Navient Corporation’s NAVI third-quarter 2015 core earnings of 47 cents per share missed the Zacks Consensus Estimate by a penny. Also, the figure compared unfavorably with core earnings of 52 cents per share reported in the year-ago quarter.
Core earnings excluded impact of the financial results of the consumer banking business for periods prior to the spin-off of Navient from Sallie Mae in April 2014, as well as the related restructuring and reorganization expenses. It also excludes 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 – the loan management, servicing and asset recovery company formed through the strategic split of Sallie Mae last year – reflects reduced net interest income and higher expenses. However, on a positive note, the quarter experienced increase in non-interest income and lower provision for credit losses.
Net income came in at $174 million in the third quarter of 2015, down from $218 million in the prior-year quarter.
GAAP net income for the quarter was $237 million or 63 cents per share, compared with $359 million or 85 cents per share in the prior-year quarter.
Performance in Detail
The following figures are calculated on a core-earnings basis.
Net interest income declined 13% year over year to $460 million.
However, non-interest income increased 5.7% year over year to $166 million year over year. While asset recovery revenues rose, servicing revenues declined.
Further, provision for credit losses decreased 12.1% year over year to $123 million.
Total expenses increased 16.9% year over year to $228 million. The increase mainly reflected operating costs related to Gila LLC, incremental third-party servicing expenses and regulatory compliance costs.
Segmental Performance
Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $70 million, down 11.4% year over year. The decline was mainly due to lower net interest income, partially offset by reduced expenses.
During the quarter, Navient acquired FFELP loans of $1.1 billion. As of Sep 30, 2015, the company’s FFELP loans came in at $98.5 billion up from $97.7 billion as of Sep 30, 2014.
FFELP loan spread decreased 12 basis bps year over year to 0.90%.
Private Education Loans: The segment reported core earnings of $77 million in the quarter, down 21.4% year over year. The decrease was due to lower net interest income, partially offset by reduced provision for private education loan losses.
Total delinquencies came in at 7.4% of loans in repayment, down 50 basis points (bps) while charge-off rate of 2.3% of average loans in repayment remained stable with the prior-year quarter.
As of Sep 30, 2015, the company’s private education loans came in at $27.3 billion versus $30.5 billion a year ago.
Student loan spread declined 18 bps year over year to 3.88%.
Business Services: The segment reported core earnings of $79 million, down 7.1% year over year. The decline was mainly due to $11 million of one-time conversion costs to transfer $4.9 billion of FFELP loans to the company’s servicing system.
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 $52 million, compared with net loss of $44 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, 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 quarter, Navient issued private education loan ABS of $700 million and funded cleanup call options tied to seven FFELP ABS trusts and bonds of $852 million through conduit facilities. Further, the company amended the transaction agreements for 16 Navient-sponsored securitization trusts backed by federally guaranteed student loans.
Share Repurchase
During the quarter, Navient repurchased 12.1 million shares of common stock for $175 million under the share repurchase program started in January 2015, which authorizes the company to repurchase shares worth up to $1 billion.
Other Developments
During the quarter, Navient completed conversion of $4.9 billion of FFELP loans to its servicing system
Following the quarter end, Navient acquired Xtend Healthcare. Based in Hendersonville, TN, Xtend is a health care payments company, engaged in providing health insurance claims billing and account resolution and patient billing and customer service to over 130 hospitals. The deal boosts Navient's asset recovery and business process outsourcing capabilities into the lucrative health care payments sector.
Our Take
Although Navient’s results do not reflect a strong performance; we believe Navient 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 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 #4 (Sell).
Among others, Capital One Financial Corporation COF is scheduled to release results on Oct 22, while both Ally Financial Inc. ALLY and World Acceptance Corp. WRLD are slated to release results on Oct 29.
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