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Navient (NAVI) Q4 Earnings Meet Estimates, Down Y/Y

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Navient Corporation’s (NAVI - Free Report) fourth-quarter 2014 core earnings came in at 53 cents per share, in line with the Zacks Consensus Estimate. The figure compared unfavorably with core earnings of 62 cents per share reported in the year-ago quarter.

Core earnings exclude 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 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 in Apr 2014 – reflects lower expenses and provisions for loan losses, partially offset by lower asset recovery revenue and reduced net interest income. Private education loans segment exhibited an improvement.

Excluding expenses associated with regulatory matters, fourth-quarter 2014 core earnings per share were 54 cents compared with 70 cents in the prior-year quarter.

Net income came in at $217 million, down from $274 million in the prior-year quarter.

GAAP net income for the quarter was $263 million or 64 cents per share, compared with GAAP net income $270 million or 60 cents per share in the prior-year quarter.

For full-year 2014, core earnings per share came in at $1.93 share, missing the Zacks Consensus Estimate by a penny. Also, it came below the prior-year figure of $2.77 per share. Net income for 2014 was $818 million versus $1.2 billion in 2013.

GAAP net income was $1.1 billion or $2.69 per share in 2014 versus GAAP net income of $1.4 billion or $3.12 per share in the prior year.

Performance in Detail

The following figures are on a core-earnings basis.

Net interest income declined 6.3% year over year to $517 million.

Non-interest income decreased slightly to $171 million. While servicing revenues rose, asset recovery revenue declined.

On a positive note, provision for credit losses declined 13.8% year over year to $138 million. Also, total expenses decreased 7.7% year over year to $215 million. Expenses in both comparable periods include regulatory costs.

During 2014, the company acquired student loans worth $13 billion.

Segmental Performance

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $82 million, slightly up from $81 million in the year-ago quarter.

During the quarter, Navient acquired FFELP loans of $9.5 billion. As of Dec 31, 2014, the company’s FFELP loans stood at $104.5 billion versus $103.2 billion of FFELP loans as of Dec. 31, 2013.

FFELP loan spread declined 1 basis point year over year to 1.00%.

Private Education Loans: The segment reported core earnings of $92 million in the quarter, up from $86 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 8.1% of loans in repayment, down 120 basis points (bps) and annualized charge-off rate declined 80 bps to 2.5% of average loans in repayment.

During the quarter, Navient acquired private education loans of $11 million. As of Dec 31, 2014, the company’s private education loans stood at $29.8 billion versus private education loans of $31 billion as of Dec. 31, 2013.

Student loan spread declined 5 bps year over year to 3.99 %.

Business Services: The segment reported core earnings of $98 million, down from $187 million in the year-ago quarter. The decrease reflects after-tax gain realized with the sale of a subsidiary in the prior-year quarter, lower asset recovery revenue and reduced balance of FFELP loans serviced.

Currently, Navient services student loans for more than 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 $55 million, compared with net loss of $80 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, private education loan ABS and unsecured debt of $1.0 billion, $664 million and $1.0 billion, respectively.

Share Repurchase

During the quarter Navient repurchased 8.7 million shares of common stock for $168 million. For 2014, the company repurchased 30.4 million shares for $600 million, thereby fully utilizing the company’s share repurchase program authorization for 2014.

Our Take

Though results reflected declined profits,  continued  improved performance in the Private Education Loan segment was the tail wind. We believe the company’s initiatives that are currently underway including enhancement of servicing operations, improving credit quality, coupled with a strengthening economy, will drive its earnings going forward. Also, we remain encouraged by the company’s steady capital deployment activities that boost investors’ confidence in the stock.

We believe Navient will be able to maintain its leading position in the student lending market through its continued acquisition of federal and private student loans.

Navient currently carries a Zacks Rank #2 (Buy).

Other companies in the Finance-Consumer Loans space include Encore Capital Group, Inc. (ECPG - Free Report) , First Cash Financial Services Inc. (FCFS - Free Report) and Ally Financial Inc. (ALLY - Free Report) . First Cash Financial is expected to report its quarterly results on Jan 27, Ally Financial on Jan 29 and Encore Capital is slated to release results on Feb 24.

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