Navient (NAVI) Q2 Earnings Beat Estimates, Provisions Fall

Navient Corporation’s NAVI second-quarter 2018 adjusted core earnings per share (EPS) of 49 cents surpassed the Zacks Consensus Estimate by a penny. The reported figure came in higher than the year-ago quarter tally of 43 cents.

Core earnings excluded the impact of derivative accounting treatment. It also excluded the impact of certain other one-time items, including goodwill and acquired intangible asset amortization.

Second-quarter results of Navient benefited from a decline in provisions. However, lower revenues along with escalated expenses were key headwinds.

The company reported core net income of $131 million in the quarter, up 6.5% from $123 million in the year-ago quarter.

GAAP net income for the quarter was $83 million or 31 cents per share compared with $112 million or 39 cents per share in the year-ago quarter.

NII and Fee Income Fall, Expenses Escalate (on core earnings basis)

Net interest income (NII) dipped 7% year over year to $319 million.

Non-interest income fell 10.3% year over year to $166 million. Asset recovery and business processing revenues declined, while servicing revenues rose slightly.

Provision for loan losses decreased nearly 6.7% year over year to $112 million.

Total expenses rose 11.7% to $203 million from the year-ago quarter.

Segment Performance

Federal Education Loans: The segment generated core earnings of $148 million, up 7.2% year over year. Lower operating and income tax expenses were partially offset by decreased NII and fee income.

During the reported quarter, Navient acquired FFELP loans of $58 million. As of Jun 30, 2018, the company’s FFELP loans were $76.6 billion, down 11% year over year.

Consumer Lending: The segment reported core earnings of $66 million, up 65% year over year. Increased revenues and lower provisions were the positives. Net interest margin was 3.21%, down 7 basis points.

Private education loan delinquencies of 30 days or more of $1.3 billion were down $119 million from the prior-year quarter.

As of Jun 30, 2018, the company’s private education loans totaled $22.6 billion, down 6.6% year over year.

Business Processing: The segment reported core earnings of $8 million, up 33.3% from $6 million in the prior-year quarter, aided by increase in fee income.

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 might also issue term asset-backed securities (ABS).

During the reported quarter, Navient issued $997 million in FFELP Loan ABS, $521 million in private education loan ABS and $550 million in unsecured debt. Also, the company repurchased $1.3 billion of senior unsecured debt during the quarter.

Our Take

Though the company has taken several steps lately to build fee income base, Navient’s declining revenues remain a major concern. Also, its involvement in improper lending practices is likely to keep legal expenses elevated. Nevertheless, its efforts to enforce digitization are encouraging.

Navient Corporation Price, Consensus and EPS Surprise

Navient Corporation Price, Consensus and EPS Surprise | Navient Corporation Quote

Currently, Navient carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Companies

Capital One COF reported second-quarter 2018 adjusted earnings of $3.22 per share that easily surpassed the Zacks Consensus Estimate of $2.63. Also, it compared favorably with the year-ago quarter’s adjusted earnings of $1.96.

People's United Financial Inc. PBCT reported net earnings of 32 cents per share in second-quarter 2018, in line with the Zacks Consensus Estimate. Moreover, the reported figure climbed 33.3% year over year.

Riding on higher revenues, Citizens Financial Group CFG delivered a positive earnings surprise of 2.3% in second-quarter 2018. Earnings per share of 88 cents topped the Zacks Consensus Estimate of 66 cents.

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