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NAVI Navient

Filed: 27 Jul 21, 8:00pm
0001593538 navi:AdjustmentsForCoreToGaapAccountingMember navi:NetImpactOfDerivativeAccountingMember navi:EliminationsAndReconcilingItemsMember 2020-04-01 2020-06-30

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

 

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

For the quarterly period ended June 30, 2021

or

 

 

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

For the transition period from                  to                 

Commission File Number: 001-36228

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

 

Delaware

46-4054283

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

123 Justison Street, Wilmington, Delaware

19801

(Address of principal executive offices)

(Zip Code)

(302) 283-8000

(Registrant’s telephone number, including area code)

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

 

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

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

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

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

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

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common stock, par value $.01 per share

 

NAVI

 

The NASDAQ Global Select Market

6% Senior Notes due December 15, 2043

 

JSM

 

The NASDAQ Global Select Market

 

As of June 30, 2021, there were 167,840,188 shares of common stock outstanding.

 

 

 

 


 

TABLE OF CONTENTS

Organization of Our Form 10-Q

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

 

 

Page

Number

 

 

 

 

 

 

 

Forward-Looking and Cautionary Statements

1

Use of Non-GAAP Financial Measures

2

 

 

Business

3

Overview and Fundamentals of Our Business

3

How We Organize Our Business

6

 

 

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

7

Selected Historical Financial Information and Ratios

7

The Quarter in Review

8

Navient’s Response to COVID-19

9

Results of Operations

11

Segment Results

14

Financial Condition

21

Liquidity and Capital Resources

27

Critical Accounting Policies and Estimates

30

Non-GAAP Financial Measures

30

 

 

Legal Proceedings

40

Risk Factors

40

Quantitative and Qualitative Disclosures about Market Risk

41

 

 

Unregistered Sales of Equity Securities and Use of Proceeds

45

Controls and Procedures

45

Exhibits

46

Financial Statements

47

Signatures

87

Appendix A – Form 10-Q Cross-Reference Index

88

 

 

 

 

 

 

 


 

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

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

 

 

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

 

the economic conditions and the creditworthiness of third parties;

 

increased defaults on education loans held by us;

 

the cost and availability of funding in the capital markets;

 

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

 

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

 

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

 

a reduction in our credit ratings;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

shareholder activism;

 

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

 

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

 

reputational risk and social factors;

 

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

 

acquisitions or strategic investments that we pursue.

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

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

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

 

1


 

USE OF NON-GAAP FINANCIAL MEASURES

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

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

 

 

 

2


 

Overview and Fundamentals of Our Business

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

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

 

 

Federal Education Loans

We own a portfolio of $55.6 billion of federally guaranteed Federal Family Education Loan Program (FFELP) Loans. We service and provide asset recovery services on this portfolio and for third parties, deploying data-driven approaches to support the success of our customers.

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

 

Consumer Lending

We own, service and originate Private Education Loans that enable students to pursue higher education and economic opportunities. Our $19.7 billion private loan portfolio demonstrates high customer success rates. Our loan origination business assists borrowers in refinancing their education loan debt and supports students and families in financing their higher education. In second-quarter 2021, we originated $1.3 billion in Private Education Loans.

 

Business Processing

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

 

Superior Operational Performance with a Strong Customer Service and Compliance Commitment

 

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

 

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

 

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

 

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

 

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

 


3


 

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

 

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

 

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

 

o

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

 

o

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

 

o

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

 

o

Private loan modification program: In 2009, we pioneered the creation of a loan modification program to help Private Education Loan borrowers needing additional assistance. As of June 30, 2021, $802 million of our Private Education Loans were enrolled in this interest rate reduction program, helping customers through more affordable monthly payments while making progress in repaying their principal loan balance.

 

o

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

 

o

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

 

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


4


 

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

Federal loans serviced by Navient achieved a Cohort Default Rate (CDR) 26% better than our peers as calculated from the most recent CDR released by ED in September 2020. During the COVID-19 pandemic, we quickly and accurately delivered assistance to student loan borrowers. We are consistently a top performer in our asset recovery business and deliver superior service to our public and private sector clients. We regularly leverage data-driven insights, scale, technology and customer service to deliver value to our clients.

 

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

 

o

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

 

o

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

 

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

 

Strong Financial Performance Resulting in a Strong Capital Return

 

Our second-quarter 2021 results continue to build upon our previous year’s results demonstrating the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments. Adjusted Core Earnings(1) per share grew 92% and 8% on a year-to-date and quarterly basis, respectively, compared to the year-ago periods.  

 

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

 

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

 

(Dollars and shares in millions)

 

Q2-21

 

 

Q2-20

 

Shares repurchased

 

 

11.8

 

 

 

 

Reduction in shares outstanding

 

 

7

%

 

 

 

Total repurchases in dollars

 

$

200

 

 

$

 

Dividends paid

 

$

27

 

 

$

31

 

At June 30, 2021, $300 million remained in share repurchase authorization.

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

(Dollars in millions)

 

Q1-20

 

 

Q2-20

 

 

Q3-20

 

 

Q4-20

 

 

YTD-20

 

 

Q1-21

 

 

Q2-21

 

Capital Returned(2)

 

$

366

 

 

$

31

 

 

$

96

 

 

$

30

 

 

$

523

 

 

$

129

 

 

$

227

 

Adjusted Tangible Equity Ratio(1)

 

 

3.2

%

 

 

3.6

%

 

 

4.1

%

 

 

5.0

%

 

 

5.0

%

 

 

6.2

%

 

 

6.3

%

Pro forma Adjusted Tangible Equity

   Ratio(1)

 

 

5.3

%

 

 

6.0

%

 

 

6.4

%

 

 

7.1

%

 

 

7.1

%

 

 

8.1

%

 

 

8.0

%

(1)

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

(2)

Capital Returned is defined as share repurchases and dividends paid.

 

5


 

How We Organize Our Business

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

 

 

Federal Education Loans Segment

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

Consumer Lending Segment

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

Business Processing Segment

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

 

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

 

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

Other Segment

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

 

 

 

 

6


 

 

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

 

Selected Historical Financial Information and Ratios

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(In millions, except per share data)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

GAAP Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

185

 

 

$

125

 

 

$

555

 

 

$

19

 

Diluted earnings (loss) per common share

 

$

1.05

 

 

$

.64

 

 

$

3.08

 

 

$

.10

 

Weighted average shares used to compute diluted earnings per share

 

 

176

 

 

 

195

 

 

 

180

 

 

 

198

 

Return on assets

 

 

.91

%

 

 

.56

%

 

 

1.35

%

 

 

.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Core Earnings Basis(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income(1)

 

$

165

 

 

$

179

 

 

$

469

 

 

$

272

 

Diluted earnings per common share(1)

 

$

.94

 

 

$

.92

 

 

$

2.61

 

 

$

1.37

 

Adjusted diluted earnings per common share(1)

 

$

.98

 

 

$

.91

 

 

$

2.71

 

 

$

1.41

 

Weighted average shares used to compute diluted earnings per share

 

 

176

 

 

 

195

 

 

 

180

 

 

 

198

 

Net interest margin, Federal Education Loans segment

 

 

.97

%

 

 

1.07

%

 

 

.97

%

 

 

.94

%

Net interest margin, Consumer Lending segment

 

 

2.95

%

 

 

3.20

%

 

 

2.97

%

 

 

3.26

%

Return on assets

 

 

.81

%

 

 

.81

%

 

 

1.14

%

 

 

.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Education Loan Portfolios(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending FFELP Loans, net

 

$

55,550

 

 

$

60,921

 

 

$

55,550

 

 

$

60,921

 

Ending Private Education Loans, net

 

 

19,725

 

 

 

21,462

 

 

 

19,725

 

 

 

21,462

 

Ending total education loans, net

 

$

75,275

 

 

$

82,383

 

 

$

75,275

 

 

$

82,383

 

Average FFELP Loans

 

$

56,649

 

 

$

62,141

 

 

$

57,360

 

 

$

63,018

 

Average Private Education Loans

 

 

20,730

 

 

 

23,008

 

 

 

21,433

 

 

 

23,060

 

Average total education loans

 

$

77,379

 

 

$

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.”

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


7


The Quarter in Review

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

Second-quarter 2021 GAAP net income was $185 million ($1.05 diluted earnings per share), compared with $125 million ($0.64 diluted Core Earnings per share) for the year-ago quarter. See “Results of Operations – Comparison of Second-Quarter 2021 Results with Second-Quarter 2020” for a discussion of the primary contributors to the change in GAAP earnings between periods.

Second-quarter 2021 Core Earnings net income was $165 million ($0.94 diluted Core Earnings per share), compared with $179 million ($0.92 diluted Core Earnings per share) for the year-ago quarter. Second-quarter 2021 and 2020 adjusted diluted Core Earnings(1) per share were $0.98 and $0.91, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.

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

 

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, funding and liquidity:

 

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.

 

Issued $2.1 billion in term asset-backed securities (ABS).

 

Retired $692 million of unsecured debt. On July 12, 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.”

 

8


 

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

Our Team Members

 

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

Customers and Education Loan Performance

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. In compliance with the CARES Act and through subsequent legislative and executive actions, we have placed all loans owned by ED into forbearance and suspend payments and interest accrual until September 30, 2021. While the CARES Act applies only to loans owned by ED, our FFELP and Private Education Loan portfolios have also been impacted by the pandemic and we have offered COVID-19 relief options such as the use of forbearance to those borrowers. Private Education Loans in forbearance decreased to $606 million or 3.0% of the portfolio at June 30, 2021, after peaking at $3.4 billion or 14.7% during the second quarter of 2020. This compared to $604 million or 2.7% of the portfolio at December 31, 2019, prior to the impact of COVID-19. Despite the COVID-19 crisis, we have seen most borrowers continue to make payments according to their payment plans. And while forbearance rates are slightly higher today than they were pre-pandemic, the balance of loans delinquent has declined – our Private Education Loan delinquency rate declined from 4.6% at December 31, 2019 to 2.6% as of June 30, 2021. Our Private Education Loan charge-offs declined 49% to $184 million for the full year of 2020 compared with $364 million in full year 2019. This decline was due to the strength of the economy heading into March 2020 as well as a result of the COVID-19 forbearance granted to borrowers. We see this continued decline with charge-offs of $35 million in second-quarter 2021 compared to $48 million in the year-ago quarter. We do expect defaults to begin to increase in 2022 given the default timing impact of the use of forbearance which our allowance for loan losses captures. Our total reserves were $1.69 billion (excluding the expected future recoveries on charged-off loans) at June 30, 2021, which represent reserves equal to 6.8% of our Private Education Loans and 0.5% of our FFELP Loan portfolio. While we are paying close attention to the needs of our customers, it is too early to know the full impact of this crisis or the path and timing of the recovery.

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

9


 

Clients and Business Processing Segment Performance

In our Business Processing Segment (BPS), EBITDA(1) increased to $40 million from $8 million in the year-ago quarter. This increase is a result of being able to transition hundreds of our experienced BPS colleagues and adapt our technology enabled solutions to support state clients working to help residents access unemployment benefits implemented in the CARES Act, as well as to perform contact tracing and vaccine administration services. These new services have generated revenue in 2020 and the first six months of 2021 that more than offset the negative revenue impact BPS is experiencing as a result of COVID-19 which includes lower transaction-related placements in both government services and health care revenue cycle management. For the remainder of 2021 we expect the revenue from the unemployment contracts related to the CARES Act and contact tracing and vaccine administration contracts to decline as the economy recovers and the need decreases. We also expect revenue from the core parts of the business to continue to improve into 2022 to pre-COVID-19 levels if the economy continues to improve.

Liquidity, Financings and Capital

The impact of the COVID-19 crisis on the capital markets was significant during the early part of the crisis, decreasing the number of transactions brought to market and increasing the pricing of those that were successfully marketed. However, in the second half of 2020 the capital markets began to improve with ready access to the markets, albeit at a higher cost than pre-COVID-19 levels. In the first half of 2021, we issued $500 million of unsecured debt and $5.5 billion of ABS below pre-COVID-19 cost of funds levels. Throughout the crisis we have maintained a strong liquidity position. As of June 30, 2021, we had $2.3 billion of primary sources of liquidity, $1.5 billion of which was cash. We also had, as of June 30, 2021, additional capacity in our funding facilities of $2.4 billion for Private Education Loans and $530 million for FFELP Loans. In addition, cash flow from our loan portfolio and services contracts remains strong as our very seasoned loan portfolio experiences lower levels of stress.

We ended the quarter with an Adjusted Tangible Equity Ratio(1) of 6.3% compared to 5.0% as of December 31,2020. In 2020, our GAAP equity was reduced due to the implementation of CECL on January 1, 2020 as well as a result of the net mark-to-market losses related to derivative accounting as a result of the significant decrease in interest rates.  These mark-to-market losses recognized under GAAP cumulatively totaled $459 million (after tax) as of June 30, 2021. This decrease will reverse over time as these derivatives mature. The resulting Pro forma Adjusted Tangible Equity Ratio(1), which excludes these cumulative mark-to-market losses, was 8.0% at June 30, 2021. We expect our capital levels to continue to rebuild over the course of 2021.

Other Matters

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

 

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

 

 

 

 

 

 

 

 

 

 

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


10


 

Results of Operations

GAAP Income Statements (Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Increase

(Decrease)

 

 

Six Months Ended June 30,

 

 

Increase

(Decrease)

 

(In millions, except per share data)

 

2021

 

 

2020

 

 

$

 

 

%

 

 

2021

 

 

2020

 

 

$

 

 

%

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

365

 

 

$

455

 

 

$

(90

)

 

 

(20

)%

 

$

737

 

 

$

1,025

 

 

$

(288

)

 

 

(28

)%

Private Education Loans

 

 

295

 

 

 

362

 

 

 

(67

)

 

 

(19

)

 

 

614

 

 

 

767

 

 

 

(153

)

 

 

(20

)

Cash and investments

 

 

1

 

 

 

2

 

 

 

(1

)

 

 

(50

)

 

 

1

 

 

 

15

 

 

 

(14

)

 

 

(93

)

Total interest income

 

 

661

 

 

 

819

 

 

 

(158

)

 

 

(19

)

 

 

1,352

 

 

 

1,807

 

 

 

(455

)

 

 

(25

)

Total interest expense

 

 

339

 

 

 

519

 

 

 

(180

)

 

 

(35

)

 

 

667

 

 

 

1,234

 

 

 

(567

)

 

 

(46

)

Net interest income

 

 

322

 

 

 

300

 

 

 

22

 

 

 

7

 

 

 

685

 

 

 

573

 

 

 

112

 

 

 

20

 

Less: provisions for loan losses

 

 

(1

)

 

 

44

 

 

 

(45

)

 

 

(102

)

 

 

(88

)

 

 

139

 

 

 

(227

)

 

 

(163

)

Net interest income after provisions for loan losses

 

 

323

 

 

 

256

 

 

 

67

 

 

 

26

 

 

 

773

 

 

 

434

 

 

 

339

 

 

 

78

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing revenue

 

 

50

 

 

 

52

 

 

 

(2

)

 

 

(4

)

 

 

102

 

 

 

109

 

 

 

(7

)

 

 

(6

)

Asset recovery and business processing revenue

 

 

142

 

 

 

102

 

 

 

40

 

 

 

39

 

 

 

281

 

 

 

212

 

 

 

69

 

 

 

33

 

Other income (loss)

 

 

4

 

 

 

9

 

 

 

(5

)

 

 

(56

)

 

 

5

 

 

 

17

 

 

 

(12

)

 

 

(71

)

Gains on sales of loans

 

 

2

 

 

 

 

 

 

2

 

 

 

100

 

 

 

78

 

 

 

 

 

 

78

 

 

 

100

 

Losses on debt repurchases

 

 

(12

)

 

 

 

 

 

(12

)

 

 

100

 

 

 

(12

)

 

 

 

 

 

(12

)

 

 

100

 

Gains (losses) on derivative and hedging activities, net

 

 

(10

)

 

 

(30

)

 

 

20

 

 

 

(67

)

 

 

26

 

 

 

(253

)

 

 

279

 

 

 

110

 

Total other income (loss)

 

 

176

 

 

 

133

 

 

 

43

 

 

 

32

 

 

 

480

 

 

 

85

 

 

 

395

 

 

 

465

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

252

 

 

 

213

 

 

 

39

 

 

 

18

 

 

 

510

 

 

 

463

 

 

 

47

 

 

 

10

 

Goodwill and acquired intangible assets impairment and

   amortization expense

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

 

10

 

 

 

11

 

 

 

(1

)

 

 

(9

)

Restructuring/other reorganization expenses

 

 

2

 

 

 

1

 

 

 

1

 

 

 

100

 

 

 

8

 

 

 

6

 

 

 

2

 

 

 

33

 

Total expenses

 

 

259

 

 

 

219

 

 

 

40

 

 

 

18

 

 

 

528

 

 

 

480

 

 

 

48

 

 

 

10

 

Income before income tax expense

 

 

240

 

 

 

170

 

 

 

70

 

 

 

41

 

 

 

725

 

 

 

39

 

 

 

686

 

 

 

1,759

 

Income tax expense

 

 

55

 

 

 

45

 

 

 

10

 

 

 

22

 

 

 

170

 

 

 

20

 

 

 

150

 

 

 

750

 

Net income

 

$

185

 

 

$

125

 

 

$

60

 

 

 

48

%

 

$

555

 

 

$

19

 

 

$

536

 

 

 

2,821

%

Basic earnings per common share

 

$

1.07

 

 

$

.65

 

 

$

.42

 

 

 

65

%

 

$

3.12

 

 

$

.10

 

 

$

3.02

 

 

 

3,020

%

Diluted earnings per common share

 

$

1.05

 

 

$

.64

 

 

$

.41

 

 

 

64

%

 

$

3.08

 

 

$

.10

 

 

$

2.98

 

 

 

2,980

%

Dividends per common share

 

$

.16

 

 

$

.16

 

 

$

 

 

 

%

 

$

.32

 

 

$

.32

 

 

$

 

 

 

%

 


11


 

Comparison of Second-Quarter 2021 Results with Second-Quarter 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.  

 

Comparison of Six Months Ended June 30, 2021 Results 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

12


 

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 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.  

 

13


 

Segment Results

Federal Education Loans Segment

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

 

 

 

Three Months Ended June 30,

 

 

% Increase

(Decrease)

 

 

Six Months Ended June 30,

 

 

% Increase

(Decrease)

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021 vs. 2020

 

 

2021

 

 

2020

 

 

2021 vs. 2020

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loans

 

$

351

 

 

$

456

 

 

 

(23

)%

 

$

709

 

 

$

1,037

 

 

 

(32

)%

Cash and investments

 

 

 

 

 

1

 

 

 

(100

)

 

 

 

 

 

7

 

 

 

(100

)

Total interest income

 

 

351

 

 

 

457

 

 

 

(23

)

 

 

709

 

 

 

1,044

 

 

 

(32

)

Total interest expense

 

 

210

 

 

 

286

 

 

 

(27

)

 

 

424

 

 

 

742

 

 

 

(43

)

Net interest income

 

 

141

 

 

 

171

 

 

 

(18

)

 

 

285

 

 

 

302

 

 

 

(6

)

Less: provision for loan losses

 

 

 

 

 

3

 

 

 

(100

)

 

 

 

 

 

9

 

 

 

(100

)

Net interest income after provision for loan losses

 

 

141

 

 

 

168

 

 

 

(16

)

 

 

285

 

 

 

293

 

 

 

(3

)

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Servicing revenue

 

 

47

 

 

 

51

 

 

 

(8

)

 

 

99

 

 

 

106

 

 

 

(7

)

   Asset recovery and business processing

     revenue

 

 

12

 

 

 

38

 

 

 

(68

)

 

 

26

 

 

 

90

 

 

 

(71

)

   Other income

 

 

2

 

 

 

5

 

 

 

(60

)

 

 

2

 

 

 

9

 

 

 

(78

)

Total other income

 

 

61

 

 

 

94

 

 

 

(35

)

 

 

127

 

 

 

205

 

 

 

(38

)

Direct operating expenses

 

 

55

 

 

 

70

 

 

 

(21

)

 

 

117

 

 

 

153

 

 

 

(24

)

Income before income tax expense

 

 

147

 

 

 

192

 

 

 

(23

)

 

 

295

 

 

 

345

 

 

 

(14

)

Income tax expense

 

 

34

 

 

 

46

 

 

 

(26

)

 

 

70

 

 

 

62

 

 

 

13

 

Core Earnings

 

$

113

 

 

$

146

 

 

 

(23

)%

 

$

225

 

 

$

283

 

 

 

(20

)%

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

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.

 

 

14


 

Key performance metrics are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Segment net interest margin

 

 

.97

%

 

 

1.07

%

 

 

.97

%

 

 

.94

%

FFELP Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      FFELP Loan spread

 

 

1.03

%

 

 

1.15

%

 

 

1.03

%

 

 

1.01

%

      Provision for loan losses

 

$

 

 

$

3

 

 

$

 

 

$

9

 

      Charge-offs

 

$

5

 

 

$

12

 

 

$

11

 

 

$

31

 

      Charge-off rate

 

 

.04

%

 

 

.11

%

 

 

.05

%

 

 

.13

%

      Greater than 30-days delinquency rate

 

 

8.3

%

 

 

8.2

%

 

 

8.3

%

 

 

8.2

%

      Greater than 90-days delinquency rate

 

 

3.8

%

 

 

3.8

%

 

 

3.8

%

 

 

3.8

%

      Forbearance rate

 

 

13.9

%

 

 

26.6

%

 

 

13.9

%

 

 

26.6

%

      Average FFELP Loans

 

$

56,649

 

 

$

62,141

 

 

$

57,360

 

 

$

63,018

 

      Ending FFELP Loans, net

 

$

55,550

 

 

$

60,921

 

 

$

55,550

 

 

$

60,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in billions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of accounts serviced for ED (in millions)

 

 

5.6

 

 

 

5.6

 

 

 

5.6

 

 

 

5.6

 

Total federal loans serviced

 

$

283

 

 

$

282

 

 

$

283

 

 

$

282

 

Contingent collections receivables inventory

 

$

11.3

 

 

$

13.5

 

 

$

11.3

 

 

$

13.5

 

Net Interest Margin

The following table details the net interest margin. 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

FFELP Loan yield

 

 

1.89

%

 

 

2.12

%

 

 

1.90

%

 

 

2.61

%

Hedged Floor Income

 

 

.41

 

 

 

.42

 

 

 

.41

 

 

 

.39

 

Unhedged Floor Income

 

 

.18

 

 

 

.41

 

 

 

.18

 

 

 

.31

 

FFELP Loan net yield

 

 

2.48

 

 

 

2.95

 

 

 

2.49

 

 

 

3.31

 

FFELP Loan cost of funds

 

 

(1.45

)

 

 

(1.80

)

 

 

(1.46

)

 

 

(2.30

)

FFELP Loan spread

 

 

1.03

 

 

 

1.15

 

 

 

1.03

 

 

 

1.01

 

Other interest-earning asset spread impact

 

 

(.06

)

 

 

(.08

)

 

 

(.06

)

 

 

(.07

)

Net interest margin(1)

 

 

.97

%

 

 

1.07

%

 

 

.97

%

 

 

.94

%

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

FFELP Loans

 

$

56,649

 

 

$

62,141

 

 

$

57,360

 

 

$

63,018

 

Other interest-earning assets

 

 

1,832

 

 

 

1,856

 

 

 

1,813

 

 

 

1,883

 

Total FFELP Loan interest-earning assets

 

$

58,481

 

 

$

63,997

 

 

$

59,173

 

 

$

64,901

 

 

As of June 30, 2021, our FFELP Loan portfolio totaled $55.6 billion, comprised of $18.9 billion of FFELP Stafford Loans and $36.7 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of June 30, 2021 was 6 years and 7 years, respectively, assuming a Constant Prepayment Rate (CPR) of 9% and 5%, respectively.

 

15


 

Floor Income

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

 

 

 

 

 

 

 

 

 

(Dollars in billions)

 

June 30, 2021

 

 

June 30, 2020

 

Education loans eligible to earn Floor Income

 

$

55.1

 

 

$

60.5

 

Less: post-March 31, 2006 disbursed loans required

   to rebate Floor Income

 

 

(25.4

)

 

 

(27.6

)

Less: economically hedged Floor Income

 

 

(13.8

)

 

 

(17.6

)

Education loans eligible to earn Floor Income after

   rebates and economically hedged

 

$

15.9

 

 

$

15.3

 

Education loans earning Floor Income

 

$

11.0

 

 

$

9.4

 

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

 

(Dollars in billions)

 

July 1, 2021

to

December 31,

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

Average balance of FFELP Consolidation Loans

   whose Floor Income is economically hedged

 

$

13.3

 

 

$

11.8

 

 

$

7.3

 

 

$

1.6

 

 

$

.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for Loan Losses

The provision for FFELP Loan Losses was $0 in second-quarter 2021, down $3 million from the year-ago quarter.

Servicing Revenue

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

Asset Recovery and Business Processing Revenue

Asset recovery and business processing revenue decreased $26 million primarily as a result of the wind-down of the ED asset recovery contract as well as the impact of COVID-19 on certain collection and processing activities (temporary stoppage or other restrictions on certain activities).

Operating Expenses

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

16


 

Consumer Lending Segment

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

 

 

Three Months Ended June 30,

 

 

% Increase

(Decrease)

 

 

Six Months Ended June 30,

 

 

% Increase

(Decrease)

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021 vs. 2020

 

 

2021

 

 

2020

 

 

2021 vs. 2020

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Education Loans

 

$

295

 

 

$

362

 

 

 

(19

)%

 

$

614

 

 

$

767

 

 

 

(20

)%

Cash and investments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

(100

)

Interest income

 

 

295

 

 

 

362

 

 

 

(19

)

 

 

614

 

 

 

770

 

 

 

(20

)

Interest expense

 

 

137

 

 

 

174

 

 

 

(21

)

 

 

287

 

 

 

385

 

 

 

(25

)

Net interest income

 

 

158

 

 

 

188

 

 

 

(16

)

 

 

327

 

 

 

385

 

 

 

(15

)

Less: provision for loan losses

 

 

(1

)

 

 

41

 

 

 

(102

)

 

 

(88

)

 

 

130

 

 

 

(168

)

Net interest income after provision for

   loan losses

 

 

159

 

 

 

147

 

 

 

8

 

 

 

415

 

 

 

255

 

 

 

63

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Servicing revenue

 

 

3

 

 

 

1

 

 

 

200

 

 

 

3

 

 

 

3

 

 

 

 

   Other income

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

100

 

   Gains on sales of loans

 

 

2

 

 

 

 

 

 

100

 

 

 

91

 

 

 

 

 

 

100

 

Total other income

 

 

5

 

 

 

1

 

 

 

400

 

 

 

95

 

 

 

3

 

 

 

3,067

 

Direct operating expenses

 

 

39

 

 

 

34

 

 

 

15

 

 

 

79

 

 

 

72

 

 

 

10

 

Income before income tax expense

 

 

125

 

 

 

114

 

 

 

10

 

 

 

431

 

 

 

186

 

 

 

132

 

Income tax expense

 

 

29

 

 

 

27

 

 

 

7

 

 

 

101

 

 

 

43

 

 

 

135

 

Core Earnings

 

$

96

 

 

$

87

 

 

 

10

%

 

$

330

 

 

$

143

 

 

 

131

%

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

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.

 

17


 

Key performance metrics are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Segment net interest margin

 

 

2.95

%

 

 

3.20

%

 

 

2.97

%

 

 

3.26

%

Private Education Loans (including Refinance Loans):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Private Education Loan spread

 

 

3.18

%

 

 

3.39

%

 

 

3.19

%

 

 

3.46

%

     Provision for loan losses

 

$

(1

)

 

$

41

 

 

$

(88

)

 

$

130

 

     Charge-offs

 

$

35

 

 

$

48

 

 

$

70

 

 

$

116

 

     Charge-off rate

 

 

.71

%

 

 

.97

%

 

 

0.70

%

 

 

1.13

%

     Greater than 30-days delinquency rate

 

 

2.6

%

 

 

2.0

%

 

 

2.6

%

 

 

2.0

%

     Greater than 90-days delinquency rate

 

 

1.0

%

 

 

1.0

%

 

 

1.0

%

 

 

1.0

%

     Forbearance rate

 

 

3.0

%

 

 

8.4

%

 

 

3.0

%

 

 

8.4

%

     Average Private Education Loans

 

$

20,730

 

 

$

23,008

 

 

$

21,433

 

 

$

23,060

 

     Ending Private Education Loans, net

 

$

19,725

 

 

$

21,462

 

 

$

19,725

 

 

$

21,462

 

Private Education Refinance Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Charge-offs

 

$

2

 

 

$

2

 

 

$

5

 

 

$

4

 

     Greater than 90-days delinquency rate

 

 

%

 

 

.1

%

 

 

.1

%

 

 

.1

%

     Average Private Education Refinance Loans

 

$

8,271

 

 

$

7,710

 

 

$

8,437

 

 

$

7,429

 

     Ending Private Education Refinance Loans

 

$

8,393

 

 

$

7,455

 

 

$

8,393

 

 

$

7,455

 

     Private Education Refinance Loan originations

 

$

1,285

 

 

$

238

 

 

$

2,956

 

 

$

2,129

 

 

Net Interest Margin

The following table details the net interest margin.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Private Education Loan yield

 

 

5.71

%

 

 

6.33

%

 

 

5.78

%

 

 

6.69

%

Private Education Loan cost of funds

 

 

(2.53

)

 

 

(2.94

)

 

 

(2.59

)

 

 

(3.23

)

Private Education Loan spread

 

 

3.18

 

 

 

3.39

 

 

 

3.19

 

 

 

3.46

 

Other interest-earning asset spread impact

 

 

(.23

)

 

 

(.19

)

 

 

(.22

)

 

 

(.20

)

Net interest margin(1)

 

 

2.95

%

 

 

3.20

%

 

 

2.97

%

 

 

3.26

%

 

(1) 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Private Education Loans

 

$

20,730

 

 

$

23,008

 

 

$

21,433

 

 

$

23,060

 

Other interest-earning assets

 

 

821

 

 

 

692

 

 

 

821

 

 

 

722

 

Total Private Education Loan interest-earning assets

 

$

21,551

 

 

$

23,700

 

 

$

22,254

 

 

$

23,782

 

 

As of June 30, 2021, our Private Education Loan portfolio totaled $19.7 billion. The weighted-average life of this portfolio as of June 30, 2021 was 4 years assuming a CPR of 11%.

Provision for Loan Losses

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.

 

18


 

Gains on Sales of Loans

Gains on sales of education loans 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.

The sales of Private Education Loans for the six months ended June 30, 2021 were comprised of the following transactions:

 

 

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 $43 million gain on sale.

Operating Expenses

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

 

Business Processing Segment

The following table presents Core Earnings results for our Business Processing segment.

 

 

 

Three Months Ended June 30,

 

 

% Increase

(Decrease)

 

 

Six Months Ended June 30,

 

 

% Increase

(Decrease)

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021 vs. 2020

 

 

2021

 

 

2020

 

 

2021 vs. 2020

 

Business processing revenue

 

$

130

 

 

$

64

 

 

 

103

%

 

$

255

 

 

$

122

 

 

 

109

%

Direct operating expenses

 

 

92

 

 

 

57

 

 

 

61

 

 

 

183

 

 

 

111

 

 

 

65

 

Income before income tax expense

 

 

38

 

 

 

7

 

 

 

443

 

 

 

72

 

 

 

11

 

 

 

555

 

Income tax expense

 

 

9

 

 

 

1

 

 

 

800

 

 

 

17

 

 

 

3

 

 

 

467

 

Core Earnings

 

$

29

 

 

$

6

 

 

 

383

%

 

$

55

 

 

$

8

 

 

 

588

%

 

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

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%.

 

Key performance metrics are as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Revenue from government services

 

$

66

 

 

$

43

 

 

$

129

 

 

$

77

 

Revenue from healthcare services

 

 

64

 

 

 

21

 

 

 

126

 

 

 

45

 

Total fee revenue

 

$

130

 

 

$

64

 

 

$

255

 

 

$

122

 

EBITDA(1)

 

$

40

 

 

$

8

 

 

$

76

 

 

$

13

 

EBITDA margin(1)

 

 

30

%

 

 

13

%

 

 

30

%

 

 

10

%

Contingent collections receivables

   inventory (in billions)

 

$

15.5

 

 

$

14.5

 

 

$

15.5

 

 

$

14.5

 

 

 

 

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

19


Other Segment

The following table presents Core Earnings results for our Other segment.

 

 

 

Three Months Ended June 30,

 

 

% Increase

(Decrease)

 

 

Six Months Ended June 30,

 

 

% Increase

(Decrease)

 

(Dollars in millions)

 

2021

 

 

2020

 

 

2021 vs. 2020

 

 

2021

 

 

2020

 

 

2021 vs. 2020

 

Net interest loss after provision for loan

   losses

 

$

(17

)

 

$

(30

)

 

 

(43

)%

 

$

(35

)

 

$

(61

)

 

 

(43

)%

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Other income

 

 

2

 

 

 

4

 

 

 

(50

)

 

 

2

 

 

 

8

 

 

 

(75

)

   Losses on debt repurchases

 

 

(12

)

 

 

 

 

 

100

 

 

 

(12

)

 

 

 

 

 

100

 

Other income

 

 

(10

)

 

 

4

 

 

 

(350

)

 

 

(10

)

 

 

8

 

 

 

(225

)

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Unallocated shared services expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Unallocated information technology costs

 

 

20

 

 

 

21

 

 

 

(5

)

 

 

41

 

 

 

42

 

 

 

(2

)

   Unallocated corporate costs

 

 

46

 

 

 

31

 

 

 

48

 

 

 

90

 

 

 

85

 

 

 

6

 

   Total unallocated shared services expenses

 

 

66

 

 

 

52

 

 

 

27

 

 

 

131

 

 

 

127

 

 

 

3

 

   Restructuring/other reorganization

      expenses

 

 

2

 

 

 

1

 

 

 

100

 

 

 

8

 

 

 

6

 

 

 

33

 

Total expenses

 

 

68

 

 

 

53

 

 

 

28

 

 

 

139

 

 

 

133

 

 

 

5

 

Loss before income tax benefit

 

 

(95

)

 

 

(79

)

 

 

20

 

 

 

(184

)

 

 

(186

)

 

 

(1

)

Income tax benefit

 

 

(22

)

 

 

(19

)

 

 

16

 

 

 

(43

)

 

 

(44

)

 

 

(2

)

Core Earnings (loss)

 

$

(73

)

 

$

(60

)

 

 

22

%

 

$

(141

)

 

$

(142

)

 

 

(1

)%

 

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses is due to the negative carrying cost of our corporate liquidity portfolio. The decrease in the net interest loss is primarily a result of a decrease in the cost of funds of the debt funding the corporate liquidity portfolio.

Unallocated Shared Services Expenses

Unallocated shared services expenses are comprised of costs primarily related to information technology costs related to infrastructure and operations, stock-based compensation expense, accounting, finance, legal, compliance and risk management, regulatory-related expenses, human resources, certain executive management and the board of directors. Regulatory-related expenses include actual settlement amounts as well as third-party professional fees we incur in connection with such regulatory matters and are presented net of any insurance reimbursements for covered costs related to such matters. On an adjusted basis, expenses increased $4 million from the year-ago quarter. Adjusted expenses exclude $8 million and $(2) million, respectively, of regulatory-related expenses in the second quarters of 2021 and 2020. Regulatory expenses in the three months ended June 30, 2020 are net of $10 million, of insurance reimbursements for costs related to such matters.

See “Note 9 – Commitments, Contingencies and Guarantees” for a discussion of legal and regulatory matters where it is reasonably possible that a loss contingency exists. The Company is unable to anticipate the timing of a resolution or the impact that these matters may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.  

Restructuring/Other Reorganization Expenses

During the second quarters of 2021 and 2020, 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. The charges were due primarily to facility lease terminations and severance-related costs.


20


 

Financial Condition

This section provides information regarding the balances, activity and credit performance metrics of our education loan portfolio.

Summary of Our Education Loan Portfolio

Ending Education Loan Balances, net 

 

 

 

June 30, 2021

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Private

Education

Loans

 

 

Total

Portfolio

 

Total education loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-school(1)

 

$

24

 

 

$

 

 

$

24

 

 

$

17

 

 

$

41

 

Grace, repayment and other(2)

 

 

19,025

 

 

 

36,778

 

 

 

55,803

 

 

 

20,684

 

 

 

76,487

 

Total

 

 

19,049

 

 

 

36,778

 

 

 

55,827

 

 

 

20,701

 

 

 

76,528

 

Allowance for loan losses

 

 

(188

)

 

 

(89

)

 

 

(277

)

 

 

(976

)

 

 

(1,253

)

Total education loan portfolio

 

$

18,861

 

 

$

36,689

 

 

$

55,550

 

 

$

19,725

 

 

$

75,275

 

% of total FFELP

 

 

34

%

 

 

66

%

 

 

100

%

 

 

 

 

 

 

 

 

% of total

 

 

25

%

 

 

49

%

 

 

74

%

 

 

26

%

 

 

100

%

 

 

 

December 31, 2020

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Private

Education

Loans

 

 

Total

Portfolio

 

Total education loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-school(1)

 

$

30

 

 

$

 

 

$

30

 

 

$

14

 

 

$

44

 

Grace, repayment and other(2)

 

 

19,771

 

 

 

38,771

 

 

 

58,542

 

 

 

22,154

 

 

 

80,696

 

Total

 

 

19,801

 

 

 

38,771

 

 

 

58,572

 

 

 

22,168

 

 

 

80,740

 

Allowance for loan losses

 

 

(194

)

 

 

(94

)

 

 

(288

)

 

 

(1,089

)

 

 

(1,377

)

Total education loan portfolio

 

$

19,607

 

 

$

38,677

 

 

$

58,284

 

 

$

21,079

 

 

$

79,363

 

% of total FFELP

 

 

34

%

 

 

66

%

 

 

100

%

 

 

 

 

 

 

 

 

% of total

 

 

25

%

 

 

49

%

 

 

74

%

 

 

26

%

 

 

100

%

 

 

 

June 30, 2020

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Private

Education

Loans

 

 

Total

Portfolio

 

Total education loan portfolio:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In-school(1)

 

$

35

 

 

$

 

 

$

35

 

 

$

14

 

 

$

49

 

Grace, repayment and other(2)

 

 

20,520

 

 

 

40,668

 

 

 

61,188

 

 

 

22,546

 

 

 

83,734

 

Total

 

 

20,555

 

 

 

40,668

 

 

 

61,223

 

 

 

22,560

 

 

 

83,783

 

Allowance for loan losses

 

 

(202

)

 

 

(100

)

 

 

(302

)

 

 

(1,098

)

 

 

(1,400

)

Total education loan portfolio

 

$

20,353

 

 

$

40,568

 

 

$

60,921

 

 

$

21,462

 

 

$

82,383

 

% of total FFELP

 

 

33

%

 

 

67

%

 

 

100

%

 

 

 

 

 

 

 

 

% of total

 

 

25

%

 

 

49

%

 

 

74

%

 

 

26

%

 

 

100

%

 

(1) 

Loans for customers still attending school and are not yet required to make payments on the loan.

(2) 

Includes loans in deferment or forbearance.

 


21


 

Education Loan Activity

 

 

 

Three Months Ended June 30, 2021

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Total Private

Education

Loans

 

 

Total

Portfolio

 

Beginning balance

 

$

19,218

 

 

$

37,655

 

 

$

56,873

 

 

$

19,742

 

 

$

76,615

 

Acquisitions (originations and purchases)(1)

 

 

2

 

 

 

1

 

 

 

3

 

 

 

1,313

 

 

 

1,316

 

Capitalized interest and premium/discount

   amortization

 

 

161

 

 

 

192

 

 

 

353

 

 

 

45

 

 

 

398

 

Refinancings and consolidations to third

   parties

 

 

(232

)

 

 

(395

)

 

 

(627

)

 

 

(127

)

 

 

(754

)

Loan sales

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

(23

)

Repayments and other

 

 

(288

)

 

 

(764

)

 

 

(1,052

)

 

 

(1,225

)

 

 

(2,277

)

Ending balance

 

$

18,861

 

 

$

36,689

 

 

$

55,550

 

 

$

19,725

 

 

$

75,275

 

 

 

 

Three Months Ended June 30, 2020

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Total Private

Education

Loans

 

 

Total

Portfolio

 

Beginning balance

 

$

20,900

 

 

$

41,592

 

 

$

62,492

 

 

$

22,338

 

 

$

84,830

 

Acquisitions (originations and purchases)(1)

 

 

4

 

 

 

4

 

 

 

8

 

 

 

241

 

 

 

249

 

Capitalized interest and premium/discount

   amortization

 

 

120

 

 

 

132

 

 

 

252

 

 

 

60

 

 

 

312

 

Refinancings and consolidations to third

   parties

 

 

(245

)

 

 

(347

)

 

 

(592

)

 

 

(150

)

 

 

(742

)

Repayments and other

 

 

(426

)

 

 

(813

)

 

 

(1,239

)

 

 

(1,027

)

 

 

(2,266

)

Ending balance

 

$

20,353

 

 

$

40,568

 

 

$

60,921

 

 

$

21,462

 

 

$

82,383

 

 

 

 

Six Months Ended June 30, 2021

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Total Private

Education

Loans

 

 

Total

Portfolio

 

Beginning balance

 

$

19,607

 

 

$

38,677

 

 

$

58,284

 

 

$

21,079

 

 

$

79,363

 

Acquisitions (originations and purchases)(1)

 

 

4

 

 

 

3

 

 

 

7

 

 

 

3,043

 

 

 

3,050

 

Capitalized interest and premium/discount

   amortization

 

 

353

 

 

 

401

 

 

 

754

 

 

 

90

 

 

 

844

 

Refinancings and consolidations to third

   parties

 

 

(480

)

 

 

(827

)

 

 

(1,307

)

 

 

(266

)

 

 

(1,573

)

Loan sales

 

 

 

 

 

 

 

 

 

 

 

(1,488

)

 

 

(1,488

)

Repayments and other

 

 

(623

)

 

 

(1,565

)

 

 

(2,188

)

 

 

(2,733

)

 

 

(4,921

)

Ending balance

 

$

18,861

 

 

$

36,689

 

 

$

55,550

 

 

$

19,725

 

 

$

75,275

 

 

 

 

Six Months Ended June 30, 2020

 

(Dollars in millions)

 

FFELP

Stafford and

Other

 

 

FFELP

Consolidation

Loans

 

 

Total

FFELP

Loans

 

 

Total Private

Education

Loans

 

 

Total

Portfolio

 

Beginning balance

 

$

21,723

 

 

$

42,852

 

 

$

64,575

 

 

$

22,245

 

 

$

86,820

 

Acquisitions (originations and purchases)(1)

 

 

10

 

 

 

9

 

 

 

19

 

 

 

2,151

 

 

 

2,170

 

Capitalized interest and premium/discount

   amortization

 

 

307

 

 

 

319

 

 

 

626

 

 

 

131

 

 

 

757

 

Refinancings and consolidations to third

   parties

 

 

(517

)

 

 

(667

)

 

 

(1,184

)

 

 

(302

)

 

 

(1,486

)

Repayments and other

 

 

(1,170

)

 

 

(1,945

)

 

 

(3,115

)

 

 

(2,763

)

 

 

(5,878

)

Ending balance

 

$

20,353

 

 

$

40,568

 

 

$

60,921

 

 

$

21,462

 

 

$

82,383

 

 

(1)

Includes the origination of $407 million and $94 million of Private Education Refinance Loans in the second quarters of 2021 and 2020, and $1.0 billion and $415 million in the six months ended of 2021 and 2020, respectively, that refinanced FFELP and Private Education Loans that were on our balance sheet.

 

 

22


 

FFELP Loan Portfolio Performance

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

(Dollars in millions)

 

Balance

 

 

%

 

 

Balance

 

 

%

 

 

Balance

 

 

%

 

Loans in-school/grace/deferment(1)

 

$

2,576

 

 

 

 

 

 

$

2,791

 

 

 

 

 

 

$

3,130

 

 

 

 

 

Loans in forbearance(2)

 

 

7,397

 

 

 

 

 

 

 

7,725

 

 

 

 

 

 

 

15,453

 

 

 

 

 

Loans in repayment and percentage of each status:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans current

 

 

42,026

 

 

 

91.7

%

 

 

43,623

 

 

 

90.8

%

 

 

39,152

 

 

 

91.8

%

Loans delinquent 31-60 days(3)

 

 

1,398

 

 

 

3.0

 

 

 

1,374

 

 

 

2.9

 

 

 

1,222

 

 

 

2.9

 

Loans delinquent 61-90 days(3)

 

 

685

 

 

 

1.5

 

 

 

836

 

 

 

1.7

 

 

 

657

 

 

 

1.5

 

Loans delinquent greater than 90 days(3)

 

 

1,745

 

 

 

3.8

 

 

 

2,223

 

 

 

4.6

 

 

 

1,609

 

 

 

3.8

 

Total FFELP Loans in repayment

 

 

45,854

 

 

 

100

%

 

 

48,056

 

 

 

100

%

 

 

42,640

 

 

 

100

%

Total FFELP Loans

 

 

55,827

 

 

 

 

 

 

 

58,572

 

 

 

 

 

 

 

61,223

 

 

 

 

 

FFELP Loan allowance for losses

 

 

(277

)

 

 

 

 

 

 

(288

)

 

 

 

 

 

 

(302

)

 

 

 

 

FFELP Loans, net

 

$

55,550

 

 

 

 

 

 

$

58,284

 

 

 

 

 

 

$

60,921

 

 

 

 

 

Percentage of FFELP Loans in repayment

 

 

 

 

 

 

82.1

%

 

 

 

 

 

 

82.0

%

 

 

 

 

 

 

69.6

%

Delinquencies as a percentage of FFELP Loans in

   repayment

 

 

 

 

 

 

8.3

%

 

 

 

 

 

 

9.2

%

 

 

 

 

 

 

8.2

%

FFELP Loans in forbearance as a percentage of

   loans in repayment and forbearance

 

 

 

 

 

 

13.9

%

 

 

 

 

 

 

13.8

%

 

 

 

 

 

 

26.6

%

 

(1)  

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making 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.

 

 


23


 

Private Education Loan Portfolio Performance

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

(Dollars in millions)

 

Balance

 

 

%

 

 

Balance

 

 

%

 

 

Balance

 

 

%

 

Loans in-school/grace/deferment(1)

 

$

403

 

 

 

 

 

 

$

483

 

 

 

 

 

 

$

512

 

 

 

 

 

Loans in forbearance(2)

 

 

606

 

 

 

 

 

 

 

844

 

 

 

 

 

 

 

1,847

 

 

 

 

 

Loans in repayment and percentage of each status:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans current

 

 

19,187

 

 

 

97.4

%

 

 

20,287

 

 

 

97.4

%

 

 

19,775

 

 

 

98.0

%

Loans delinquent 31-60 days(3)

 

 

208

 

 

 

1.1

 

 

 

211

 

 

 

1.0

 

 

 

128

 

 

 

.6

 

Loans delinquent 61-90 days(3)

 

 

104

 

 

 

.5

 

 

 

126

 

 

 

.6

 

 

 

88

 

 

 

.4

 

Loans delinquent greater than 90 days(3)

 

 

193

 

 

 

1.0

 

 

 

217

 

 

 

1.0

 

 

 

210

 

 

 

1.0

 

Total Private Education Loans in repayment

 

 

19,692

 

 

 

100

%

 

 

20,841

 

 

 

100

%

 

 

20,201

 

 

 

100

%

Total Private Education Loans

 

 

20,701

 

 

 

 

 

 

 

22,168

 

 

 

 

 

 

 

22,560

 

 

 

 

 

Private Education Loan allowance for losses

 

 

(976

)

 

 

 

 

 

 

(1,089

)

 

 

 

 

 

 

(1,098

)

 

 

 

 

Private Education Loans, net

 

$

19,725

 

 

 

 

 

 

$

21,079

 

 

 

 

 

 

$

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

%

 

 

 

 

 

 

2.6

%

 

 

 

 

 

 

2.0

%

Loans in forbearance as a percentage of loans in

   repayment and forbearance

 

 

 

 

 

 

3.0

%

 

 

 

 

 

 

3.9

%

 

 

 

 

 

 

8.4

%

Percentage of Private Education Loans with a

   cosigner(4)

 

 

 

 

 

 

39

%

 

 

 

 

 

 

41

%

 

 

 

 

 

 

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 their 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 all periods presented.


24


 

Allowance for Loan Losses

 

 

 

Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

(Dollars in millions)

 

FFELP Loans

 

 

Private Education Loans

 

 

Total

 

 

FFELP Loans

 

 

Private Education Loans

 

 

Total

 

Allowance at beginning of period

 

$

282

 

 

$

992

 

 

$

1,274

 

 

$

311

 

 

$

1,083

 

 

$

1,394

 

Provision:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reversal of allowance related to loan sales(1)

 

 

 

 

 

(5

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

Remaining provision

 

 

 

 

 

4

 

 

 

4

 

 

 

3

 

 

 

41

 

 

 

44

 

Total provision

 

 

 

 

 

(1

)

 

 

(1

)

 

 

3

 

 

 

41

 

 

 

44

 

Charge-offs(2)

 

 

(5

)

 

 

(35

)

 

 

(40

)

 

 

(12

)

 

 

(48

)

 

 

(60

)

Decrease in expected future recoveries on

   charged-off loans(3)

 

 

 

 

 

20

 

 

 

20

 

 

 

 

 

 

22

 

 

 

22

 

Allowance at end of period

 

 

277

 

 

 

976

 

 

 

1,253

 

 

 

302

 

 

 

1,098

 

 

 

1,400

 

Plus: expected future recoveries on charged-off

   loans(3)

 

 

 

 

 

434

 

 

 

434

 

 

 

 

 

 

549

 

 

 

549

 

Allowance at end of period excluding expected future

   recoveries on charged-off loans(4)

 

$

277

 

 

$

1,410

 

 

$

1,687

 

 

$

302

 

 

$

1,647

 

 

$

1,949

 

Charge-offs as a percentage of average loans in

   repayment (annualized)

 

 

.04

%

 

 

.71

%

 

 

 

 

 

 

.11

%

 

 

.97

%

 

 

 

 

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

 

 

15.5

 

 

 

10.0

 

 

 

 

 

 

 

6.3

 

 

 

8.6

 

 

 

 

 

Allowance as a percentage of the ending total loan

   balance(4)

 

 

.5

%

 

 

6.8

%

 

 

 

 

 

 

.5

%

 

 

7.3

%

 

 

 

 

Allowance as a percentage of ending loans in

   repayment(4)

 

 

.6

%

 

 

7.2

%

 

 

 

 

 

 

.7

%

 

 

8.2

%

 

 

 

 

Ending total loans

 

$

55,827

 

 

$

20,701

 

 

 

 

 

 

$

61,223

 

 

$

22,560

 

 

 

 

 

Average loans in repayment

 

$

46,348

 

 

$

19,667

 

 

 

 

 

 

$

44,144

 

 

$

19,731

 

 

 

 

 

Ending loans in repayment

 

$

45,854

 

 

$

19,692

 

 

 

 

 

 

$

42,640

 

 

$

20,201

 

 

 

 

 

 

(1)

In connection with the sale of approximately $30 million of Private Education Loans in second-quarter 2021. See “Consumer Lending Segment" for a further discussion.

(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 Private Education 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:

 

 

 

Three Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

Receivable at beginning of period

 

$

454

 

 

$

571

 

Expected future recoveries of current period defaults

 

 

5

 

 

 

9

 

Recoveries

 

 

(22

)

 

 

(28

)

Charge-offs

 

 

(3

)

 

 

(3

)

Receivable at end of period

 

$

434

 

 

$

549

 

Change in balance during period

 

$

(20

)

 

$

(22

)

 

(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.

 

 

25


 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

(Dollars in millions)

 

FFELP Loans

 

 

Private Education Loans

 

 

Total

 

 

FFELP Loans

 

 

Private Education Loans

 

 

Total

 

Allowance at beginning of period

 

$

288

 

 

$

1,089

 

 

$

1,377

 

 

$

64

 

 

$

1,048

 

 

$

1,112

 

Transition adjustment made under CECL on

   January 1, 2020(1)

 

 

 

 

 

 

 

 

 

 

 

260

 

 

 

(3

)

 

 

257

 

Allowance at beginning of period after transition

   adjustment to CECL

 

 

288

 

 

 

1,089

 

 

 

1,377

 

 

 

324

 

 

 

1,045

 

 

 

1,369

 

Provision:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Reversal of allowance related to loan sales(2)

 

 

 

 

 

(107

)

 

 

(107

)

 

 

 

 

 

 

 

 

 

   Remaining provision

 

 

 

 

 

19

 

 

 

19

 

 

 

9

 

 

 

130

 

 

 

139

 

Total provision

 

 

 

 

 

(88

)

 

 

(88

)

 

 

9

 

 

 

130

 

 

 

139

 

Total charge-offs(3)

 

 

(11

)

 

 

(70

)

 

 

(81

)

 

 

(31

)

 

 

(116

)

 

 

(147

)

Decrease in expected future recoveries on

   charged-off loans(4)

 

 

 

 

 

45

 

 

 

45

 

 

 

 

 

 

39

 

 

 

39

 

Ending balance

 

 

277

 

 

 

976

 

 

 

1,253

 

 

 

302

 

 

 

1,098

 

 

 

1,400

 

Plus: expected future recoveries on charged-off

   loans(4)

 

 

 

 

 

434

 

 

 

434

 

 

 

 

 

$

549

 

 

 

549

 

Allowance at end of period excluding expected future

   recoveries on charged-off loans(5)

 

$

277

 

 

$

1,410

 

 

$

1,687

 

 

$

302

 

 

$

1,647

 

 

$

1,949

 

Charge-offs as a percentage of average loans in

   repayment (annualized)

 

 

.05

%

 

 

.70

%

 

 

 

 

 

 

.13

%

 

 

1.13

%

 

 

 

 

Allowance coverage of charge-offs (annualized)(5)

 

 

12.5

 

 

 

10.0

 

 

 

 

 

 

 

4.8

 

 

 

7.1

 

 

 

 

 

Allowance as a percentage of ending total loans(5)

 

 

.5

%

 

 

6.8

%

 

 

 

 

 

 

.5

%

 

 

7.3

%

 

 

 

 

Allowance as a percentage of ending loans in

   repayment(5)

 

 

.6

%

 

 

7.2

%

 

 

 

 

 

 

.7

%

 

 

8.2

%

 

 

 

 

Ending total loans

 

$

55,827

 

 

$

20,701

 

 

 

 

 

 

$

61,223

 

 

$

22,560

 

 

 

 

 

Average loans in repayment

 

$

46,694

 

 

$

20,272

 

 

 

 

 

 

$

48,302

 

 

$

20,666

 

 

 

 

 

Ending loans in repayment

 

$

45,854

 

 

$

19,692

 

 

 

 

 

 

$

42,640

 

 

$

20,201

 

 

 

 

 

 

(1) 

For a further discussion of our adoption of CECL, see “Note 2 – Significant Accounting Policies” in our 2020 Annual Report on Form 10-K.

(2) 

In connection with the sale of approximately $1.6 billion of Private Education Loans in 2021.

(3) 

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.

(4) 

At the end of each month, for Private Education 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.

 

 

 

Six Months Ended June 30,

 

(Dollars in millions)

 

2021

 

 

2020

 

Receivable at beginning of period

 

$

479

 

 

$

588

 

Expected future recoveries of current period defaults

 

 

10

 

 

 

22

 

Recoveries

 

 

(47

)

 

 

(57

)

Charge-offs

 

 

(8

)

 

 

(4

)

Receivable at end of period

 

$

434

 

 

$

549

 

Change in balance during period

 

$

(45

)

 

$

(39

)

(5) 

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.

 

 

26


 

Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates primarily on our Federal Education Loans and Consumer Lending segments. Our Business Processing and Other segments require minimal liquidity and funding. See “Navient’s Response to COVID-19” for a discussion of COVID-19’s impact on liquidity and capital resources.

 

We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for running the operations of our businesses (including derivative collateral requirements) throughout market cycles, including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include the origination of Private Education Loans, acquisitions of Private Education Loan and FFELP Loan portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of our common stock. To achieve these objectives, we analyze and monitor our liquidity needs and maintain excess liquidity and access to diverse funding sources including the issuance of unsecured debt and the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.

 

We define our liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses or to invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risk relates to our ability to service our debt, meet our other business obligations and to continue to grow our business. The ability to access the capital markets is impacted by general market and economic conditions, our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

 

Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change, from time to time, based on our financial performance, industry and market dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions. We have unsecured debt totaling $8.1 billion at June 30, 2021. Three credit rating agencies currently rate our long-term unsecured debt at below investment grade.

 

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 ($333 million in the six months ended June 30, 2021), 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 second-quarter 2021. We had $300 million of remaining share repurchase authority as of June 30, 2021.

 


27


 

Sources of Primary Liquidity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in millions)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

Ending Balances:

 

 

 

 

 

 

 

 

 

 

 

 

Total unrestricted cash and liquid investments

 

$

1,453

 

 

$

1,183

 

 

$

1,632

 

Unencumbered FFELP Loans

 

 

309

 

 

 

208

 

 

 

266

 

Unencumbered Private Education Refinance

   Loans

 

 

574

 

 

 

274

 

 

 

481

 

Total

 

$

2,336

 

 

$

1,665

 

 

$

2,379

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(Dollars in millions)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Average Balances:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total unrestricted cash and liquid investments

 

$

1,254

 

 

$

1,365

 

 

$

1,315

 

 

$

1,226

 

 

$

1,232

 

Unencumbered FFELP Loans

 

 

320

 

 

 

387

 

 

 

225

 

 

 

298

 

 

 

281

 

Unencumbered Private Education Refinance

   Loans

 

 

688

 

 

 

572

 

 

 

422

 

 

 

720

 

 

 

558

 

Total

 

$

2,262

 

 

$

2,324

 

 

$

1,962

 

 

$

2,244

 

 

$

2,071

 

 

 

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 additional borrowing capacity of these facilities with maturity dates ranging from October 2021 to June 2023.

 

(Dollars in millions)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

Ending Balances

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loan ABCP facilities

 

$

530

 

 

$

506

 

 

$

242

 

Private Education Loan ABCP facilities

 

 

2,405

 

 

 

2,221

 

 

 

1,969

 

Total

 

$

2,935

 

 

$

2,727

 

 

$

2,211

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

(Dollars in millions)

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FFELP Loan ABCP facilities

 

$

577

 

 

$

542

 

 

$

256

 

 

$

616

 

 

$

554

 

Private Education Loan ABCP facilities

 

 

2,423

 

 

 

2,138

 

 

 

1,132

 

 

 

2,422

 

 

 

1,009

 

Total

 

$

3,000

 

 

$

2,680

 

 

$

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 principal 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.

 

28


 

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

 

(Dollars in billions)

 

June 30, 2021

 

 

December 31, 2020

 

Net assets of consolidated variable interest entities

   (encumbered assets) — FFELP Loans

 

$

3.8

 

 

 

3.9

 

Net assets of consolidated variable interest entities

   (encumbered assets) — Private Education Loans

 

 

1.7

 

 

 

2.1

 

Tangible unencumbered assets(1)

 

 

5.6

 

 

 

5.4

 

Senior unsecured debt

 

 

(8.1

)

 

 

(8.4

)

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

 

 

(.5

)

 

 

(.7

)

Other liabilities, net

 

 

(.5

)

 

 

(.6

)

Total Tangible Equity (1)

 

$

2.0

 

 

$

1.7

 

 

 

(1) 

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

 

(2) 

At June 30, 2021 and December 31, 2020, there were $459 million and $634 million, respectively, of net gains (losses) on derivatives hedging this debt in unencumbered assets, which partially offset these gains (losses).

 

Borrowings

Ending Balances

 

 

 

June 30, 2021

 

 

December 31, 2020

 

(Dollars in millions)

 

Short

Term

 

 

Long

Term

 

 

Total

 

 

Short

Term

 

 

Long

Term

 

 

Total

 

Unsecured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Senior unsecured debt

 

$

1,658

 

 

$

6,465

 

 

$

8,123

 

 

$

677

 

 

$

7,714

 

 

$

8,391

 

Total unsecured borrowings

 

 

1,658

 

 

 

6,465

 

 

 

8,123

 

 

 

677

 

 

 

7,714

 

 

 

8,391

 

Secured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FFELP Loan securitizations

 

 

 

 

 

54,000

 

 

 

54,000

 

 

 

 

 

 

54,697

 

 

 

54,697

 

   Private Education Loan securitizations

 

 

832

 

 

 

13,154

 

 

 

13,986

 

 

 

960

 

 

 

13,891

 

 

 

14,851

 

   FFELP Loan ABCP facilities

 

 

 

 

 

462

 

 

 

462

 

 

 

2,053

 

 

 

479

 

 

 

2,532

 

   Private Education Loan ABCP facilities

 

 

1,194

 

 

 

1,259

 

 

 

2,453

 

 

 

2,582

 

 

 

 

 

 

2,582

 

   Other

 

 

354

 

 

 

 

 

 

354

 

 

 

337

 

 

 

 

 

 

337

 

Total secured borrowings

 

 

2,380

 

 

 

68,875

 

 

 

71,255

 

 

 

5,932

 

 

 

69,067

 

 

 

74,999

 

Core Earnings basis borrowings(1)

 

 

4,038

 

 

 

75,340

 

 

 

79,378

 

 

 

6,609

 

 

 

76,781

 

 

 

83,390

 

Adjustment for GAAP accounting treatment

 

 

30

 

 

 

474

 

 

 

504

 

 

 

4

 

 

 

551

 

 

 

555

 

GAAP basis borrowings

 

$

4,068

 

 

$

75,814

 

 

$

79,882

 

 

$

6,613

 

 

$

77,332

 

 

$

83,945

 

Average Balances

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

(Dollars in millions)

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

Unsecured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Senior unsecured debt

 

$

8,195

 

 

 

4.48

%

 

$

9,485

 

 

 

4.95

%

 

$

8,434

 

 

 

4.54

%

 

$

9,652

 

 

 

5.48

%

Total unsecured borrowings

 

 

8,195

 

 

 

4.48

 

 

 

9,485

 

 

 

4.95

 

 

 

8,434

 

 

 

4.54

 

 

 

9,652

 

 

 

5.48

 

Secured borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   FFELP Loan securitizations

 

 

54,524

 

 

 

1.27

 

 

 

57,340

 

 

 

1.66

 

 

 

54,529

 

 

 

1.28

 

 

 

58,165

 

 

 

2.16

 

   Private Education Loan securitizations

 

 

13,856

 

 

 

2.48

 

 

 

13,756

 

 

 

2.91

 

 

 

14,248

 

 

 

2.51

 

 

 

13,798

 

 

 

3.17

 

   FFELP Loan ABCP facilities

 

 

702

 

 

 

1.80

 

 

 

3,415

 

 

 

1.53

 

 

 

1,369

 

 

 

1.57

 

 

 

3,401

 

 

 

2.09

 

   Private Education Loan ABCP facilities

 

 

2,290

 

 

 

2.00

 

 

 

3,864

 

 

 

2.61

 

 

 

2,322

 

 

 

2.04

 

 

 

3,685

 

 

 

2.79

 

   Other

 

 

318

 

 

 

.28

 

 

 

355

 

 

 

.29

 

 

 

300

 

 

 

.30

 

 

 

348

 

 

 

1.05

 

Total secured borrowings

 

 

71,690

 

 

 

1.53

 

 

 

78,730

 

 

 

1.91

 

 

 

72,768

 

 

 

1.54

 

 

 

79,397

 

 

 

2.35

 

Core Earnings basis borrowings(1)

 

 

79,885

 

 

 

1.83

 

 

 

88,215

 

 

 

2.24

 

 

 

81,202

 

 

 

1.86

 

 

 

89,049

 

 

 

2.69

 

Adjustment for GAAP accounting treatment

 

 

 

 

 

(.13

)

 

 

 

 

 

.13

 

 

 

 

 

 

(.20

)

 

 

 

 

 

.10

 

GAAP basis borrowings

 

$

79,885

 

 

 

1.70

%

 

$

88,215

 

 

 

2.37

%

 

$

81,202

 

 

 

1.66

%

 

$

89,049

 

 

 

2.79

%

 

(1) 

Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” The differences in derivative accounting give rise to the difference above.

 


29


 

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). A discussion of our critical accounting policies, which includes the allowance for loan losses, goodwill, and premium and discount amortization, can be found in our 2020 Form 10-K. There were no significant changes to these critical accounting policies during the six months ended June 30, 2021.

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.


30


 

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 and reported in “Note 12 — Segment Reporting.”

 

 

 

Three Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

 

 

(Dollars in millions)

 

Federal Education Loans

 

 

Consumer Lending

 

 

Business Processing

 

 

Other

 

 

Total

Core

Earnings

 

 

Reclassi-

fications

 

 

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:  

 

 

 

Three Months Ended June 30, 2021

 

(Dollars in millions)

 

Net Impact of

Derivative

Accounting

 

 

Net Impact of

Goodwill and

Acquired

Intangibles

 

 

Total

 

Net interest income (loss) 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.

 

31


 

 

 

 

Three Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

 

 

(Dollars in millions)

 

Federal Education Loans

 

 

Consumer Lending

 

 

Business Processing

 

 

Other

 

 

Total

Core

Earnings

 

 

Reclassi-

fications

 

 

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:  

 

 

Three Months Ended June 30, 2020

 

(Dollars in millions)

 

Net Impact of

Derivative

Accounting

 

 

Net Impact of

Goodwill and

Acquired

Intangibles

 

 

Total

 

Net interest income (loss) 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.

 

 

 

32


 

 

 

 

 

Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

 

 

(Dollars in millions)

 

Federal Education Loans

 

 

Consumer Lending

 

 

Business Processing

 

 

Other

 

 

Total

Core

Earnings

 

 

Reclassi-

fications

 

 

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 (loss) 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.

 

 

 


33


 

 

 

Six Months Ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

 

 

 

(Dollars in millions)

 

Federal Education Loans

 

 

Consumer Lending

 

 

Business Processing

 

 

Other

 

 

Total

Core

Earnings

 

 

Reclassi-

fications

 

 

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