Navient Corporation 2017 Form 10-K Summary
Business context and reporting period
Navient provides education-loan asset management, loan servicing, asset recovery and business-processing services to education, government, health-care and other clients. The filing covers the fiscal year ended December 31, 2017; fourth-quarter results are included in the annual disclosure. Reportable segments are FFELP Loans, Private Education Loans, Business Services and Other.
At year-end, Navient held $105.1 billion of net education loans, serviced approximately $300 billion of education loans for approximately 12 million customers, and served more than 1,000 business-processing clients. The portfolio comprised $81.7 billion of FFELP Loans and $23.4 billion of Private Education Loans.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $1.412 billion | $1.705 billion | Down 17% |
| Provision for loan losses | $426 million | $429 million | Down 1% |
| Servicing revenue | $290 million | $304 million | Down 5% |
| Asset recovery and business-processing revenue | $475 million | $390 million | Up 22% |
| Total operating expenses | $1.018 billion | $987 million | Up 3% |
| Net income attributable to Navient | $292 million | $681 million | Down 57% |
| Diluted EPS | $1.04 | $2.12 | Down 51% |
| GAAP net interest margin | 1.24% | 1.38% | Down 14 basis points |
| Return on assets | 0.26% | 0.55% | Down 29 basis points |
| Operating cash flow | $1.157 billion | $1.357 billion | Down 15% |
Fourth-quarter 2017 net income was a loss of $84 million, or a diluted loss of $0.32 per share, compared with fourth-quarter 2016 net income of $145 million, or $0.48 per diluted share. Fourth-quarter results included $266 million of income tax expense, principally reflecting the Tax Cuts and Jobs Act deferred-tax-asset remeasurement loss.
- FFELP Loans net interest margin on a Core Earnings basis was 0.79%, versus 0.85% in 2016; the GAAP margin was 0.80%.
- Private Education Loans net interest margin on a Core Earnings basis was 3.33%, versus 3.41% in 2016; the GAAP margin was 3.38%.
- Private Education Loan delinquencies declined to 5.8% of loans in repayment from 7.4%; charge-offs decreased to $443 million from $513 million.
- FFELP Loan delinquencies increased modestly to 12.7% of loans in repayment from 12.2%, while charge-offs declined to $49 million from $54 million.
- Core Earnings were $251 million, or $0.89 per diluted share, versus $587 million, or $1.82 per diluted share. Excluding the $224 million Core Earnings deferred-tax-asset remeasurement loss and $43 million of restructuring and regulatory costs, Core Earnings were $502 million versus $597 million in 2016, excluding 2016 regulatory costs.
Balance sheet, debt and liquidity
| Metric | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $114.991 billion | $121.136 billion |
| Total borrowings | $109.783 billion | $114.702 billion |
| Senior unsecured debt | $13.930 billion | $13.746 billion |
| Navient stockholders’ equity | $3.454 billion | $3.699 billion |
| Book value per common share | $13.13 | $12.72 |
| Unrestricted cash and liquid investments | $1.520 billion | $1.256 billion |
| Unencumbered FFELP Loans | $690 million | $359 million |
| Primary liquidity | $2.210 billion | $1.615 billion |
Navient expected to repay $1.3 billion of senior unsecured notes maturing in 2018 using cash, investments, unencumbered FFELP Loans, operating cash flow, loan principal collections, securitization-trust distributions and, subject to market access, secured or unsecured financing. Total unsecured debt maturing before year-end 2020 was $5.7 billion. Three rating agencies rated Navient’s long-term unsecured debt below investment grade.
During 2017, Navient issued $5.7 billion of FFELP asset-backed securities, $662 million of Private Education Loan asset-backed securities and $1.6 billion of unsecured debt. It retired or repurchased $1.5 billion of senior unsecured debt and entered into $1.5 billion of new Private Education Loan asset-backed repurchase facilities.
Material changes versus the prior comparable period
- Net interest income fell $293 million, driven by education-loan portfolio amortization, higher funding spreads, reduced Floor Income from higher interest rates and a $28 million cumulative adjustment from faster prepayment assumptions.
- The total net education-loan portfolio decreased $5.9 billion to $105.1 billion, despite $10 billion of loan acquisitions during 2017.
- Business Services revenue increased $85 million, including $47 million of previously deferred asset-recovery revenue recognized after contract termination and growth in non-education services.
- Non-education fee revenue increased 21% to $211 million, including $133 million from government services and $78 million from health-care revenue-cycle management.
- Navient acquired Earnest in November 2017 for approximately $149 million in cash and Duncan Solutions in July 2017 for approximately $86 million in cash. Earnest originated $900 million of Private Education Refinance Loans during 2017.
- The company repurchased 29.6 million shares for $440 million and paid $176 million in dividends. Share repurchases were suspended on October 4, 2017; management announced an expected restart in the second half of 2018. The remaining authorization was $160 million.
- The FFELP servicing revenue stream continues to decline as the legacy portfolio amortizes. Intercompany servicing revenue declined to $348 million from $389 million.
Guidance, outlook, commentary, risks and unusual items
- Management expects future tax expense to benefit from the reduction in the federal statutory corporate tax rate from 35% to 21%. The 2017 results include a non-cash $208 million GAAP deferred-tax-asset remeasurement loss, or $224 million on a Core Earnings basis.
- Management expects to restart share repurchases in the second half of 2018 while maintaining the quarterly dividend policy of $0.16 per share.
- The ED Direct Loan servicing contract, generating $150 million of revenue in 2017 and covering approximately 6.1 million accounts, was scheduled to expire in 2019. ED cancelled its prior single-servicer procurement and issued a new Next Generation Financial Services Environment solicitation in February 2018.
- Neither Pioneer Credit Recovery nor General Revenue Corporation received an award in ED’s January 2018 replacement collection-contract procurement. Pioneer filed a bid protest, and ED’s ability to place additional accounts under Pioneer’s existing extension could be affected by court action.
- Navient faces CFPB, Illinois, Washington and Pennsylvania lawsuits alleging violations of consumer-protection laws. The company stated that it could not estimate the timing or ultimate financial impact, and no reserves had been established for these matters. An adverse ruling could materially affect results, liquidity or cash flows.
- Key financial risks include private-loan credit losses, prepayment speeds, funding costs, below-investment-grade ratings, capital-market access, interest-rate and basis risk, derivative valuation volatility, cybersecurity and operational failures, evolving regulation, litigation and reputational risk.
- The company expects adoption of the CECL credit-loss standard on January 1, 2020 to materially change allowance calculations and potentially require a significant increase in reserves and reduction in equity; the magnitude was not yet determinable.
- Fourth-quarter restructuring and reorganization expense was $29 million, primarily severance-related. Goodwill and acquired-intangible amortization expense was $23 million for the year.
Most important facts for an investor to verify
- Whether declining FFELP and legacy Private Education Loan balances can be offset by Earnest refinance originations, acquisitions and growth in Business Services.
- The sustainability of cash flow and liquidity relative to the $5.7 billion of unsecured debt maturing through 2020 and the $1.3 billion due in 2018.
- Changes in private-loan delinquencies, charge-offs, recoveries, forbearance, TDR balances and allowance adequacy, particularly after acquired-loan discounts are exhausted.
- The outcome and potential cost of CFPB and state attorney-general litigation, the ED collection-contract bid protest and the pending ED Special Allowance Payment audit appeal.
- The renewal, restructuring or loss of ED servicing and collection contracts, including the potential revenue impact of the 2019 servicing-contract expiration.
- The effect of CECL adoption, interest-rate movements, prepayment assumptions and derivative mark-to-market volatility on equity, earnings and capital access.
- The distinction between GAAP net income of $292 million and non-GAAP Core Earnings of $251 million, including the specific adjustments used in management reporting.