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Navient (NAVI) Q4 Earnings Lag on Lower Net Interest Income

Zacks Equity Research

Navient Corporation’s NAVI fourth-quarter 2016 core earnings per share (EPS) of 43 cents missed the Zacks Consensus Estimate by a penny. Also, the figure came below the year-ago quarter tally.

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 reflect reduced net interest income and higher expenses. However, on a positive note, the loan management, servicing and asset recovery company recorded increase in non-interest income and lower provision for credit losses in the quarter.

Net income came in at $129 million in the fourth quarter, down from $169 million recorded in the prior-year quarter.

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GAAP net income for the quarter was $145 million or 48 cents per share compared with $283 million or 78 cents per share in the year-ago quarter.

For full-year 2016, core EPS of $1.82 missed the Zacks Consensus Estimate by a penny. However, it improved from the prior-year figure of $1.79. Net income for 2016 was $587 million, down from $681 million in 2015.

GAAP net income was $681 million or $2.12 per share in 2016 as against $984 million or $2.58 per share in the prior year.

Performance in Detail

The following figures are calculated on core earnings basis.

Net interest income declined 16.2% year over year to $373 million.

However, non-interest income inched up 1.7% year over year to $179 million. Asset recovery revenues rose, while servicing revenues declined.

Further, provision for credit losses decreased 15% year over year to $102 million.

Total expenses climbed 4.7% year over year to $246 million.

Segment Performance

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $68 million, down 4.2% year over year. The underperformance was mainly attributable to lower net interest income owing to amortization of the portfolio.

FFELP loan spread expanded 5 basis points (bps) year over year to 0.98%.

During the quarter, Navient acquired FFELP loans of $709 million. As of Dec 31, 2016, the company’s FFELP loans came in at $87.7 billion, down 9% year over year.

Private Education Loans: The segment reported core earnings of $41 million in the quarter, down 26.8% year over year. The decrease was due to lower net interest income owing to amortization of the portfolio, partially offset by reduced provision for loan losses.  

Total delinquency rate came in at 7.4%, up 20 bps. Charge-off rate of 2.3% of average loans in repayment was flat year over year. Student loan spread contracted 50 bps year over year to 3.23%.

As of Dec 31, 2016, the company’s private education loans totaled $23.3 billion, down 11.6% year over year.

Business Services: The segment reported core earnings of $71 million, down 12.3% year over year. The decline was mainly due to higher legal contingency expense and conversion fees of $7 million for loans transferred to the company’s servicing system during the reported quarter.

Currently, Navient services student loans for over 12 million customers. This includes 6.2 million customers on behalf of the U.S. Department of Education (“ED”).

Other: The segment reported a net loss of $51 million, compared to a net loss of $39 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 completed $1.9 billion in FFELP Loan ABS. Also, the company retired or repurchased $755 million of senior unsecured debt during the quarter.

Share Repurchase

During the quarter, Navient repurchased 12.5 million shares of common stock for $180 million.

Notably, the company completed its previous share repurchase program and in Dec 2016, its board of directors authorized a new $600-million share buyback program effective Jan 1, 2017.

Our Take

Navient’s fourth-quarter results were not strong. However, we believe that the company will continue to maintain its leadership position in the student-lending market through various growth avenues, including its continued acquisition of federal and private student loans. Additionally, the economic recovery and declining unemployment rate are likely to fortify its business prospects as well as help borrowers in repaying their loans. Further, we remain encouraged by the company’s steady capital deployment activities that boost shareholders' value.

However, legal and regulatory issues remain one of the key concerns for Navient. Recently, the company made headlines after it was hit with a lawsuit by the Consumer Financial Protection Bureau (CFPB). According to the release by the CFPB, Navient – the nation’s largest servicer of both federal and private student loans – has been accused of “systematically and illegally failing borrowers at every stage of repayment.”  In response, Navient stated that it will “vigorously defend” itself against the allegations.

In addition, the company’s top line faces pressure due to lack of access to new loans and alternate sources of revenue.

Navient Corporation Price, Consensus and EPS Surprise

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

Navient currently carries a Zacks Rank #4 (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 and Credit Acceptance Corp. CACC are slated to release results on Jan 31, while Regional Management Corp. RM is scheduled to release on Feb 7.

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