8-K
NAVIENT CORP false 0001593538 0001593538 2021-07-27 2021-07-27 0001593538 us-gaap:CommonStockMember 2021-07-27 2021-07-27 0001593538 us-gaap:SeniorNotesMember 2021-07-27 2021-07-27

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 27, 2021

 

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   001-36228   46-4054283

(State or other jurisdiction

of incorporation)

 

(Commission

File Number)

 

(I.R.S. Employer

Identification No.)

 

123 Justison Street, Wilmington, Delaware   19801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (302) 283-8000

Not Applicable

(Former name or former address, if changed since last report)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

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. ☐

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

 

 

 


ITEM 2.02

RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

On July 27, 2021, Navient Corporation (the “Company”) issued an informational press release announcing its financial results for the quarter ended June 30, 2021 were available on the “Investor” page of its website located at https://www.navient.com/investors. Additionally, on July 27, 2021, the Company posted its financial results for the quarter ended June 30, 2021 to its above-referenced web location. A copy of each press release is furnished as Exhibit 99.1 and Exhibit 99.2 hereto.

 

ITEM 9.01

FINANCIAL STATEMENTS AND EXHIBITS.

(d) Exhibits

 

Exhibit
Number

  

Description

99.1*    Press Release, dated July 27, 2021.
99.2*    Financial Press Release, dated July 27, 2021.
104    Cover Page Interactive Data File (embedded within the Inline XBRL document).

 

*

Furnished herewith.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    NAVIENT CORPORATION
Date: July 27, 2021     By:  

/s/ JOE FISHER

      Joe Fisher
      Chief Financial Officer
EX-99.1

Exhibit 99.1

 

 

LOGO

NEWS RELEASE

For immediate release

Navient posts second quarter 2021 financial results

WILMINGTON, Del., July 27, 2021 — Navient (Nasdaq: NAVI), a leading provider of education loan management and business processing solutions, today posted its 2021 second quarter financial results. The complete financial results release is available on the company’s website at Navient.com/investors. The results will also be available on Form 8-K on the SEC’s website at www.sec.gov.

Navient will hold a conference call tomorrow, July 28, 2021, at 8 a.m. ET, hosted by Jack Remondi, president and CEO, and Joe Fisher, CFO.

To access the conference call, dial 855-838-4156 (USA and Canada) or 267-751-3600 (international) and use access code 5860986 starting at 7:45 a.m. ET. The live audio webcast will be available on Navient.com/investors. Supplemental financial information and presentation slides used during the call will be available on the company’s website no later than the call’s start time.

A replay may be accessed approximately two hours after the call through August 11, 2021, at 855-859-2056 (USA and Canada) or 404-537-3406 (international), with access code 5860986.

* * *

About Navient

Navient (Nasdaq: NAVI) 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. Navient helps clients and millions of Americans achieve success through technology-enabled financing, services, and support. Learn more at Navient.com.

Contact:

Media:    Paul Hartwick, 302-283-4026, paul.hartwick@navient.com

Investor: Nathan Rutledge, 703-984-6801, nathan.rutledge@navient.com

# # #

EX-99.2

Exhibit 99.2

 

LOGO

  

NAVIENT REPORTS SECOND-QUARTER     

2021 FINANCIAL RESULTS     

 

LOGO

WILMINGTON, Del., July 27, 2021 — Navient (Nasdaq: NAVI) today released its second-quarter 2021 financial results.

 

 

OVERALL

RESULTS

  

 

•   GAAP net income of $185 million ($1.05 diluted earnings per share) compared to net income of $125 million ($0.64 diluted earnings per share) in the year-ago quarter.

 

•   Adjusted diluted Core Earnings(1) per share of $0.98 compared to $0.91 in the year-ago quarter.

 

•   Core Earnings(1) of $165 million ($0.94 diluted Core Earnings per share) compared to $179 million ($0.92 diluted Core Earnings per share) in the year-ago quarter.

CEO COMMENTARY – “This quarter’s solid results reflect Navient’s ongoing response to the needs of the borrowers and clients we serve as the nation’s economy continues to reopen,” said Jack Remondi, CEO and president. “We continue to exceed our targets across our business. Our optimized balance sheet and high-quality education loan portfolio keep driving value and solidifying the strength of our franchise, and we continue to build our business by originating high-quality private education loans and delivering high-value services to our business processing segment clients.”

 

 

HIGHLIGHTS COMPARED TO THE YEAR-AGO QUARTER

 

 

FEDERAL
EDUCATION
LOANS SEGMENT

 

 

•   Net income decreased $33 million, or 23%, from $146 million to $113 million.

 

•   Net interest income decreased 18%.

 

•   FFELP Loan delinquency rate increased from 8.2% to 8.3%.

CONSUMER LENDING
SEGMENT

 

 

•   Net income increased $9 million, or 10%, from $87 million to $96 million.

 

•   Originated $1.3 billion of Private Education Refinance Loans.

 

•   Private Education Loan delinquency rate increased from 2.0% to 2.6%.

BUSINESS
PROCESSING
SEGMENT

 

 

•   EBITDA(1) increased $32 million, or 400%, from $8 million to $40 million, primarily due to revenue earned from contracts to support states.

 

•   Revenue increased $66 million, or 103%, to $130 million.

CAPITAL

 

 

•   Adjusted tangible equity ratio(1) increased to 6.3% from 3.6%. Pro forma adjusted tangible equity ratio(1) increased to 8.0% from 6.0%.

 

•   Repurchased $200 million of common shares. $300 million repurchase authority remains outstanding.

 

•   Paid $27 million in common stock dividends.

FUNDING & LIQUIDITY

 

 

•   Issued $2.1 billion in term ABS.

 

•   Retired $692 million of unsecured debt. On July 12, 2021, retired an additional $750 million of unsecured debt scheduled to mature in 2022.

EXPENSES

 

 

•   Adjusted Core Earnings expenses(1) increased $29 million to $244 million. This increase was primarily a result of a $35 million increase in expenses in the Business Processing segment.

 

(1)

Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures” on pages 18 – 28.


 

SEGMENT RESULTS — CORE EARNINGS

 

 

 

FEDERAL EDUCATION LOANS

 

In this segment, Navient owns FFELP Loans and performs servicing and asset recovery services for this loan portfolio, as well as for federal education loans owned by the U.S. Department of Education and other institutions.

FINANCIAL RESULTS AND KEY PERFORMANCE METRICS

 

(Dollars in millions)

     2Q21        1Q21        2Q20  

Net interest income

    $ 141         $ 144         $ 171    

Provision for loan losses

     —          —          3    

Other revenue

     61          66          94    
  

 

 

    

 

 

    

 

 

 

Total revenue

     202          210          262    

Expenses

     55          63          70    
  

 

 

    

 

 

    

 

 

 

Pre-tax income

     147          147          192    
  

 

 

    

 

 

    

 

 

 

Net income

    $ 113         $ 112         $ 146    
  

 

 

    

 

 

    

 

 

 

Segment net interest margin

     .97%         .97%         1.07% 

FFELP Loans:

        

FFELP Loan spread

     1.03%       1.03%       1.15% 

Provision for loan losses

    $ —         $ —         $ 3    

Charge-offs

    $ 5         $ 6         $ 12    

Charge-off rate

     .04%         .06%         .11%   

Greater than 30-days delinquency rate

     8.3%       8.3%       8.2% 

Greater than 90-days delinquency rate

     3.8%       3.5%       3.8% 

Forbearance rate

     13.9%       15.5%       26.6% 

Average FFELP Loans

    $ 56,649         $ 58,078         $ 62,141    

Ending FFELP Loans, net

    $ 55,550         $ 56,873         $ 60,921    

(Dollars in billions)

                    

Number of accounts serviced for ED (in millions)

     5.6          5.6          5.6    

Total federal loans serviced

    $ 283         $ 285         $ 282    

Contingent collections receivables inventory

    $ 11.3         $ 11.7         $ 13.5    

DISCUSSION OF RESULTS — 2Q21 vs. 2Q20

 

 

Core Earnings were $113 million compared to $146 million.

 

 

Net interest income decreased $30 million primarily due to a decrease in annual reset rate Floor Income that occurred on July 1, 2020.

 

 

Provision for loan losses decreased $3 million.

 

     

Charge-offs were $5 million compared with $12 million.

 

     

Delinquencies greater than 30 days were $3.8 billion compared with $3.5 billion.

 

     

Forbearances were $7.4 billion, down $8.1 billion from $15.5 billion. Forbearances have declined by approximately $9.8 billion from the COVID-19 peak in second-quarter 2020.

 

 

Other revenue decreased $33 million primarily due to a $26 million decrease in asset recovery revenue, which was primarily a result of the wind-down of the ED asset recovery contract as well as the impact of COVID-19 on certain collection activities.

 

 

Expenses were $15 million lower primarily as a result of the decrease in asset recovery revenue discussed above.

 

2


CONSUMER LENDING

In this segment, Navient owns, originates, acquires and services consumer loans.

FINANCIAL RESULTS AND KEY PERFORMANCE METRICS

 

(Dollars in millions)

   2Q21      1Q21      2Q20  

Net interest income

    $ 158         $ 169         $ 188    

Provision for loan losses

     (1)          (87)          41    

Other revenue

     5          90          1    
  

 

 

    

 

 

    

 

 

 

Total revenue

     164          346          148    

Expenses

     39          41          34    
  

 

 

    

 

 

    

 

 

 

Pre-tax income

     125          305          114    
  

 

 

    

 

 

    

 

 

 

Net income

    $ 96         $ 234         $ 87    
  

 

 

    

 

 

    

 

 

 

Segment net interest margin

     2.95%       2.99%       3.20% 

Private Education Loans (including Refinance Loans):

        

Private Education Loan spread

     3.18%       3.21%       3.39% 

Provision for loan losses

    $ (1)       $ (87)       $ 41    

Charge-offs

    $ 35         $ 35         $ 48    

Charge-off rate

     .71%         .68%         .97%   

Greater than 30-days delinquency rate

     2.6%       2.3%       2.0% 

Greater than 90-days delinquency rate

     1.0%       .9%         1.0% 

Forbearance rate

     3.0%       3.9%       8.4% 

Average Private Education Loans

    $ 20,730         $ 22,143         $ 23,008    

Ending Private Education Loans, net

    $ 19,725         $ 19,742         $ 21,462    

Private Education Refinance Loans:

        

Charge-offs

    $ 2         $ 3         $ 2    

Greater than 90-days delinquency rate

     —%         .1%         .1%   

Average Private Education Refinance Loans

    $ 8,271         $ 8,604         $ 7,710    

Ending Private Education Refinance Loans, net

    $ 8,393         $ 7,882         $ 7,455    

Private Education Refinance Loan originations

    $ 1,285         $ 1,671         $ 238    

DISCUSSION OF RESULTS — 2Q21 vs. 2Q20

 

 

Originated $1.3 billion of Private Education Refinance Loans compared to $238 million.

 

 

Core Earnings were $96 million compared to $87 million.

 

 

Net interest income decreased $30 million primarily due to the natural paydown of the non-refinance loan portfolio. Partially offsetting this decrease was the growth of the Private Education Refinance Loan portfolio.

 

 

Provision for loan losses decreased $42 million. The negative provision for the current quarter of $(1) million was comprised of $13 million in connection with loan originations less the reversal of both $5 million of allowance for loan losses in connection with the sale of approximately $30 million of Private Education Loans, as well as $9 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 March 31,2021, 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 in the future. 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.

 

     

Charge-offs were $35 million compared with $48 million.

 

     

Private Education Loan delinquencies greater than 90 days: $193 million, down $17 million from $210 million.

 

     

Private Education Loan delinquencies greater than 30 days: $505 million, up $79 million from $426 million.

 

     

Private Education Loan forbearances: $606 million, down $1.2 billion from $1.8 billion. Forbearances have declined by approximately $2.8 billion from the COVID-19 peak in second-quarter 2020.

 

 

Gains on sales of education loans (included in “Other revenue”) were $2 million in connection with the sale of approximately $30 million of Private Education Loans in second-quarter 2021. There were no such sales in the year-ago quarter.

 

 

Expenses were $5 million higher as a result of the significant increase in loan originations as well as an increase in legal expenses.

 

3


BUSINESS PROCESSING

In this segment, Navient performs business processing services for non-education related government and healthcare clients.    

FINANCIAL RESULTS AND KEY PERFORMANCE METRICS

 

(Dollars in millions)

       2Q21              1Q21              2Q20      

Revenue from government services

    $ 66         $ 63         $ 43    

Revenue from healthcare services

     64          62          21    
  

 

 

    

 

 

    

 

 

 

Total fee revenue

     130          125          64    

Expenses

     92          91          57    
  

 

 

    

 

 

    

 

 

 

Pre-tax income

     38          34          7    
  

 

 

    

 

 

    

 

 

 

Net income

    $ 29         $ 26         $ 6    
  

 

 

    

 

 

    

 

 

 

EBITDA(1)

    $ 40         $ 36         $ 8    

EBITDA margin(1)

     30%       29%       13% 

Contingent collections receivables inventory (in billions)

    $ 15.5         $ 17.9         $ 14.5    

 

  (1) 

Item is a non-GAAP financial measure. For an explanation and reconciliation of our non-GAAP financial measures, see pages 18 – 28.

DISCUSSION OF RESULTS — 2Q21 vs. 2Q20

 

 

Core Earnings were $29 million compared to $6 million.

 

 

Revenue increased $66 million, or 103%, primarily as a result of revenue earned from contracts to support states in providing unemployment benefits, contact tracing and vaccine administration services, as well as an increase in revenue from our traditional Business Processing segment services that we perform for our government and healthcare services clients.

 

 

EBITDA was $40 million, up $32 million, or 400%. The increase in EBITDA is primarily the result of the revenue increase discussed above. The EBITDA margin increased to 30% from 13%.

 

 

Definitions for capitalized terms in this release can be found in Navient’s Annual Report on Form 10-K for the year ended December 31, 2020 (filed with the SEC on February 26, 2021).

Navient will host an earnings conference call tomorrow, July 28, 2021, at 8 a.m. ET. Navient executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. To participate, join a live audio webcast at navient.com/investors or dial 855-838-4156 (USA and Canada) or dial 267-751-3600 (international) and use access code 5860986 starting at 7:45 a.m. ET.

Presentation slides for the conference call, as well as additional information about the company’s loan portfolios, operating segments and other details, may be accessed at www.navient.com/investors under the webcasts tab.

A replay of the conference call will be available approximately two hours after the call’s conclusion through August 11, 2021, at navient.com/investors or by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 5860986.

This news release contains “forward-looking statements,” within the meaning of the federal securities law, about our business and prospects and other information that is based on management’s current expectations as of the date of this release. Statements that are not historical facts, including statements about the company’s 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,” “goal,” or “target.” Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. For Navient, these factors include, among others, the severity, magnitude and duration of the COVID-19 pandemic, including changes in the macroeconomic environment, restrictions on business, individual or travel activities intended to slow the spread of the pandemic and volatility in market conditions resulting from the pandemic including interest rates, the value

 

4


of equities and other financial assets; the risks and uncertainties associated with increases in financing costs; the availability of financing or limits on our liquidity resulting from disruptions in the capital markets or other factors; unanticipated increases in costs associated with compliance with federal, state or local laws and regulations; changes in the demand for asset management and business processing solutions or other changes in marketplaces in which we compete (including increased competition); changes in accounting standards including but not limited to changes pertaining to loan loss reserves and estimates or other accounting standards that may impact our operations; adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company’s underwriting standards or exposure to third parties, including counterparties to hedging transactions; and changes in the terms of education loans and the educational credit marketplace (including changes resulting from the CARES Act or other new laws and the implementation of existing laws). The company could also be affected by, among other things: unanticipated repayment trends on loans including prepayments or deferrals in our securitization trusts that could accelerate or delay repayment of the bonds; reductions to our credit ratings, the credit ratings of asset-backed securitizations we sponsor or the credit ratings of the United States of America; failures of our operating systems or infrastructure or those of third-party vendors; risks related to cybersecurity including the potential disruption of our systems or those of our third-party vendors or customers, or potential disclosure of confidential customer information; damage to our reputation resulting from cyber-breaches, litigation, the politicization of student loan servicing or other actions or factors; failure to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business; failure to adequately integrate acquisitions or realize anticipated benefits from acquisitions including delays or errors in converting portfolio acquisitions to our servicing platform; changes in law and regulations whether new laws or regulations, or new interpretations of existing laws and regulations applicable to any of our businesses or activities or those of our vendors, suppliers or customers; changes in the general interest rate environment, including the availability of any relevant money-market index rate, including LIBOR, or the relationship between the relevant money-market index rate and the rate at which our assets are priced; our ability to successfully effectuate any acquisitions and other strategic initiatives; activities by shareholder activists, including a proxy contest or any unsolicited takeover proposal; changes in general economic conditions; and the other factors that are described in the “Risk Factors” section of Navient’s Annual Report on Form 10-K for the year ended December 31, 2020, and in our other reports filed with the Securities and Exchange Commission. The preparation of the company’s 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 release are qualified by these cautionary statements and are made only as of the date of this release. The company does not undertake any obligation to update or revise these forward-looking statements except as required by law.

* * *

About Navient

Navient (Nasdaq: NAVI) 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. Navient helps clients and millions of Americans achieve success through technology-enabled financing, services and support. Learn more at Navient.com.

Contact:

 

Media:   

Paul Hartwick, 302-283-4026,  paul.hartwick@navient.com

Investors:   

Nathan Rutledge, 703-984-6801, nathan.rutledge@navient.com

# # #

 

 

 

LOGO

 

 

5


 SELECTED HISTORICAL FINANCIAL INFORMATION AND RATIOS

 

 

    

 

QUARTERS ENDED

 

           

 

SIX MONTHS ENDED

 

 

(In millions, except per share data)

   June 30,
2021
     March 31,
2021
     June 30,
2020
            June 30,
2021
     June 30,
2020
 

GAAP Basis

                 

Net income

    $ 185         $ 370         $ 125            $ 555         $ 19    

Diluted earnings per common share

    $ 1.05         $ 2.00         $ .64            $ 3.08         $ .10    

Weighted average shares used to compute diluted earnings per share

     176          185          195             180          198    

Return on assets

     .91%         1.78%       .56%            1.35%       .04%   

Core Earnings Basis(1)

                 

Net income(1)

    $ 165         $ 305         $ 179            $ 469         $ 272    

Diluted earnings per common share(1)

    $ .94         $ 1.65         $ .92            $ 2.61         $ 1.37    

Adjusted diluted earnings per common share(1)

    $ .98         $ 1.71         $ .91            $ 2.71         $ 1.41    

Weighted average shares used to compute diluted earnings per share

     176          185          195             180          198    

Net interest margin, Federal Education Loan segment

     .97%         .97%         1.07%          .97%         .94%   

Net interest margin, Consumer Lending segment

     2.95%       2.99%       3.20%          2.97%       3.26% 

Return on assets

     .81%         1.46%       .81%            1.14%       .61%   

Education Loan Portfolios(2)

                 

Ending FFELP Loans, net

    $ 55,550         $ 56,873         $ 60,921            $ 55,550         $ 60,921    

Ending Private Education Loans, net

     19,725          19,742          21,462             19,725          21,462    
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Ending total education loans, net

    $ 75,275         $ 76,615         $ 82,383            $ 75,275         $ 82,383    
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Average FFELP Loans

    $ 56,649         $ 58,078         $ 62,141            $ 57,360         $ 63,018    

Average Private Education Loans

     20,730          22,143          23,008             21,433          23,060    
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Average total education loans

    $ 77,379         $ 80,221         $ 85,149            $ 78,793         $ 86,078    
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

 

(1) 

Item is a non-GAAP financial measure. For a description and reconciliation, see the section titled “Non-GAAP Financial Measures – Core Earnings” at pages 18 – 28.

 

(2) 

Balances are the same for GAAP and Core Earnings basis.

 

6


  RESULTS OF OPERATIONS

 

We present the results of operations below first in accordance with GAAP. Following our discussion of earnings results on a GAAP basis, we present our results on a segment basis. We have four reportable operating segments: Federal Education Loans, Consumer Lending, Business Processing and Other. These segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures we call Core Earnings (see “Non-GAAP Financial Measures – Core Earnings” for further discussion).

 

  GAAP INCOME STATEMENTS (UNAUDITED)

 

 

       June 30, 2021
vs.
March 31, 2021
     June 30, 2021
vs.
June 30, 2020
 
     QUARTERS ENDED      Increase
(Decrease)
     Increase
(Decrease)
 

(In millions, except per share data)

       June 30,    
2021
         March 31,    
2021
         June 30,    
2020
             $                      %                      $                      %          

Interest income:

                    

FFELP Loans

    $ 365        $ 373        $ 455        $ (8)        (2)%       $ (90)        (20)%  

Private Education Loans

     295         319         362         (24)          (8)          (67)          (19)    

Cash and investments

     1         —         2         1         100         (1)          (50)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     661         692         819         (31)          (4)          (158)          (19)    

Total interest expense

     339         329         519         10         3         (180)          (35)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     322         363         300         (41)          (11)          22         7   

Less: provisions for loan losses

     (1)          (87)          44         86         (99)          (45)          (102)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provisions for loan losses

     323         450         256         (127)          (28)          67         26   

Other income (loss):

                                            

Servicing revenue

     50         53         52         (3)          (6)          (2)          (4)    

Asset recovery and business processing revenue

     142         139         102         3         2         40         39   

Other income (loss)

     4         —         9         4         100         (5)          (56)    

Gains on sales of loans

     2         76         —         (74)          (97)          2         100   

Losses on debt repurchases

     (12)          —         —         (12)          100         (12)          100   

Gains (losses) on derivative and hedging activities, net

     (10)          36         (30)          (46)          (128)          20         (67)    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (loss)

     176         304         133         (128)          (42)          43         32   

Expenses:

                                                  

Operating expenses

     252         259         213         (7)          (3)          39         18   

Goodwill and acquired intangible asset impairment and amortization expense

     5         5         5         —         —         —         —   

Restructuring/other reorganization expenses

     2         6         1         (4)          (67)          1         100   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     259         270         219         (11)          (4)          40         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     240         484         170         (244)          (50)          70         41   

Income tax expense

     55         114         45         (59)          (52)          10         22   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

    $ 185        $ 370        $ 125        $ (185)        (50)%       $ 60         48% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

    $ 1.07        $ 2.02        $ .65        $ (.95)        (47)%       $ .42         65% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

    $ 1.05        $ 2.00        $ .64        $ (.95)        (48)%       $ .41         64% 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

    $ .16        $ .16        $ .16        $ —         —%        $ —         —%   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

7


     SIX MONTHS ENDED
June 30,
     Increase
(Decrease)
 

(In millions, except per share data)

           2021                      2020                      $                      %          

Interest income:

           

FFELP Loans

    $ 737        $ 1,025        $ (288)        (28)%  

Private Education Loans

     614         767         (153)          (20)    

Cash and investments

     1         15         (14)          (93)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     1,352         1,807         (455)          (25)    

Total interest expense

     667         1,234         (567)          (46)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     685         573         112         20   

Less: provisions for loan losses

     (88)          139         (227)          (163)    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provisions for loan losses

     773         434         339         78   

Other income (loss):

           

Servicing revenue

     102         109         (7)          (6)    

Asset recovery and business processing revenue

     281         212         69         33   

Other income (loss)

     5         17         (12)          (71)    

Gains on sales of loans

     78         —           78         100   

Losses on debt repurchases

     (12)          —           (12)          100   

Gains (losses) on derivative and hedging activities, net

     26           (253)          279         110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other income (loss)

     480         85         395         465   

Expenses:

           

Operating expenses

     510         463         47         10   

Goodwill and acquired intangible asset impairment and amortization expense

     10         11         (1)          (9)    

Restructuring/other reorganization expenses

     8         6         2         33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total expenses

     528         480         48         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense

     725         39         686         1,759   

Income tax expense

     170         20         150         750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

    $ 555        $ 19        $ 536         2,821% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

    $ 3.12        $ .10        $ 3.02         3,020% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

    $ 3.08        $ .10        $ 2.98         2,980% 
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

    $ .32        $ .32        $ —         —%   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8


 

  GAAP BALANCE SHEETS (UNAUDITED)

 

 

(In millions, except share and per share data)

        June 30,     
2021
         March 31,    
2021
          June 30,     
2020
 

Assets

        

FFELP Loans (net of allowance for losses of $277, $282 and $302, respectively)

    $ 55,550      $ 56,873      $ 60,921 

Private Education Loans (net of allowance for losses of $976, $992 and $1,098, respectively)

     19,725       19,742       21,462 

Investments

     313       303       316 

Cash and cash equivalents

     1,453       1,497       1,632 

Restricted cash and cash equivalents

     2,309       2,605       2,357 

Goodwill and acquired intangible assets, net

     726       731       746 

Other assets

     3,272       3,206       3,611 
  

 

 

    

 

 

    

 

 

 

Total assets

    $ 83,348      $ 84,957      $ 91,045 
  

 

 

    

 

 

    

 

 

 

Liabilities

        

Short-term borrowings

    $ 4,068      $ 5,684      $ 7,310 

Long-term borrowings

     75,814       75,674       80,260 

Other liabilities

     754       862       1,349 
  

 

 

    

 

 

    

 

 

 

Total liabilities

     80,636       82,220       88,919 
  

 

 

    

 

 

    

 

 

 

Commitments and contingencies

        

Equity

        

Common stock, par value $0.01 per share; 1.125 billion shares authorized: 458 million, 457 million and 453 million shares, respectively, issued

              

Additional paid-in capital

     3,268       3,255       3,215 

Accumulated other comprehensive income (loss), net of tax

     (209)        (226)        (317)  

Retained earnings

     3,828       3,670       2,999 
  

 

 

    

 

 

    

 

 

 

Total Navient Corporation stockholders’ equity before treasury stock

     6,891       6,703       5,901 

Less: Common stock held in treasury: 290 million, 278 million and 259 million shares, respectively

     (4,190)        (3,980)        (3,786)  
  

 

 

    

 

 

    

 

 

 

Total Navient Corporation stockholders’ equity

     2,701       2,723       2,115 

Noncontrolling interest

     11       14       11 
  

 

 

    

 

 

    

 

 

 

Total equity

     2,712       2,737       2,126 
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

    $ 83,348      $ 84,957      $ 91,045 
  

 

 

    

 

 

    

 

 

 

 

9


 

  COMPARISON OF 2021 RESULTS WITH 2020

 

Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020

For the three months ended June 30, 2021, net income was $185 million, or $1.05 diluted earnings per common share, compared with net income of $125 million, or $0.64 diluted earnings 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 $22 million, primarily as a result of a $22 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 $45 million from $44 million to $(1) million:

 

     

The provision for FFELP loan losses decreased $3 million to $0.

 

     

The provision for Private Education Loan losses decreased $42 million from $41 million to $(1) million.

The negative provision for the current quarter of $(1) million was comprised of $13 million in connection with loan originations less the reversal of both $5 million of allowance for loan losses in connection with the sale of approximately $30 million of Private Education Loans, as well as $9 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 March 31,2021, 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 in the future. 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 $40 million primarily as a result of a $53 million increase in 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. In addition, there was an increase in revenue from our traditional Business Processing segment services we perform for our government and healthcare services clients. These increases were partially offset by the wind-down of the ED asset recovery contract and the impact of COVID-19 on certain collection activities in the Federal Education Loan segment.

 

   

Losses on debt repurchases increased $12 million. We repurchased $692 million of debt at a $12 million loss in the current quarter. There were no debt repurchases in the year-ago quarter.

 

   

Net losses on derivative and hedging activities decreased $20 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 $(2) million in the second quarters of 2021 and 2020, respectively, operating expenses were $244 million and $215 million in the second quarters of 2021 and 2020, respectively. This $29 million increase was primarily a result of a $35 million increase in expenses in the Business Processing segment in connection with the increase in segment revenue. Regulatory-related expenses in the year-ago quarter are net of $10 million of insurance reimbursements for costs related to such matters.

 

   

During the three months ended June 30, 2021 and 2020, respectively, the Company incurred $2 million and $1 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 11.8 million shares of our common stock during the second quarter of 2021. There were no share repurchases in the year-ago quarter. As a result of repurchases, our average outstanding diluted shares decreased by 19 million common shares (or 10%) from the year-ago period.

 

10


Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020

For the six months ended June 30, 2021, net income was $555 million, or $3.08 diluted earnings per common share, compared with net income of $19 million, or $0.10 diluted earnings 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 $112 million, primarily as a result of a $76 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 $227 million from $139 million to $(88) million:

 

     

The provision for FFELP loan losses decreased $9 million to $0.

 

     

The provision for Private Education Loan losses decreased $218 million from $130 million to $(88) million.

The negative provision for the current period of $(88) million was comprised of $29 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 $10 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 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.

 

   

Asset recovery and business processing revenue increased $69 million primarily as a result of a $121 million increase in 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. In addition, there was an increase in revenue from our traditional Business Processing segment services we perform for our government and healthcare services clients. These increases were partially offset by the wind-down of the ED asset recovery contract and the impact of COVID-19 on certain collection activities in the Federal Education Loan segment.

 

   

Gains on sales of loans increased $78 million in connection with the sale of approximately $1.6 billion of Private Education Loans in 2021. There were no such sales in the year-ago period. The sale of Private Education Loans was comprised as follows:

 

     

Approximately $590 million of non-Refinance Loans, resulting in a $48 million gain on sale (of which $560 million were sold in the first quarter and $30 million were sold in the second quarter); 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.

 

   

Losses on debt repurchases increased $12 million. We repurchased $717 million of debt at a $12 million loss in the current period. There were no debt repurchases in the year-ago period.

 

   

Net losses on derivative and hedging activities decreased $279 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. In particular, the net loss in the six months ended June 30, 2020 was primarily related to the significant reduction in interest rates and resulting impact on the mark-to-market of the derivatives used to economically hedge FFELP Loan Floor Income that do not qualify for hedge accounting. For the six months ended June 30, 2021, interest rates have increased which has resulted in mark-to-market gains on these instruments.

 

   

Excluding net regulatory-related expenses of $16 million and $5 million in the six months ended June 30, 2021 and 2020, respectively, operating expenses were $494 million and $458 million in the six months ended June 30, 2021 and 2020, respectively. This $36 million increase was primarily a result of a $72 million increase in expenses

 

11


 

in the Business Processing segment in connection with the increase in segment revenue, with an offsetting $36 million decrease in expenses primarily in the Federal Education Loans segment as a result of the decrease of Federal Education Loan asset recovery revenue discussed above. Regulatory-related expenses in the year-ago period are net of $10 million of insurance reimbursements for costs related to such matters.

 

   

During the six months ended June 30, 2021 and 2020, respectively, the Company incurred $8 million and $6 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 19.9 million and 23.0 million shares of our common stock during the six months ended June 30, 2021 and 2020, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 18 million common shares (or 9%) from the year-ago period.

 

 

PRIVATE EDUCATION LOANS PORTFOLIO PERFORMANCE

 

Private Education Loan Delinquencies and Forbearance

 

    June 30,
2021
    March 31,
2021
    June 30,
2020
 

(Dollars in millions)

          Balance                     %                     Balance                     %                     Balance                     %          

Loans in-school/grace/deferment(1)

  $ 403      $ 457      $ 512   

Loans in forbearance(2)

    606        797        1,847   

Loans in repayment and percentage of each status:

           

Loans current

    19,187      97.4%       19,020      97.7%       19,775      98.0%  

Loans delinquent 31-60 days(3)

    208      1.1        179      .9          128      .6     

Loans delinquent 61-90 days(3)

    104      .5          100      .5          88      .4     

Loans delinquent greater than 90 days(3)

    193      1.0        181      .9          210      1.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

    19,692      100%       19,480      100%       20,201      100%  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

    20,701        20,734        22,560   

Private Education Loan allowance for losses

    (976)         (992)         (1,098)    
 

 

 

     

 

 

     

 

 

   

Private Education Loans, net

  $ 19,725      $ 19,742      $ 21,462   
 

 

 

     

 

 

   

 

 

   

 

 

   

Percentage of Private Education Loans in repayment

      95.1%         94.0%         89.5%  
   

 

 

     

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

      2.6%         2.3%         2.0%  
   

 

 

     

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

      3.0%         3.9%         8.4%  
   

 

 

     

 

 

     

 

 

 

Cosigner rate(4)

      39%         40%         43%  
   

 

 

     

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief, including COVID-19 relief programs, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

(4) 

Excluding Private Education Refinance Loans, which do not have a cosigner, the cosigner rate was 65% for second-quarter 2021, first-quarter 2021 and second-quarter 2020.

 

12


 

ALLOWANCE FOR LOAN LOSSES

 

 

     QUARTER ENDED  
     June 30, 2021  

(Dollars in millions)

   FFELP
        Loans        
     Private
        Education        
Loans
             Total          

Allowance at beginning of period

    $ 282        $ 992        $ 1,274   

Provision:

                

Reversal of allowance related to loan sales(1)

     —           (5)          (5)    

Remaining provision

     —           4         4   
  

 

 

    

 

 

    

 

 

 

Total provision

     —           (1)          (1)    

Charge-offs(2)

     (5)          (35)          (40)    

Decrease in expected future recoveries on charged-off loans(3)

     —           20         20   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period

     277         976         1,253   

Plus: expected future recoveries on charged off loans(3)

     —           434         434   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period excluding expected future recoveries on charged-off loans(4)

    $ 277        $ 1,410        $ 1,687   
  

 

 

    

 

 

    

 

 

 

Net charge-offs as a percentage of average loans in repayment (annualized)

     .04%        .71%     

Allowance coverage of charge-offs (annualized)(4)

     15.5         10.0      

Allowance as a percentage of the ending total loan balance(4)

     .5%        6.8%   

Allowance as a percentage of ending loans in repayment(4)

     .6%        7.2%   

Ending total loans

    $ 55,827        $ 20,701      

Average loans in repayment

    $ 46,348        $ 19,667      

Ending loans in repayment

    $ 45,854        $ 19,692      

 

     QUARTER ENDED  
     March 31, 2021  

(Dollars in millions)

   FFELP
        Loans        
     Private
        Education        
Loans
             Total          

Allowance at beginning of period

    $ 288        $ 1,089        $ 1,377   

Provision:

        

Reversal of allowance related to loan sales(1)

     —           (102)          (102)    

Remaining provision

     —           15         15   
  

 

 

    

 

 

    

 

 

 

Total provision

     —           (87)          (87)    

Charge-offs(2)

     (6)          (35)          (41)    

Decrease in expected future recoveries on charged-off loans(3)

     —           25         25   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period

     282         992         1,274   

Plus: expected future recoveries on charged off loans(3)

     —           454         454   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period excluding expected future recoveries on charged-off loans(4)

    $ 282        $ 1,446        $ 1,728   
  

 

 

    

 

 

    

 

 

 

Net charge-offs as a percentage of average loans in repayment (annualized)

     .06%        .68%     

Allowance coverage of charge-offs (annualized)(4)

     10.7         10.2      

Allowance as a percentage of the ending total loan balance(4)

     .5%        7.0%   

Allowance as a percentage of ending loans in repayment(4)

     .6%        7.4%   

Ending total loans

    $ 57,155        $ 20,734      

Average loans in repayment

    $ 47,044        $ 20,883      

Ending loans in repayment

    $ 45,922        $ 19,480      

 

13


     QUARTER ENDED  
     June 30, 2020  

(Dollars in millions)

   FFELP
        Loans        
     Private
        Education        
Loans
             Total          

Allowance at beginning of period

    $ 311        $ 1,083        $ 1,394   

Total provision

     3         41         44   

Charge-offs(2)

     (12)          (48)          (60)    

Decrease in expected future recoveries on charged-off loans(3)

     —           22         22   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period

     302         1,098         1,400   

Plus: expected future recoveries on charged off loans(3)

     —           549         549   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period excluding expected future recoveries on charged-off loans(4)

    $ 302        $ 1,647        $ 1,949   
  

 

 

    

 

 

    

 

 

 

Net charge-offs as a percentage of average loans in repayment (annualized)

     .11%        .97%     

Allowance coverage of charge-offs (annualized)(4)

     6.3         8.6      

Allowance as a percentage of the ending total loan balance(4)

     .5%        7.3%   

Allowance as a percentage of ending loans in repayment(4)

     .7%        8.2%   

Ending total loans

    $ 61,223        $ 22,560      

Average loans in repayment

    $ 44,144        $ 19,731      

Ending loans in repayment

    $ 42,640        $ 20,201      

 

     SIX MONTHS ENDED  
     June 30, 2021  

(Dollars in millions)

   FFELP
        Loans        
     Private
        Education        
Loans
             Total          

Allowance at beginning of period

    $ 288        $ 1,089        $ 1,377   

Provision:

        

Reversal of allowance related to loan sales(1)

     —           (107)          (107)    

Remaining provision

     —           19         19   
  

 

 

    

 

 

    

 

 

 

Total provision

     —           (88)          (88)    

Charge-offs(2)

     (11)          (70)          (81)    

Decrease in expected future recoveries on charged-off loans(3)

     —           45         45   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period

     277         976         1,253   

Plus: expected future recoveries on charged off loans(3)

     —           434         434   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period excluding expected future recoveries on charged-off loans(4)

    $ 277        $ 1,410        $ 1,687   
  

 

 

    

 

 

    

 

 

 

Net charge-offs as a percentage of average loans in repayment (annualized)

     .05%        .70%     

Allowance coverage of charge-offs (annualized)(4)

     12.5         10.0      

Allowance as a percentage of the ending total loan balance(4)

     .5%        6.8%   

Allowance as a percentage of ending loans in repayment(4)

     .6%        7.2%   

Ending total loans

    $ 55,827        $ 20,701      

Average loans in repayment

    $ 46,694        $ 20,272      

Ending loans in repayment

    $ 45,854        $ 19,692      

 

14


    

 

SIX MONTHS ENDED

 

 
     June 30, 2020  

(Dollars in millions)

   FFELP
        Loans        
     Private
        Education        
Loans
             Total          

Allowance as of December 31, 2019

    $ 64        $ 1,048        $ 1,112   

Transition adjustment made under CECL on January 1, 2020

     260         (3)          257   
  

 

 

    

 

 

    

 

 

 

Allowance as of January 1, 2020 after transition adjustment to CECL

     324         1,045         1,369   

Total provision

     9         130         139   

Charge-offs(2)

     (31)          (116)          (147)    

Decrease in expected future recoveries on charged-off loans(3)

     —           39         39   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period

     302         1,098         1,400   

Plus: expected future recoveries on charged off loans(3)

     —           549         549   
  

 

 

    

 

 

    

 

 

 

Allowance at end of period excluding expected future recoveries on charged-off loans(4)

    $ 302        $ 1,647        $ 1,949   
  

 

 

    

 

 

    

 

 

 

Net charge-offs as a percentage of average loans in repayment (annualized)

     .13%        1.13%   

Allowance coverage of charge-offs (annualized)(4)

     4.8         7.1      

Allowance as a percentage of the ending total loan balance(4)

     .5%        7.3%   

Allowance as a percentage of ending loans in repayment(4)

     .7%        8.2%   

Ending total loans

    $ 61,223        $ 22,560      

Average loans in repayment

    $ 48,302        $ 20,666      

Ending loans in repayment

    $ 42,640        $ 20,201      

 

(1)

In connection with the sale of approximately $30 million and $1.6 billion of Private Education Loans in second-quarter 2021 and first-quarter 2021, respectively.

 

(2)

Charge-offs are reported net of expected recoveries. For Private Education Loans, at the time of charge-off, the expected recovery amount is transferred from the education loan balance to the allowance for loan loss and is referred to as the “expected future recoveries on charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off.

 

(3)

At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this as the expected future recoveries on charged-off loans. If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the expected future recoveries on charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on charged-off loans:

 

    

 

QUARTERS ENDED

 

           

 

SIX MONTHS ENDED

 

 

(Dollars in millions)

       June 30,    
2021
         March 31,    
2021
         June 30,    
2020
                June 30,    
2021
         June 30,    
2020
 

Beginning of period expected recoveries

    $ 454        $ 479        $ 571           $ 479        $ 588   

Expected future recoveries of current period defaults

                             10         22   

Recoveries

     (22)        (25)        (28)           (47)        (57)  

Charge-offs

     (3)        (5)        (3)           (8)        (4)  
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

End of period expected recoveries

    $ 434        $ 454        $ 549           $ 434        $ 549   
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Change in balance during period

    $ (20)       $ (25)       $ (22)          $ (45)       $ (39)  

 

(4)

The allowance used for these metrics excludes the expected future recoveries on charged-off loans to better reflect the current expected credit losses remaining in the portfolio.

 

15


 

  LIQUIDITY AND CAPITAL RESOURCES

 

We expect to fund our ongoing liquidity needs, including the repayment of $1.6 billion of senior unsecured notes that mature in the short term (i.e., over the next 12 months, of which $750 million was retired in July 2021) and the remaining $6.5 billion of senior unsecured notes that mature in the long term (from 2023 to 2043 with 82% maturing by 2029), primarily through our current cash, investments and unencumbered FFELP Loan and Private Education Refinance Loan portfolios (see “Sources of Liquidity” below), the predictable operating cash flows provided by operating activities, the repayment of principal on unencumbered education loan assets, and the distribution of overcollateralization from our securitization trusts. We may also, depending on market conditions and availability, draw down on our secured FFELP Loan and Private Education Loan facilities, issue term ABS, enter into additional Private Education Loan ABS repurchase facilities, or issue additional unsecured debt.

We originate Private Education Loans. We also have purchased and may purchase, in future periods, Private Education Loan and FFELP Loan portfolios from third parties. Those originations and purchases are part of our ongoing liquidity needs. We purchased 11.8 million shares of common stock for $200 million in the second quarter of 2021. We had $300 million of remaining share repurchase authority as of June 30, 2021.

 

  SOURCES OF LIQUIDITY

 

Sources of Primary Liquidity

 

(Dollars in millions)

           June 30,        
2021
             March 31,        
2021
             June 30,        
2020
 

Ending balances:

        

Total unrestricted cash and liquid investments

    $ 1,453      $ 1,497      $ 1,632 

Unencumbered FFELP Loans

     309       259       266 

Unencumbered Private Education Refinance Loans

     574       936       481 
  

 

 

    

 

 

    

 

 

 

Total

    $ 2,336      $ 2,692      $ 2,379 
  

 

 

    

 

 

    

 

 

 

 

   

 

QUARTERS ENDED

 

         

 

SIX MONTHS ENDED

 

 

(Dollars in millions)

      June 30,    
2021
        March 31,    
2021
        June 30,    
2020
              June 30,    
2021
        June 30,    
2020
 

Average balances:

           

Total unrestricted cash and liquid investments

  $ 1,254   $ 1,198   $ 1,315     $ 1,226   $ 1,232

Unencumbered FFELP Loans

    320     276     225       298     281

Unencumbered Private Education Refinance Loans

    688     752     422       720     558
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ 2,262   $ 2,226   $ 1,962     $ 2,244   $ 2,071
 

 

 

   

 

 

   

 

 

     

 

 

   

 

 

 

 

16


Sources of Additional Liquidity

Liquidity may also be available under our secured credit facilities. Maximum borrowing capacity under the FFELP Loan and Private Education Loan asset-backed commercial paper (ABCP) facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered loans. The following tables detail the additional borrowing capacity of these facilities with maturity dates ranging from October 2021 to June 2023.

 

(Dollars in millions)

           June 30,        
2021
             March 31,        
2021
             June 30,        
2020
 

Ending balances:

        

FFELP Loan ABCP facilities

   $ 530    $ 826    $ 242

Private Education Loan ABCP facilities

     2,405      2,844      1,969
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,935    $ 3,670    $ 2,211
  

 

 

    

 

 

    

 

 

 

 

    

 

QUARTERS ENDED

 

           

 

SIX MONTHS ENDED

 

 

(Dollars in millions)

       June 30,    
2021
         March 31,    
2021
         June 30,    
2020
                June 30,    
2021
         June 30,    
2020
 

Average balances:

                 

FFELP Loan ABCP facilities

   $ 577    $ 656    $ 256       $ 616    $ 554

Private Education Loan ABCP facilities

     2,423      2,420      1,132         2,422      1,009
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Total

   $ 3,000    $ 3,076    $ 1,388       $ 3,038    $ 1,563
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

At June 30, 2021, we had a total of $5.6 billion of unencumbered tangible assets inclusive of those listed in the table above as sources of primary liquidity. Total unencumbered education loans comprised $2.6 billion of our unencumbered tangible assets of which $2.3 billion and $309 million related to Private Education Loans and FFELP Loans, respectively. In addition, as of June 30, 2021, we had $5.5 billion of encumbered net assets (i.e., overcollateralization) in our various financing facilities (consolidated variable interest entities). Our secured financing facilities include Private Education Loan ABS Repurchase Facilities, which had $0.8 billion outstanding as of June 30, 2021. These repurchase facilities are collateralized by Residual Interests in previously issued Private Education Loan ABS trusts. These are examples of how we can effectively finance previously encumbered assets to generate additional liquidity in addition to the unencumbered assets we traditionally have encumbered in the past. Additionally, these repurchase facilities had a cost of funds lower than that of a new unsecured debt issuance.

The following table reconciles encumbered and unencumbered assets and their net impact on total Tangible Equity.

 

(Dollars in billions)

           June 30,        
2021
             March 31,        
2021
             June 30,        
2020
 

Net assets of consolidated variable interest entities
(encumbered assets) — FFELP Loans

   $ 3.8     $ 3.8     $ 3.8 

Net assets of consolidated variable interest entities
(encumbered assets) — Private Education Loans

     1.7       2.0       2.2 

Tangible unencumbered assets(1)

     5.6       6.1       6.3 

Senior unsecured debt

     (8.1)        (8.8)        (9.5)  

Mark-to-market on unsecured hedged debt(2)

     (.5)        (.5)        (.8)  

Other liabilities, net

     (.5)        (.6)        (.6)  
  

 

 

    

 

 

    

 

 

 

Total Tangible Equity(1)

   $ 2.0     $ 2.0     $ 1.4 
  

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

(2) 

At June 30, 2021, March 31, 2021 and June 30, 2020, there were $459 million, $437 million and $758 million, respectively, of net gains (losses) on derivatives hedging this debt in unencumbered assets, which partially offset these gains (losses).

 

17


  NON-GAAP FINANCIAL MEASURES

In addition to financial results reported on a GAAP basis, Navient also provides certain performance measures which are non-GAAP financial measures. We present the following non-GAAP financial measures: (1) Core Earnings, (2) Adjusted Tangible Equity Ratio and (3) EBITDA for the Business Processing segment.

1. Core Earnings

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 refer to 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.

Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed below, that can create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the two items we remove to result in our Core Earnings presentations are:

 

  (1)

Mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness; and

 

  (2)

The accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.

 

18


The following tables show Core Earnings for each reportable segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP.

 

    QUARTER ENDED JUNE 30, 2021  

(Dollars in millions)

  Federal
Education
Loans
    Consumer
Lending
    Business
Processing
    Other     Total
Core
Earnings
    Adjustments        
  Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(1)
    Total
GAAP
 

Interest income:

                 

Education loans

  $ 351      $ 295      $ —      $ —      $ 646      $ 24      $ (10)     $ 14      $ 660   

Cash and investments

    —          —          —          1        1        —          —          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    351        295        —          1        647        24        (10)         14        661   

Total interest expense

    210        137        —          18        365        (2)         (24)         (26)         339   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    141        158        —          (17)         282        26        14        40        322   

Less: provisions for loan losses

    —          (1)         —          —          (1)         —          —          —          (1)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    141        159        —          (17)         283        26        14        40        323   

Other income (loss):

                 

Servicing revenue

    47        3        —          —          50        —          —          —          50   

Asset recovery and business processing revenue

    12        —          130        —          142        —          —          —          142   

Other income (loss)

    2          —          —          2        4        (26)         16        (10)         (6)    

Gains on sales of loans

    —          2        —          —          2        —          —          —          2   

Losses on debt repurchases

    —          —          —          (12)         (12)         —          —          —          (12)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    61        5        130        (10)         186        (26)         16        (10)         176   

Expenses:

                                                                                 

Direct operating expenses

    55        39        92        —          186        —          —          —          186   

Unallocated shared services expenses

    —          —          —          66        66        —          —          —          66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    55        39        92        66        252        —          —          —          252   

Goodwill and acquired intangible asset impairment and amortization

    —          —          —          —          —          —          5        5        5   

Restructuring/other reorganization expenses

    —          —          —          2        2        —          —          —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    55        39        92        68        254        —          5        5        259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    147        125        38        (95)         215        —          25        25        240   

Income tax expense (benefit)(2)

    34        29        9        (22)         50        —          5        5        55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 113      $ 96      $ 29      $ (73)     $ 165      $ —      $ 20      $ 20      $ 185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Core Earnings adjustments to GAAP:

 

    

 

    QUARTER ENDED JUNE 30, 2021    

 

 

(Dollars in millions)

   Net Impact of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 40       $ —       $ 40   

Total other income (loss)

     (10)          —           (10)    

Goodwill and acquired intangible asset impairment and amortization

     —           5         5   
  

 

 

    

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

   $ 30       $ (5)        25   
  

 

 

    

 

 

    

Income tax expense (benefit)

           5   
        

 

 

 

Net income (loss)

         $ 20   
        

 

 

 

 

(2) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

19


    QUARTER ENDED MARCH 31, 2021  

(Dollars in millions)

  Federal
Education
Loans
    Consumer
Lending
    Business
Processing
    Other     Total
Core
Earnings
    Adjustments        
  Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(1)
    Total
GAAP
 

Interest income:

                 

Education loans

  $ 359       $ 319       $ —       $ —       $ 678       $ 23       $ (9)      $ 14       $ 692    

Cash and investments

    —         —         —         —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    359         319         —         —         678         23         (9)        14         692    

Total interest expense

    215         150         —         18         383         (1)        (53)        (54)        329    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    144         169         —         (18)        295         24         44         68         363    

Less: provisions for loan losses

    —         (87)        —         —         (87)        —         —         —         (87)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    144         256         —         (18)        382         24         44         68         450    

Other income (loss):

                                                                                

Servicing revenue

    52         1         —         —         53         —         —         —         53    

Asset recovery and business processing revenue

    14         —         125         —         139         —         —         —         139    

Other income (loss)

    —         —         —         —         —         (11)        47         36         36    

Gains on sales of loans

    —         89         —         —         89         (13)        —         (13)        76    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    66         90         125         —         281         (24)        47         23         304    

Expenses:

                                                                                

Direct operating expenses

    63         41         91         —         195         —         —         —         195    

Unallocated shared services expenses

    —         —         —         64         64         —         —         —         64    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    63         41         91         64         259         —         —         —         259    

Goodwill and acquired intangible asset impairment and amortization

    —         —         —         —         —         —         5         5         5    

Restructuring/other reorganization
expenses

    —         —         —         6         6         —         —         —         6    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    63         41         91         70         265         —         5         5         270    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    147         305         34         (88)        398         —         86         86         484    

Income tax expense (benefit)(2)

    35         71         8         (21)        93         —         21         21         114    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 112       $ 234       $ 26       $ (67)      $ 305       $ —       $ 65       $ 65       $ 370    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Core Earnings adjustments to GAAP:

 

    

 

    QUARTER ENDED MARCH 31, 2021    

 

 

(Dollars in millions)

   Net Impact of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 68      $ —      $ 68  

Total other income (loss)

     23        —          23  

Goodwill and acquired intangible asset impairment and amortization

     —          5        5  
  

 

 

    

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

   $ 91      $ (5)       86  
  

 

 

    

 

 

    

Income tax expense (benefit)

           21  
        

 

 

 

Net income (loss)

         $ 65  
        

 

 

 

 

(2) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

20


    QUARTER ENDED JUNE 30, 2020  

(Dollars in millions)

  Federal
Education
Loans
    Consumer
Lending
    Business
Processing
    Other     Total
Core
Earnings
    Adjustments        
  Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(1)
    Total
GAAP
 

Interest income:

                 

Education loans

  $ 456     $ 362     $ —     $ —     $ 818     $ 13     $ (14)      $ (1)      $ 817  

Cash and investments

    1       —         —         1       2       —         —         —         2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    457       362       —         1       820       13       (14)        (1)        819  

Total interest expense

    286       174       —         31       491       25       3       28       519  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    171       188       —         (30)        329       (12)        (17)        (29)        300  

Less: provisions for loan losses

    3       41       —         —         44       —         —         —         44  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    168       147       —         (30)        285       (12)        (17)        (29)        256  

Other income (loss):

                                                                                

Servicing revenue

    51       1       —         —         52       —         —         —         52  

Asset recovery and business processing revenue

    38       —         64       —         102       —         —         —         102  

Other income (loss)

    5       —         —         4       9       12       (42)        (30)        (21)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    94       1       64       4       163       12       (42)        (30)        133  

Expenses:

                                                                                

Direct operating expenses

    70       34       57       —         161       —         —         —         161  

Unallocated shared services expenses

    —         —         —         52       52       —         —         —         52  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    70       34       57       52       213       —         —         —         213  

Goodwill and acquired intangible asset impairment and amortization

    —         —         —         —         —         —         5       5       5  

Restructuring/other reorganization expenses

    —         —         —         1       1       —         —         —         1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    70       34       57       53       214       —         5       5       219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    192       114       7       (79)        234       —         (64)        (64)        170  

Income tax expense (benefit)(2)

    46       27       1       (19)        55       —         (10)        (10)        45  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 146     $ 87     $ 6     $ (60)      $ 179     $ —     $ (54)      $ (54)      $ 125  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Core Earnings adjustments to GAAP:

 

     QUARTER ENDED JUNE 30, 2020  

(Dollars in millions)

   Net Impact of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ (29)     $ —      $ (29) 

Total other income (loss)

     (30)         —          (30)   

Goodwill and acquired intangible asset impairment and amortization

     —          5        5  
  

 

 

    

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

   $ (59)     $ (5)       (64)   
  

 

 

    

 

 

    

Income tax expense (benefit)

           (10)   
        

 

 

 

Net income (loss)

         $ (54) 
        

 

 

 

 

(2) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

21


    SIX MONTHS ENDED JUNE 30, 2021  

(Dollars in millions)

  Federal
Education
Loans
    Consumer
Lending
    Business
Processing
    Other     Total
Core
Earnings
    Adjustments        
  Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(1)
    Total
GAAP
 

Interest income:

                 

Education loans

  $ 709     $ 614     $ —     $ —     $ 1,323     $ 48     $ (20)      $ 28     $ 1,351  

Cash and investments

    —         —         —         1       1       —         —         —         1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    709       614       —         1       1,324       48       (20)        28       1,352  

Total interest expense

    424       287       —         36       747       (3)        (77)        (80)        667  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    285       327       —         (35)        577       51       57         108       685  

Less: provisions for loan losses

    —         (88)        —         —         (88)        —         —         —         (88)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    285       415       —         (35)        665       51       57         108       773  

Other income (loss):

                                                                                

Servicing revenue

    99       3       —         —         102       —         —         —         102  

Asset recovery and business processing revenue

    26       —         255       —         281       —         —         —         281  

Other income (loss)

    2       1       —         2       5       (38)        64         26       31  

Gains on sales of loans

    —         91       —         —         91       (13)        —         (13)        78  

Losses on debt repurchases

    —         —         —         (12)        (12)        —         —         —         (12)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    127       95       255       (10)        467       (51)        64         13       480  

Expenses:

                                                                                

Direct operating expenses

    117       79       183       —         379       —         —         —         379  

Unallocated shared services expenses

    —         —         —         131       131       —         —         —         131  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    117       79       183       131       510       —         —         —         510  

Goodwill and acquired intangible asset impairment and amortization

    —         —         —         —         —         —         10         10       10  

Restructuring/other reorganization expenses

    —         —         —         8       8       —         —         —         8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    117       79       183       139       518       —         10         10       528  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    295       431       72       (184)        614       —         111         111       725  

Income tax expense (benefit)(2)

    70       101       17       (43)        145       —         25         25       170  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 225     $ 330     $ 55     $ (141)      $ 469       $ —     $ 86       $ 86     $ 555  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Core Earnings adjustments to GAAP:

 

     SIX MONTHS ENDED JUNE 30, 2021  

(Dollars in millions)

   Net Impact of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 108      $ —      $ 108    

Total other income (loss)

     13        —          13    

Goodwill and acquired intangible asset impairment and amortization

     —          10        10    
  

 

 

    

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

   $ 121      $ (10)       111    
  

 

 

    

 

 

    

Income tax expense (benefit)

           25    
        

 

 

 

Net income (loss)

         $ 86  
        

 

 

 

 

(2) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

22


    SIX MONTHS ENDED JUNE 30, 2020  

(Dollars in millions)

  Federal
Education
Loans
    Consumer
Lending
    Business
Processing
    Other     Total
Core
Earnings
    Adjustments        
  Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(1)
    Total
GAAP
 

Interest income:

                 

Education loans

  $ 1,037     $ 767       $ —     $ —     $ 1,804     $ 16     $ (28)    $ (12)    $ 1,792  

Cash and investments

    7       3         —         5       15       —         —         —         15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,044       770         —         5       1,819       16       (28)        (12)        1,807  

Total interest expense

    742       385         —         66       1,193       32       9       41       1,234  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    302       385         —         (61)        626       (16)        (37)        (53)        573  

Less: provisions for loan losses

    9       130         —         —         139       —         —        —         139  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    293       255         —         (61)        487       (16)        (37)        (53)        434  

Other income (loss):

                                                                                

Servicing revenue

    106       3         —         —         109       —         —         —         109  

Asset recovery and business processing revenue

    90       —         122       —         212       —         —         —         212  

Other income (loss)

    9       —         —         8       17       16       (269)        (253)        (236)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    205       3         122       8       338       16       (269)        (253)        85  

Expenses:

                                                                                

Direct operating expenses

    153       72         111       —         336       —         —         —         336  

Unallocated shared services expenses

    —         —         —         127       127       —         —         —         127  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    153       72         111       127       463       —         —         —         463  

Goodwill and acquired intangible asset impairment and amortization

    —         —         —         —         —         —         11       11       11  

Restructuring/other reorganization expenses

    —         —         —         6       6       —         —         —         6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    153       72         111       133       469       —         11       11       480  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax expense (benefit)

    345       186         11       (186)        356       —         (317)        (317)        39  

Income tax expense (benefit)(2)

    82       43         3       (44)        84       —         (64)        (64)        20  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 263     $ 143       $ 8     $ (142)    $ 272     $ —     $ (253)    $ (253)    $ 19  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Core Earnings adjustments to GAAP:

 

    

 

    SIX MONTHS ENDED JUNE 30, 2020    

 

 

(Dollars in millions)

   Net Impact of
Derivative
Accounting
     Net Impact of
Goodwill and
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ (53)    $ —      $ (53)

Total other income (loss)

     (253)        —          (253)  

Goodwill and acquired intangible asset impairment and amortization

     —         11        11 
  

 

 

    

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

   $ (306)    $ (11)       (317)  
  

 

 

    

 

 

    

Income tax expense (benefit)

           (64)  
        

 

 

 

Net income (loss)

         $ (253)
        

 

 

 

 

(2) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

23


The following discussion summarizes the differences between Core Earnings and GAAP net income and details each specific adjustment required to reconcile our Core Earnings segment presentation to our GAAP earnings.

 

     QUARTERS ENDED             SIX MONTHS ENDED  

(Dollars in millions)

     June 30,  
2021
           March 31,  
2021
       June 30,  
2020
              June 30,  
2021
       June 30,  
2020
 

Core Earnings net income

    $ 165       $ 305       $ 179          $ 469       $ 272  

Core Earnings adjustments to GAAP:

                 

Net impact of derivative accounting

     30        91        (59)            121        (306)   

Net impact of goodwill and acquired intangible assets

     (5)         (5)         (5)            (10)         (11)   

Net tax effect

     (5)         (21)         10           (25)         64  
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Total Core Earnings adjustments to GAAP

     20        65        (54)            86        (253)  
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

GAAP net income

    $ 185       $ 370       $ 125          $ 555       $ 19  
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

 

(1)

Derivative Accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic mark-to-market gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These gains and losses occur in our Federal Education Loans, Consumer Lending and Other reportable segments. Under GAAP, for our derivatives that are held to maturity, the mark-to-market gain or loss over the life of the contract will equal $0 except for Floor Income Contracts, where the mark-to-market gain will equal the amount for which we sold the contract. In our Core Earnings presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

 

24


The table below quantifies the adjustments for derivative accounting between GAAP and Core Earnings net income.

 

     QUARTERS ENDED            SIX MONTHS ENDED  

(Dollars in millions)

   June 30,
2021
     March 31,
2021
     June 30,
2020
           June 30,
2021
     June 30,
2020
 

Core Earnings derivative adjustments:

                

Gains (losses) on derivative and hedging activities, net, included in other income

   $ (10)     $ 36      $ (30)       $ 26      $ (253) 

Plus: Gains (losses) on fair value hedging activity included in interest expense

     16        45        (6)           61        (15)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total gains (losses)

     6        81        (36)           87      $ (268) 

Plus: Settlements on derivative and hedging activities, net(1)

     26        11        (12)           38        (16)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Mark-to market gains (losses) on derivative and hedging activities, net(2)

     32        92        (48)           125        (284)   

Amortization of net premiums on Floor Income Contracts in net interest income for Core Earnings

     (10)         (9)         (14)           (20)         (28)   

Other derivative accounting adjustments(3)

     8        8        3          16        6  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total net impact of derivative accounting

   $ 30      $ 91      $ (59)       $ 121      $ (306) 
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

 

(1) 

Derivative accounting requires net settlement income/expense on derivatives that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our Core Earnings presentation, these settlements are reclassified to the income statement line item of the economically hedged item. For our Core Earnings net interest income, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to education loan interest income; and (b) reclassifying the net settlement amounts related to certain of our interest rate swaps to debt interest expense. The table below summarizes these net settlements on derivative and hedging activities and the associated reclassification on a Core Earnings basis.

 

    

 

QUARTERS ENDED

 

          

 

SIX MONTHS ENDED

 

 

(Dollars in millions)

   June 30,
2021
     March 31,
2021
     June 30,
2020
           June 30,
2021
     June 30,
2020
 

Reclassification of settlements on derivative and hedging activities:

                

Net settlement expense on Floor Income Contracts reclassified to net interest income

   $ (24)     $ (23)     $ (13)       $ (48)     $ (16) 

Net settlement income (expense) on interest rate swaps reclassified to net interest income

     (2)         (1)         25            (3)         32  

Net realized gains (losses) on terminated derivative contracts reclassified to other income

     —          13        —            13          —    
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total reclassifications of settlements on derivative and hedging activities

   $ (26)     $ (11)     $ 12        $ (38)     $ 16  
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

(2)

“Mark-to-market gains (losses) on derivative and hedging activities, net” is comprised of the following:

 

    

 

QUARTERS ENDED

 

          

 

SIX MONTHS ENDED

 

 

(Dollars in millions)

   June 30,
2021
     March 31,
2021
     June 30,
2020
           June 30,
2021
     June 30,
2020
 

Floor Income Contracts

   $ 21        $ 37      $ (10)       $ 58        $ (190) 

Basis swaps

     (1)         4        (21)           4          12    

Foreign currency hedges

     15        30        6          45        16    

Other

     (3)         21        (23)           18        (122)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Total mark-to-market gains (losses) on derivative and hedging activities, net

   $ 32      $ 92      $ (48)       $ 125      $ (284) 
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

(3) 

Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustments are reversed for Core Earnings and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under Core Earnings and, as a result, such gains or losses are amortized into Core Earnings over the life of the hedged item.

 

25


Cumulative Impact of Derivative Accounting under GAAP compared to Core Earnings

As of June 30, 2021, derivative accounting has decreased GAAP equity by approximately $459 million as a result of cumulative net mark-to-market losses (after tax) recognized under GAAP, but not under Core Earnings. The following table rolls forward the cumulative impact to GAAP equity due to these after-tax mark-to-market net gains and losses related to derivative accounting.

 

     QUARTERS ENDED            SIX MONTHS ENDED  

(Dollars in millions)

     June 30,  
2021
       March 31,  
2021
       June 30,
2020
             June 30,  
2021
       June 30,  
2020
 

Beginning impact of derivative accounting on GAAP equity

   $ (499)     $ (616)     $ (629)       $ (616)     $ (235) 

Net impact of net mark-to-market gains (losses) under derivative accounting(1)

     40          117        (63)           157          (457)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Ending impact of derivative accounting on GAAP equity

   $ (459)     $ (499)       $ (692)         $ (459)     $ (692)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

(1) 

Net impact of net mark-to-market gains (losses) under derivative accounting is composed of the following:

 

     QUARTERS ENDED            SIX MONTHS ENDED  

(Dollars in millions)

     June 30,  
2021
       March 31,  
2021
       June 30,  
2020
             June 30,  
2021
       June 30,  
2020
 

Total pre-tax net impact of derivative accounting recognized in net income(a)

   $ 30      $ 91      $ (59)       $ 121      $ (306) 

Tax impact of derivative accounting adjustment recognized in net income

     (7)         (22)         13          (29)         75  

Change in mark-to-market gains (losses) on derivatives, net of tax recognized in other comprehensive income

     17        48        (17)           65        (226)   
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net impact of net mark-to-market gains (losses) under derivative accounting

   $ 40      $ 117      $ (63)       $ 157      $ (457) 
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

 

(a)  See “Core Earnings derivative adjustments” table above.

   

  

 

 

26


Hedging Embedded Floor Income

Net Floor premiums received on Floor Income Contracts that have not been amortized into Core Earnings as of the respective period-ends are presented in the table below. These net premiums will be recognized in Core Earnings in future periods. As of June 30, 2021, the remaining term of the floor income contracts was approximately 2 years. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

In addition to using Floor Income Contracts, we also use pay-fixed interest rate swaps to hedge the embedded Floor Income within FFELP Loans. These interest rate swaps qualify as GAAP hedges and are accounted for as cash flow hedges of variable rate debt. For GAAP, gains and losses on these hedges are recorded in accumulated other comprehensive income. Hedged Floor Income from these cash flow hedges that has not been recognized into Core Earnings and GAAP as of the respective period-ends is presented in the table below. This hedged Floor Income will be recognized in Core Earnings and GAAP in future periods and is presented net of tax. As of June 30, 2021, the remaining term of these pay-fixed interest rate swaps was approximately 6 years. Historically, we have used pay-fixed interest rate swaps on a periodic basis to hedge embedded Floor Income and depending upon market conditions and pricing, we may enter into swaps in the future. The balance of unrecognized hedged Floor Income will increase as we enter into new swaps and decline as revenue is recognized.

 

(Dollars in millions)

     June 30,  
2021
       March 31,  
2021
       June 30,  
2020
 

Unamortized net Floor premiums, net of tax

    $ 24       $ 31       $ 56  

Unrecognized hedged Floor Income related to pay fixed interest rate swaps, net of tax

     312        333        398  
  

 

 

    

 

 

    

 

 

 

Total hedged Floor Income, net of tax(1)(2)

    $ 336       $ 364       $ 454  
  

 

 

    

 

 

    

 

 

 

 

(1)  $439 million, $476 million and $593 million on a pre-tax basis as of June 30, 2021, March 31, 2021 and June 30, 2020, respectively.

 

(2)  Of the $336 million as of June 30, 2021, approximately $86 million, $118 million and $89 million will be recognized as part of Core Earnings net income in 2021, 2022 and 2023, respectively.

   

   

 

(2)

Goodwill and Acquired Intangible Assets: Our Core Earnings exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

 

     QUARTERS ENDED            SIX MONTHS ENDED  

(Dollars in millions)

     June 30,  
2021
       March 31,  
2021
       June 30,  
2020
             June 30,  
2021
       June 30,  
2020
 

Core Earnings goodwill and acquired intangible asset adjustments

    $ (5)         $ (5)         $ (5)           $ (10)         $ (11)    

Adjusted Core Earnings

Adjusted Core Earnings net income and adjusted Core Earnings operating expenses exclude restructuring and regulatory-related expenses. Management excludes these expenses as it is one of the measures we review internally when making management decisions regarding our performance and how we allocate resources, as this presentation is a useful basis for management and investors to further analyze Core Earnings. We also refer to this information in our presentations with credit rating agencies, lenders and investors.

The following table summarizes these excluded expenses:

 

     QUARTERS ENDED            SIX MONTHS ENDED  

(Dollars in millions)

     June 30,  
2021
       March 31,  
2021
       June 30,  
2020
             June 30,  
2021
       June 30,  
2020
 

Restructuring/other reorganization expenses

   $ 2       $ 6       $ 1