Navient Corporation — 2018 Q1 Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. The financial statements are unaudited and prepared under U.S. GAAP. Navient provides education-loan asset management, servicing, asset recovery, refinancing, and government and healthcare business-processing services.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total interest income | $1,172 million | $1,015 million | 15% |
| Net interest income | $329 million | $340 million | (3%) |
| Provision for loan losses | $87 million | $107 million | (19%) |
| Net interest income after provisions | $242 million | $233 million | 4% |
| Other income | $211 million | $152 million | 39% |
| Total expenses | $291 million | $244 million | 19% |
| Income before taxes | $162 million | $141 million | 15% |
| Net income attributable to Navient | $126 million | $88 million | 43% |
| Diluted EPS | $0.47 | $0.30 | 57% |
| Core Earnings | $107 million | $107 million | Flat |
| Diluted Core Earnings per share | $0.40 | $0.36 | 11% |
The filing does not provide a single consolidated revenue figure comparable to a conventional operating company; income is primarily generated from interest income, servicing, asset recovery and business-processing activities, and derivative results.
Balance Sheet, Debt and Liquidity
- Total assets were $113.2 billion at March 31, 2018, down from $115.0 billion at December 31, 2017.
- Net FFELP Loans were $79.4 billion, down from $81.7 billion at year-end. Net Private Education Loans were $22.9 billion, down from $23.4 billion.
- Total borrowings were $107.9 billion, including $5.1 billion of short-term borrowings and $102.8 billion of long-term borrowings, versus $109.8 billion at December 31, 2017.
- Unsecured borrowings totaled $13.8 billion. Management identified approximately $2.4 billion of senior unsecured notes maturing within the next twelve months.
- Cash and cash equivalents were $2.4 billion; total cash, cash equivalents and restricted cash were $5.8 billion.
- Primary liquidity sources totaled $2.8 billion, comprising $2.4 billion of unrestricted cash and liquid investments and $445 million of unencumbered FFELP Loans.
- Additional capacity was approximately $2.4 billion under FFELP facilities and $723 million under Private Education Loan facilities, subject to collateral and other borrowing conditions.
- Total equity was $3.7 billion, including $3.6 billion attributable to Navient stockholders.
Cash Flow and Capital Allocation
- Operating cash flow was $284 million, compared with $357 million in Q1 2017.
- Investing activities provided $2.7 billion, primarily reflecting $3.5 billion of loan repayments, partially offset by $821 million of education-loan acquisitions.
- Financing activities used $1.9 billion, including net repayments of asset-backed commercial paper and long-term notes.
- Navient issued $2.0 billion of FFELP asset-backed securities and $507 million of Private Education Loan asset-backed securities, and closed $1.4 billion of Private Education Loan ABS repurchase facilities.
- The company paid $42 million of common dividends, or $0.16 per share. The share-repurchase program remained suspended, although management expected to restart repurchases in the second half of 2018; $160 million of authorization remained.
Margins, Credit Quality and Portfolio Trends
- GAAP consolidated net interest margin was 1.21%, compared with 1.19% in Q1 2017.
- Core Earnings net interest margin was 0.83% for Federal Education Loans and 3.23% for Consumer Lending, compared with 0.78% and 3.16%, respectively, in Q1 2017.
- Private Education Loan charge-offs declined to $78 million from $137 million, and the charge-off rate declined to 1.4% from 2.6%. Delinquencies declined to 5.7% of loans in repayment from 6.8%.
- FFELP Loan delinquencies increased to 13.1% of loans in repayment from 11.4%, including a greater-than-90-day delinquency rate of 7.7% versus 6.2%. FFELP Loans are generally guaranteed for at least 97% of principal and accrued interest on disbursed loans.
- The total allowance for loan losses was $1.4 billion, including $1.3 billion for Private Education Loans. The allowance excludes certain purchased loans whose remaining discounts exceeded incurred losses.
Material Changes Versus Q1 2017
- GAAP net income increased $38 million, primarily due to lower loan-loss provisions, a $64 million improvement in derivative and hedging results, and lower income taxes. These benefits were partly offset by lower net interest income and higher operating expenses.
- Interest expense increased 25% to $843 million, reflecting higher funding costs and changes in funding mix, while total interest income rose 15%.
- Operating expenses increased $37 million to $275 million. The increase included costs from the Earnest and Duncan Solutions acquisitions, a $9 million fee to transfer $3 billion of Private Education Loans to Navient’s servicing platform, and $14 million associated with revenue-recognition accounting changes.
- Business Processing revenue increased to $73 million from $44 million, and Core Earnings increased to $10 million from $3 million, supported by organic growth and Duncan Solutions.
- Federal Education Loans Core Earnings increased to $141 million from $129 million, while Consumer Lending Core Earnings increased to $50 million from $38 million. Other segment loss widened to $94 million from $63 million.
- Core Earnings remained $107 million; the improvement in per-share Core Earnings primarily reflected fewer shares outstanding, lower provisions and lower taxes.
Guidance, Outlook and Unusual Items
- Management expects the legacy FFELP portfolio and related revenue to decline over time because new FFELP originations ended in 2010. The portfolio had an estimated seven-year remaining weighted-average life.
- Navient’s contract to service approximately 6.0 million Department of Education accounts, representing $207.4 billion of loans, currently expires in 2019. The company submitted a bid with partners for the Department of Education’s next-generation servicing platform.
- Neither Pioneer Credit Recovery nor General Revenue Corporation received replacement Department of Education collection contracts in January 2018. Pioneer filed a bid protest and may receive additional account placements during the pending proceedings, subject to court action.
- Earnest originated $500 million of Private Education Refinance Loans in Q1 2018; Navient held $1.2 billion of such loans at quarter-end.
- Navient adopted ASC 606 prospectively. The adoption added $8 million of revenue and $5 million of expense in Q1 2018, with no material net-income impact. Certain third-party collection-agency payments were reclassified into revenue and operating expense, increasing both by $9 million.
- Q1 included $7 million of restructuring and reorganization expense, primarily severance, and $9 million of goodwill and acquired-intangible amortization and impairment expense.
- Derivative and hedging gains were $48 million versus a $16 million loss in Q1 2017. Management cautioned that these results can vary substantially with interest rates, foreign exchange rates, credit spreads and other market factors; Core Earnings excludes specified derivative mark-to-market effects.
Risks and Contingencies
- Navient faces CFPB, Illinois, Washington and Pennsylvania proceedings alleging violations of consumer-protection and debt-servicing laws. The company stated that the timing and ultimate exposure cannot currently be estimated and that no reserves were established for certain matters; an adverse ruling could be material.
- The company has indemnification obligations to SLM BankCo and related entities for specified pre-spin-off liabilities, with no additional indemnification reserves recorded at March 31, 2018.
- Liquidity is sensitive to capital-market access, credit ratings, funding costs, collateral requirements, interest-rate and basis risk, and the availability of secured and unsecured financing. Three rating agencies rated Navient’s long-term unsecured debt below investment grade.
- Private Education Loans expose Navient to the full credit risk of borrowers and cosigners. The company also identified regulatory change, litigation, cybersecurity, operational failures, acquisition integration, prepayment behavior and changes in interest-rate indices such as LIBOR as material risks.
Most Important Facts for Investors to Verify
- Refinancing and liquidity plans for the $2.4 billion of senior unsecured notes maturing within twelve months.
- The outcome and potential financial exposure of CFPB and state Attorneys General litigation and related regulatory investigations.
- Renewal or replacement of the Department of Education servicing contract expiring in 2019.
- Progress and economics of the Pioneer bid protest and the company’s ability to obtain future collection placements.
- Sustainability of Private Education Loan credit improvements, particularly the higher forbearance rate and allowance treatment for purchased loans.
- Whether reported GAAP earnings continue to benefit from volatile derivative mark-to-market gains and how Core Earnings reconcile to GAAP results.
- The timing and feasibility of restarting share repurchases while maintaining liquidity and funding access.