Navient Corporation’s (NAVI) third-quarter 2014 core earnings came in at 52 cents per share, marginally beating the Zacks Consensus Estimate. However, the figure compared unfavorably with 58 cents per share earned in the year-ago quarter.
Core earnings exclude the impact of the financial results of the consumer banking business for periods prior to the spin off as well as the spin-off related restructuring and reorganization expenses. It also excludes the impact of certain other one time items – unrealized, mark-to-market gains/losses on derivatives, and goodwill and acquired intangible asset amortization and impairment.
Results were aided by lower provisions for loan losses, partially offset by lower asset recovery revenue, reduced net interest income and higher expenses. Private education loans segment exhibited an improvement.
Net income came in at $218 million compared with $259 million in the prior-year quarter.
GAAP net income for the quarter was $359 million or 85 cents per share, compared with $260 million or 57 cents per share in the year-ago quarter.
Following the separation of SLM Corporation into two distinct publicly-traded entities on Apr 30, 2014, Navient started operating independently as a loan management, servicing and asset recovery company. The separation came as part of several initiatives undertaken by management in 2013 to enhance shareholder value.
Quarter in Detail
The following figures are on a core-earnings basis.
Net interest income declined 8.3% year over year to $529 million. Non-interest income fell 17.8% year over year to $157 million. Operating expenses increased 2.6% year over year to $195 million.
On a positive note, provision for credit losses declined 25.1% year over year to $140 million. Also, during the quarter, the company acquired student loans worth $1.4 billion.
Segmental Performance
Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $79 million, down from $91 million in the year-ago quarter. The decline mainly reflected reduced net interest income owing to the reduction in outstanding FFELP loans.
During the quarter the Navient acquired FFELP loans of $521 million. As of Sep 30, 2014, the company’s FFELP loans stood at $97.7 billion.
FFELP loan spread declined 1 basis point year over year to 1.02 %.
Private Education Loans: The segment reported core earnings of $98 million in the quarter, up from $75 million in the prior-year quarter. Lower provision for private education loan losses drove the increase.
Also, the quarter witnessed improvement in delinquencies and charge-offs on a year-over-year basis. Total delinquencies came in at 7.9% of loans in repayment, down 190 basis points (bps) and annualized charge-off rate declined 60 bps to 2.3% of average loans in repayment.
During the quarter, Navient acquired private education loans of $848 million. As of Sep 30, 2014, the company’s private education loans stood at $30.5 billion.
Student loan spread declined 6 bps year over year to 4.06 %.
Business Services: The segment reported core earnings of $85 million, down from $127 million in the year-ago quarter. The decrease was mainly attributable to lower asset recovery revenue and reduced balance of FFELP loans serviced.
Currently, Navient services student loans for 12 million customers. This includes 6.1 million customers on behalf of the U.S. Department of Education (ED).
Other: The segment reported net loss of $44 million, compared with net loss of $34 million in the prior-year quarter.
Source of Funding and Liquidity
In order to meet the liquidity needs, Navient expects to utilize various sources including cash and investment portfolio, issuance of additional unsecured debt, the repayment of principal on unencumbered student loan assets and the distributions from securitization trusts (including servicing fees). It may also issue term asset-backed securities ("ABS").
During the quarter, Navient issued FFELP ABS and private education loan ABS of $1.3 billion and $463 million, respectively.
Share Repurchase
During the quarter Navient repurchased 9.5 million shares of common stock for $167 million. As of Sep 30, 2014, $168 million shares remained outstanding under the repurchase authorization.
Our Take
This marked the second consecutive quarter of Navient reporting standalone financials post split. We believe the company’s initiatives that are currently underway, such as enhancing servicing operations, improving credit quality, coupled with an improving economy, will drive its earnings going forward.
Navient currently carries a Zacks Rank #3 (Hold).
Other companies in the Finance-Consumer Loans space include Sallie Mae (SLM), Discover Financial Services (DFS) and Cash America International, Inc. (CSH). Discover Financial is expected to report its quarterly results on Oct 21, Sallie Mae on Oct 22 and Cash America is slated to release results on Oct 23.
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