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Navient (NAVI) Q1 Earnings Beat on Lower Provisions

Navient Corporation’s NAVI first-quarter 2016 core earnings of 43 cents per share outpaced the Zacks Consensus Estimate by almost 5%. But the figure declined from core earnings of 48 cents per share reported in the year-ago quarter.

Core earnings excluded the impact of the financial results of the consumer banking business for periods prior to the spin-off of Navient from Sallie Mae in Apr 2014 as well as the related restructuring and reorganization expenses. 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.

Results of Navient were aided by lower provision for credit losses and improved delinquencies in the quarter. However, the quarter recorded reduced net interest income and higher expenses. Net income came in at $147 million in the quarter, down 24.2% from the prior-year quarter.

GAAP net income for the quarter was $181million or 53 cents per share compared with $292 million or 72 cents per share in the prior-year quarter

Performance in Detail

The following figures are calculated on core earnings basis.

Net interest income declined 14.9% year over year to $416 million.

Non-interest income declined slightly to $176 million. Servicing revenues increased while asset recovery revenues remained relatively stable.

Also, total expenses increased 7.4% year over year to $247 million. The increase reflected rise in operating costs related to acquisitions of Gila LLC and Xtend Healthcare.

However, provision for credit losses decreased 11.2% year over year to $111 million.

Segmental Performance

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $66 million, down 22.4% year over year. The underperformance was mainly attributable to lower net interest income, partially offset by reduced expenses.

During the quarter Navient acquired FFELP loans of $1.5 billion. As of Mar 31, 2016, the company’s FFELP loans came in at $95.0 billion, down from $102.4 billion as of Mar 31, 2015.

FFELP loan spread decreased 7 basis points (bps) year over year to 0.89%.

Private Education Loans: The segment reported core earnings of $61million in the quarter, down 20.8% year over year.  The decrease was due to lower net interest income and loss on sale of loans, partially offset by reduced provision for loan losses.  

Total delinquencies came in at 6.2% of loans in repayment, down 70 bps. Charge-off rate of 2.4% of average loans decreased from 2.9% in the prior-year quarter.

As of Mar 31, 2016, the company’s private education loans totaled $25.5 billion compared with $29.0 billion a year ago.

Student loan spread declined 17 bps year over year to 3.70%.

Business Services: The segment reported core earnings of $75 million, down 12.8% year over year. Decline in education loan-related asset recovery revenue mainly tied with a legislated reduction in certain fees along with lower volumes, led to the downside.

Currently, Navient services student loans for over 12 million customers. This includes 6.3 million customers on behalf of the U.S. Department of Education (“ED”).

Other: The segment reported a net loss of $55 million, compared with $54 million in the prior-year quarter.

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 FFELP ABS of $1.1 billion and $488 million in private education loan ABS. Also, it retired or repurchased senior unsecured debt of $1.0 billion. Among others, Navient extended and increased its $7.5 billion FFELP asset-backed commercial paper (ABCP) facility with seven global financial institutions.

Share Repurchase

During the quarter, Navient repurchased 19.2 million shares of common stock for $200 million. As of Mar 31, 2016, shares of $555 million remained outstanding under the share repurchase authorization.

Our Take

Although Navient’s first-quarter results were not decent, we believe that the company will continue to maintain its leading position in the student-lending market through various growth avenues including its acquisition of federal and private student loans. Further, we remain optimistic as the company strengthens its Business Services segment with strategic acquisitions. Additionally, we remain encouraged by the company’s steady capital deployment activities that boost investors’ confidence in the stock.

However, escalating costs and margin pressure remain key concerns for Navient.

Navient currently carries a Zacks Rank #3 (Hold).

Among other firms in the finance space, Regional Management Corp. RM and World Acceptance Corp. WRLD are expected to release results on Apr 28, and Ally Financial Inc. ALLY is set to release results on Apr 26.

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