Navient Corporation 2014 Form 10-K Summary
Business context and reporting period
Navient filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Navient became an independent publicly traded company following the April 30, 2014 separation from SLM Corporation. Because Navient is the accounting successor to Old SLM, historical GAAP results before the separation include the former consumer banking business, limiting direct comparability. Navient manages, services and recovers education-related receivables, serving more than 12 million customers and servicing more than $300 billion of student loans.
- Primary segments: FFELP Loans, Private Education Loans, Business Services and Other.
- December 31, 2014 student loan portfolio: $134.3 billion, consisting of $104.5 billion of FFELP Loans and $29.8 billion of Private Education Loans.
- Business Services serviced approximately 6.2 million federal loan accounts for the Department of Education and held approximately $15.4 billion of asset recovery receivables.
Financial results and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net interest income | $2.667 billion | $3.167 billion | Down $500 million |
| Net income attributable to Navient | $1.149 billion | $1.418 billion | Down 19% |
| Diluted EPS | $2.69 | $3.12 | Down 14% |
| Core Earnings | $818 million | $1.242 billion | Down 34% |
| Core Earnings diluted EPS | $1.93 | $2.77 | Down $0.84 |
| Net interest margin | 1.89% | 1.98% | Down 9 basis points |
| Return on assets | 0.81% | 0.89% | Down 8 basis points |
| Operating cash flow from continuing operations | $1.664 billion | $1.858 billion | Down $194 million |
GAAP results included $139 million of net derivative and hedging gains, compared with a $268 million loss in 2013. Core Earnings exclude certain derivative mark-to-market effects, the former SLM BankCo consumer banking results and goodwill or acquired-intangible amortization; Core Earnings are non-GAAP and may not be comparable with similarly titled measures used by other companies.
- Provision for loan losses declined to $628 million from $839 million, primarily reflecting improved Private Education Loan credit performance.
- Private Education Loan charge-offs fell to 2.6% of loans in repayment from 3.1%, while delinquencies declined to 8.1% from 9.3%.
- FFELP Loan net interest margin on a Core Earnings basis increased to 0.90% from 0.88%; the Private Education Loan margin increased to 3.94% from 3.87%.
- Business Services revenue declined to $1.06 billion from $1.13 billion, with FFELP-related revenue representing 77% of segment revenue versus 80% in 2013.
- Operating cash flow was $1.664 billion; investing activities used $1.653 billion, including $13.8 billion of student loan acquisitions and originations, partly offset by $12.3 billion of loan repayments, claims and other reductions.
Balance sheet, debt and liquidity
| Metric | December 31, 2014 | December 31, 2013 |
|---|---|---|
| Total assets | $146.4 billion | $159.5 billion |
| Total borrowings | $139.5 billion | $150.4 billion |
| Senior unsecured debt | $17.4 billion | $18.3 billion |
| Navient stockholders’ equity | $4.2 billion | $5.6 billion |
| Unrestricted cash and liquid investments | $1.449 billion | $3.015 billion |
| Unencumbered FFELP Loans | $1.909 billion | $1.259 billion |
- Total Core Earnings-basis primary liquidity was $3.358 billion, including unrestricted cash and unencumbered FFELP Loans.
- Additional capacity under FFELP secured facilities was approximately $13.2 billion; available capacity under the $1.0 billion Private Education Loan ABCP facility was $652 million.
- Navient issued $5.0 billion of FFELP asset-backed securities, $1.8 billion of Private Education Loan asset-backed securities and $1.9 billion of unsecured debt during 2014.
- Approximately $1.1 billion of senior unsecured notes was scheduled to mature within the following 12 months.
- All three rating agencies rated Navient’s long-term unsecured debt below investment grade at December 31, 2014, increasing funding costs and refinancing risk.
Material changes versus the prior comparable period
- GAAP net income declined $269 million, primarily because of lower net interest income, the absence of 2013 loan-sale gains and discontinued-operation gains, and higher restructuring costs.
- The 2014 decline in net interest income was partly attributable to the April 2014 distribution of SLM BankCo and lower average FFELP Loan balances.
- 2013 included a $312 million gain from selling residual interests in FFELP securitization trusts; no comparable transaction occurred in 2014.
- Private Education Loan portfolio balance declined to $29.8 billion from $37.5 billion on a GAAP basis, while FFELP Loans were broadly stable at $104.5 billion.
- Navient acquired $12.9 billion of student loans in 2014, including $11.3 billion of FFELP Loans and $1.6 billion of Private Education Loans.
- Navient paid $249 million in common dividends and repurchased $600 million of common stock. The board authorized an additional $1.0 billion repurchase program effective January 1, 2015 and increased the quarterly dividend from $0.15 to $0.16 per share.
Guidance, outlook, risks and unusual items
- Management expects existing FFELP and Private Education Loan portfolios to generate substantial cash flow as they amortize, but both portfolios and related servicing revenues will decline over time because new originations have ended.
- Navient’s strategy is to acquire additional loan portfolios, expand third-party servicing and asset recovery revenue, and diversify beyond declining FFELP-related revenue. The company announced the acquisition of Municipal Services Bureau after year-end.
- The Department of Education extended Navient’s federal servicing contract for five years. Navient’s account allocation increased to 24% for the period beginning August 15, 2014, but future allocations depend on performance metrics and competition.
- The Department of Education asset recovery contract expired on February 21, 2015. Navient submitted a response to a new request for proposals, but stated that no assurance exists regarding renewal, award or future account volumes. Management’s 2015 earnings guidance included approximately $48 million of revenue from the former contract.
- The Bipartisan Budget Act reduced guarantor rehabilitation fees beginning July 1, 2014 and reduced 2014 fee income by approximately $78 million.
- Regulatory matters remained significant. Navient recorded an additional $112 million reserve in 2014, bringing total regulatory reserves to $177 million; $78 million remained at year-end. Separate CFPB, New York, Illinois and Washington investigations had no established reserves because potential exposure was not estimable.
- Navient funded a $60 million DOJ settlement fund, paid related civil penalties, funded a $30 million FDIC restitution account and estimated an additional $42 million of customer refunds for certain late fees.
- The company faces risks from below-investment-grade ratings, refinancing and liquidity needs, interest-rate and basis risk, derivative valuation volatility, Private Education Loan credit losses, prepayments, regulatory enforcement, litigation, cybersecurity, operating systems and third-party vendors.
- The filing identifies a pending Department of Education audit concerning Special Allowance Payment billing practices. Navient reserved for the matter and retained an appeal right with a March 31, 2015 deadline.
Most important facts an investor should verify
- Reconcile GAAP results with Core Earnings and assess the effect of the $573 million derivative-accounting adjustment on 2014 GAAP income.
- Evaluate refinancing capacity for approximately $1.1 billion of senior unsecured debt maturing within 12 months and the broader contractual debt obligations.
- Monitor whether declining FFELP and Private Education Loan balances are offset by loan acquisitions, third-party servicing and diversified asset recovery revenue.
- Verify the outcome of the Department of Education asset recovery contract process and the effect of the lost or reduced account placements on 2015 earnings.
- Track CFPB, state regulatory and litigation matters, including the adequacy of the $78 million remaining regulatory reserve and the unreserved investigations.
- Assess Private Education Loan allowance adequacy, including the $1.916 billion allowance, $10.205 billion of recorded TDR loans and $385 million reserve for potential recovery shortfalls.
- Review credit ratings, unsecured funding spreads, derivative collateral requirements and sensitivity to a 25-basis-point funding-index increase, which the filing estimates could reduce annual pre-tax income by $317 million.