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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 001-36228

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-4054283

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

123 Justison Street, Wilmington, Delaware

19801

(Address of principal executive offices)

(Zip Code)

(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.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

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.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $.01 per share

 

NAVI

 

The NASDAQ Global Select Market

6% Senior Notes due December 15, 2043

 

JSM

 

The NASDAQ Global Select Market

 

As of March 31, 2021, there were 179,513,282 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.

 

 

Page

Number

 

 

 

 

 

 

 

Forward-Looking and Cautionary Statements

1

Use of Non-GAAP Financial Measures

2

 

 

Business

3

Overview and Fundamentals of Our Business

3

How We Organize Our Business

6

 

 

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

7

Selected Historical Financial Information and Ratios

7

The Quarter in Review

8

Navient’s Response to COVID-19

9

Results of Operations

11

Segment Results

13

Financial Condition

20

Liquidity and Capital Resources

26

Critical Accounting Policies and Estimates

29

Non-GAAP Financial Measures

29

 

 

Legal Proceedings

37

Risk Factors

37

Quantitative and Qualitative Disclosures about Market Risk

38

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

Controls and Procedures

42

Exhibits

43

Financial Statements

44

Signatures

78

Appendix A – Form 10-Q Cross-Reference Index

79

 

 

 

 

 

 

 


 

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:  

 

 

the continuing impacts of the COVID-19 pandemic and related risks;

 

the economic conditions and the creditworthiness of third parties;

 

increased defaults on education loans held by us;

 

the cost and availability of funding in the capital markets;

 

the transition away from the LIBOR reference rate to an alternative reference rate;  

 

higher or lower than expected prepayments of loans could change the expected net interest income we receive or cause the bonds issued by a securitization trust to be paid at a differently speed than anticipated;

 

our unhedged Floor Income is dependent on the future interest rate environment and therefore is variable;

 

a reduction in our credit ratings;

 

adverse market conditions or an inability to effectively manage our liquidity risk could negatively impact us;

 

the interest rate characteristics of our assets do not always match those of our funding arrangements;

 

our use of derivatives exposes us to credit and market risk;

 

our ability to continually and effectively align our cost structure with our business operations;

 

a failure of our operating systems, infrastructure or information technology systems;

 

failure by any third party providing us material services or products or a breach or violation of law by one of these third parties;

 

changes to applicable laws, rules, regulations and government policies and expanded regulatory and governmental oversight;

 

our work with government clients exposes us to additional risks inherent in the government contracting environment;

 

shareholder activism;

 

federal funding constraints and spending policy changes may result in disruption of federal payments for services we provide to the government;

 

shareholders’ percentage ownership in Navient may be diluted in the future;

 

reputational risk and social factors;

 

obligations owed to parties under various transaction agreements that were executed as part of the spin-off of Navient from SLM Corporation (the Spin-Off); and

 

acquisitions or strategic investments that we pursue.

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.

 

1


 

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.

 

 

 

2


 

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:

 

 

Federal Education Loans

We own a portfolio of $56.9 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.

We service federal education loans for approximately 5.6 million customers on behalf of the U.S. Department of Education (ED). Our flexible and scalable infrastructure manages large volumes of complex transactions with continued customer experience and efficiency improvements.

 

Consumer Lending

We own, service and originate Private Education Loans that enable students to pursue higher education and economic opportunities. Our $19.7 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 first-quarter 2021, we originated $1.7 billion in Private Education Loans.

 

Business Processing

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.

 

Scalable, data-driven solutions. Annually, we support tens of millions of people to conduct hundreds of millions of transactions and interactions. Designed using configurable architecture, our systems are built for scale and rapid implementation. We harness the power of data to build tailored programs that optimize our clients’ results.

 

For example, in our education loan segments, we support approximately 10 million borrowers to navigate their path to successful repayment. 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.

 


3


 

Simplify complex processes. On our clients’ behalf, we help individuals successfully navigate a broad spectrum of complex transactions.

 

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.

 

Improve customer experience and success. We continually make enhancements in an effort to improve customer experience, drawing from a variety of inputs including customer surveys, research panels, analysis of customer inquiries, transactions and activities, and complaint data, and regulator commentary. Across our businesses, our customer-facing representatives are trained and measured to provide empathetic, accurate support.

 

o

Repayment plan education and outreach: We help federal student loan borrowers understand the wide range of repayment options so they can make informed choices about the plans that align with their financial circumstances and goals. We continue to lead in enrolling customers in affordable repayment plans.

 

o

Advocating for enhancements to student loans: Navient has been a leader in recommending policy reforms that would enhance the student loan outcomes. For example, we have recommended improving financial literacy before borrowing, simplifying federal loan repayment options and encouraging college completion — reforms that we believe would make a meaningful difference for millions of Americans.

 

o

Office of the Customer Advocate: Our Office of the Customer Advocate, established in 1997, offers escalated assistance to customers. We are committed to working with customers and appreciate customer comments, which, combined with our own customer communication channels, help us improve the ways we assist our customers.

 

o

Private loan modification program: In 2009, we pioneered the creation of a loan modification program to help Private Education Loan borrowers needing additional assistance. As of March 31, 2021, $831 million of our Private Education Loans were enrolled in this interest rate reduction program, helping customers through more affordable monthly payments while making progress in repaying their principal loan balance.

 

o

Serving military customers: Navient was the first student loan servicer to launch a dedicated military benefits customer service team, website (Navient.com/military), and toll-free number. Navient’s military benefits team supports service members and their families to access the benefits designed for them, including interest rate benefits, deferment and other options.

 

o

Financial literacy: We also continue to offer free resources to help customers and the general public build knowledge on personal finance topics, including videos, articles and online tools.

 

Commitment to compliance. Our rigorous compliance posture ensures adherence with laws and regulations and helps protect our clients, customers, employees and shareholders. We use a “Three Lines of Defense” compliance framework, considered best practice by the U.S. Federal Financial Institutions Examination Council (FFIEC). This framework and other compliance protocols ensure we adhere to key industry laws and regulations including: Fair and Accurate Credit Transactions Act (FACTA); Fair Credit Reporting Act (FCRA); Fair Debt Collection Practices Act (FDCPA); Equal Credit Opportunity Act (ECOA); Federal Information Security Management Act (FISMA); Gramm-Leach-Bliley Act (GLBA); Health Insurance Portability and Accountability Act (HIPAA); IRS Publication 1075; Servicemembers Civil Relief Act (SCRA); Military Lending Act (MLA); Telephone Consumer Protection Act (TCPA); Unfair, Deceptive, or Abusive Acts and Practices (UDAAP); state laws; and state and city licensing.


4


 

Deliver superior performance. Navient delivers value for our clients and customers. Whether supporting student loan borrowers to successfully manage their loans, delivering new citizen services for public sector agencies, or helping a state manage backlogs or recover revenue to support essential services, we deliver results.

Federal loans serviced by Navient achieved a Cohort Default Rate (CDR) 26% better than our peers as calculated from the most recent CDR released by ED in September 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:

 

o

For one client, we delivered efficiency results 30% higher than our client’s other vendors.

 

o

We have increased our transportation clients’ revenue by up to 15%.  

 

Corporate Social Responsibility. We are committed to contributing to the social and economic wellbeing of our local communities, to fostering the success of our customers, to supporting a culture of integrity, inclusion and equality in our workforce, and to integrating environmental responsibility into our business. More information about our environmental, social and governance commitments is available at about.Navient.com.

 

Strong Financial Performance Resulting in a Strong Capital Return

 

Our first-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 235% over the year-ago quarter.  

 

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.

 

(Dollars and shares in millions)

 

Q1-21

 

 

Q1-20

 

Shares repurchased

 

 

8.2

 

 

 

23.0

 

Reduction in shares outstanding

 

 

4

%

 

 

10

%

Total repurchases in dollars

 

$

100

 

 

$

335

 

Dividends paid

 

$

29

 

 

$

31

 

At March 31, 2021, $500 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 been rebuilding throughout 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 Pro forma Adjusted Tangible Equity Ratio(1) at March 31, 2021, which excludes the cumulative net mark-to-market losses related to derivative accounting that will reverse to zero as the contracts mature, was 8.1%.

(Dollars in millions)

 

Q1-20

 

 

Q2-20

 

 

Q3-20

 

 

Q4-20

 

 

YTD-20

 

 

Q1-21

 

Capital Returned(2)

 

$

366

 

 

$

31

 

 

$

96

 

 

$

30

 

 

$

523

 

 

$

129

 

Adjusted Tangible Equity Ratio(1)

 

 

3.2

%

 

 

3.6

%

 

 

4.1

%

 

 

5.0

%

 

 

5.0

%

 

 

6.2

%

Pro forma Adjusted Tangible Equity Ratio(1)

 

 

5.3

%

 

 

6.0

%

 

 

6.4

%

 

 

7.1

%

 

 

7.1

%

 

 

8.1

%

(1)

Item is a non-GAAP financial measure. For a description and reconciliation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures.”        

(2)

Capital Returned is defined as share repurchases and dividends paid.

 

5


 

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 ED and 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 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. We generate revenue primarily through net interest income on our Private Education Loan portfolio.

Business Processing Segment

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

 

Government services: We provide state governments, agencies, court systems, municipalities, and parking and tolling authorities with expert service, leveraging our scale, integrated technology solutions and data-driven approach. Our support enables our clients to better serve their constituents, meet rapidly changing needs, reduce their operating expenses, manage risk and maximize revenue opportunities.  

 

Healthcare services: We perform revenue cycle outsourcing, accounts receivable management, extended business office support, consulting engagements and public health programs. We offer customizable solutions for our clients that include hospitals, hospital systems, medical centers, large physician groups, other healthcare providers and departments of public health.  

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.

 

 

 

 

 

 

6


 

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

 

Selected Historical Financial Information and Ratios

 

 

 

Three Months Ended March 31,

 

(In millions, except per share data)

 

2021

 

 

2020

 

GAAP Basis

 

 

 

 

 

 

 

 

Net income (loss)

 

$

370

 

 

$

(106

)

Diluted earnings (loss) per common share

 

$

2.00

 

 

$

(.53

)

Weighted average shares used to compute diluted earnings per share

 

 

185

 

 

 

200

 

Return on assets

 

 

1.78

%

 

 

(.47

)%

 

 

 

 

 

 

 

 

 

Core Earnings Basis(1)

 

 

 

 

 

 

 

 

Net income

 

$

305

 

 

$

93

 

Diluted earnings per common share

 

$

1.65

 

 

$

.46

 

Adjusted diluted earnings per common share(1)

 

$

1.71

 

 

$

.51

 

Weighted average shares used to compute diluted earnings per share

 

 

185

 

 

 

202

 

Net interest margin, Federal Education Loans segment

 

 

.97

%

 

 

.81

%

Net interest margin, Consumer Lending segment

 

 

2.99

%

 

 

3.31

%

Return on assets

 

 

1.46

%

 

 

.41

%

 

 

 

 

 

 

 

 

 

Education Loan Portfolios(2)

 

 

 

 

 

 

 

 

Ending FFELP Loans, net

 

$

56,873

 

 

$

62,492

 

Ending Private Education Loans, net

 

 

19,742

 

 

 

22,338

 

Ending total education loans, net

 

$

76,615

 

 

$

84,830

 

Average FFELP Loans

 

$

58,078

 

 

$

63,894

 

Average Private Education Loans

 

 

22,143

 

 

 

23,112

 

Average total education loans

 

$

80,221

 

 

$

87,006

 

 

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

(2)   Balances are the same for GAAP and Core Earnings basis.


7


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.

First-quarter 2021 GAAP net income was $370 million ($2.00 diluted earnings per share), compared with a net loss of $106 million ($0.53 diluted loss per share) for the year-ago quarter. See “Results of Operations – Comparison of First-Quarter 2021 Results with First-Quarter 2020” for a discussion of the primary contributors to the change in GAAP earnings between periods.

First-quarter 2021 Core Earnings net income was $305 million ($1.65 diluted Core Earnings per share), compared with $93 million ($0.46 diluted Core Earnings per share) for the year-ago quarter. First-quarter 2021 and 2020 adjusted diluted Core Earnings(1) per share were $1.71 and $0.51, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.

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

 

Federal Education Loans segment:

 

Net income decreased $7 million, or 6%, from $119 million to $112 million.

 

Net interest income increased 9%.

 

FFELP Loan delinquency rate decreased 21% from 10.5% to 8.3%.

Consumer Lending segment:

 

Net income increased $180 million, or 333%, from $54 million to $234 million.

 

Sold $1.6 billion of Private Education Loans, resulting in: (1) gains on sales of $89 million; and (2) the reversal of $102 million of allowance for loan losses through provision.

 

Originated $1.7 billion of Private Education Refinance Loans.  

 

Private Education Loan delinquency rate decreased 36% from 3.6% to 2.3%.

Business Processing segment:

 

EBITDA(1) increased $32 million, or 800%, from $4 million to $36 million, primarily due to revenue earned from contracts to support states in providing unemployment benefits, contact tracing and vaccine administration services.  

 

Revenue increased $68 million, or 119%, to $125 million.

Capital, funding and liquidity:

 

Adjusted Tangible Equity Ratio(1) of 6.2%. Pro forma Adjusted Tangible Equity Ratio(1) of 8.1%.

 

Repurchased $100 million of common shares.

 

Paid $29 million in common stock dividends.

 

$500 million common share repurchase authority remains outstanding.

 

Issued $2.8 billion in term asset-backed securities (ABS) and $500 million in unsecured debt.

 

On April 5, 2021, retired $627 million of the remaining unsecured debt scheduled to mature in 2021.

Expenses:

 

Adjusted Core Earnings expenses(1) increased $7 million to $251 million. This increase was a result of a $37 million increase in expenses in the Business Processing segment in connection with the $68 million increase in related revenue, with an offsetting $30 million decrease in expenses primarily in the Federal Education Loans and Other segments.

 

 

 

(1) 

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

 

8


 

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 have 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 have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events. They have 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, we are unable to predict how widely utilized the vaccines will be or how effective they will be in preventing the spread of COVID-19. 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. 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 March 31, 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 been instructed to place all loans owned by ED into forbearance and suspend payments and interest accrual until September 30, 2021. 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 $797 million or 3.9% of the portfolio at March 31, 2021, after peaking at $3.4 billion or 14.7% during the second quarter of 2020 due to the COVID-19 forbearance granted to borrowers. 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 2.6% as of December 31, 2020 and further to 2.3% as of March 31, 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 $35 million in first-quarter 2021 compared to $68 million in the year-ago quarter. We do expect defaults to begin to increase in 2021 and 2022 given the default timing impact of the use of forbearance which our allowance for loan losses captures. Our total reserves were $1.73 billion (excluding the expected future recoveries on charged-off loans) at March 31, 2021, which represent reserves equal to 7.0% 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 2021 originations were $1.7 billion. We expect 2021 originations to be higher than 2020 if the economy continues to improve.

9


 

Clients and Business Processing Segment Performance

 

In our Business Processing Segment (BPS), EBITDA(1) increased to $36 million from $4 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 quarter 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. In 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 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 first-quarter 2021, we issued $500 million of unsecured debt and $2.8 billion of ABS below pre-COVID-19 cost of funds levels. Throughout the crisis we have maintained a strong liquidity position. As of March 31, 2021, we had $2.7 billion of primary sources of liquidity, $1.5 billion of which was cash. We also had, as of March 31, 2021, additional capacity in our funding facilities of $2.8 billion for Private Education Loans and $826 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 6.2% 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 $499 million (after tax) as of March 31, 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 8.1% at March 31, 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.”


10


 

Results of Operations

GAAP Income Statements (Unaudited)

 

 

 

Three Months Ended March 31,

 

 

Increase

(Decrease)

 

(In millions, except per share data)

 

2021

 

 

2020

 

 

$

 

 

%

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

373

 

 

$

571

 

 

$

(198

)

 

 

(35

)%

Private Education Loans

 

 

319

 

 

 

404

 

 

 

(85

)

 

 

(21

)

Cash and investments

 

 

 

 

 

12

 

 

 

(12

)

 

 

(100

)

Total interest income

 

 

692

 

 

 

987

 

 

 

(295

)

 

 

(30

)

Total interest expense

 

 

329

 

 

 

714

 

 

 

(385

)

 

 

(54

)

Net interest income

 

 

363

 

 

 

273

 

 

 

90

 

 

 

33

 

Less: provisions for loan losses

 

 

(87

)

 

 

95

 

 

 

(182

)

 

 

(192

)

Net interest income after provisions for loan losses

 

 

450

 

 

 

178

 

 

 

272

 

 

 

153

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing revenue

 

 

53

 

 

 

58

 

 

 

(5

)

 

 

(9

)

Asset recovery and business processing revenue

 

 

139

 

 

 

110

 

 

 

29

 

 

 

26

 

Other income (loss)

 

 

 

 

 

7

 

 

 

(7

)

 

 

(100

)

Gains on sales of loans

 

 

76

 

 

 

 

 

 

76

 

 

 

100

 

Gains (losses) on derivative and hedging activities, net

 

 

36

 

 

 

(223

)

 

 

259

 

 

 

116

 

Total other income (loss)

 

 

304

 

 

 

(48

)

 

 

352

 

 

 

733

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

259

 

 

 

251

 

 

 

8

 

 

 

3

 

Goodwill and acquired intangible assets impairment and

   amortization expense

 

 

5

 

 

 

5

 

 

 

 

 

 

 

Restructuring/other reorganization expenses

 

 

6

 

 

 

5

 

 

 

1

 

 

 

20

 

Total expenses

 

 

270

 

 

 

261

 

 

 

9

 

 

 

3

 

Income (loss) before income tax expense (benefit)

 

 

484

 

 

 

(131

)

 

 

615

 

 

 

469

 

Income tax expense (benefit)

 

 

114

 

 

 

(25

)

 

 

139

 

 

 

556

 

Net income (loss)

 

$

370

 

 

$

(106

)

 

$

476

 

 

 

449

%

Basic earnings (loss) per common share

 

$

2.02

 

 

$

(.53

)

 

$

2.55

 

 

 

481

%

Diluted earnings (loss) per common share

 

$

2.00

 

 

$

(.53

)

 

$

2.53

 

 

 

477

%

Dividends per common share

 

$

.16

 

 

$

.16

 

 

$

 

 

 

%

 


11


 

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

For the three months ended March 31, 2020, net income was $370 million, or $2.00 diluted earnings per common share, compared with a net loss of $106 million, or $0.53 diluted loss per common share, for the year-ago period.

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

 

Net interest income increased by $90 million, primarily as a result of a $54 million increase in mark-to-market gains on fair value hedges recorded in interest expense.  Also contributing to the increase is a favorable interest rate environment with lower interest rates  and the growth in the Private Education Refinance Loan portfolio. Partially offsetting this increase is the continued natural paydown of the FFELP and non-refinance Private Education Loan portfolios.

 

Provisions for loan losses decreased $182 million from $95 million to $(87) million:

 

○ 

The provision for FFELP loan losses decreased $6 million to $0.

 

○ 

The provision for Private Education Loan losses decreased $176 million from $89 million to $(87) million.

There was not a significant change in the credit quality of the loan portfolio or in the current and forecasted economic conditions since December 31, 2020. The negative provision of $(87) million in the first quarter of 2021 was primarily related to the reversal of $102 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans discussed below. This was partially offset by provision related to loan originations. The provision in the year-ago quarter 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

 

Asset recovery and business processing revenue increased $29 million primarily as a result of $68 million of revenue earned in our Business Processing segment from contracts to support states in providing unemployment benefits, contact tracing and vaccine administration services in connection with COVID-19. This was partially offset by the wind-down of the ED asset recovery contract in the Federal Education Loan segment and the impact of COVID-19 (temporary stoppage or other restrictions on certain collection and processing activities, and lower volume in the transportation business).

 

Gains of sales of loans increased $76 million in connection with the sale of approximately $1.6 billion of Private Education Loans in first-quarter 2021. There were no such sales in the year-ago quarter. The sale of Private Education Loans was comprised of two separate transactions:

 

○ 

Approximately $560 million of non-Refinance Loans, resulting in a $46 million gain on sale; and

 

○ 

Approximately $1.03 billion of Refinance Loans, resulting in a $30 million gain on sale. In addition, there was a $13 million gain related to derivatives that were used to hedge this transaction that did not qualify for hedge accounting. As a result, this gain related to the derivatives was included as a part of “gains (losses) on derivative and hedging activities, net” on the income statement.

 

Net gains on derivative and hedging activities increased $259 million. The primary factors affecting the change were interest rate and foreign currency fluctuations, which impact the valuations of derivative instruments including Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments fluctuate based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may vary significantly in future periods.

 

Excluding net regulatory-related expenses of $8 million and $7 million in the first quarters of 2021 and 2020, respectively, operating expenses were $251 million and $244 million in the first quarters of 2021 and 2020, respectively. This $7 million increase was a result of a $37 million increase in expenses in the Business Processing segment in connection with the $68 million increase in segment revenue, with an offsetting $30 million decrease in expenses primarily in the Federal Education Loans and Other segments as a result of the decrease of Federal Education Loan asset recovery revenue discussed above as well as improvements in operating efficiencies.

 

During the three months ended March 31, 2021 and 2020, respectively, the Company incurred $6 million and $5 million, respectively of restructuring/other reorganization expenses in connection with an effort to reduce costs and improve operating efficiency. These charges were primarily due to facility lease terminations and severance-related costs.

 

We repurchased 8.2 million and 23.0 million shares of our common stock during the first quarters of 2021 and 2020, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 15 million common shares (or 8%) from the year-ago period.

 

12


 

Segment Results

Federal Education Loans Segment

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

 

 

 

Three Months Ended March 31,

 

 

% Increase

(Decrease)

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021 vs. 2020

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

359

 

 

$

582

 

 

 

(38

)%

Cash and investments

 

 

 

 

 

6

 

 

 

(100

)

Total interest income

 

 

359

 

 

 

588

 

 

 

(39

)

Total interest expense

 

 

215

 

 

 

456

 

 

 

(53

)

Net interest income

 

 

144

 

 

 

132

 

 

 

9

 

Less: provision for loan losses

 

 

 

 

 

6

 

 

 

(100

)

Net interest income after provision for loan losses

 

 

144