Navient (NAVI) Q1 Earnings Miss On Low Non-Interest Income

Navient Corporation’s (NASDAQ:NAVI) first-quarter 2018 adjusted core earnings per share (EPS) of 40 cents missed the Zacks Consensus Estimate by a penny. The reported figure came in higher than the year-ago quarter tally of 36 cents.

Core earnings excluded the impact of derivative accounting treatment. It also excluded the impact of certain other one-time items, including goodwill and acquired intangible asset amortization.

First-quarter results of Navient reflect lower revenues aided by decrease in net interest income and non-interest income. Moreover, expenses escalated. However, lower provisions were a tailwind.

The company reported core net income of $107 million in the quarter, in line with the year-ago quarter.

GAAP net income for the quarter was $126 million or 47 cents per share against income of $88 million or 30 cents per share in the year-ago quarter.

Fall in NII and Fee Income Recorded, Expenses Escalate (on core earnings basis)

Net interest income (NII) dipped 1.2% year over year to $330 million.

Non-interest income edged down 1.1% year over year to $179 million. Asset recovery and business processing revenues rose, while servicing and other revenues declined.

Provision for credit losses decreased nearly 18.7% year over year to $87 million.

Total expenses rose 18.5% year over year to $282 million.

Segment Performance

Federal Education Loans: The segment generated core earnings of $141 million, up 9.3% year over year. Lower operating and income tax expenses were partially offset by decreased NII and fee income.

During the reported quarter, Navient acquired FFELP loans of $283 million. As of Mar 31, 2018, the company’s FFELP loans were $79.4 billion, down 6.9% year over year.

Consumer Lending: The segment reported core earnings of $50 million, up 31.6% year over year. Increased NII and lower provisions were the positives. Net interest margin was 3.23%, up 7 basis points year over year.

Private education loan total delinquencies of $1.3 billion were down 11.6% from the prior-year quarter.

As of Mar 31, 2018, the company’s private education loans totaled $22.9 billion, up slightly year over year.

Business Processing: The segment reported core earnings of $10 million, significantly up from $3 million in the prior-year quarter, aided by increase in fee income.

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).

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During the reported quarter, Navient issued $2 billion in FFELP Loan ABS, $507 million in private education loan ABS and $1.2 billion in unsecured debt. Also, the company repurchased $167 million of senior unsecured debt during the quarter.

Our Take

Navient’s disappointing fee income base impacted revenues. Nevertheless, its efforts to enforce digitization are encouraging. Further, the company’s involvement in improper lending practices is likely to hurt its reputation and keep legal expenses elevated.