatively totaled $417 million (after tax) as of September 30, 2021. This decrease will reverse over time as these derivatives mature. The resulting Pro forma Adjusted Tangible Equity Ratio⁽¹⁾, which excludes these cumulative mark-to-market losses, was 8.0% at September 30, 2021. We expect our capital levels to continue to rebuild over the course of 2021.

Other Matters

From an accounting, reporting and disclosure perspective, COVID-19 and the related work-from-home policies did not negatively impact our ability to close our books, manage our financial systems, or maintain our internal control over financial reporting and our disclosure controls and procedures. See “Critical Accounting Policies and Estimates” in our 2020 Form 10-K for a discussion of how COVID-19 impacted our allowance for loan loss and our conclusion of goodwill not being impaired.

We have successfully implemented our business continuity plans in response to COVID-19. We do not foresee requiring material expenditures to continue to operate in a work-from-home environment nor do we expect material expenditures to return to work in the office. We do not anticipate a material adverse impact of COVID-19 on our supply chain and we do not expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues. We have not been adversely impacted by travel restrictions and border closures nor do we anticipate that our operations will be materially impacted by any constraints on our human capital resources and productivity.

⁽¹⁾ Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Results of Operations

GAAP Income Statements (Unaudited)

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GAAP Comparison of Third-Quarter 2021 Results with Third-Quarter 2020

For the three months ended September 30, 2021, net income was $173 million, or $1.04 diluted earnings per common share, compared with net income of $207 million, or $1.07 diluted earnings per common share, for the year-ago period.

The primary contributors to the change in net income are as follows:

The provision for loan losses in both periods primarily related to loan originations. There has been an improvement in the current and forecasted economic conditions since the prior period, but such improvement has not mitigated the uncertainty related to the potential negative impact on the portfolio from the end of various payment relief and stimulus benefits recently and in the future.

We repurchased 7.0 million and 7.7 million shares of our common stock during the third quarters of 2021 and 2020, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 27 million common shares (or 14%) from the year-ago period.     

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Comparison of Nine Months Ended September 30, 2021 Results with Nine Months Ended September 30, 2020

For the nine months ended September 30, 2021, net income was $728 million, or $4.15 diluted earnings per common share, compared with net income of $227 million, or $1.15 diluted earnings per common share, for the year-ago period.

The primary contributors to the change in net income are as follows:

The negative provision for the current period of $(66) million was comprised of $49 million in connection with loan originations less the reversal of both $107 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans, as well as $8 million related to a decrease in expected losses for the overall portfolio. There has been an improvement in the current and forecasted economic conditions since December 31,2020, but such improvement has not mitigated the uncertainty related to the potential negative impact on the portfolio from the end of various payment relief and stimulus benefits recently and in the future. The provision in the year-ago period primarily related to an increase in expected losses due to COVID-19’s negative impact on the current and forecasted economic conditions that occurred subsequent to the adoption of CECL on January 1, 2020.

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Included in current period operating expenses is $42.5 million of litigation expense in connection with reaching preliminary agreements to settle two separate cases related to certain investors in Navient stock and unsecured debt, resulting in $0 net expense due to offsetting insurance reimbursements. See “Note 9 – Commitments and Contingencies” for further discussion.

We repurchased 26.9 million and 30.6 million shares of our common stock during the nine months ended September 30, 2021 and 2020, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 21 million common shares (or 11%) from the year-ago period.  

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Segment Results

Federal Education Loans Segment

The following table presents Core Earnings results for our Federal Education Loans segment.

Comparison of Third-Quarter 2021 Results with Third-Quarter 2020

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Key performance metrics are as follows:

Net Interest Margin

The following table details the net interest margin. 

⁽¹⁾  The average balances of the interest-earning assets for the respective periods are:

As of September 30, 2021, our FFELP Loan portfolio totaled $54.4 billion, comprised of $18.6 billion of FFELP Stafford Loans and $35.8 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of September 30, 2021 was 6 years and 7 years, respectively, assuming a Constant Prepayment Rate (CPR) of 9% and 5%, respectively.

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Floor Income

The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn Floor Income after September 30, 2021 and 2020, based on interest rates as of those dates.  

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period October 1, 2021 to December 31, 2025.

Provision for Loan Losses

The provision for FFELP Loan Losses was $0 in third-quarter 2021, down $4 million from the year-ago quarter.

Servicing Revenue

The Company serviced loans for approximately 5.6 million customer accounts under its ED servicing contract as of September 30, 2021, unchanged from September 30, 2020. Third-party loan servicing fees in the three months ended September 30, 2021 and 2020 included $34 million and $36 million, respectively, of servicing revenue related to the ED servicing contract.

In October 2021, we received all required approvals and transferred our loan servicing contract for 5.6 million ED owned student loan accounts from Navient to a third party through a contract novation. As a result, as previously planned, Navient no longer is a party to the ED servicing contract. To aid in the transition, Navient will provide certain services into 2022 to the third party through a transition services agreement. As part of the transaction, approximately 800 Navient employees on the ED loan servicing team will transfer to the third party, which is expected to occur later in the fourth quarter 2021. 

Asset Recovery and Business Processing Revenue

Asset recovery and business processing revenue decreased $22 million primarily as a result of the impact of COVID-19 on certain collection and processing activities (temporary stoppage or other restrictions on certain activities) and the planned wind-down of the ED asset recovery contract .

Operating Expenses

Expenses were $11 million lower primarily as a result of the decrease in asset recovery revenue discussed above.

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Consumer Lending Segment

The following table presents Core Earnings results for our Consumer Lending segment.