Navient (NAVI) Q4 Earnings Beat Estimates, Expenses Fall

Navient Corporation (NASDAQ:NAVI) reported a notable positive earnings surprise of 20.8% in fourth-quarter 2018. Adjusted core earnings per share of 58 cents surpassed the Zacks Consensus Estimate of 48 cents. Also, the bottom line came in above the year-ago quarter figure of 43 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.

Fourth-quarter results of Navient benefited from a decline in provisions and expenses. Also, higher fee income supported the results. However, lower net interest income was a key headwind. Year-over-year decline in loans was another offsetting factor.

GAAP net income for the quarter was $72 million or 28 cents per share against net loss of $84 million or 32 cents per share in the year-ago quarter.

For full-year 2018, the company reported GAAP net income of $395 million or $1.49 per share, up from $292 million or $1.04 per share.

Fall in NII Offset by Lower Expenses (on core earnings basis)

Net interest income (NII) dipped 12.6% year over year to $312 million.

Non-interest income rose 11.6% to $202 million. Asset recovery and business processing revenues along with gain on debt repurchases increased.

Provision for loan losses decreased nearly 22% year over year to $85 million.

Total expenses declined 11.4% to $256 million from the year-ago quarter.

Segment Performance

Federal Education Loans: The segment generated core earnings of $147 million, up 2.8% year over year. Lower adjusted expenses along with decline in provisions came as tailwinds.

During the reported quarter, Navient acquired FFELP loans of $256 million. As of Dec 31, 2018, the company’s FFELP loans were $72.3 billion, down 11.5%.

Consumer Lending: The segment reported core earnings of $66 million, up 46.7% year over year. Lower provisions and expenses were the positives. Net interest margin was 3.18%, down 13 basis points.

Private education loan delinquencies of 30 days or more of $1.3 billion were down $38 million from the prior-year quarter.

As of Dec 31, 2018, the company’s private education loans totaled $22.2 billion, down 5.1%.

Business Processing: The segment reported core earnings of $7 million, up 75% year over year. Increase in fee income was offset by higher expenses.

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 $1.3 billion in FFELP Loan ABS. Also, the company repurchased $1.4 billion of senior unsecured debt during the quarter.

Our Take

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

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Navient Corporation Price, Consensus and EPS Surprise