Navient Corporation 10-Q Summary
Business context and reporting period
Navient provides education-loan ownership, origination, servicing and asset-recovery services, along with business-processing and healthcare revenue-cycle services. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited and presented under U.S. GAAP.
- Reportable segments: Federal Education Loans, Consumer Lending, Business Processing and Other.
- Education loan portfolio, net: $89.5 billion at June 30, 2019, comprising $68.0 billion of FFELP Loans and $21.6 billion of Private Education Loans.
- Navient serviced more than $300 billion of education loans and served more than 600 non-education government and healthcare clients.
Financial performance and key metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total interest income | $1,204 million | $1,227 million | Down 2% |
| Net interest income | $293 million | $298 million | Down 2% |
| Provision for loan losses | $68 million | $112 million | Down 39% |
| Net interest income after provisions | $225 million | $186 million | Up 21% |
| Total other income | $222 million | $136 million | Up 63% |
| Total operating and other expenses | $253 million | $209 million | Up 21% |
| Net income | $153 million | $83 million | Up 84% |
| Diluted EPS | $0.64 | $0.31 | Up 106% |
| Core Earnings net income | $175 million | $131 million | Up 34% |
| Diluted Core Earnings EPS | $0.74 | $0.49 | Up 51% |
For the six months ended June 30, 2019, net income was $281 million versus $210 million, diluted EPS was $1.16 versus $0.78, and Core Earnings were $312 million versus $238 million.
- GAAP Federal Education Loans segment net interest margin was 0.83% in Q2 2019 versus 0.68% in Q2 2018; Core Earnings segment margin was 0.81% versus 0.82%.
- GAAP Consumer Lending segment net interest margin was 3.31% versus 3.27%; Core Earnings margin was 3.22% in both periods.
- Business Processing revenue was $65 million in Q2, with EBITDA of $11 million and an EBITDA margin of 17%.
- Allowance for loan losses was $1.218 billion at June 30, 2019, including $1.151 billion for Private Education Loans and $67 million for FFELP Loans.
Cash flow, debt and liquidity
| Metric | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|
| Operating cash flow | $522 million | $482 million |
| Investing cash flow | $4.881 billion | $5.756 billion |
| Financing cash flow | $(6.239) billion | $(5.876) billion |
| Ending cash, cash equivalents and restricted cash | $4.426 billion | $5.008 billion |
- Total borrowings were $93.6 billion at June 30, 2019, consisting of $6.8 billion short-term and $86.8 billion long-term borrowings.
- Secured borrowings were $83.1 billion; unsecured borrowings were $10.5 billion.
- Unrestricted cash and liquid investments were $1.746 billion, and unencumbered FFELP Loans were $256 million, for reported primary liquidity of $2.002 billion.
- Management expected to repay approximately $1.5 billion of senior unsecured notes maturing within the next twelve months using cash, operating cash flow, loan repayments, securitization-trust distributions and available financing sources.
- The tangible net asset ratio was 1.27x, compared with 1.23x at June 30, 2018.
Material changes versus the prior comparable period
- Net income increased primarily because loan-loss provisions declined by $44 million, asset-recovery and business-processing revenue increased by $24 million, loan-sale gains increased by $16 million, and debt-repurchase results improved by $51 million.
- Net interest income declined by $5 million in Q2 and $47 million for the six-month period, primarily because of the natural paydown of the education-loan portfolio and higher funding costs.
- Education loans, net, declined from $99.2 billion at June 30, 2018 to $89.5 billion at June 30, 2019.
- Private Education Loan delinquencies greater than 30 days declined to 5.0% from 5.9%, and forbearance declined to 2.9% from 3.8%. FFELP delinquencies greater than 30 days declined to 10.5% from 13.0%.
- Private Education Refinance Loan originations rose to $846 million from $629 million. Navient sold $412 million of refinance loans and recorded a $16 million pretax gain.
- Navient repurchased 9.6 million shares for $126 million in Q2 and paid $37 million in dividends. Remaining repurchase authorization was $207 million.
- The company issued $747 million of FFELP asset-backed securities and $1.2 billion of Private Education Loan asset-backed securities during Q2.
- Operating expenses increased on a reported basis, partly reflecting proxy-contest costs, transition-services costs and other unusual items; management cited ongoing cost-saving initiatives.
Guidance, outlook, commentary and risks
- Management expected the FFELP and Private Education Loan portfolios to generate approximately $21 billion of cash flows, net of secured financing obligations, over the next 20 years. This is a forward-looking estimate, not a contractual guarantee.
- Management expected the education-loan portfolios to generate significant earnings and cash flow over their remaining lives, while continuing to pursue private-loan originations, portfolio acquisitions and business-processing growth.
- The current Department of Education servicing contract was scheduled to expire in December 2019. The timing and outcome of the replacement servicing solicitation were unclear in the filing.
- The company’s Pioneer asset-recovery contract had reached its original April 2019 expiration, and Navient had not received communication regarding the Department of Education’s next steps.
- Navient faced CFPB, state attorney general, New York Department of Financial Services, securities-class-action and other legal and regulatory matters. For several consumer-protection proceedings, the company could not estimate potential exposure, had established no reserve and stated that an adverse ruling could materially affect the company.
- An Education Department administrative law judge affirmed findings in the Special Allowance Payments audit in March 2019; Navient appealed. The company had a reserve and did not believe an adverse ruling would be material to the company as a whole.
- Three credit-rating agencies rated Navient’s long-term unsecured debt below investment grade, creating refinancing, funding-cost and liquidity risks.
- Material risks included interest-rate and basis risk, derivative valuation volatility, capital-market access, credit losses, regulatory changes, litigation, cybersecurity, operating-system failures, competition and changes in education-loan repayment behavior.
- Navient adopted new lease and hedge-accounting standards in 2019. The current expected credit loss standard was scheduled to take effect January 1, 2020 and was expected to materially change loan-loss accounting, primarily for Private Education and FFELP Loans; the filing did not provide a quantified adoption impact.
Most important facts for investors to verify
- Whether the Department of Education servicing contract was renewed, replaced or materially changed after its December 2019 expiration.
- The status, reserve adequacy and potential financial exposure from CFPB, state attorney general, securities and other litigation.
- Funding availability and refinancing plans for the $1.5 billion of senior unsecured debt maturing within twelve months.
- The effect of CECL adoption on retained earnings, allowances, capital ratios and reported earnings.
- Trends in Private Education Loan charge-offs, delinquencies, forbearance, TDR balances and recovery assumptions.
- The sustainability of debt-repurchase gains, loan-sale gains, derivative results and other unusual items included in Q2 earnings.
- Whether portfolio runoff, funding costs and below-investment-grade ratings could reduce future net interest income, liquidity or capital returns.