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Navient (NAVI) Q2 Earnings Beat Estimates, Expenses Escalate

Zacks Equity Research

Navient Corporation NAVI pulled off a positive earnings surprise of 37% in second-quarter 2019. Core earnings per share of 74 cents surpassed the Zacks Consensus Estimate of 54 cents. Also, the bottom line came in higher than the year-ago quarter figure of 49 cents.

Core earnings excluded the impact of certain other one-time items, including restructuring and regulatory-related expenses.

Second-quarter results of Navient benefited from a rise in fee income and lower provisions. However, lower net interest income was a key headwind. Further, expenses flared up. Moreover, year-over-year decline in loans was a major drag.

GAAP net income for the quarter was $153 million or 64 cents per share compared with $83 million or 31 cents per share in the year-ago quarter.

NII down, Fee Income Escalate, Expenses Flare Up (on core earnings basis)

Net interest income (NII) dipped 7.2% year over year to $296 million.

Non-interest income surged 45.8% to $242 million. Asset recovery and business processing revenues, other income and gain on debt repurchases increased.

Provision for loan losses plunged nearly 39.3% to $68 million.

Total expenses escalated 19.2% to $242 million from the year-ago quarter.

Segment Performance

Federal Education Loans: The segment generated core earnings of $131 million, down 11.5% year over year. Higher adjusted expenses, partly muted by elevated revenues, posed as a headwind.

During the reported quarter, Navient acquired FFELP loans of $43 million. As of Jun 30, 2019, the company’s FFELP loans were $68 billion, down 11.2%.

Consumer Lending: The segment reported core earnings of $85 million, up 28.8% year over year. Lower provisions and expenses were the positives. Net interest margin was 3.22%, up 1 basis point.

Private education loan delinquencies of 30 days or more of $1.1 billion were down $237 million from the prior-year quarter.

As of Jun 30, 2019, the company’s private education loans totaled $21.6 billion, down 4.4%.

Business Processing: The segment reported core earnings of $7 million, down 12.5% year over year. Higher expenses led to this downside.

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 $1.9 billion in term ABS. Also, the company repurchased $138 million of senior unsecured debt.

Our Take

Navient reported a decent quarter as costs declined and segments reported improved performance. Also, other income increased owing to several measures taken, of late, to build fee income base. However, the lender’s loan portfolios have witnessed an annual fall as well. Additionally, its involvement in improper lending practices is likely to keep legal expenses elevated. Nevertheless, its digitization efforts are encouraging.

Navient Corporation Price, Consensus and EPS Surprise

Navient Corporation Price, Consensus and EPS Surprise

Navient Corporation price-consensus-eps-surprise-chart | Navient Corporation Quote

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

Performance of Other Banks

Texas Capital Bancshares Inc. TCBI reported earnings per share of $1.50 in second-quarter 2019, lagging the Zacks Consensus Estimate of $1.53. Results, however, compare favorably with the prior-year quarter’s $1.38. Elevated expenses were on the downside. However, rise in revenues was a positive factor. Further, organic growth was reflected, with significant rise in loans and deposit balances.

Driven by top-line strength, Synovus Financial SNV reported a positive earnings surprise of 1.01% in the June-end period. Adjusted earnings of $1.00 per share beat the Zacks Consensus Estimate of 99 cents. This apart, the reported figure came in 8.4% higher than the prior-year quarter tally. Higher revenues, backed by strong loan balances, stoked organic growth. Notably, lower efficiency ratio and rising fee income were tailwinds. Nonetheless, escalating expenses and provisions were undermining factors.

PNC Financial PNC reported positive earnings surprise of 1.8% in the second quarter. Earnings per share of $2.88 outpaced the Zacks Consensus Estimate of $2.83. The bottom line also reflected a 5.9% jump from the prior-year quarter’s reported figure. Higher revenues, driven by higher net interest income and escalating fee income, aided the company’s results. However, rise in costs and provisions were headwinds.

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