Navient Corporation 2018 Form 10-K Summary
Business context and reporting period
Navient is an education-loan owner, originator, servicer and asset-recovery provider, with additional revenue-cycle and business-processing services for government and healthcare clients. The filing covers the fiscal year ended December 31, 2018; fourth-quarter 2018 results are included in the annual filing.
- Reportable segments: Federal Education Loans, Consumer Lending, Business Processing and Other.
- Education loan portfolio: $94.5 billion at year-end, consisting of $72.3 billion of FFELP Loans and $22.2 billion of Private Education Loans.
- Servicing scale: approximately 12 million education-loan customers and more than $300 billion of loans serviced, including 5.9 million accounts under the Department of Education contract.
- Business Processing served more than 600 clients and employed approximately 6,500 people.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total interest income | $4,908 million | $4,383 million | Up 12% |
| Net interest income | $1,240 million | $1,412 million | Down 12% |
| Provision for loan losses | $370 million | $426 million | Down 13% |
| Net interest income after provisions | $870 million | $986 million | Down 12% |
| Other income | $702 million | $796 million | Down 12% |
| Operating expenses | $984 million | $966 million | Up 2% |
| Net income | $395 million | $292 million | Up 35% |
| Diluted EPS | $1.49 | $1.04 | Up 43% |
| GAAP net interest margin | 1.17% | 1.24% | Down 7 bps |
| Return on assets | 0.37% | 0.26% | Improved |
Fourth-quarter 2018 net income was $72 million, or $0.28 diluted EPS, compared with a fourth-quarter 2017 net loss of $84 million, or $(0.32) diluted EPS. Quarterly results included volatile derivative gains and losses.
- Core Earnings, a non-GAAP measure, were $519 million, or $1.96 diluted Core Earnings per share, compared with $251 million and $0.89 in 2017. Adjusted diluted Core Earnings per share were $2.09 versus $1.79.
- Federal Education Loans Core Earnings were $580 million, up from $567 million. The segment net interest margin was 0.83%, compared with 0.79%.
- Consumer Lending Core Earnings were $252 million, up from $183 million. The segment net interest margin declined to 3.24% from 3.33%.
- Business Processing revenue rose 26% to $267 million; segment EBITDA increased to $44 million from $28 million, and EBITDA margin improved to 17% from 13%.
- Operating cash flow was $1.14 billion, compared with $1.16 billion in 2017.
Balance sheet, credit and liquidity
- Total assets were $104.2 billion, down from $115.0 billion. Total borrowings were $98.9 billion, down from $109.8 billion, including $11.5 billion of unsecured debt.
- Stockholders’ equity was $3.5 billion. The tangible net asset ratio improved to 1.25x from 1.20x.
- Unrestricted cash and liquid investments were $1.286 billion; unencumbered FFELP Loans were $332 million, providing $1.618 billion of primary liquidity.
- Senior unsecured debt maturities before the end of 2020 totaled $2.9 billion, including $0.8 billion maturing in 2019. Management expected to fund these obligations through cash, investments, operating cash flow, loan repayments, securitization-trust distributions and available financing facilities.
- FFELP Loans are generally guaranteed for at least 97% of principal and accrued interest upon default, while Navient bears the full credit risk on Private Education Loans.
- FFELP delinquency declined to 10.2% of loans in repayment from 12.7%; greater-than-90-day delinquency declined to 5.3% from 6.2%.
- Private Education Loan delinquency increased modestly to 5.9% from 5.8%; greater-than-90-day delinquency increased to 2.8% from 2.6%. Private-loan charge-offs, excluding a $32 million accounting-related adjustment, declined to $371 million from $443 million.
Material changes versus the prior comparable period
- Net income increased primarily because of the lower effective tax rate following the Tax Cuts and Jobs Act, lower Private Education Loan-loss provisions, cost reductions and debt-repurchase gains. The 2017 results included a $208 million GAAP deferred-tax-asset remeasurement loss.
- Net interest income declined despite higher interest income because the education-loan portfolio continued to pay down, funding costs increased and Floor Income declined as interest rates rose.
- Education loans declined to $94.5 billion from $105.1 billion, with FFELP Loans down $9.5 billion and Private Education Loans down $1.2 billion.
- Navient originated $2.8 billion of Private Education Refinance Loans, compared with $233 million in 2017, and held $3.2 billion of refinance loans at year-end.
- The company repurchased 17.4 million shares for $220 million, versus 29.6 million shares for $440 million in 2017, and paid $166 million of dividends. Remaining repurchase authorization was $440 million.
- Navient issued $4.0 billion of FFELP asset-backed securities, $3.0 billion of Private Education Loan asset-backed securities and $500 million of unsecured debt, while retiring $3.0 billion of senior unsecured debt.
- ASC 606 adoption increased reported Federal Education Loan asset-recovery revenue and operating expense by $46 million each, with no net-income impact. The filing states that the overall timing impact was not material.
Guidance, outlook, management commentary and risks
- Management expected substantial long-term cash generation from the education-loan portfolios, estimating approximately $24 billion of cash flows over the next 20 years, net of secured financing obligations.
- Navient planned to re-enter the in-school lending market through Earnest in 2019 and continued pursuing private-loan originations, FFELP acquisitions and business-processing growth.
- The Department of Education servicing contract was scheduled to expire in June 2019. The company could not predict the outcome or timing of the next-generation servicing procurement or its effect on the current contract.
- The Pioneer Credit Recovery ED collections contract was scheduled to expire in April 2019, and the company had not received clear direction from ED regarding subsequent arrangements.
- Major risks include declining FFELP balances, dependence on government contracts and funding, below-investment-grade unsecured debt ratings, refinancing and liquidity risk, interest-rate and basis risk, LIBOR transition risk, prepayment volatility, private-loan credit losses and the future adoption of CECL on January 1, 2020.
- Navient faced CFPB and State Attorneys General litigation alleging consumer-protection and servicing violations. The company denied the allegations, had not established reserves for these matters, and stated that potential exposure could not be estimated and an adverse outcome could be material.
- An ED Office of Inspector General Special Allowance Payment audit remained under appeal. The company had a reserve and stated that it did not currently expect a material company-wide effect from an adverse ruling.
- The company disclosed a strategic agreement with First Data to become the primary technology provider for federal education-loan servicing, intended to improve the long-term variable-cost structure.
Most important facts for an investor to verify
- Whether ED renews, restructures or replaces Navient’s servicing and collections contracts and the resulting revenue and cost impact.
- The ultimate exposure, reserves and timing of CFPB and State Attorneys General litigation and related indemnification obligations.
- The sustainability of private-loan credit performance, including the 5.9% delinquency rate, allowance adequacy and CECL adoption impact.
- Liquidity coverage for 2019–2020 maturities, access to secured and unsecured funding, and the effect of below-investment-grade ratings.
- The sensitivity of earnings to interest rates, Floor Income, LIBOR replacement, prepayment speeds and derivative mark-to-market volatility.
- Whether refinance-loan originations and planned in-school lending offset the long-term runoff of the FFELP portfolio.
- The difference between GAAP net income and non-GAAP Core Earnings, particularly the recurring effect of derivative and intangible-asset adjustments.