NAVIENT CORP annual report, FY2019

Navient Corporation 2019 Form 10-K Summary

Business context and reporting period

Navient provides education-loan ownership, origination, servicing and asset-recovery services, plus business-processing services for government and healthcare clients. It reports Federal Education Loans, Consumer Lending, Business Processing and Other segments. The filing covers the fiscal year ended December 31, 2019; fourth-quarter information is provided only as unaudited supplemental data.

Owned $86.8 billion of net education loans at year-end, including $64.6 billion of FFELP Loans and $22.2 billion of Private Education Loans.
Serviced more than $300 billion of education loans and served more than 500 non-education clients.
Had approximately 5,800 employees.

Key financial metrics

Metric	2019	2018	Change
Total interest income	$4,673 million	$4,908 million	Down 5%
Net interest income	$1,185 million	$1,240 million	Down 4%
Provision for loan losses	$258 million	$370 million	Down 30%
Net interest income after provisions	$927 million	$870 million	Up 7%
Other income	$856 million	$702 million	Up 22%
Total expenses	$1,020 million	$1,044 million	Down 2%
Net income	$597 million	$395 million	Up 51%
Diluted EPS	$2.56	$1.49	Up 72%
Net interest margin	1.24%	1.17%	Up 7 basis points
Return on assets	0.63%	0.37%	Improved
Return on common equity	18%	11%	Improved
Operating cash flow	$1,019 million	$1,140 million	Down 11%

Core Earnings, a non-GAAP measure, were $607 million, or $2.60 diluted per share, compared with $519 million, or $1.96 per share, in 2018. Adjusted diluted Core Earnings per share, excluding restructuring and regulatory-related expenses, were $2.64 versus $2.09.

Federal Education Loans segment Core Earnings were $525 million versus $580 million. Its Core Earnings net interest margin was 0.83%, unchanged from 2018.
Consumer Lending segment Core Earnings were $316 million versus $252 million. Its Core Earnings net interest margin increased to 3.30% from 3.24%.
Business Processing segment Core Earnings were $33 million versus $30 million. EBITDA increased to $49 million from $44 million and EBITDA margin increased to 19% from 17%.

Balance sheet, debt and liquidity

Total assets were $94.9 billion, down from $104.2 billion; total borrowings were $90.2 billion, down from $98.9 billion.
Senior unsecured debt was $9.5 billion, down from $11.5 billion. The filing states that Moody’s, S&P and Fitch rated Navient’s long-term unsecured debt below investment grade.
Total stockholders’ equity was $3.3 billion, compared with $3.5 billion. Tangible net assets were $12.5 billion and the tangible net asset ratio was 1.30x, compared with 1.25x.
Unrestricted cash and liquid investments were $1.2 billion. Primary liquidity, including unencumbered FFELP Loans and Private Education Refinance Loans, was $2.0 billion.
Additional unused capacity was $867 million under FFELP asset-backed commercial paper facilities and $384 million under Private Education Loan facilities.
Approximately $1.1 billion of senior unsecured notes were scheduled to mature within the next twelve months as of December 31, 2019.
Secured borrowings represented approximately 89% of Core Earnings debt at year-end.

Material changes versus the prior comparable period

Net income increased $202 million, primarily because loan-loss provisions declined $112 million, other income increased $154 million, and expenses decreased $24 million.
FFELP Loan balances declined $7.7 billion to $64.6 billion because the portfolio continues to amortize and no new FFELP loans are originated.
Private Education Loan balances were stable at $22.2 billion, while Private Education Loan originations increased 75% to $4.9 billion from $2.8 billion.
Private Education Loan delinquencies declined to 4.6% of loans in repayment from 5.9%; greater-than-90-day delinquencies declined to 2.0% from 2.8%.
FFELP Loan delinquencies increased to 11.7% of loans in repayment from 10.2%, although FFELP charge-offs declined to $42 million from $54 million.
Asset-recovery revenue in Federal Education Loans increased $67 million, or 41%, while servicing revenue declined $34 million.
Navient repurchased 34.5 million shares for $440 million, compared with 17.4 million shares for $220 million in 2018, and paid $147 million of common dividends.
Navient issued $2.7 billion of FFELP ABS and $4.1 billion of Private Education Loan ABS, and retired $2.0 billion of senior unsecured debt.

Outlook, risks, contingencies and unusual items

Management expects predictable cash flows from the education-loan portfolios, estimating approximately $19 billion of cash flows over the next 20 years, net of secured financing obligations. This is a management projection, not a guarantee.
The FFELP portfolio is in runoff and its earnings are expected to decline over time. Management is relying on Private Education Loan growth, servicing, asset recovery and Business Processing activities to diversify revenue.
The Department of Education extended the existing servicing contract through December 2020, with two six-month extension options. The future servicing procurement and its effect on Navient remain uncertain. Pioneer’s asset-recovery contract expired in 2019, and ED began recalling certain accounts.
Navient faces CFPB and State Attorneys General litigation, securities class actions, consumer-protection claims and regulatory investigations. The company states that it cannot estimate potential exposure for the principal consumer-protection matters and has established no reserves for them; an adverse ruling could materially affect results.
An administrative law judge affirmed findings in the Department of Education Special Allowance Payment audit in March 2019. Navient appealed and had a reserve for the matter; management did not expect a material company-wide effect as of the filing date.
CECL became effective January 1, 2020. Navient estimated that its allowance for credit losses would increase by approximately $800 million, reducing equity by approximately $615 million, although the estimate remained subject to refinement.
The company had approximately $250 billion of financial instruments indexed to LIBOR and warned that the transition from LIBOR could affect funding costs, margins, asset values and liquidity.
2019 included $45 million of gains on debt repurchases, a $16 million gain on sale of Private Education Refinance Loans, $6 million of restructuring costs, $13 million of proxy-contest expenses and $30 million of insurance reimbursements for covered regulatory costs.
Derivative and hedge accounting created material earnings and equity volatility. Cumulative derivative accounting effects reduced GAAP equity by approximately $235 million at year-end.
In January 2020, Navient issued $700 million of unsecured debt and repurchased 20.3 million shares held by affiliates of Canyon Partners for $14.77 per share.

Most important facts for investors to verify

Whether the estimated $800 million CECL allowance increase and approximately $615 million equity reduction were ultimately recorded as estimated.
The status, potential monetary exposure and reserve adequacy for CFPB, State Attorneys General, securities and other consumer-protection litigation.
The outcome of the Department of Education servicing procurement and the effect of the expired Pioneer contract on Federal Education Loans revenue.
Private Education Loan credit performance, including delinquencies, recoveries, charge-offs, TDR balances and allowance coverage.
Funding availability and refinancing requirements given below-investment-grade unsecured ratings, $1.1 billion of near-term unsecured maturities and reliance on securitization markets.
The sustainability of share repurchases and the $0.64 annual dividend after considering liquidity, CECL-related capital effects and debt repayment needs.
The sensitivity of net interest income and GAAP equity to LIBOR transition, interest rates, prepayment speeds and derivative valuations.