Navient (NAVI) Beats Q3 Earnings on High Non-Interest Income

Navient Corporation’s NAVI third-quarter 2017 core earnings per share (EPS) of 55 cents surpassed the Zacks Consensus Estimate of 50 cents. Also, the figure came 10% above the year-ago quarter tally.

Core earnings excluded the impact of losses from the derivative accounting treatment. It also excluded the impact of certain other one-time items, including unrealized, mark-to-market gains /losses on derivatives, and goodwill and acquired intangible asset amortization and impairment.

Third-quarter results of Navient reflect higher non-interest income. However, on the downside, the company recorded reduced net interest income and higher expenses.

Net income came in at $152 million in the quarter, down from $157 million in the prior-year period.

GAAP net income for the quarter was $176 million or 64 cents per share compared with $230 million or 73 cents per share in the year-ago quarter.

Rise in Fee Income More Than Offsets Decline in NII (on core earnings basis)

Net interest income (NII) declined 14.8% year over year to $345 million.

However, non-interest income jumped 32.4% year over year to $237 million. Asset recovery revenues rose while servicing revenues declined slightly.

Provision for credit losses increased nearly 1% year over year to $105 million.

Total expenses climbed 4.4% year over year to $238 million.

Segment Performance

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $46 million, down 33.3% year over year. The underperformance was mainly due to lower NII owing to amortization of portfolio and decrease in net interest margin, partially offset by a decline in operating expenses.

FFELP loan spread contracted 17 basis points (bps) year over year to 0.79%.

During the quarter, Navient acquired FFELP loans of $523 million. As of Sep 30, 2017, the company’s FFELP loans were $83.9 billion, down 6.8% year over year.

Private Education Loans: The segment reported core earnings of $60 million, flat year over year.

Total delinquency rate came in at 5.7% compared with 6.9% in the year ago quarter. Charge-off rate of 1.6% of average loans in repayment was 3 bps down on a year-over-year basis. Private Education loan spread expanded 15 bps year over year to 3.79%.

As of Sep 30, 2017, the company’s private education loans totaled $23.4 billion, down 2.5% year over year.

Business Services: The segment reported core earnings of $105 million, up 29.6% from the prior-year quarter figure.

Currently, Navient services student loans for over 12 million customers. This includes 6.1 million customers on behalf of the U.S. Department of Education.

Source of Funding and Liquidity

In order to meet liquidity needs, Navient expects to utilize various sources, including cash and investment portfolio, issuance of additional unsecured debt, repayment of principal on unencumbered student loan assets and distributions from securitization trusts (including servicing fees). It may also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $2 billion in FFELP Loan ABS and closed on two private education loan ABS repurchase facilities totaling $343 million. Also, the company retired or repurchased $548 million of senior unsecured debt during the quarter.

Share Repurchase

During the quarter, Navient repurchased 11.3 million shares of common stock for $165 million. However, the company has currently suspended its share repurchase program through 2018 in order to use available capital toward growing education lending business and build book value.

Our Take

Navient’s top-line continues to remain under pressure. Also, the company was recently alleged for conducting improper lending practices, which is likely to hurt its reputation and keep legal expenses elevated.

However, its efforts to enforce digitization through acquisition of two technologically advanced companies are encouraging.

Navient Corporation Price and EPS Surprise

Navient Corporation Price and EPS Surprise | Navient Corporation Quote

Navient currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the finance space, Ally Financial Inc. ALLY is slated to release results on Oct 25 while Trustmark Corp. TRMK and T.Rowe Price Group, Inc. TROW will release their earnings on Oct 24 and Oct 26, respectively.

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