Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

  þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 001-36228

 

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   46-4054283

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

123 Justison Street, Wilmington, Delaware   19801
(Address of principal executive offices)   (Zip Code)

(302) 283-8000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  þ       Accelerated filer  ¨
Non-accelerated filer  ¨       Smaller reporting company  ¨
(Do not check if a smaller reporting company)    

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class    Outstanding at March 31, 2015

Common Stock, $0.01 par value

   389,021,445 shares

 

 

 


Table of Contents

NAVIENT CORPORATION

Table of Contents

 

Part I. Financial Information

  

Item 1.

   Financial Statements      1   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      83   

Item 4.

   Controls and Procedures      88   

PART II. Other Information

  

Item 1.

   Legal Proceedings      89   

Item 1A.

   Risk Factors      91   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      92   

Item 3.

   Defaults Upon Senior Securities      92   

Item 4.

   Mine Safety Disclosures      92   

Item 5.

   Other Information      92   

Item 6.

   Exhibits      93   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

NAVIENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)

 

     March 31,
2015
    December 31,
2014
 

Assets

    

FFELP Loans (net of allowance for losses of $91 and $93, respectively)

   $ 102,424      $ 104,521   

Private Education Loans (net of allowance for losses of $1,849 and $1,916 respectively)

     28,990        29,796   

Investments

    

Available-for-sale

     6        6   

Other

     597        627   
  

 

 

   

 

 

 

Total investments

     603        633   

Cash and cash equivalents

     2,051        1,443   

Restricted cash and investments

     3,799        3,926   

Goodwill and acquired intangible assets, net

     549        369   

Other assets

     5,456        5,664   
  

 

 

   

 

 

 

Total assets

   $ 143,872      $ 146,352   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 4,090      $ 2,663   

Long-term borrowings

     132,330        136,866   

Other liabilities

     3,361        2,625   
  

 

 

   

 

 

 

Total liabilities

     139,781        142,154   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Common stock, par value $0.01 per share, 1.125 billion shares authorized: 429 million and 426 million shares issued, respectively

     4        4   

Additional paid-in capital

     2,935        2,893   

Accumulated other comprehensive (loss) income (net of tax benefit (expense) of $21 and $(5), respectively)

     (36     9   

Retained earnings

     1,951        1,724   
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity before treasury stock

     4,854        4,630   

Less: Common stock held in treasury at cost: 40 million and 24 million shares, respectively

     (767     (432
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity

     4,087        4,198   

Noncontrolling interest

     4          
  

 

 

   

 

 

 

Total equity

     4,091        4,198   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 143,872      $ 146,352   
  

 

 

   

 

 

 

Supplemental information — assets and liabilities of consolidated variable interest entities:

 

     March 31,
2015
     December  31,
2014
 

FFELP Loans

   $ 98,369       $ 100,367   

Private Education Loans

     24,526         24,418   

Restricted cash and investments

     3,607         3,733   

Other assets

     288         1,230   

Short-term borrowings

     631         653   

Long-term borrowings

     114,509         117,678   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 11,650       $ 11,417   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

 

     Three Months Ended
March 31,
 
          2015                2014       

Interest income:

     

FFELP Loans

   $ 637       $ 646   

Private Education Loans

     456         644   

Other loans

     2         3   

Cash and investments

     2         3   
  

 

 

    

 

 

 

Total interest income

     1,097         1,296   

Total interest expense

     514         530   
  

 

 

    

 

 

 

Net interest income

     583         766   

Less: provisions for loan losses

     125         185   
  

 

 

    

 

 

 

Net interest income after provisions for loan losses

     458         581   
  

 

 

    

 

 

 

Other income (loss):

     

Gains on sales of loans and investments

     5           

Gains (losses) on derivative and hedging activities, net

     71         (8

Servicing revenue

     77         61   

Asset recovery revenue

     89         111   

Gains on debt repurchases

               

Other

     7         6   
  

 

 

    

 

 

 

Total other income

     249         170   
  

 

 

    

 

 

 

Expenses:

     

Salaries and benefits

     123         142   

Other operating expenses

     107         224   
  

 

 

    

 

 

 

Total operating expenses

     230         366   

Goodwill and acquired intangible asset impairment and amortization expense

     1         4   

Restructuring and other reorganization expenses

     3         26   
  

 

 

    

 

 

 

Total expenses

     234         396   
  

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     473         355   

Income tax expense

     181         136   
  

 

 

    

 

 

 

Net income from continuing operations

     292         219   

Income (loss) from discontinued operations, net of tax expense (benefit)

               
  

 

 

    

 

 

 

Net income

     292         219   

Less: net loss attributable to noncontrolling interest

               
  

 

 

    

 

 

 

Net income attributable to Navient Corporation

     292         219   

Preferred stock dividends

             5   
  

 

 

    

 

 

 

Net income attributable to Navient Corporation common stock

   $ 292       $ 214   
  

 

 

    

 

 

 

Basic earnings per common share attributable to Navient Corporation:

     

Continuing operations

   $ .73       $ .50   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .73       $ .50   
  

 

 

    

 

 

 

Average common shares outstanding

     398         427   
  

 

 

    

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

     

Continuing operations

   $ .72       $ .49   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .72       $ .49   
  

 

 

    

 

 

 

Average common and common equivalent shares outstanding

     405         435   
  

 

 

    

 

 

 

Dividends per common share attributable to Navient Corporation

   $ .16       $ .15   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended
March  31,
 
         2015             2014      

Net income

   $ 292      $ 219   

Other comprehensive income (loss):

    

Unrealized gains (losses) on derivatives:

    

Unrealized hedging gains (losses) on derivatives

     (71     (11

Reclassification adjustments for derivative losses included in net income (interest expense)

            3   
  

 

 

   

 

 

 

Total unrealized gains (losses) on derivatives

     (71     (8

Income tax benefit

     26        2   
  

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (45     (6
  

 

 

   

 

 

 

Comprehensive income attributable to Navient Corporation

   $ 247      $ 213   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in millions, except share and per share amounts)

(Unaudited)

 

    Preferred
Stock
Shares
   

 

Common Stock Shares

    Preferred
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Total
Stockholders’
Equity
    Noncontrolling
Interest
    Total
Equity
 
      Issued     Treasury     Outstanding                    

Balance at December 31, 2013

    7,300,000        545,210,941        (116,262,066     428,948,875      $ 565      $ 109      $ 4,399      $ 13      $ 2,584      $ (2,033   $ 5,637      $ 5      $ 5,642   

Comprehensive income:

                         

Net income

                                                            219               219               219   

Other comprehensive income (loss), net of tax

                                                     (6                   (6            (6
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          213               213   

Cash dividends:

                         

Common stock ($.15 per share)

                                                            (64            (64            (64

Preferred stock, series A ($.87 per share)

                                                            (3            (3            (3

Preferred stock, series B ($.49 per share)

                                                            (2            (2            (2

Dividend equivalent units related to employee stock-based compensation plans

                                                            (1            (1            (1

Issuance of common shares

           4,238,182               4,238,182               1        33                             34               34   

Tax benefit related to employee stock-based compensation plans

                                              11                             11               11   

Stock-based compensation expense

                                              18                             18               18   

Common stock repurchased

                  (8,368,300     (8,368,300                                        (200     (200            (200

Shares repurchased related to employee stock-based compensation plans

                  (2,115,470     (2,115,470                                        (50     (50            (50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

    7,300,000        549,449,123        (126,745,836     422,703,287      $ 565      $ 110      $ 4,461      $ 7      $ 2,733      $ (2,283   $ 5,593      $ 5      $ 5,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

           425,637,635        (23,902,829     401,734,806      $      $ 4      $ 2,893      $ 9      $ 1,724      $ (432   $ 4,198      $      $ 4,198   

Comprehensive income:

                         

Net income

                                                            292               292               292   

Other comprehensive income, net of tax

                                                     (45                   (45            (45
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          247               247   

Cash dividends:

                         

Common stock ($.16 per share)

                                                            (63            (63            (63

Dividend equivalent units related to employee stock-based compensation plans

                                                            (2            (2            (2

Issuance of common shares

           3,585,238               3,585,238                      21                             21               21   

Tax benefit related to employee stock-based compensation plans

                                              9                             9               9   

Stock-based compensation expense

                                              12                             12               12   

Common stock repurchased

                  (14,653,835     (14,653,835                                        (300     (300            (300

Shares repurchased related to employee stock-based compensation plans

                  (1,644,764     (1,644,764                                        (35     (35            (35

Noncontrolling interest in asset recovery business

                                                                                 4        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

           429,222,873        (40,201,428     389,021,445      $      $ 4      $ 2,935      $ (36   $ 1,951      $ (767   $ 4,087      $ 4      $ 4,091   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Three Months Ended March 31,  
             2015                      2014          

Operating activities

    

Net income

   $ 292      $ 219   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Gains on loans and investments, net

     (5       

Goodwill and acquired intangible asset impairment and amortization expense

     1        4   

Stock-based compensation expense

     12        18   

Unrealized gains on derivative and hedging activities

     (224     (181

Provisions for loan losses

     125        185   

(Increase) decrease in restricted cash — other

     (7     5   

Decrease in accrued interest receivable

     148        109   

Decrease in accrued interest payable

     (60     (69

Decrease in other assets

     153        257   

Increase in other liabilities

     64        11   
  

 

 

   

 

 

 

Total net cash provided by operating activities

     499        558   
  

 

 

   

 

 

 

Investing activities

    

Student loans acquired and originated

     (830     (1,975

Reduction of student loans:

    

Installment payments, claims and other

     3,407        3,090   

Proceeds from sales of student loans

     193          

Other investing activities, net

     24        119   

Purchases of available-for-sale securities

            (25

Proceeds from maturities of available-for-sale securities

            2   

Purchases of other securities

            (65

Proceeds from maturities of other securities

     1        67   

Decrease (increase) in restricted cash — variable interest entities

     126        (221

Purchase of subsidiary, net of cash acquired

     (181       
  

 

 

   

 

 

 

Total net cash provided by investing activities

     2,740        992   
  

 

 

   

 

 

 

Financing activities

    

Borrowings collateralized by loans in trust — issued

     1,678        2,649   

Borrowings collateralized by loans in trust — repaid

     (3,369     (2,834

Asset-backed commercial paper conduits, net

     (539     (1,918

Other long-term borrowings issued

     493        834   

Other long-term borrowings repaid

     (590     (1,535

Other financing activities, net

     59        (11

Retail and other deposits, net

            86   

Common stock repurchased

     (300     (200

Common stock dividends paid

     (63     (64

Preferred stock dividends paid

            (5
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,631     (2,998
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     608        (1,448

Cash and cash equivalents at beginning of period

     1,443        5,190   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,051      $ 3,742   
  

 

 

   

 

 

 

Cash disbursements made (refunds received) for:

    

Interest

   $ 500      $ 519   
  

 

 

   

 

 

 

Income taxes paid

   $ 1      $ 38   
  

 

 

   

 

 

 

Income taxes received

   $      $ (1
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

1. The Separation

On April 30, 2014, the spin-off of Navient from SLM Corporation (the “Spin-Off”) was completed and Navient became an independent, publicly traded company focused on loan management, servicing and asset recovery. The separation was completed through the distribution of 100 percent of the outstanding shares of Navient common stock, on the basis of one share of Navient common stock for each share of SLM Corporation common stock. SLM Corporation continues operation as a separate publicly traded company and includes Sallie Mae Bank and its Private Education Loan originations business and the Private Education Loans the bank held at the time of the separation.

Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is the accounting successor, the historical financial statements of SLM Corporation prior to the distribution on April 30, 2014 are the historical financial statements of Navient. As a result, the GAAP financial results reported in this Quarterly Report on Form 10-Q include the historical financial results of SLM Corporation prior to the Spin-Off on April 30, 2014 (i.e., such consolidated results include our loan management, servicing and asset recovery business and the consumer banking business associated with Sallie Mae Bank (“SLM BankCo”)) and reflect the deemed distribution of SLM BankCo to SLM Corporation’s stockholders on April 30, 2014.

 

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of Navient have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of Navient and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three-month period ended March 31, 2015 are not necessarily indicative of the results for the year ending December 31, 2015 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2014 Form 10-K.

Reclassifications

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2014 to be consistent with classifications adopted for 2015, and had no effect on net income, total assets, or total liabilities.

Recently Issued Accounting Pronouncements

Revenue Recognition

On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

2. Significant Accounting Policies (Continued)

 

entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet determined the effect of the standard on our ongoing financial reporting but do not expect it to be material.

 

3. Allowance for Loan Losses

The financial statements of Navient reflect the deemed distribution of SLM BankCo on April 30, 2014. As a result of the deemed distribution, all disclosures in this footnote as of a date prior to April 30, 2014 include SLM BankCo’s FFELP and Private Education Loans, whereas the disclosures as of December 31, 2014 and March 31, 2015 do not contain SLM BankCo’s FFELP and Private Education Loans.

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios. We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

Allowance for Loan Losses Metrics

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 93      $ 1,916      $ 24      $ 2,033   

Total provision

     5        120               125   

Charge-offs(1)

     (7     (190     (1     (198

Reclassification of interest reserve(2)

            3               3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 91      $ 1,849      $ 23      $ 1,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,077      $ 18      $ 1,095   

Ending balance: collectively evaluated for impairment

   $ 91      $ 772      $ 5      $ 868   

Loans:

        

Ending balance: individually evaluated for impairment(3)

   $      $ 10,859      $ 43      $ 10,902   

Ending balance: collectively evaluated for impairment(3)

   $ 101,347      $ 20,561      $ 59      $ 121,967   

Charge-offs as a percentage of average loans in repayment (annualized)

     .03     2.89     3.43  

Allowance as a percentage of the ending total loan balance

     .09     5.88     22.30  

Allowance as a percentage of the ending loans in repayment

     .12     7.04     22.30  

Allowance coverage of charge-offs (annualized)

     3.6        2.4        6.3     

Ending total loans(3)

   $ 101,347      $ 31,420      $ 102     

Average loans in repayment

   $ 77,474      $ 26,644      $ 105     

Ending loans in repayment

   $ 76,755      $ 26,260      $ 102     

 

(1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be recovered and any shortfalls in what was actually recovered in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 119      $ 2,097      $ 28      $ 2,244   

Total provision

     10        175               185   

Charge-offs(1)

     (22     (218     (1     (241

Reclassification of interest reserve(2)

            5               5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 107      $ 2,059      $ 27      $ 2,193   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,081      $ 20      $ 1,101   

Ending balance: collectively evaluated for impairment

   $ 107      $ 978      $ 7      $ 1,092   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 9,590      $ 44      $ 9,634   

Ending balance: collectively evaluated for impairment

   $ 101,727      $ 31,307      $ 79      $ 133,113   

Charge-offs as a percentage of average loans in repayment (annualized)

     .12     2.82     3.62  

Allowance as a percentage of the ending total loan balance

     .10     5.03     21.80  

Allowance as a percentage of the ending loans in repayment

     .15     6.58     21.80  

Allowance coverage of charge-offs (annualized)

     1.2        2.3        5.9     

Ending total loans(3)

   $ 101,727      $ 40,897      $ 123     

Average loans in repayment

   $ 73,496      $ 31,416      $ 126     

Ending loans in repayment

   $ 73,061      $ 31,309      $ 123     

 

(1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Ending total loans for Private Education Loans includes the receivable for partially charged-off loans.

Key Credit Quality Indicators

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default; therefore, the key credit quality indicator for this portfolio is loan status. The impact of changes in loan status is incorporated quarterly into the allowance for loan losses calculation.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

For Private Education Loans, the key credit quality indicators are school type, FICO scores, the existence of a cosigner, the loan status and loan seasoning. The school type/FICO score are assessed at origination and maintained through the traditional/non-traditional loan designation. The other Private Education Loan key quality indicators can change and are incorporated quarterly into the allowance for loan losses calculation. The following table highlights the principal balance (excluding the receivable for partially charged-off loans) of our Private Education Loan portfolio stratified by the key credit quality indicators.

 

     Private Education Loans
Credit Quality Indicators
 
     March 31, 2015     December 31, 2014  

(Dollars in millions)

   Balance(3)      % of Balance     Balance(3)      % of Balance  

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 27,729         92   $ 28,527         92

Non-Traditional(1)

     2,455         8        2,534         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,184         100   $ 31,061         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 19,460         64   $ 20,001         64

Without cosigner

     10,724         36        11,060         36   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,184         100   $ 31,061         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 2,355         8   $ 2,734         9

13-24 payments

     2,801         9        3,161         10   

25-36 payments

     4,043         13        4,259         14   

37-48 payments

     4,218         14        4,404         14   

More than 48 payments

     13,873         46        13,450         43   

Not yet in repayment

     2,894         10        3,053         10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 30,184         100   $ 31,061         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Defined as loans to customers attending for-profit schools (with a FICO score of less than 670 at origination) and customers attending not-for-profit schools (with a FICO score of less than 640 at origination).

 

(2) 

Number of months in active repayment for which a scheduled payment was received.

 

(3) 

Balance represents gross Private Education Loans.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

The following tables provide information regarding the loan status and aging of past due loans.

 

     FFELP Loan Delinquencies  
     March 31,
2015
    December 31,
2014
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 10,555        $ 10,861     

Loans in forbearance(2)

     14,037          14,366     

Loans in repayment and percentage of each status:

        

Loans current

     64,522        84.1     65,221        83.4

Loans delinquent 31-60 days(3)

     3,656        4.8        3,942        5.0   

Loans delinquent 61-90 days(3)

     2,087        2.7        2,451        3.1   

Loans delinquent greater than 90 days(3)

     6,490        8.4        6,597        8.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     76,755        100     78,211        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     101,347          103,438     

FFELP Loan unamortized premium

     1,168          1,176     
  

 

 

     

 

 

   

Total FFELP Loans

     102,515          104,614     

FFELP Loan allowance for losses

     (91       (93  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 102,424        $ 104,521     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       75.7       75.6
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       15.9       16.6
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       15.5       15.5
    

 

 

     

 

 

 

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships.

 

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making full payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

     Private Education Traditional Loan
Delinquencies
 
     March  31,
2015
    December  31,
2014
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 2,630        $ 2,777     

Loans in forbearance(2)

     909          935     

Loans in repayment and percentage of each status:

        

Loans current

     22,706        93.9     23,012        92.7

Loans delinquent 31-60 days(3)

     444        1.8        624        2.5   

Loans delinquent 61-90 days(3)

     286        1.2        363        1.5   

Loans delinquent greater than 90 days(3)

     754        3.1        816        3.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans in repayment

     24,190        100     24,815        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     27,729          28,527     

Traditional loans unamortized discount

     (515       (526  
  

 

 

     

 

 

   

Total traditional loans

     27,214          28,001     

Traditional loans receivable for partially charged-off loans

     775          775     

Traditional loans allowance for losses

     (1,470       (1,515  
  

 

 

     

 

 

   

Traditional loans, net

   $ 26,519        $ 27,261     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       87.2       87.0
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       6.1       7.3
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       3.6       3.6
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

     Private Education Non-Traditional  Loan
Delinquencies
 
     March 31,
2015
    December 31,
2014
 

(Dollars in millions)

     Balance         %         Balance         %    

Loans in-school/grace/deferment(1)

   $ 264        $ 276     

Loans in forbearance(2)

     121          124     

Loans in repayment and percentage of each status:

        

Loans current

     1,745        84.3     1,749        81.9

Loans delinquent 31-60 days(3)

     84        4.0        110        5.2   

Loans delinquent 61-90 days(3)

     55        2.7        73        3.4   

Loans delinquent greater than 90 days(3)

     186        9.0        202        9.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans in repayment

     2,070        100     2,134        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     2,455          2,534     

Non-traditional loans unamortized discount

     (66       (68  
  

 

 

     

 

 

   

Total non-traditional loans

     2,389          2,466     

Non-traditional loans receivable for partially charged-off loans

     461          470     

Non-traditional loans allowance for losses

     (379       (401  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 2,471        $ 2,535     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       84.3       84.2
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       15.7       18.1
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       5.5       5.5
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days or more past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which have defaulted since 2007 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $380

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

million and $334 million in the allowance for Private Education Loan losses at March 31, 2015 and 2014, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

The following table summarizes the activity in the receivable for partially charged-off Private Education Loans.

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015              2014      

Receivable at beginning of period

   $ 1,245       $ 1,313   

Expected future recoveries of current period defaults(1)

     62         71   

Recoveries(2)

     (52      (61

Charge-offs(3)

     (19      (26
  

 

 

    

 

 

 

Receivable at end of period

     1,236         1,297   

Allowance for estimated recovery shortfalls(4)

     (380      (334
  

 

 

    

 

 

 

Net receivable at end of period

   $ 856       $ 963   
  

 

 

    

 

 

 

 

  (1) 

Represents the difference between the loan balance and our estimate of the amount to be collected in the future.

 

  (2) 

Current period cash collections.

 

  (3) 

Represents the current period recovery shortfall – the difference between what was expected to be collected and what was actually collected. These amounts are included in the Private Education Loan total charge-offs as reported in the “Allowance for Loan Losses Metrics” tables.

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $1.8 billion and $2.1 billion overall allowance for Private Education Loan losses as of March 31, 2015 and 2014, respectively.

Troubled Debt Restructurings (“TDRs”)

We sometimes modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 53 percent and 51 percent of the loans granted forbearance have qualified as a TDR loan at March 31, 2015 and December 31, 2014, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan was $2.2 billion as of March 31, 2015 and December 31, 2014.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

At March 31, 2015 and December 31, 2014, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.

 

     TDR Loans  

(Dollars in millions)

   Recorded
Investment(1)
     Unpaid
Principal
Balance
     Related
Allowance
 

March 31, 2015

        

Private Education Loans — Traditional

   $ 8,954       $ 9,021       $ 875   

Private Education Loans — Non-Traditional

     1,472         1,472         202   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,426       $ 10,493       $ 1,077   
  

 

 

    

 

 

    

 

 

 

December 31, 2014

        

Private Education Loans — Traditional

   $ 8,728       $ 8,790       $ 917   

Private Education Loans — Non-Traditional

     1,477         1,476         215   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,205       $ 10,266       $ 1,132   
  

 

 

    

 

 

    

 

 

 

 

  (1) 

The recorded investment is equal to the unpaid principal balance and accrued interest receivable net of unamortized deferred fees and costs.

The following table provides the average recorded investment and interest income recognized for our TDR loans.

 

     Three Months Ended March 31,  
     2015      2014  

(Dollars in millions)

   Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Private Education Loans — Traditional

   $ 8,856       $ 132       $ 7,631       $ 118   

Private Education Loans — Non-Traditional

     1,476         29         1,434         29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,332       $ 161       $ 9,065       $ 147   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

The following table provides information regarding the loan status and aging of TDR loans that are past due.

 

     TDR Loan Delinquencies  
     March 31, 2015     December 31, 2014  

(Dollars in millions)

     Balance          %         Balance          %    

Loans in deferment(1)

   $ 846         $ 825      

Loans in forbearance(2)

     760           745      

Loans in repayment and percentage of each status:

          

Loans current

     7,558         85.1     7,186         82.7

Loans delinquent 31-60 days(3)

     365         4.1        464         5.3   

Loans delinquent 61-90 days(3)

     249         2.8        299         3.4   

Loans delinquent greater than 90 days(3)

     715         8.0        747         8.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     8,887         100     8,696         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 10,493         $ 10,266      
  

 

 

      

 

 

    

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

The following table provides the amount of loans modified in the periods presented that resulted in a TDR. Additionally, the table summarizes charge-offs occurring in the TDR portfolio, as well as TDRs for which a payment default occurred in the current period within 12 months of the loan first being designated as a TDR. We define payment default as 60 days past due for this disclosure. The majority of our loans that are considered TDRs involve a temporary forbearance of payments and do not change the contractual interest rate of the loan.

 

     Three Months Ended March 31,  
     2015      2014  

(Dollars in millions)

   Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
     Modified
Loans(1)
     Charge-
Offs(2)
     Payment
Default
 

Private Education Loans — Traditional

   $ 430       $ 91       $ 100       $ 466       $ 100       $ 119   

Private Education Loans — Non-Traditional

     42         28         18         57         34         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 472       $ 119       $ 118       $ 523       $ 134       $ 148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Represents period ending balance of loans that have been modified during the period and resulted in a TDR.

 

(2) 

Represents loans that charged off that were classified as TDRs.

 

16


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

3. Allowance for Loan Losses (Continued)

 

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans and our allowance for uncollectible interest.

 

(Dollars in millions)

   Accrued
Interest
Receivable
     Allowance for
Uncollectible
Interest
 

March 31, 2015

     

Private Education Loans — Traditional

   $ 513       $ 24   

Private Education Loans — Non-Traditional

     65         9   
  

 

 

    

 

 

 

Total

   $ 578       $ 33   
  

 

 

    

 

 

 

December 31, 2014

     

Private Education Loans — Traditional

   $ 542       $ 29   

Private Education Loans — Non-Traditional

     70         11   
  

 

 

    

 

 

 

Total

   $ 612       $ 40   
  

 

 

    

 

 

 

 

4. Borrowings

The following table summarizes our borrowings.

 

     March 31, 2015      December 31, 2014  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,458       $ 14,830       $ 17,288       $ 1,066       $ 16,311       $ 17,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     2,458         14,830         17,288         1,066         16,311         17,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             84,579         84,579                 86,241         86,241   

Private Education Loan securitizations

             17,992         17,992                 17,997         17,997   

FFELP Loan — other facilities

             14,841         14,841                 15,358         15,358   

Private Education Loan — other facilities

     631                 631         653                 653   

Other(1)

     983                 983         937                 937   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     1,614         117,412         119,026         1,590         119,596         121,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     4,072         132,242         136,314         2,656         135,907         138,563   

Hedge accounting adjustments

     18         88         106         7         959         966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,090       $ 132,330       $ 136,420       $ 2,663       $ 136,866       $ 139,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

 

17


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

4. Borrowings (Continued)

 

Variable Interest Entities

We consolidated the following financing VIEs as of March 31, 2015 and December 31, 2014, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

 

    March 31, 2015  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 84,579      $ 84,579      $ 85,245      $ 2,882      $ 667      $ 88,794   

Private Education Loan securitizations

           17,992        17,992        23,319        472        401        24,192   

FFELP Loan — other facilities

           12,841        12,841        13,124        235        199        13,558   

Private Education Loan — other facilities

    631               631        1,207        18        37        1,262   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    631        115,412        116,043        122,895        3,607        1,304        127,806   

Hedge accounting adjustments

           (903     (903                   (1,016     (1,016
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 631      $ 114,509      $ 115,140      $ 122,895      $ 3,607      $ 288      $ 126,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2014  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other Assets     Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 86,241      $ 86,241      $ 86,715      $ 3,069      $ 722      $ 90,506   

Private Education Loan securitizations

           17,997        17,997        23,184        378        389        23,951   

FFELP Loan — other facilities

           13,358        13,358        13,653        269        260        14,182   

Private Education Loan — other facilities

    653               653        1,233        17        36        1,286   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    653        117,596        118,249        124,785        3,733        1,407        129,925   

Hedge accounting adjustments

           82        82                      (177     (177
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 653      $ 117,678      $ 118,331      $ 124,785      $ 3,733      $ 1,230      $ 129,748   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

5. Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2014 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2014 Form 10-K for a full discussion.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

5. Derivative Financial Instruments (Continued)

 

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at March 31, 2015 and December 31, 2014, and their impact on other comprehensive income and earnings for the three months ended March 31, 2015 and 2014.

Impact of Derivatives on Consolidated Balance Sheet

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

 

Hedged Risk

Exposure

  Mar. 31,
2015
    Dec. 31,
2014
    Mar. 31,
2015
    Dec. 31,
2014
    Mar. 31,
2015
    Dec. 31,
2014
    Mar. 31,
2015
    Dec. 31,
2014
 

Fair Values(1)

                 

Derivative Assets:

                 

Interest rate swaps

  Interest rate   $      $ 6      $ 930      $ 828      $ 32      $ 23      $ 962      $ 857   

Cross-currency interest rate swaps

  Foreign currency
and interest rate
                         164                             164   

Other(2)

  Interest rate                                 1        1        1        1   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

             6        930        992        33        24        963        1,022   

Derivative Liabilities:

                 

Interest rate swaps

  Interest rate     (68     (3     (2     (22     (112     (120     (182     (145

Floor Income Contracts

  Interest rate                                 (845     (915     (845     (915

Cross-currency interest rate swaps

  Foreign currency
and interest rate
                  (972     (293     (65     (65     (1,037     (358

Other(2)

  Interest rate                                 (14     (12     (14     (12
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

      (68     (3     (974     (315     (1,036     (1,112     (2,078     (1,430
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

    $ (68   $ 3      $ (44   $ 677      $ (1,003   $ (1,088   $ (1,115   $ (408
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements, and classified in other assets or other liabilities depending on whether in a net positive or negative position.

 

(2) 

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

 

(3) 

The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

 

     Other Assets      Other Liabilities  

(Dollar in millions)

   March 31,
2015
     December 31,
2014
     March 31,
2015
     December 31,
2014
 

Gross position

   $ 963       $ 1,022       $ (2,078    $ (1,430

Impact of master netting agreements

     (153      (241      153         241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative values with impact of master netting agreements (as carried on balance sheet)

     810         781         (1,925      (1,189

Cash collateral (held) pledged

     (981      (935      594         624   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net position

   $ (171    $ (154    $ (1,331    $ (565
  

 

 

    

 

 

    

 

 

    

 

 

 

The above fair values include adjustments for counterparty credit risk both for when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the overall net asset positions at March 31, 2015 and December 31, 2014 by $0 million and $18 million, respectively. In addition, the above fair values reflect adjustments for illiquid

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

5. Derivative Financial Instruments (Continued)

 

derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at March 31, 2015 and December 31, 2014 by $74 million and $73 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   Mar. 31,
2015
     Dec. 31,
2014
     Mar. 31,
2015
     Dec. 31,
2014
     Mar. 31,
2015
     Dec. 31,
2014
     Mar. 31,
2015
     Dec. 31,
2014
 

Notional Values:

                       

Interest rate swaps

   $ 6.0       $ 6.0       $ 14.3       $ 14.3       $ 27.8       $ 28.7       $ 48.1       $ 49.0   

Floor Income Contracts

                                     35.1         35.2         35.1         35.2   

Cross-currency interest rate swaps

                     9.3         9.4         .4         .4         9.7         9.8   

Other(1)

                                     3.5         3.6         3.5         3.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 6.0       $ 6.0       $ 23.6       $ 23.7       $ 66.8       $ 67.9       $ 96.4       $ 97.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” includes embedded derivatives bifurcated from securitization debt as well as derivatives related to our Total Return Swap Facility.

Impact of Derivatives on Consolidated Statements of Income

 

     Three Months Ended March 31,  
     Unrealized Gain
(Loss) on
Derivatives(1)(2)
    Realized Gain
(Loss) on
Derivatives(3)
    Unrealized Gain
(Loss) on
Hedged Item(1)
    Total Gain (Loss)  

(Dollars in millions)

     2015         2014         2015         2014       2015         2014         2015         2014    

Fair Value Hedges:

                

Interest rate swaps

   $ 121      $ 53      $ 95      $ 100      $ (130   $ (53   $ 86      $ 100   

Cross-currency interest rate swaps

     (842     (53     2        22        988        7        148        (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     (721            97        122        858        (46     234        76   

Cash Flow Hedges:

                

Interest rate swaps

                          (3                          (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

                          (3                          (3

Trading:

                

Interest rate swaps

     18        19        11        12                      29        31   

Floor Income Contracts

     72        181        (162     (198                   (90     (17

Cross-currency interest rate swaps

     (1     7        (1     (1                   (2     6   

Other

     (2     19        (1     (1                   (3     18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading derivatives

     87        226        (153     (188                   (66     38   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (634     226        (56     (69     858        (46     168        111   

Less: realized gains (losses) recorded in interest expense

                   97        119                      97        119   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ (634   $ 226      $ (153   $ (188   $ 858      $ (46   $ 71      $ (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Recorded in “Gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

(2) 

Represents ineffectiveness related to cash flow hedges.

 

(3) 

For fair value and cash flow hedges, recorded in interest expense. For trading derivatives, recorded in “Gains (losses) on derivative and hedging activities, net.”

 

20


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

5. Derivative Financial Instruments (Continued)

 

Collateral

Collateral held and pledged related to derivative exposures between us and our derivative counterparties are detailed in the following table:

 

(Dollars in millions)

   March 31,
2015
     December 31,
2014
 

Collateral held:

     

Cash (obligation to return cash collateral is recorded in short-term borrowings)

   $ 981       $ 935   

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(1)

     243         344   
  

 

 

    

 

 

 

Total collateral held

   $ 1,224       $ 1,279   
  

 

 

    

 

 

 

Derivative asset at fair value including accrued interest

   $ 1,042       $ 1,091   
  

 

 

    

 

 

 

Collateral pledged to others:

     

Cash (right to receive return of cash collateral is recorded in investments)

   $ 594       $ 624   
  

 

 

    

 

 

 

Total collateral pledged

   $ 594       $ 624   
  

 

 

    

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

   $ 1,642       $ 926   
  

 

 

    

 

 

 

 

(1) 

The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $639 million with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements, except to increase the frequency of collateral calls. Two counterparties have the right to terminate the contracts based on our current unsecured credit rating. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $65 million and have posted $64 million of collateral to these counterparties. If these two counterparties exercised their right to terminate, we would be required to deliver additional assets of $1 million to settle the contracts. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings.

 

6. Other Assets

The following table provides the detail of our other assets.

 

     March 31, 2015     December 31, 2014  

(Dollars in millions)

   Ending
Balance
     % of
Balance
    Ending
Balance
     % of
Balance
 

Accrued interest receivable, net

   $ 1,672         31   $ 1,821         32

Income tax asset, net current and deferred

     1,244         23        1,389         25   

Derivatives at fair value

     810         15        781         14   

Accounts receivable

     582         11        558         10   

Benefit and insurance-related investments

     488         9        485         9   

Fixed assets, net

     154         3        152         3   

Other loans, net

     79         1        83         1   

Other

     427         7        395         6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 5,456         100   $ 5,664         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

21


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

7. Business Combination — Acquisition of Gila LLC

Acquisitions are accounted for under the acquisition method of accounting as defined in ASC Topic 805, “Business Combinations.” The Company allocates the purchase price to the fair value of the acquired tangible assets, liabilities and identifiable intangible assets as of the acquisition date.

On February 20, 2015, Navient acquired a 97.9% controlling interest in Gila LLC. Gila LLC is an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, agencies, court systems and municipalities. We have engaged an independent appraiser to assist in the valuation of the assets acquired and liabilities assumed including identifiable intangible assets, primarily customer relationships, the trade name and developed technology. We anticipate the purchase price allocation will be completed by the end of the third quarter 2015. The results of operations of Gila LLC have been included in Navient’s consolidated financial statements since the acquisition date and are reflected in Navient’s Business Services segment results in “Note 12 — Segment Reporting.”

During the first-quarter 2015, there were no other changes or adjustments to goodwill and intangible assets.

 

8. Stockholders’ Equity

The following table summarizes common share repurchases and issuances.

 

     Three Months Ended March 31,  
     2015      2014  

Common shares repurchased(1)

     14,653,835         8,368,300   

Average purchase price per share

   $ 20.49       $ 23.89   

Shares repurchased related to employee stock-based compensation plans(2)

     1,644,764         2,115,470   

Average purchase price per share

   $ 20.86       $ 23.56   

Common shares issued(3)

     3,585,238         4,238,182   

 

  (1) 

Common shares purchased under our share repurchase programs, including share repurchase programs conducted by SLM Corporation prior to April 30, 2014.

 

  (2) 

Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

 

  (3) 

Common shares issued under our various compensation and benefit plans, including shares issued by SLM Corporation prior to April 30, 2014.

The closing price of our common stock on March 31, 2015 was $20.33.

Dividend and Share Repurchase Program

In March 2015, we paid a common stock dividend of $0.16 per share, up from $0.15 per share in the prior quarter.

We repurchased 14.7 million shares of common stock for $300 million in the first quarter of 2015. The shares were repurchased under our January 2015 share repurchase program that authorizes up to $1 billion of share repurchases, of which $700 million remained available at March 31, 2015. In first-quarter 2014, SLM Corporation repurchased 8.4 million shares for $200 million.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

9. Earnings per Common Share

Basic earnings per common share (“EPS”) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations follows.

 

     Three Months Ended March 31,  

(In millions, except per share data)

         2015                    2014          

Numerator:

     

Net income attributable to Navient Corporation

   $ 292       $ 219   

Preferred stock dividends

             5   
  

 

 

    

 

 

 

Net income attributable to Navient Corporation common stock

   $ 292       $ 214   
  

 

 

    

 

 

 

Denominator:

     

Weighted average shares used to compute basic EPS

     398         427   

Effect of dilutive securities:

     

Dilutive effect of stock options, non-vested restricted stock, restricted stock units and Employee Stock Purchase Plans (“ESPPs”)(1)

     7         8   
  

 

 

    

 

 

 

Dilutive potential common shares(2)

     7         8   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     405         435   
  

 

 

    

 

 

 

Basic earnings (loss) per common share attributable to Navient Corporation:

     

Continuing operations

   $ .73       $ .50   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .73       $ .50   
  

 

 

    

 

 

 

Diluted earnings (loss) per common share attributable to Navient Corporation:

     

Continuing operations

   $ .72       $ .49   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .72       $ .49   
  

 

 

    

 

 

 

 

(1) 

Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, non-vested restricted stock, restricted stock units, and the outstanding commitment to issue shares under applicable ESPPs, determined by the treasury stock method.

 

(2) 

For the three months ended March 31, 2015 and 2014, stock options covering approximately 4 million and 3 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

 

10. Fair Value Measurements

We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. Please refer to “Note 12 — Fair Value Measurements” in our 2014 Form 10-K for a full discussion.

During the three months ended March 31, 2015, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

10. Fair Value Measurements (Continued)

 

The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis.

 

    Fair Value Measurements on a Recurring Basis  
    March 31, 2015     December 31, 2014  

(Dollars in millions)

  Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total  

Assets

               

Available-for-sale investments:

               

Agency residential mortgage-backed securities

  $  —      $ 1      $      $ 1      $      $ 1      $      $ 1   

Other

           5               5               5               5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

           6               6               6               6   

Derivative instruments:(1)

               

Interest rate swaps

           943        19        962               841        16        857   

Cross-currency interest rate swaps

                                              164        164   

Other

                  1        1                      1        1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

           943        20        963               841        181        1,022   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $  —      $ 949      $ 20      $ 969      $      $ 847      $ 181      $ 1,028   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities(2)

               

Derivative instruments(1)

               

Interest rate swaps

  $  —      $ (75   $ (107   $ (182   $      $ (41   $ (104   $ (145

Floor Income Contracts

           (845            (845            (915            (915

Cross-currency interest rate swaps

           (79     (958     (1,037            (77     (281     (358

Other

                  (14     (14                   (12     (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

           (999     (1,079     (2,078            (1,033     (397     (1,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $  —      $ (999   $ (1,079   $ (2,078   $      $ (1,033   $ (397   $ (1,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Fair value of derivative instruments excludes accrued interest and the value of collateral.

 

(2) 

Borrowings which are the hedged items in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and are not reflected in this table.

 

(3) 

See “Note 5 — Derivative Financial Instruments” for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

10. Fair Value Measurements (Continued)

 

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

 

 

    Three Months Ended March 31,  
    2015     2014  
    Derivative instruments     Derivative instruments  

(Dollars in millions)

  Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
    Interest
Rate Swaps
    Cross
Currency
Interest
Rate Swaps
    Other     Total
Derivative
Instruments
 

Balance, beginning of period

  $ (88   $ (117   $ (11   $ (216   $ (87   $ 1,007      $ (21   $ 899   

Total gains/(losses) (realized and unrealized):

               

Included in earnings(1)

    1        (840     (3     (842            (10     17        7   

Included in other comprehensive income

                                                       

Settlements

    (1     (1     1        (1            (17     1        (16

Transfers in and/or out of level 3

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ (88   $ (958   $ (13   $ (1,059   $ (87   $ 980      $ (3   $ 890   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains/(losses) relating to instruments still held at the reporting date(2)

  $      $ (838   $ (2   $ (840   $      $ (28   $ 19      $ (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

Gains (losses) on derivative and hedging activities, net

   $ (843    $ (11

Interest expense

     1         18   
  

 

 

    

 

 

 

Total

   $ (842    $ 7   
  

 

 

    

 

 

 

 

(2) 

Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

10. Fair Value Measurements (Continued)

 

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

 

(Dollars in millions)

  Fair Value at
March 31, 2015
    Valuation
Technique
  Input   Range
(Weighted Average)

Derivatives

       

Consumer Price Index/LIBOR basis swaps

  $ 13      Discounted cash flow   Bid/ask adjustment

to discount rate

  .02% — .05%

(.05%)

Prime/LIBOR basis swaps

    (101   Discounted cash flow   Constant prepayment rate   4.6%
      Bid/ask adjustment to
discount rate
  .08% — .08%

(.08%)

Cross-currency interest rate swaps

    (958   Discounted cash flow   Constant prepayment rate   2.7%

Other

    (13      
 

 

 

       

Total

  $ (1,059      
 

 

 

       

The significant inputs that are unobservable or from inactive markets related to our level 3 derivatives detailed in the table above would be expected to have the following impacts to the valuations:

 

   

Consumer Price Index/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation.

 

   

Prime/LIBOR basis swaps — These swaps do not actively trade in the markets as indicated by a wide bid/ask spread. A wider bid/ask spread will result in a decrease in the overall valuation. In addition, the unobservable inputs include Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap which will increase the value for swaps in a gain position and decrease the value for swaps in a loss position, everything else equal. The opposite is true for an increase in the input.

 

   

Cross-currency interest rate swaps — The unobservable inputs used in these valuations are Constant Prepayment Rates of the underlying securitization trust the swap references. A decrease in this input will result in a longer weighted average life of the swap. All else equal in a typical currency market, this will result in a decrease to the valuation due to the delay in the cash flows of the currency exchanges as well as diminished liquidity in the forward exchange markets as the term of the swap is increased. The opposite is true for an increase in the input.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

10. Fair Value Measurements (Continued)

 

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

 

     March 31, 2015     December 31, 2014  

(Dollars in millions)

   Fair
Value
    Carrying
Value
    Difference     Fair
Value
    Carrying
Value
    Difference  

Earning assets

            

FFELP Loans

   $ 102,440      $ 102,424      $ 16      $ 104,419      $ 104,521      $ (102

Private Education Loans

     28,661        28,990        (329     29,433        29,796        (363

Cash and investments(1)

     6,453        6,453               6,002        6,002          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     137,554        137,867        (313     139,854        140,319        (465
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

            

Short-term borrowings

     4,114        4,090        (24     2,661        2,663        2   

Long-term borrowings

     130,015        132,330        2,315        134,201        136,866        2,665   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     134,129        136,420        2,291        136,862        139,529        2,667   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative financial instruments

            

Floor Income Contracts

     (845     (845            (915     (915       

Interest rate swaps

     780        780               712        712          

Cross-currency interest rate swaps

     (1,037     (1,037            (194     (194       

Other

     (13     (13            (11     (11       
      

 

 

       

 

 

 

Excess of net asset fair value over carrying value

       $ 1,978          $ 2,202   
      

 

 

       

 

 

 

 

(1) 

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $5 million and $5 million at March 31, 2015 and December 31, 2014, respectively, versus a fair value of $6 million and $6 million at March 31, 2015 and December 31, 2014, respectively.

 

11. Commitments and Contingencies

Regulatory Matters

On May 2, 2014, Navient Solutions, Inc. (“NSI”), a wholly-owned subsidiary of Navient, and Sallie Mae Bank entered into consent orders with the Federal Deposit Insurance Corporation (the “FDIC”) (respectively, the “NSI Order” and the “Bank Order”; collectively, “the FDIC Orders”) to resolve matters related to certain cited violations of Section 5 of the Federal Trade Commission Act, including the disclosures and assessments of certain late fees, as well as alleged violations under the Servicemembers Civil Relief Act (“SCRA”). The FDIC Orders, which became effective upon the signing of the consent order with the United States Department of Justice (“DOJ”) by NSI and SLM BankCo on May 13, 2014, required NSI to pay $3.3 million in civil monetary penalties. NSI has paid its civil monetary penalties. In addition, the FDIC Orders required the establishment of a restitution reserve account totaling $30 million to provide restitution with respect to loans owned or originated by Sallie Mae Bank, from November 28, 2005 until the effective date of the FDIC Orders. Pursuant to the Separation and Distribution Agreement among SLM Corporation, SLM BankCo and Navient dated as of April 28, 2014 (the “Separation Agreement”), Navient funded the restitution reserve account in May 2014.

The NSI Order also required NSI to ensure proper servicing for service members and proper application of SCRA benefits under a revised and broader definition of eligibility than previously required by the statute and regulatory guidance and to make changes to billing statements and late fee practices. These changes to billing

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

11. Commitments and Contingencies (Continued)

 

statements and late fee practices have already been implemented. NSI also decided to voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank. They were calculated in the same manner as that which was required under the FDIC Orders and are estimated to be $42 million. The process to refund these fees as well as amounts from the restitution fund is substantially complete.

With respect to alleged civil violations of the SCRA, NSI and Sallie Mae Bank entered into a consent order with the DOJ. The DOJ consent order (“DOJ Order”) covers all loans either owned by Sallie Mae Bank or serviced by NSI from November 28, 2005 until the effective date of the settlement. The DOJ Order required NSI to fund a $60 million settlement fund, which represents the total amount of compensation due to service members under the DOJ agreement, and to pay $55,000 in civil money penalties. The DOJ Order was approved by the United States District Court in Delaware on September 29, 2014. Shortly thereafter, Navient funded the settlement fund and paid the civil money penalties pursuant to the terms of the order. On April 15, 2015, the DOJ approved the distribution plan for the settlement fund and we anticipate disbursements will begin in the second quarter of 2015.

The total reserves established by the Company in 2013 and 2014 to cover these costs were $177 million, and as of March 31, 2015, $73 million of those reserves remained. The final cost of these proceedings will remain uncertain until all of the work under the various consent orders has been completed.

As previously disclosed, the Company and various of its subsidiaries are subject to the following investigations and inquiries:

 

   

In December 2013, Navient received a Civil Investigative Demand (“CID”) issued by the State of Illinois Office of Attorney General and the State of Washington Office of the Attorney General and multiple other state Attorneys General in connection with these investigations. According to the CIDs, the investigations were initiated to ascertain whether any practices declared to be unlawful under the Consumer Fraud and Deceptive Business Practices Act have occurred or are about to occur. 

 

   

In April 2014, NSI received a CID from the Consumer Financial Protection Bureau (the “CFPB”) as part of the CFPB’s separate investigation regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters. Navient has been in discussions with the CFPB and has received a series of supplemental CIDs on these matters.

 

   

In November 2014, NSI’s subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), received a CID from the CFPB as part of the CFPB’s investigation regarding Pioneer’s activities relating to rehabilitation loans and collection of defaulted student debt. Navient has been in discussions with the CFPB and has received a supplemental CID on these matters.

 

   

In December 2014, NSI received a subpoena from the New York Department of Financial Services (the “NY DFS”) as part of the NY DFS’s inquiry with regard to whether persons or entities have engaged in fraud or misconduct with respect to a financial product or service under New York Financial Services Law or other laws. Navient has been in discussions with the NY DFS relating to this matter.

In addition, Navient and its subsidiaries are subject to examination by the CFPB, FDIC, ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from those described above may arise during the course of those examinations.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

11. Commitments and Contingencies (Continued)

 

We are cooperating with these investigations, inquiries or examinations and are committed to resolving any potential concerns. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established.

Under the terms of the Separation Agreement, Navient agreed to be responsible for, and to indemnify SLM BankCo for, all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. As a result, all liabilities arising out of the regulatory matters mentioned above, other than fines or penalties directly levied against Sallie Mae Bank, are the responsibility of, or assumed by, Navient or one of its subsidiaries, and Navient has agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank, therefrom. Navient has no additional reserves related to indemnification matters with SLM BankCo as of March 31, 2015 other than with respect to the FDIC Orders and the DOJ Order.

OIG Audit

The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance Payments (“SAP”) on September 10, 2007. On September 25, 2013, we received the final audit determination of Federal Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG on August 3, 2009 related to this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make adjustment to our government billing to reflect the policy determination. Navient remains in active discussions with ED on this matter and we also have the right to appeal the Final Audit Determination to the Administrative Actions and Appeals Service Group of ED. The last date to file an appeal in this matter has been extended by ED and is currently May 31, 2015. We continue to believe that our SAP billing practices were proper, considering then-existing ED guidance and lack of applicable regulations. The Company established a reserve for this matter in 2014 as part of the total reserve for pending regulatory matters discussed previously.

Contingencies

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, we cannot predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

11. Commitments and Contingencies (Continued)

 

Based on current knowledge, reserves have been established for certain litigation or regulatory matters where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows.

 

12. Segment Reporting

FFELP Loans Segment

In the FFELP Loans segment, we acquire and finance FFELP Loans. Even though FFELP Loans are no longer originated due to changes in federal law that took effect in 2010, we continue to pursue acquisitions of FFELP Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the FFELP Loan portfolio. This segment is expected to generate significant amounts of earnings and cash flow as the portfolio amortizes.

 

(Dollars in millions)

   March 31, 2015      December 31, 2014  

FFELP Loans, net

   $ 102,424       $ 104,521   

Cash and investments(1)

     3,851         4,050   

Other

     2,462         2,566   
  

 

 

    

 

 

 

Total assets

   $ 108,737       $ 111,137   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

Private Education Loans Segment

In this segment, we acquire, finance and service Private Education Loans. Even though we no longer originate Private Education Loans, we continue to pursue acquisitions of Private Education Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the Private Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts of cash as the portfolio amortizes.

The following table includes GAAP-basis asset information for our Private Education Loans segment.

 

(Dollars in millions)

   March 31, 2015      December 31, 2014  

Private Education Loans, net

   $ 28,990       $ 29,796   

Cash and investments(1)

     446         402   

Other

     2,359         2,453   
  

 

 

    

 

 

 

Total assets

   $ 31,795       $ 32,651   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

Business Services Segment

Our Business Services segment generates its revenue from servicing our FFELP Loan portfolio as well as providing servicing and asset recovery services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED, higher education institutions and other federal, state, court and municipal clients.

At March 31, 2015 and December 31, 2014, the Business Services segment had total assets of $643 million and $416 million, respectively, on a GAAP basis.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

12. Segment Reporting (Continued)

 

Other Segment

Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all unallocated overhead. We also include results from certain smaller wind-down and discontinued operations within this segment. Overhead expenses include costs related to executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology costs related to infrastructure and operations.

At March 31, 2015 and December 31, 2014, the Other segment had total assets of $2.7 billion and $2.1 billion, respectively, on a GAAP basis.

Measure of Profitability

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for three items, discussed below, that are either related to the Spin-Off or create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the three items we remove to result in our “Core Earnings” presentations are:

 

  1. The financial results attributable to the operations of SLM BankCo prior to the Spin-Off and related restructuring and reorganization expense incurred in connection with the Spin-Off. For GAAP purposes, Navient reflected the deemed distribution of SLM BankCo on April 30, 2014. For “Core Earnings,” we exclude the consumer banking business as if it had never been a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014;

 

  2. Unrealized mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness; and

 

  3. The accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

12. Segment Reporting (Continued)

 

Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.

Segment Results and Reconciliations to GAAP

 

    Three Months Ended March 31, 2015  

(Dollars in millions)

  FFELP
Loans
    Private
Education
Loans
    Business
Services
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 534      $ 456      $      $      $      $ 990      $ 162      $ (59   $ 103      $ 1,093   

Other loans

                         2               2                             2   

Cash and investments

    1                      1               2                             2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    535        456               3               994        162        (59     103        1,097   

Total interest expense

    302        173               30               505        9               9        514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    233        283               (27            489        153        (59     94        583   

Less: provisions for loan losses

    5        120                             125                             125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    228        163               (27            364        153        (59     94        458   

Other income (loss):

                   

Gains on sales of loans and investments

    5                                    5                             5   

Servicing revenue

    18        7        163               (111     77                             77   

Asset recovery revenue

                  89                      89                             89   

Gains on debt repurchases

                                                                     

Other income (loss)

                  2        4               6        (153     225        72        78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    23        7        254        4        (111     177        (153     225        72        249   

Expenses:

                   

Direct operating expenses

    115        46        116        4        (111     170                             170   

Overhead expenses

                         60               60                             60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    115        46        116        64        (111     230                             230   

Goodwill and acquired intangible asset impairment and amortization

                                                     1        1        1   

Restructuring and other reorganization expenses

                                                     3        3        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    115        46        116        64        (111     230               4        4        234   

Income (loss) from continuing operations, before income tax expense (benefit)

    136        124        138        (87            311               162        162        473   

Income tax expense (benefit)(3)

    51        47        52        (33            117               64        64        181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 85      $ 77      $ 86      $ (54   $      $ 194      $      $ 98      $ 98      $ 292   

Income (loss) from discontinued operations, net of tax expense (benefit)

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 85      $ 77      $ 86      $ (54   $      $ 194      $      $ 98      $ 98      $ 292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   Net Impact from
Spin-Off of
SLM BankCo
     Net Impact of
Derivative
Accounting
     Net Impact of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $       $ 94       $       $ 94   

Total other income

             72                 72   

Operating expenses

                               

Goodwill and acquired intangible asset impairment and amortization

                     1         1   

Restructuring and other reorganization expenses

     3                         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (3    $ 166       $ (1      162   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              64   
           

 

 

 

Net income

            $ 98   
           

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

12. Segment Reporting (Continued)

 

    Three Months Ended March 31, 2014  

(Dollars in millions)

  FFELP
Loans
    Private
Education
Loans
    Business
Services
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 512      $ 494      $      $      $      $ 1,006      $ 198      $ 86      $ 284      $ 1,290   

Other loans

                         3               3                             3   

Cash and investments

    1                      1               2               1        1        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    513        494               4               1,011        198        87        285        1,296   

Total interest expense

    287        185               24               496        10        24        34        530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    226        309               (20            515        188        63        251        766   

Less: provisions for loan losses

    10        136                             146               39        39        185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    216        173               (20            369        188        24        212        581   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    11        1        167               (118     61                             61   

Asset recovery revenue

                  111                      111                             111   

Gains on debt repurchases

                                                                     

Other income (loss)

                  1        3               4        (188     182        (6     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    11        1        279        3        (118     176        (188     182        (6     170   

Expenses:

                   

Direct operating expenses

    124        55        95        113        (118     269               25        25        294   

Overhead expenses

                         49               49               23        23        72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    124        55        95        162        (118     318               48        48        366   

Goodwill and acquired intangible asset impairment and amortization

                                                     4        4        4   

Restructuring and other reorganization expenses

                                                     26        26        26   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    124        55        95        162        (118     318               78        78        396   

Income (loss) from continuing operations, before income tax expense (benefit)

    103        119        184        (179            227               128        128        355   

Income tax expense (benefit)(3)

    39        45        69        (67            86               50        50        136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 64      $ 74      $ 115      $ (112   $      $ 141      $      $ 78      $ 78      $ 219   

Income (loss) from discontinued operations, net of tax expense (benefit)

                  1                      1               (1     (1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 64      $ 74      $ 116      $ (112   $      $ 142      $      $ 77      $ 77      $ 219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   Net Impact from
Spin-Off of
SLM BankCo
     Net Impact of
Derivative
Accounting
     Net Impact of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 100       $ 112       $       $ 212   

Total other loss

     7         (13              (6

Operating expenses

     48                         48   

Goodwill and acquired intangible asset impairment and amortization

                     4         4   

Restructuring and other reorganization expenses

     26                         26   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 33       $ 99       $ (4      128   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              50   

Income (loss) from discontinued operations

              (1
           

 

 

 

Net income

            $ 77   
           

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information at March 31, 2015 and for the three months ended March 31, 2015 and 2014 is unaudited)

 

12. Segment Reporting (Continued)

 

Summary of “Core Earnings” Adjustments to GAAP

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

“Core Earnings” adjustments to GAAP:

     

Net impact of the removal of SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off(1)

   $ (3    $ 33   

Net impact of derivative accounting(2)

     166         99   

Net impact of goodwill and acquired intangibles assets(3)

     (1      (4

Net tax effect(4)

     (64      (50

Net effect from discontinued operations and noncontrolling interest

             (1
  

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 98       $ 77   
  

 

 

    

 

 

 

 

  (1)

SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off: For “Core Earnings,” we have assumed the consumer banking business (SLM BankCo) was never a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014 and we have removed the restructuring and reorganization expense incurred in connection with the Spin-Off. Excluding these items provides management with a useful basis from which to better evaluate results from ongoing operations against results from prior periods. The adjustment relates to the exclusion of the consumer banking business and represents the operations, assets, liabilities and equity of SLM BankCo, which is comprised of Sallie Mae Bank, Upromise Rewards, the Insurance Business, and the Private Education Loan origination functions. Included in these amounts are also certain general corporate overhead expenses related to the consumer banking business. General corporate overhead consists of costs primarily associated with accounting, finance, legal, human resources, certain information technology costs, stock compensation, and executive management and the board of directors. These costs were generally allocated to the consumer banking business based on the proportionate level of effort provided to the consumer banking business relative to SLM Corporation using a relevant allocation driver (e.g., in proportion to the number of employees by function that were being transferred to SLM BankCo as opposed to remaining at Navient). All intercompany transactions between SLM BankCo and Navient have been eliminated. In addition, all preferred stock dividends have been removed as SLM BankCo succeeded SLM Corporation as the issuer of the preferred stock in connection with the Spin-Off.

 

  (2)

Derivative accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our FFELP Loans, Private Education Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

 

  (3)

Goodwill and acquired intangible assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.

 

  (4)

Net tax effect: Such tax effect is based upon our “Core Earnings” effective tax rate for the year.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”).

This Quarterly Report on Form 10-Q contains “forward-looking” statements and information based on management’s current expectations as of the date of this document. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in our 2014 Form 10-K and subsequent filings with the Securities and Exchange Commission (“SEC”); increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which we are a party; credit risk associated with our exposure to third parties, including counterparties to our derivative transactions; risks inherent in the government contracting environment, including the possible loss of government contracts and potential civil and criminal penalties as a result of governmental investigations or audits; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). We could also be affected by, among other things: changes in our funding costs and availability; reductions to our credit ratings or the credit ratings of the United States of America; failures of our operating systems or infrastructure, or those of third-party vendors; risks related to cybersecurity including the potential disruption of our systems or potential disclosure of confidential customer information; damage to our reputation; failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business; failures or delays in the planned conversion to our servicing platform of the recently acquired Wells Fargo portfolio of Federal Family Education Loan Program (“FFELP”) loans or any other FFELP or Private Education Loan portfolio acquisitions; risks associated with restructuring initiatives; risks associated with the April 30, 2014 separation of Navient and SLM Corporation into two, distinct publicly traded companies, including failure to achieve the expected benefits of the separation; changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from banks and other consumer lenders; the creditworthiness of our customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of our earning assets versus our funding arrangements; changes in general economic conditions; our ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this document. We do not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in our expectations.

Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2014 Form 10-K.

Through this discussion and analysis, we intend to provide the reader with some narrative context for how our management views our consolidated financial statements, additional context within which to assess our operating results, and information on the quality and variability of our earnings, liquidity and cash flows.

 

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Table of Contents

Spin-Off of Navient

On April 30, 2014, the spin-off of Navient from SLM Corporation (the “Spin-Off”) was completed and Navient became an independent, publicly traded company focused on loan management, servicing and asset recovery. The separation was completed through the distribution of 100 percent of the outstanding shares of Navient common stock, on the basis of one share of Navient common stock for each share of SLM Corporation common stock. SLM Corporation continues operation as a separate publicly traded company and includes Sallie Mae Bank and its Private Education Loan originations business and the Private Education Loans the bank held at the time of the separation.

Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is the accounting successor, the historical financial statements of SLM Corporation prior to the distribution on April 30, 2014, are the historical financial statements of Navient. As a result, the GAAP financial results reported in this Quarterly Report on Form 10-Q include the historical financial results of SLM Corporation prior to the Spin-Off on April 30, 2014 (i.e., such consolidated results include our loan management, servicing and asset recovery business and the consumer banking business associated with Sallie Mae Bank (“SLM BankCo”)) and reflect the deemed distribution of SLM BankCo to SLM Corporation’s stockholders on April 30, 2014. See “‘Core Earnings’ — Definitions and Limitations” for a discussion of the exclusion of the pre-Spin-Off financial results of the consumer banking business from our “Core Earnings” results.

Navient’s Business

Navient is the nation’s leading loan management, servicing and asset recovery company, committed to helping customers navigate the path to financial success. Servicing more than $300 billion in student loans, Navient supports the educational and economic achievements of more than 12 million customers. A growing number of government and higher education clients rely on Navient for proven solutions to meet their financial goals. Navient began trading on Nasdaq as an independent company on May 1, 2014. Our website is navient.com. Information contained or referenced on our website is not incorporated by reference into and does not form a part of this Quarterly Report on Form 10-Q.

Navient holds the largest portfolio of education loans insured or guaranteed under the Federal Family Education Loan Program (“FFELP”), as well as the largest portfolio of Private Education Loans. FFELP Loans are insured or guaranteed by state or not-for-profit agencies based on guaranty agreements among the United States Department of Education (“ED”) and these agencies. Private Education Loans are education loans to students or their families that bear the full credit risk of the customer and any cosigner. Private Education Loans are made primarily to bridge the gap between the cost of higher education and the amount funded through financial aid, federal loans or students’ and families’ resources.

Navient services its own portfolio of education loans, as well as those owned by banks, credit unions, non-profit education lenders and ED. Navient is one of four large servicers to ED under its Direct Student Loan Program (“DSLP”). Navient also provides asset recovery services on its own portfolio (consisting of both education loans as well as other asset classes), guaranty agencies, higher education institutions, ED and other federal clients, as well as states, courts, and municipalities.

As of March 31, 2015, Navient’s principal assets consisted of:

 

   

$102.4 billion in FFELP Loans, with a student loan spread of 0.96 percent for the quarter ended March 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.3 years;

 

   

$29.0 billion in Private Education Loans, with a student loan spread of 3.87 percent for the quarter ended March 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.0 years;

 

   

a leading student loan servicing platform that services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts serviced under Navient’s contract with ED; and

 

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a leading student loan asset recovery platform with an outstanding inventory of contingent asset recovery receivables of approximately $20.2 billion, of which approximately $11.0 billion was student loans and the remainder was other asset classes.

Navient’s Strengths and Opportunities

Navient possesses a number of competitive advantages that distinguishes it from its competitors, including:

Large, high quality asset base generating significant and predictable cash flows. At March 31, 2015, Navient’s $131.4 billion student loan portfolio is 75 percent funded to term and is expected to produce consistent and predictable cash flows over the remaining life of the portfolio. Navient’s $102.4 billion portfolio of FFELP Loans bears a maximum 3 percent loss exposure due to the federal guarantee. Navient’s $29.0 billion portfolio of Private Education Loans bears the full credit risk of the borrower and cosigner. Navient expects that cash flows from its FFELP Loan and Private Education Loan portfolios will significantly exceed future debt service obligations.

Efficient and large scale servicing platform. Navient is the largest servicer of education loans, servicing over $300 billion in student loans for more than 12 million customers. Navient has demonstrated scalable infrastructure with capacity to add volume at a low cost. Navient’s premier market share and tested servicing and asset recovery infrastructure make it well-positioned to expand its servicing and asset recovery businesses to additional third-party FFELP, federal, private and other loan portfolios.

Superior operating performance. Navient has demonstrated superior default prevention performance and industry leading asset recovery services. The combined portfolio of federal loans serviced by Navient experienced a Cohort Default Rate 40 percent lower than the most recent national rate released by ED in September 2014. We are consistently a top performer in our asset recovery business as well.

Commitment to compliance and customer centricity. Navient fosters a robust compliance culture driven by a “customer first” approach. We invest in rigorous training programs, internal and external auditing, escalated service tracking and analysis, and customer research to enhance our compliance and customer service.

Strong capital return. As a result of its significant cash flow and capital generation, Navient expects to return excess capital to stockholders through dividends and share repurchases. In December 2014, Navient’s board of directors authorized $1 billion to be utilized in a new common share repurchase program effective January 1, 2015. Navient increased its quarterly dividend amount from $0.15 per share to $0.16 per share effective for its first-quarter 2015 dividends. For the quarter ended March 31, 2015, we paid $63 million in dividends on shares of our common stock and repurchased $300 million of our shares of common stock.

Meaningful growth opportunities. Navient will pursue opportunistic acquisitions of FFELP and Private Education Loan portfolios. During the first quarter, Navient acquired $830 million of student loans. Navient will also pursue additional third-party servicing and asset recovery fee income opportunities. In February 2015, Navient completed the acquisition of Gila LLC, an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, court systems and municipalities. Navient will leverage its large-scale servicing platform, superior default prevention and asset recovery performance, operating efficiency and regulatory compliance and risk management infrastructure in pursuing other growth opportunities.

Navient’s Approach to Assisting Students and Families in Repaying their Education Loans

Navient services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts serviced under Navient’s contract with ED. In this work, we help our customers experience success through proactive outreach and emphasis on identifying the payment plan that best fits their budget and financial goals.

 

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We understand managing repayment of education loans is critical for students to achieve their educational goals, recognize their full earning potential and develop a strong credit profile.

Customer success means making steady progress toward repayment, instead of falling behind on payments. Our experience has taught us that the transition from school to full repayment requires customer contact and counseling. For many customers, student loans are their first borrowing experience. For new graduates, salaries grow over time, typically making payments easier to handle as their career progresses. It is also not uncommon for some to return to school, experience illness or encounter temporary interruptions in earnings.

To help customers manage these realities, Navient makes customer success and default prevention top priorities. We customize our outreach using data-driven approaches that draw from our more than 40 years of experience in helping customers successfully manage their loans. As a result, our customers experience higher records of repayment success as evidenced by lower delinquencies and defaults.

We have been a partner in ED’s campaign to inform federal student loan customers about income-driven repayment plans, and have played a leadership role in helping customers understand their options and make an informed choice.

We also find that customers who have fallen behind benefit from outreach and assistance. In fact, nine times out of ten when we can reach federal loan customers who have missed payments, we can identify a solution to help them avoid default.

We also offer free resources to help customers and the general public build knowledge on personal finance topics. In October 2014, we launched new online resources to encourage financial literacy and to help customers understand their repayment options and enroll in the plan that is best for them.

 

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Selected Historical Financial Information and Ratios

Although SLM BankCo is the entity that distributed the shares of Navient common stock to SLM BankCo common stockholders, for financial reporting purposes, Navient is treated as the “accounting spinnor” and therefore Navient, and not SLM BankCo, is the “accounting successor” to SLM Corporation. Hence, the following GAAP financial information to the extent related to periods on or prior to April 30, 2014 reflects the historical results of operations and financial condition of SLM Corporation, which is the accounting predecessor of Navient. For a discussion of how “Core Earnings” results are different than GAAP results, see “‘Core Earnings’ — Definition and Limitations” and “Differences between ‘Core Earnings’ and GAAP.”

 

     Three Months Ended
March 31,
 

(In millions, except per share data)

   2015     2014  

GAAP Basis

    

Net income attributable to Navient Corporation

   $ 292      $ 219   

Diluted earnings per common share attributable to Navient Corporation

   $ .72      $ .49   

Weighted average shares used to compute diluted earnings per common share

     405        435   

Net interest margin, FFELP Loans

     1.25     1.31

Net interest margin, Private Education Loans

     3.71     4.31

Return on assets

     .85     .59

Ending FFELP Loans, net

   $ 102,424      $ 102,635   

Ending Private Education Loans, net

     28,990        38,157   
  

 

 

   

 

 

 

Ending total student loans, net

   $ 131,414      $ 140,792   
  

 

 

   

 

 

 

Average FFELP Loans

   $ 103,617      $ 103,734   

Average Private Education Loans

     30,105        38,945   
  

 

 

   

 

 

 

Average total student loans

   $ 133,722      $ 142,679   
  

 

 

   

 

 

 

“Core Earnings” Basis(1)

    

Net income attributable to Navient Corporation

   $ 194      $ 142   

Diluted earnings per common share attributable to Navient Corporation

   $ .48      $ .33   

Weighted average shares used to compute diluted earnings per common share

     405        435   

Net interest margin, FFELP Loans

     .88     .86

Net interest margin, Private Education Loans

     3.74     3.91

Return on assets

     .56     .41

Ending FFELP Loans, net

   $ 102,424      $ 101,240   

Ending Private Education Loans, net

     28,990        30,949   
  

 

 

   

 

 

 

Ending total student loans, net

   $ 131,414      $ 132,189   
  

 

 

   

 

 

 

Average FFELP Loans

   $ 103,617      $ 102,329   

Average Private Education Loans

     30,105        31,525   
  

 

 

   

 

 

 

Average total student loans

   $ 133,722      $ 133,854   
  

 

 

   

 

 

 

 

(1) 

“Core Earnings” are non-GAAP financial measures and do not represent a comprehensive basis of accounting. For a greater explanation of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” and subsequent sections.

Overview

The following discussion and analysis presents a review of our business and operations as of and for the three months ended March 31, 2015.

We monitor and assess our ongoing operations and results based on the following four reportable segments: (1) FFELP Loans (2) Private Education Loans, (3) Business Services and (4) Other. Our segment presentation excludes the results of the consumer banking business distributed on April 30, 2014. See “‘Core Earnings’ — Definition and Limitations” for further discussion.

 

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FFELP Loans Segment

In the FFELP Loans segment, we acquire and finance FFELP Loans. Even though FFELP Loans are no longer originated due to changes in federal law that took effect in 2010, we continue to pursue acquisitions of FFELP Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the FFELP Loan portfolio. This segment is expected to generate significant amounts of earnings and cash flow as the portfolio amortizes.

Private Education Loans Segment

In this segment, we acquire, finance and service Private Education Loans. Even though we no longer originate Private Education Loans, we continue to pursue acquisitions of Private Education Loan portfolios that leverage our servicing scale and generate incremental earnings and cash flow. In this segment, we primarily earn net interest income on the Private Education Loan portfolio (after provision for loan losses). This segment is expected to generate significant amounts of cash as the portfolio amortizes.

Business Services Segment

Our Business Services segment generates its revenue from servicing our FFELP Loan portfolio as well as providing servicing and asset recovery services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED, higher education institutions and other federal, state, court and municipal clients.

Other

Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all unallocated overhead. We also include results from certain smaller wind-down and discontinued operations within this segment.

Key Financial Measures

Our operating results are primarily driven by net interest income from our student loan portfolios, provision for loan losses, the revenues and expenses generated by our servicing and asset recovery businesses, and gains and losses on subsidiary sales, loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures (net interest income; provisions for loan losses; charge-offs and delinquencies; servicing and asset recovery revenues; other income (loss); and operating expenses) can be found in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2014 Form 10-K.

First-Quarter 2015 Summary of Results

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, board of directors, credit rating agencies, lenders and investors use these “Core Earnings” measures to monitor our business performance. See “‘Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and “Core Earnings.”

First-quarter 2015 GAAP net income was $292 million ($0.72 diluted earnings per share), versus net income of $219 million ($0.49 diluted earnings per share) in the first-quarter 2014. The changes in GAAP net income are impacted by the same “Core Earnings” items discussed below, as well as changes in net income attributable to (1) the financial results attributable to the operations of the consumer banking business prior to the April 30, 2014 spin-off of Navient from SLM Corporation, and related restructuring and reorganization expense incurred in connection with the Spin-Off, (2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and acquired intangible asset amortization and impairment. These items are recognized in GAAP but have not been included in “Core Earnings” results. First-quarter 2015 GAAP results included gains of $166 million from

 

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derivative accounting treatment that are excluded from “Core Earnings” results, compared with gains of $99 million in the year-ago period. See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” for a complete reconciliation between GAAP net income and “Core Earnings.”

“Core Earnings” for the quarter were $194 million ($0.48 diluted earnings per share), compared with $142 million ($0.33 diluted earnings per share) for the year-ago quarter. Excluding expenses associated with regulatory matters, first-quarter 2015 and 2014 diluted “Core Earnings” per share were $0.48 and $0.49, respectively. This decrease was primarily the result of a $26 million decline in net interest income and a $23 million increase in operating expenses, which was partially offset by a $21 million decrease in provisions for loan losses and less common shares outstanding.

During the first three months of 2015, we:

 

   

acquired $830 million of student loans;

 

   

issued $1.0 billion of FFELP asset-backed securities (“ABS”), $689 million of Private Education Loan ABS and $500 million of unsecured debt;

 

   

repurchased 14.7 million common shares for $300 million on the open market; and

 

   

paid a common stock dividend of $0.16 per share, up from $0.15 per share in the prior quarter.

Results of Operations

We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Private Education Loans, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a “Core Earnings” basis (see “‘Core Earnings’ — Definition and Limitations”).

 

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GAAP Statements of Income (Unaudited)

 

     Three MonthsEndedMarch 31,     Increase
(Decrease)
 

(In millions, except per share data)

           2015                      2014             $     %  

Interest income:

         

FFELP Loans

   $ 637       $ 646      $ (9     (1 )% 

Private Education Loans

     456         644        (188     (29

Other loans

     2         3        (1     (33

Cash and investments

     2         3        (1     (33
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     1,097         1,296        (199     (15

Total interest expense

     514         530        (16     (3
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income

     583         766        (183     (24

Less: provisions for loan losses

     125         185        (60     (32
  

 

 

    

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     458         581        (123     (21

Other income (loss):

         

Gains on sales of loans and investments

     5                5        100   

Gains (losses) on derivative and hedging activities, net

     71         (8     79        988   

Servicing revenue

     77         61        16        26   

Asset recovery revenue

     89         111        (22     (20

Gains on debt repurchases

                             

Other income

     7         6        1        17   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total other income

     249         170        79        46   

Expenses:

         

Operating expenses

     230         366        (136     (37

Goodwill and acquired intangible asset impairment and amortization expense

     1         4        (3     (75

Restructuring and other reorganization expenses

     3         26        (23     (88
  

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     234         396        (162     (41
  

 

 

    

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     473         355        118        33   

Income tax expense

     181         136        45        33   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     292         219        73        33   

Income from discontinued operations, net of tax expense

                             
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income

     292         219        73        33   

Less: net loss attributable to noncontrolling interest

                             
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation

     292         219        73        33   

Preferred stock dividends

             5        (5     (100
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation common stock

   $ 292       $ 214      $ 78        36
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to Navient Corporation

   $ .73       $ .50      $ .23        46
  

 

 

    

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to Navient Corporation

   $ .72       $ .49      $ .23        47
  

 

 

    

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to Navient Corporation

   $ .16       $ .15      $ .01        7
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP-basis

Three Months Ended March 31, 2015 Compared with Three Months Ended March 31, 2014

For the three months ended March 31, 2015, net income was $292 million, or $0.72 diluted earnings per common share, compared with net income of $219 million, or $0.49 diluted earnings per common share, for the three months ended March 31, 2014. The increase in net income was primarily due to a $136 million decrease in operating expenses, a $23 million decrease in restructuring and other reorganization expenses, a $79 million increase in net gains on derivative and hedging activities and a $60 million decline in the provisions for loan losses. This was partially offset by a $183 million decline in net interest income.

The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:

 

   

Net interest income decreased by $183 million, of which $140 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was a reduction in Private Education Loan net interest income due to a decline in the balance and net interest margin.

 

   

Provisions for loan losses declined $60 million, of which $39 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

 

   

Gains (losses) on derivative and hedging activities, net, increased $79 million. The primary factors affecting the change were interest rate and foreign currency fluctuations, which primarily affected the valuations of our Floor Income Contracts, basis swaps and foreign currency hedges during each period. Valuations of derivative instruments vary based upon many factors including changes in interest rates, credit risk, foreign currency fluctuations and other market factors. As a result, net gains and losses on derivative and hedging activities may continue to vary significantly in future periods.

 

   

Servicing and asset recovery revenue decreased $6 million in total. Asset recovery revenue decreased $22 million primarily as a result of the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated. This legislative reduction in fees represents $40 million of the decrease in asset recovery revenue. This reduction was partially offset by higher asset recovery volume and revenue from the Gila LLC acquisition.

 

   

In the first quarter of 2014, we recorded $103 million of expenses related to the settlement of regulatory matters. Excluding these expenses, operating expenses decreased $33 million. This decrease was primarily due to $48 million related to the deemed distribution of SLM BankCo on April 30, 2014, partially offset by incremental costs resulting from operating as a new separate company, costs related to the Gila LLC acquisition this quarter, as well as incremental third-party servicing expenses related to an $8.5 billion loan acquisition in fourth-quarter 2014.

 

   

Restructuring and other reorganization expenses decreased $23 million to $3 million. These expenses were primarily related to costs incurred in connection with the Spin-Off.

We repurchased 14.7 million and 8.4 million shares of our common stock during the three months ended March 31, 2015 and 2014, respectively, as part of our common share repurchase programs. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 30 million common shares from the year-ago quarter.

“Core Earnings” — Definition and Limitations

We prepare financial statements in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we

 

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allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.

“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for three items, discussed below, that are either related to the Spin-Off or create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the three items we remove to result in our “Core Earnings” presentations are:

 

  1. The financial results attributable to the operations of SLM BankCo prior to the Spin-Off and related restructuring and reorganization expense incurred in connection with the Spin-Off. For GAAP purposes, Navient reflected the deemed distribution of SLM BankCo on April 30, 2014. For “Core Earnings,” we exclude the consumer banking business as if it had never been a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014;

 

  2. Unrealized mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks that do not qualify for hedge accounting treatment or do qualify for hedge accounting treatment but result in ineffectiveness; and

 

  3. The accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.

 

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The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 12 — Segment Reporting.”

 

    Three Months Ended March 31, 2015  

(Dollars in millions)

  FFELP
Loans
    Private
Education
Loans
    Business
Services
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 534      $ 456      $      $      $      $ 990      $ 162      $ (59   $ 103      $ 1,093   

Other loans

                         2               2                             2   

Cash and investments

    1                      1               2                             2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    535        456               3               994        162        (59     103        1,097   

Total interest expense

    302        173               30               505        9               9        514   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    233        283               (27            489        153        (59     94        583   

Less: provisions for loan losses

    5        120                             125                             125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    228        163               (27            364        153        (59     94        458   

Other income (loss):

                   

Gains on sales of loans and investments

    5                                    5                             5   

Servicing revenue

    18        7        163               (111     77                             77   

Asset recovery revenue

                  89                      89                             89   

Gains on debt repurchases

                                                                     

Other income (loss)

                  2        4               6        (153     225        72        78   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    23        7        254        4        (111     177        (153     225        72        249   

Expenses:

                   

Direct operating expenses

    115        46        116        4        (111     170                             170   

Overhead expenses

                         60               60                             60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    115        46        116        64        (111     230                             230   

Goodwill and acquired intangible asset impairment and amortization

                                                     1        1        1   

Restructuring and other reorganization expenses

                                                     3        3        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    115        46        116        64        (111     230               4        4        234   

Income (loss) from continuing operations, before income tax expense (benefit)

    136        124        138        (87            311               162        162        473   

Income tax expense (benefit)(3)

    51        47        52        (33            117               64        64        181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 85      $ 77      $ 86      $ (54   $      $ 194      $      $ 98      $ 98      $ 292   

Income (loss) from discontinued operations, net of tax expense (benefit)

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 85      $ 77      $ 86      $ (54   $      $ 194      $      $ 98      $ 98      $ 292   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   Net Impact from
Spin-Off of
SLM BankCo
     Net Impact of
Derivative
Accounting
     Net Impact of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $       $ 94       $       $ 94   

Total other income

             72                 72   

Operating expenses

                               

Goodwill and acquired intangible asset impairment and amortization

                     1         1   

Restructuring and other reorganization expenses

     3                         3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (3    $ 166       $ (1      162   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              64   
           

 

 

 

Net income

            $ 98   
           

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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Table of Contents
    Three Months Ended March 31, 2014  

(Dollars in millions)

  FFELP
Loans
    Private
Education
Loans
    Business
Services
    Other     Eliminations(1)     Total
“Core
Earnings”
    Adjustments     Total
GAAP
 
              Reclassifications     Additions/
(Subtractions)
    Total
Adjustments(2)
   

Interest income:

                   

Student loans

  $ 512      $ 494      $      $      $      $ 1,006      $ 198      $ 86      $ 284      $ 1,290   

Other loans

                         3               3                             3   

Cash and investments

    1                      1               2               1        1        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    513        494               4               1,011        198        87        285        1,296   

Total interest expense

    287        185               24               496        10        24        34        530   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    226        309               (20            515        188        63        251        766   

Less: provisions for loan losses

    10        136                             146               39        39        185   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    216        173               (20            369        188        24        212        581   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    11        1        167               (118     61                             61   

Asset recovery revenue

                  111                      111                             111   

Gains on debt repurchases

                                                                     

Other income (loss)

                  1        3               4        (188     182        (6     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    11        1        279        3        (118     176        (188     182        (6     170   

Expenses:

                   

Direct operating expenses

    124        55        95        113        (118     269               25        25        294   

Overhead expenses

                         49               49               23        23        72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    124        55        95        162        (118     318               48        48        366   

Goodwill and acquired intangible asset impairment and amortization

                                                     4        4        4   

Restructuring and other reorganization expenses

                                                     26        26        26   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    124        55        95        162        (118     318               78        78        396   

Income (loss) from continuing operations, before income tax expense (benefit)

    103        119        184        (179            227               128        128        355   

Income tax expense (benefit)(3)

    39        45        69        (67            86               50        50        136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 64      $ 74      $ 115      $ (112   $      $ 141      $      $ 78      $ 78      $ 219   

Income (loss) from discontinued operations, net of tax expense (benefit)

                  1                      1               (1     (1       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 64      $ 74      $ 116      $ (112   $      $ 142      $      $ 77      $ 77      $ 219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.

 

(2) 

“Core Earnings” adjustments to GAAP:

 

    Three Months Ended March 31, 2014  

(Dollars in millions)

  Net Impact from
Spin-Off of
SLM BankCo
    Net Impact of
Derivative
Accounting
    Net Impact of
Acquired
Intangibles
    Total  

Net interest income after provisions for loan losses

  $ 100      $ 112      $      $ 212   

Total other income (loss)

    7        (13            (6

Operating expenses

    48                      48   

Goodwill and acquired intangible asset impairment and amortization

                  4        4   

Restructuring and other reorganization expenses

    26                      26   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ 33      $ 99      $ (4     128   
 

 

 

   

 

 

   

 

 

   

Income tax expense

          50   

Loss from discontinued operations

          (1
       

 

 

 

Net income

        $ 77   
       

 

 

 

 

(3) 

Income taxes are based on a percentage of net income before tax for the individual reportable segment.

 

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Differences between “Core Earnings” and GAAP

The following discussion summarizes the differences between “Core Earnings” and GAAP net income and details each specific adjustment required to reconcile our “Core Earnings” segment presentation to our GAAP earnings.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

“Core Earnings” net income attributable to Navient Corporation

   $ 194       $ 142   

“Core Earnings” adjustments to GAAP:

     

Net impact of the removal of SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off

     (3      33   

Net impact of derivative accounting

     166         99   

Net impact of goodwill and acquired intangible assets

     (1      (4

Net tax effect

     (64      (50

Net impact of discontinued operations and noncontrolling interest

             (1
  

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

     98         77   
  

 

 

    

 

 

 

GAAP net income attributable to Navient Corporation

   $ 292       $ 219   
  

 

 

    

 

 

 

1) SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off: On April 30, 2014, the Spin-Off of Navient from SLM Corporation was completed and Navient became an independent, publicly-traded company. Due to the relative significance of Navient to SLM Corporation prior to the Spin-Off, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to SLM Corporation as constituted prior to the Spin-Off, notwithstanding the legal form of the Spin-Off. Since Navient is treated for accounting purposes as the “accounting spinnor,” the GAAP financial statements of Navient reflect the deemed distribution of SLM BankCo to SLM BankCo’s stockholders on April 30, 2014.

For “Core Earnings,” we have assumed SLM BankCo was never a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014 and we have removed the restructuring and reorganization expense incurred in connection with the Spin-Off. Excluding these items provides management with a useful basis from which to better evaluate results from ongoing operations against results from prior periods. The adjustment relates to the exclusion of the consumer banking business and represents the operations, assets, liabilities and equity of SLM BankCo, which is comprised of Sallie Mae Bank, Upromise Rewards, the Insurance Business, and the Private Education Loan origination functions. Included in these amounts are also certain general corporate overhead expenses related to the consumer banking business. General corporate overhead consists of costs primarily associated with accounting, finance, legal, human resources, certain information technology costs, stock compensation, and executive management and the board of directors. These costs were generally allocated to the consumer banking business based on the proportionate level of effort provided to the consumer banking business relative to SLM Corporation using a relevant allocation driver (e.g., in proportion to the number of employees by function that were being transferred to SLM BankCo as opposed to remaining at Navient). All intercompany transactions between SLM BankCo and Navient have been eliminated. In addition, all prior preferred stock dividends have been removed as SLM BankCo succeeded SLM Corporation as the issuer of the preferred stock in connection with the Spin-Off.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

SLM BankCo net income, before income tax expense

   $       $ 59   

Restructuring and reorganization expense in connection with the Spin-Off

     (3      (26
  

 

 

    

 

 

 

Total net impact of SLM BankCo, before income tax expense

   $ (3    $ 33   
  

 

 

    

 

 

 

 

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Table of Contents

2) Derivative Accounting: “Core Earnings” exclude periodic unrealized gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic unrealized gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. These unrealized gains and losses occur in our FFELP Loans, Private Education Loans and Other business segments. Under GAAP, for our derivatives that are held to maturity, the cumulative net unrealized gain or loss over the life of the contract will equal $0 except for Floor Income Contracts, where the cumulative unrealized gain will equal the amount for which we sold the contract. In our “Core Earnings” presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts and certain basis swaps, do not qualify for hedge accounting treatment and the stand-alone derivative must be marked-to-market in the income statement with no consideration for the corresponding change in fair value of the hedged item. These gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the student loans underlying the Floor Income embedded in those student loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the student loans. Under derivative accounting treatment, the upfront contractual payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income earned on the underlying student loans and paid to the counterparties to vary. This is economically offset by the change in value of the student loan portfolio earning Floor Income but that offsetting change in value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of “Core Earnings,” we have removed the unrealized gains and losses related to these contracts and added back the amortization of the net contractual premiums received on the Floor Income Contracts. The amortization of the net contractual premiums received on the Floor Income Contracts for “Core Earnings” is reflected in student loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.

Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our student loan assets that are primarily indexed to LIBOR or Prime. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

 

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Table of Contents

The table below quantifies the adjustments for derivative accounting between GAAP and “Core Earnings” net income.

 

     Three Months Ended March 31,  

(Dollars in millions)

           2015                     2014          

“Core Earnings” derivative adjustments:

    

Gains (losses) on derivative and hedging activities, net, included in other income

   $ 71      $ (8

Plus: Realized losses on derivative and hedging activities, net(1)

     153        188   
  

 

 

   

 

 

 

Unrealized gains on derivative and hedging activities, net(2)

     224        180   

Amortization of net premiums on Floor Income Contracts in net interest income for “Core Earnings”

     (59     (75

Other derivative accounting adjustments(3)

     1        (6
  

 

 

   

 

 

 

Total net impact of derivative accounting(4)

   $ 166      $ 99   
  

 

 

   

 

 

 

 

  (1) 

See “Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” below for a detailed breakdown of the components of realized losses on derivative and hedging activities.

 

  (2) 

“Unrealized gains on derivative and hedging activities, net” comprises the following unrealized mark-to-market gains (losses):

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015              2014      

Floor Income Contracts

   $ 72       $ 181   

Basis swaps

             (1

Foreign currency hedges

     145         (39

Other

     7         39   
  

 

 

    

 

 

 

Total unrealized gains on derivative and hedging activities, net

   $ 224       $ 180   
  

 

 

    

 

 

 

 

  (3) 

Other derivative accounting adjustments consist of adjustments related to: (1) foreign currency denominated debt that is adjusted to spot foreign exchange rates for GAAP where such adjustment are reversed for “Core Earnings” and (2) certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under “Core Earnings” and, as a result, such gains or losses amortized into “Core Earnings” over the life of the hedged item.

 

  (4) 

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income and positive amounts are added to “Core Earnings” net income to arrive at GAAP net income.

 

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Table of Contents

Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities

Derivative accounting requires net settlement income/expense on derivatives and realized gains/losses related to derivative dispositions (collectively referred to as “realized gains (losses) on derivative and hedging activities”) that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our “Core Earnings” presentation, these gains and losses are reclassified to the income statement line item of the economically hedged item. For our “Core Earnings” net interest margin, this would primarily include: (a) reclassifying the net settlement amounts related to our Floor Income Contracts to student loan interest income and (b) reclassifying the net settlement amounts related to certain of our basis swaps to debt interest expense. The table below summarizes the realized losses on derivative and hedging activities and the associated reclassification on a “Core Earnings” basis.

 

    Three Months Ended
March 31,
 

(Dollars in millions)

      2015             2014      

Reclassification of realized gains (losses) on derivative and hedging activities:

   

Net settlement expense on Floor Income Contracts reclassified to net interest income

  $ (162   $ (198

Net settlement income on interest rate swaps reclassified to net interest income

    9        10   

Net realized gains on terminated derivative contracts reclassified to other income

             
 

 

 

   

 

 

 

Total reclassifications of realized losses on derivative and hedging activities

  $ (153   $ (188
 

 

 

   

 

 

 

Cumulative Impact of Derivative Accounting under GAAP compared to “Core Earnings”

As of March 31, 2015, derivative accounting has reduced GAAP equity by approximately $505 million as a result of cumulative net unrealized losses (after tax) recognized under GAAP, but not in “Core Earnings.” The following table rolls forward the cumulative impact to GAAP equity due to these unrealized after tax net losses related to derivative accounting.

 

    Three Months Ended March 31,  

(Dollars in millions)

    2015         2014    

Beginning impact of derivative accounting on GAAP equity

  $ (553   $ (926

Net impact of net unrealized gains (losses) under derivative accounting(1)

    48        72   
 

 

 

   

 

 

 

Ending impact of derivative accounting on GAAP equity

  $ (505   $ (854
 

 

 

   

 

 

 

 

  (1) 

Net impact of net unrealized gains (losses) under derivative accounting is composed of the following:

 

     Three Months Ended March 31,  

(Dollars in millions)

     2015          2014    

Total pre-tax net impact of derivative accounting recognized in net income(a)

   $ 166       $ 99   

Tax impact of derivative accounting adjustments recognized in net income

     (73      (22

Change in unrealized gain (losses) on derivatives, net of tax recognized in other comprehensive income

     (45      (5
  

 

 

    

 

 

 

Net impact of net unrealized gains (losses) under derivative accounting

   $ 48       $ 72   
  

 

 

    

 

 

 

 

  (a)

See “‘Core Earnings’ derivative adjustments” table above.

 

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Table of Contents

Hedging FFELP Loan Embedded Floor Income

Net Floor premiums received on Floor Income Contracts that have not been amortized into “Core Earnings” as of the respective year-ends are presented in the table below. These net premiums will be recognized in “Core Earnings” in future periods. As of March 31, 2015, the remaining amortization term of the net floor premiums was approximately 4.8 years for existing contracts. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

In addition to using Floor Income Contracts, we also use pay fixed interest rate swaps to hedge the embedded Floor Income within FFELP Loans. These interest rate swaps qualify as GAAP hedges and are accounted for as cash flow hedges of variable rate debt. For GAAP, gains and losses on the effective portion of these hedges are recorded in accumulated other comprehensive income and gains and losses on the ineffective portion are recorded immediately to earnings. Hedged Floor Income from these cash flow hedges that has not been recognized into “Core Earnings” and GAAP as of the respective period-ends is presented in the table below. This hedged Floor Income will be recognized in “Core Earnings” and GAAP in future periods and is presented net of tax. As of March 31, 2015, the hedged period is from April 2016 through December 2019. Historically, we have used pay fixed interest rate swaps on a periodic basis to hedge embedded Floor Income and depending upon market conditions and pricing, we may enter into swaps in the future. The balance of unrecognized hedged Floor Income will increase as we enter into new swaps and decline as revenue is recognized.

 

(Dollars in millions)

   March 31,
2015
     March 31,
2014
 

Unamortized net Floor premiums (net of tax)

   $ (258    $ (308

Unrecognized hedged Floor Income related to pay fixed interest rate swaps (net of tax)

     (320        
  

 

 

    

 

 

 

Total(1)

   $ (578    $ (308
  

 

 

    

 

 

 

 

  (1) 

$(916) million and $(492) million on a pre-tax basis as of March 31, 2015 and 2014, respectively.

3) Goodwill and Acquired Intangible Assets: Our “Core Earnings” exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

“Core Earnings” goodwill and acquired intangible asset adjustments(1)

   $ (1    $ (4
  

 

 

    

 

 

 

 

  (1)

Negative amounts are subtracted from “Core Earnings” net income to arrive at GAAP net income.

 

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Table of Contents

Business Segment Earnings Summary — “Core Earnings” Basis

FFELP Loans Segment

The following table includes “Core Earnings” results for our FFELP Loans segment.

 

     Three Months Ended March 31,      % Increase (Decrease)  

(Dollars in millions)

       2015               2014              2015 vs. 2014      

“Core Earnings” interest income:

        

FFELP Loans

   $ 534       $ 512         4

Cash and investments

     1         1           
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     535         513         4   

Total “Core Earnings” interest expense

     302         287         5   
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     233         226         3   

Less: provision for loan losses

     5         10         (50
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income after provision for loan losses

     228         216         6   

Gains on sales of loans and investments

     5                 100   

Servicing revenue

     18         11         64   
  

 

 

    

 

 

    

 

 

 

Total other income

     23         11         109   

Direct operating expenses

     115         124         (7
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     136         103         32   

Income tax expense

     51         39         31   
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 85       $ 64         33
  

 

 

    

 

 

    

 

 

 

“Core Earnings” from the FFELP Loans segment were $85 million in the first quarter of 2015, compared with $64 million in the year-ago quarter. This increase was primarily the result of $7 million more net interest income due to an increase in the balance of, and net interest margin on, the portfolio, a $7 million increase in servicing fees, a $9 million decrease in operating expenses and a $5 million decline in the provision for FFELP Loan losses. “Core Earnings” key performance metrics are as follows:

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015             2014      

FFELP Loan spread

     .96     .95

Net interest margin

     .88     .86

Provision for loan losses

   $ 5      $ 10   

Charge-offs

   $ 7      $ 22   

Charge-off rate

     .03     .12

Total delinquency rate

     15.9     13.8

Greater than 90-day delinquency rate

     8.4     7.3

Forbearance rate

     15.5     17.6

 

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FFELP Loan Net Interest Margin

The following table includes the “Core Earnings” basis FFELP Loan net interest margin along with reconciliation to the GAAP-basis FFELP Loan net interest margin.

 

     Three Months Ended March 31,  
         2015             2014      

“Core Earnings” basis FFELP Loan yield

     2.58     2.56

Hedged Floor Income

     .23        .30   

Unhedged Floor Income

     .14        .03   

Consolidation Loan Rebate Fees

     (.64     (.65

Repayment Borrower Benefits

     (.11     (.11

Premium amortization

     (.11     (.10
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net yield

     2.09        2.03   

“Core Earnings” basis FFELP Loan cost of funds

     (1.13     (1.08
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan spread

     .96        .95   

“Core Earnings” basis other interest-earning asset spread impact

     (.08     (.09
  

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net interest margin(1)

     .88     .86
  

 

 

   

 

 

 
                  

“Core Earnings” basis FFELP Loan net interest margin(1)

     .88     .86

Adjustment for GAAP accounting treatment(2)

     .37        .45   
  

 

 

   

 

 

 

GAAP-basis FFELP Loan net interest margin(1)

     1.25     1.31
  

 

 

   

 

 

 

 

  (1) 

The average balances of our FFELP Loan “Core Earnings” basis interest-earning assets for the respective periods are:

 

     Three Months Ended March 31,  

(Dollars in millions)

           2015                      2014          

FFELP Loans

   $ 103,617       $ 102,329   

Other interest-earning assets

     3,893         3,895   
  

 

 

    

 

 

 

Total FFELP Loan “Core Earnings” basis interest-earning assets

   $ 107,510       $ 106,224   
  

 

 

    

 

 

 

 

  (2) 

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income, the reversal of the amortization of premiums received on Floor Income Contracts, and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.

As of March 31, 2015, our FFELP Loan portfolio totaled $102.4 billion, composed of $39.9 billion of FFELP Stafford loans and $62.5 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of March 31, 2015 was 4.8 years and 8.9 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 3 percent and 3 percent, respectively.

Floor Income

The following table analyzes on a “Core Earnings” basis the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2015 and 2014, based on interest rates as of those dates.

 

    March 31, 2015     March 31, 2014  

(Dollars in billions)

  Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total     Fixed
Borrower
Rate
    Variable
Borrower
Rate
    Total  

Student loans eligible to earn Floor Income

  $ 88.4      $ 12.8      $ 101.2      $ 87.2      $ 12.7      $ 99.9   

Less: post-March 31, 2006 disbursed loans required to rebate Floor Income

    (46.0     (.9     (46.9     (44.1     (.9     (45.0

Less: economically hedged Floor Income Contracts

    (27.2            (27.2     (27.2            (27.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans eligible to earn Floor Income

  $ 15.2      $ 11.9      $ 27.1      $ 15.9      $ 11.8      $ 27.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans earning Floor Income

  $ 15.1      $ .5      $ 15.6      $ 15.8      $ 1.6      $ 17.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period April 1, 2015 to December 31, 2019.

 

(Dollars in billions)

   April 1,
2015 to
December 31,
2015
     2016      2017      2018      2019  

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged

   $ 27.2       $ 19.0       $ 14.0       $ 13.2       $ 5.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Expenses — FFELP Loans

Operating expenses for our FFELP Loans segment primarily include the contractual rates we pay to service loans in term asset-backed securitization trusts or a similar rate if a loan is not in a term financing facility (which is presented as an intercompany charge from the Business Services segment who services the loans), the fees we pay for third-party loan servicing and costs incurred to acquire loans. The intercompany revenue charged by the Business Services segment and included in those amounts was $111 million and $118 million for the quarters ended March 31, 2015 and 2014, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 45 basis points and 49 basis points of average FFELP Loans in the quarters ended March 31, 2015 and 2014, respectively. The decrease in operating expenses from the year-ago quarter was primarily the result of the decrease in the average servicing rate paid.

Private Education Loans Segment

The following table includes “Core Earnings” results for our Private Education Loans segment.

 

     Three Months Ended March 31,      % Increase (Decrease)  

(Dollars in millions)

       2015              2014              2015 vs. 2014      

“Core Earnings” interest income:

        

Private Education Loans

   $ 456       $ 494         (8 )% 

Cash and investments

                       
  

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     456         494         (8

Total “Core Earnings” interest expense

     173         185         (6
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     283         309         (8

Less: provision for loan losses

     120         136         (12
  

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income after provision for loan losses

     163         173         (6

Servicing revenue

     7         1         600   

Direct operating expenses

     46         55         (16
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     124         119         4   

Income tax expense

     47         45         4   
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 77       $ 74         4
  

 

 

    

 

 

    

 

 

 

 

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Quarterly “Core Earnings” were $77 million compared with $74 million in the year-ago quarter. This increase is primarily the result of a $16 million decrease in the provision for Private Education Loan losses, a $6 million increase in servicing fees and a $9 million reduction in expenses. This was partially offset by a $26 million decrease in net interest income due to a decline in the net interest margin and balance of the portfolio. “Core Earnings” key performance metrics are as follows:

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015             2014      

Private Education Loan spread

     3.87     4.01

Net interest margin

     3.74     3.91

Provision for loan losses

   $ 120      $ 136   

Charge-offs

   $ 190      $ 218   

Charge-off rate

     2.9     3.3

Total delinquency rate

     6.9     7.8

Greater than 90-day delinquency rate

     3.6     3.9

Forbearance rate

     3.8     4.3

Loans in repayment with more than 12 payments made

     92.6     90.3

Cosigner rate

     64     64

Average FICO

     719        718   

Private Education Loan Net Interest Margin

The following table shows the “Core Earnings” basis Private Education Loan net interest margin along with reconciliation to the GAAP-basis Private Education Loan net interest margin before provision for loan losses.

 

     Three Months Ended March 31,  
         2015             2014      

“Core Earnings” basis Private Education Loan yield

     6.15     6.36

“Core Earnings” basis Private Education Loan cost of funds

     (2.28     (2.35
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan spread

     3.87        4.01   

“Core Earnings” basis other interest-earning asset spread impact

     (.13     (.10
  

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan net interest margin(1)

     3.74     3.91
  

 

 

   

 

 

 
                  

“Core Earnings” basis Private Education Loan net interest margin(1)

     3.74     3.91

Adjustment for GAAP accounting treatment(2)

     (.03     .40   
  

 

 

   

 

 

 

GAAP basis Private Education Loan net interest margin(1)

     3.71     4.31
  

 

 

   

 

 

 

 

  (1) 

The average balances of our Private Education Loan “Core Earnings” basis interest-earning assets for the respective periods are:

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015              2014      

Private Education Loans

   $ 30,105       $ 31,525   

Other interest-earning assets

     593         493   
  

 

 

    

 

 

 

Total Private Education Loan “Core Earnings” basis interest-earning assets

   $ 30,698       $ 32,018   
  

 

 

    

 

 

 

 

  (2) 

Represents the reclassification of periodic interest accruals on derivative contracts from net interest income to other income and other derivative accounting adjustments. For further discussion of these adjustments, see section titled “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP” above.

 

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Private Education Loan Provision for Loan Losses

In establishing the allowance for Private Education Loan losses as of March 31, 2015, we considered several factors with respect to our Private Education Loan portfolio. In particular, we continue to see improvement in credit quality and continuing positive delinquency and charge-off trends in connection with this portfolio. On a “Core Earnings” basis, total loans delinquent (as a percentage of loans in repayment) have decreased to 6.9 percent from 7.8 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 3.6 percent from 3.9 percent in the year-ago quarter. The “Core Earnings” charge-off rate decreased to 2.9 percent from 3.3 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) decreased to 3.8 percent from 4.3 percent in the year-ago quarter.

The Private Education Loan provision for loan losses on a “Core Earnings” basis was $120 million in the first quarter of 2015, down $16 million from the first quarter of 2014. The decline from the year-ago period was a result of the overall improvement in credit quality and performance trends discussed above, leading to decreases in expected future charge-offs.

Operating Expenses — Private Education Loans Segment

Operating expenses for our Private Education Loans segment include costs incurred to service and collect on our Private Education Loan portfolio. Direct operating expenses as a percentage of revenues (revenues calculated as net interest income after provision plus total other income) were 27 percent and 32 percent in the quarters ended March 31, 2015 and 2014, respectively.

Business Services Segment

The following table includes “Core Earnings” results for our Business Services segment.

 

     Three Months Ended March 31,      % Increase (Decrease)  

(Dollars in millions)

       2015              2014          2015 vs. 2014  

Net interest income

   $       $        

Servicing revenue:

        

Intercompany loan servicing

     111         118         (6

Third-party loan servicing

     44         40         10   

Guarantor servicing

     8         9         (11
  

 

 

    

 

 

    

 

 

 

Total servicing revenue

     163         167         (2

Asset recovery revenue

     89         111         (20

Other Business Services revenue

     2         1         100   
  

 

 

    

 

 

    

 

 

 

Total other income

     254         279         (9

Direct operating expenses

     116         95         22   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     138         184         (25

Income tax expense

     52         69         (25
  

 

 

    

 

 

    

 

 

 

Net income from continuing operations

     86         115         (25

Income from discontinued operations, net of tax expense

             1         (100
  

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 86       $ 116         (26 )% 
  

 

 

    

 

 

    

 

 

 

 

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“Core Earnings” were $86 million in the first quarter of 2015, compared with $116 million in the year-ago quarter. The decrease was primarily the result of lower asset recovery revenue, primarily related to a legislative reduction in certain fees earned and a lower balance of intercompany FFELP Loans serviced. Key segment metrics are:

 

     As of
March 31,
 

(Dollars in billions)

   2015      2014  

Number of accounts serviced for ED (in millions)

     6.2         5.8   

Total federal loans serviced

   $ 297       $ 271   

Contingent collections receivables inventory:

     

Student loans

   $ 11.0       $ 13.2   

Other

     9.2         2.7   
  

 

 

    

 

 

 

Total contingent collections receivables inventory

   $ 20.2       $ 15.9   
  

 

 

    

 

 

 

In February 2015, Navient completed the acquisition of Gila LLC, an asset recovery and business process outsourcing firm serving more than 600 clients in 39 states. The firm provides receivables management services and account processing solutions for state governments, court systems and municipalities.

Revenues related to services performed on FFELP Loans accounted for 74 percent and 78 percent, respectively, of total Business Services segment revenues for the quarters ended March 31, 2015 and 2014.

Servicing Revenue

Our Business Services segment includes intercompany loan servicing fees from servicing the FFELP Loans in our FFELP Loans segment. The average balance of this portfolio was $101 billion and $103 billion for the quarters ended March 31, 2015 and 2014, respectively. The decline in the intercompany loan servicing revenue from the year-ago quarter was primarily due to the decrease in the average servicing rate paid as well as the decline in the average balance of FFELP Loans serviced.

Third-party loan servicing income increased $4 million from the year-ago quarter primarily due to third-party servicing provided to SLM BankCo.

The Company services student loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.2 million customer accounts under the ED Servicing Contract as of March 31, 2015, compared with 5.8 million customer accounts serviced at March 31, 2014. Third-party loan servicing fees in the quarters ended March 31, 2015 and 2014 included $31 million and $31 million, respectively, of servicing revenue related to the ED Servicing Contract. On June 13, 2014, ED extended its servicing contract with us to service Direct Student Loan Program federal loans for five more years.

Asset Recovery Revenue

Our asset recovery revenue consists of fees we receive for asset recovery of delinquent and defaulted debt on behalf of third-party clients performed on a contingent basis. The majority of this fee revenue is generated through collecting or rehabilitating defaulted federal loans. Asset recovery revenue decreased $22 million in the first quarter of 2015 compared with the year-ago quarter primarily as a result of the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated. This legislative reduction in fees represents $40 million of the decrease in asset recovery revenue. This reduction was partially offset by higher asset recovery volume and revenue from the acquisition of Gila LLC.

Since 1997, Navient has provided asset recovery services on defaulted student loans to ED. This contract expired by its terms on February 21, 2015 and our Pioneer Credit Recovery subsidiary received no new account

 

57


Table of Contents

placements under the contract. We are engaged with ED to learn more about their decision and address any questions or concerns they may have. In addition, on March 9, 2015, Pioneer filed a bid protest with the U.S. Government Accountability Office (“GAO”) which was dismissed on March 13, 2015. This bid protest was dismissed from the GAO based upon overlapping jurisdiction. Following the bid protest dismissal, Pioneer filed its own complaint with the U.S. Court of Federal Claims, which complaint was consolidated with several similar cases filed by other private collection agencies. On April 16, 2015, Pioneer’s complaint, together with the other plaintiffs’ consolidated complaints, was dismissed for lack of jurisdiction. We are currently considering whether to appeal this decision.

Separately, we have submitted a response to ED’s request for proposals (RFP) in relation to a new contract for similar services. There can be no assurances that Pioneer will be awarded an extension of the existing contract, a new contract under the RFP or what volume of accounts might be placed with Pioneer.

Operating Expenses — Business Services Segment

Operating expenses for our Business Services segment primarily include costs incurred to service our FFELP Loan portfolio, third-party servicing and asset recovery costs, and other operating costs. The $21 million increase in operating expenses in the quarter ended March 31, 2015 compared with the year-ago quarter was primarily the result of incremental costs post-Spin-Off resulting from operating as a new separate company, costs related to the Gila LLC acquisition this quarter, as well as incremental third-party servicing expenses related to an $8.5 billion loan acquisition in the fourth-quarter 2014.

Other Segment

The following table includes “Core Earnings” results of our Other segment.

 

     Three Months Ended March 31,     % Increase (Decrease)  

(Dollars in millions)

       2015             2014         2015 vs. 2014  

Net interest loss after provision for loan losses

   $ (27   $ (20     35

Losses on sales of loans and investments

                     

Gains on debt repurchases

                     

Other

     4        3        33   
  

 

 

   

 

 

   

 

 

 

Total other income

     4        3        33   

Direct operating expenses

     4        113        (96

Overhead expenses:

      

Corporate overhead

     32        26        23   

Unallocated information technology costs

     28        23        22   
  

 

 

   

 

 

   

 

 

 

Total overhead expenses

     60        49        22   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     64        162        (60
  

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

     (87     (179     (51

Income tax benefit

     (33     (67     (51
  

 

 

   

 

 

   

 

 

 

“Core Earnings” (loss)

   $ (54   $ (112     (52 )% 
  

 

 

   

 

 

   

 

 

 

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses includes net interest loss related to our corporate liquidity portfolio, partially offset by net interest income related to our mortgage and consumer loan portfolios.

 

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Table of Contents

Gains on Debt Repurchases

We repurchased $530 million and $0 million face amount of our unsecured debt for the quarters ended March 31, 2015 and 2014, respectively, with no gains recognized. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

Direct Operating Expenses — Other Segment

In the year-ago quarter, we recognized $111 million of expense related to the settlement of regulatory matters (for additional information, see Part II. “Other Information,” Item 1. “Legal Proceedings — Regulatory Matters”). This regulatory expense in the year-ago quarter was the primary driver of the decrease in operating expenses from first-quarter 2014 to first-quarter 2015.

Overhead — Other Segment

Unallocated corporate overhead is comprised of costs related to executive management, the board of directors, accounting, finance, legal, human resources and stock-based compensation expense. Unallocated information technology costs are related to infrastructure and operations. The increase in overhead expenses in first-quarter 2015 compared with the year-ago quarter is primarily due to incremental costs post-Spin-Off resulting from operating as a new separate company, as well as costs incurred to provide related support to SLM BankCo under various transition services agreements entered into in connection with the Spin-Off.

Financial Condition

This section provides additional information regarding the changes in our loan portfolio assets and related liabilities as well as credit quality and performance indicators related to our loan portfolio.

Average Balance Sheets — GAAP

The following table reflects the rates earned on interest-earning assets and paid on interest-bearing liabilities and reflects our net interest margin on a consolidated basis.

 

     Three Months Ended March 31,  
     2015     2014  

(Dollars in millions)

   Balance      Rate     Balance      Rate  

Average Assets

          

FFELP Loans

   $ 103,617         2.49   $ 103,734         2.53

Private Education Loans

     30,105         6.15        38,945         6.70   

Other loans

     81         8.96        98         9.69   

Cash and investments

     6,307         .11        8,080         .17   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     140,110         3.18     150,857         3.48
     

 

 

      

 

 

 

Non-interest-earning assets

     4,251           4,124      
  

 

 

      

 

 

    

Total assets

   $ 144,361         $ 154,981      
  

 

 

      

 

 

    

Average Liabilities and Equity

          

Short-term borrowings

   $ 3,931         2.30   $ 13,258         .82

Long-term borrowings

     133,557         1.49        133,116         1.53   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     137,488         1.52     146,374         1.47
     

 

 

      

 

 

 

Non-interest-bearing liabilities

     2,709           2,982      

Equity

     4,164           5,625      
  

 

 

      

 

 

    

Total liabilities and equity

   $ 144,361         $ 154,981      
  

 

 

      

 

 

    

Net interest margin

        1.69        2.06
     

 

 

      

 

 

 

 

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Table of Contents

Rate/Volume Analysis — GAAP

The following rate/volume analysis shows the relative contribution of changes in interest rates and asset volumes.

 

     Increase
(Decrease)
     Change Due  To(1)  

(Dollars in millions)

      Rate      Volume  

Three Months Ended March 31, 2015 vs. 2014

        

Interest income

   $ (199    $ (110    $ (89

Interest expense

     (16      17         (33
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ (183    $ (131    $ (52
  

 

 

    

 

 

    

 

 

 

 

  (1) 

Changes in income and expense due to both rate and volume have been allocated in proportion to the relationship of the absolute dollar amounts of the change in each. The changes in income and expense are calculated independently for each line in the table. The totals for the rate and volume columns are not the sum of the individual lines.

Summary of our Student Loan Portfolio

Ending Student Loan Balances, net — GAAP Basis

 

     March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total student loan portfolio:

          

In-school(1)

   $ 448      $      $ 448      $ 383      $ 831   

Grace, repayment and other(2)

     38,796        62,103        100,899        29,801        130,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     39,244        62,103        101,347        30,184        131,531   

Unamortized premium/(discount)

     679        489        1,168        (581     587   

Receivable for partially charged-off loans

                          1,236        1,236   

Allowance for loan losses

     (56     (35     (91     (1,849     (1,940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 39,867      $ 62,557      $ 102,424      $ 28,990      $ 131,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     39     61     100    

% of total

     30     48     78     22     100

 

     December 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total student loan portfolio:

          

In-school(1)

   $ 488      $      $ 488      $ 436      $ 924   

Grace, repayment and other(2)

     39,958        62,992        102,950        30,625        133,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     40,446        62,992        103,438        31,061        134,499   

Unamortized premium/(discount)

     677        499        1,176        (594     582   

Receivable for partially charged-off loans

                          1,245        1,245   

Allowance for loan losses

     (58     (35     (93     (1,916     (2,009
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 41,065      $ 63,456      $ 104,521      $ 29,796      $ 134,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     39     61     100    

% of total

     31     47     78     22     100

 

(1) 

Loans for customers still attending school and are not yet required to make payments on the loan.

 

(2) 

Includes loans in deferment or forbearance.

 

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Table of Contents

Ending Student Loan Balances, net — “Core Earnings” Basis

 

     March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total student loan portfolio:

          

In-school(1)

   $ 448      $      $ 448      $ 383      $ 831   

Grace, repayment and other(2)

     38,796        62,103        100,899        29,801        130,700   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     39,244        62,103        101,347        30,184        131,531   

Unamortized premium/(discount)

     679        489        1,168        (581     587   

Receivable for partially charged-off loans

                          1,236        1,236   

Allowance for loan losses

     (56     (35     (91     (1,849     (1,940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 39,867      $ 62,557      $ 102,424      $ 28,990      $ 131,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     39     61     100    

% of total

     30     48     78     22     100

 

     December 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total student loan portfolio:

          

In-school(1)

   $ 488      $      $ 488      $ 436      $ 924   

Grace, repayment and other(2)

     39,958        62,992        102,950        30,625        133,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     40,446        62,992        103,438        31,061        134,499   

Unamortized premium/(discount)

     677        499        1,176        (594     582   

Receivable for partially charged-off loans

                          1,245        1,245   

Allowance for loan losses

     (58     (35     (93     (1,916     (2,009
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 41,065      $ 63,456      $ 104,521      $ 29,796      $ 134,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     39     61     100    

% of total

     31     47     78     22     100

 

(1) 

Loans for customers still attending school and are not yet required to make payments on the loan.

 

(2) 

Includes loans in deferment or forbearance.

 

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Table of Contents

Average Student Loan Balances (net of unamortized premium/discount) — GAAP Basis

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 40,634      $ 62,983      $ 103,617      $ 30,105      $ 133,722   

% of FFELP

     39     61     100    

% of total

     30     47     77     23     100

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 39,682      $ 64,052      $ 103,734      $ 38,945      $ 142,679   

% of FFELP

     38     62     100    

% of total

     28     45     73     27     100

Average Student Loan Balances (net of unamortized premium/discount) — “Core Earnings” Basis

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 40,634      $ 62,983      $ 103,617      $ 30,105      $ 133,722   

% of FFELP

     39     61     100    

% of total

     30     47     77     23     100

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Total

   $ 39,172      $ 63,157      $ 102,329      $ 31,525      $ 133,854   

% of FFELP

     38     62     100    

% of total

     29     47     76     24     100

 

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Table of Contents

Student Loan Activity — GAAP Basis

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 41,065      $ 63,456      $ 104,521      $ 29,796      $ 134,317   

Acquisitions and originations

     406        418        824        6        830   

Capitalized interest and premium/discount amortization

     308        279        587        136        723   

Consolidations to third parties

     (657     (487     (1,144     (23     (1,167

Sales

     (151     (36     (187            (187

Repayments and other

     (1,104     (1,073     (2,177     (925     (3,102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 39,867      $ 62,557      $ 102,424      $ 28,990      $ 131,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 40,021      $ 64,567      $ 104,588      $ 37,512      $ 142,100   

Acquisitions and originations

     278        175        453        1,522        1,975   

Capitalized interest and premium/discount amortization

     307        304        611        211        822   

Consolidations to third parties

     (404     (277     (681     (33     (714

Sales

                                   

Repayments and other

     (1,114     (1,222     (2,336     (1,055     (3,391
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 39,088      $ 63,547      $ 102,635      $ 38,157      $ 140,792   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Student Loan Activity — “Core Earnings” Basis

 

     Three Months Ended March 31, 2015  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 41,065      $ 63,456      $ 104,521      $ 29,796      $ 134,317   

Acquisitions and originations

     406        418        824        6        830   

Capitalized interest and premium/discount amortization

     308        279        587        136        723   

Consolidations to third parties

     (657     (487     (1,144     (23     (1,167

Sales

     (151     (36     (187            (187

Repayments and other

     (1,104     (1,073     (2,177     (925     (3,102
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 39,867      $ 62,557      $ 102,424      $ 28,990      $ 131,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2014  

(Dollars in millions)

   FFELP
Stafford and
Other
    FFELP
Consolidation
Loans
    Total
FFELP
Loans
    Total Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 39,499      $ 63,664      $ 103,163      $ 31,006      $ 134,169   

Acquisitions

     279        175        454        672        1,126   

Capitalized interest and premium/discount amortization

     301        295        596        183        779   

Consolidations to third parties

     (399     (274     (673     (26     (699

Sales

                                   

Repayments and other

     (1,095     (1,205     (2,300     (886     (3,186
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 38,585      $ 62,655      $ 101,240      $ 30,949      $ 132,189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Student Loan Allowance for Loan Losses Activity — GAAP Basis

 

     Three Months Ended March 31,  
     2015     2014  

(Dollars in millions)

   FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
    FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 93      $ 1,916      $ 2,009      $ 119      $ 2,097      $ 2,216   

Less:

            

Charge-offs(1)

     (7     (190     (197     (22     (218     (240

Student loan sales

                                          

Plus:

            

Provision for loan losses

     5        120        125        10        175        185   

Reclassification of interest reserve(2)

            3        3               5        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 91      $ 1,849      $ 1,940      $ 107      $ 2,059      $ 2,166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total

     5     95     100     5     95     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

            10,426        10,426               9,241        9,241   

Student Loan Allowance for Loan Losses Activity — “Core Earnings” Basis

 

     Three Months Ended March 31,  
     2015     2014  

(Dollars in millions)

   FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
    FFELP
Loans
    Private
Education
Loans
    Total
Portfolio
 

Beginning balance

   $ 93      $ 1,916      $ 2,009      $ 113      $ 2,035      $ 2,148   

Less:

            

Charge-offs(1)

     (7     (190     (197     (22     (218     (240

Student loan sales

                                          

Plus:

            

Provision for loan losses

     5        120        125        10        136        146   

Reclassification of interest reserve(2)

            3        3               5        5   

Other transactions

                                 29        29   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 91      $ 1,849      $ 1,940      $ 101      $ 1,987      $ 2,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of total

     5     95     100     5     95     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

            10,426        10,426               9,241        9,241   

 

(1) 

Charge-offs are reported net of expected recoveries. For Private Education Loans, the expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Private Education Loan Portfolio Performance—Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Represents the recorded investment of loans identified as troubled debt restructuring.

 

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Table of Contents

FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance — GAAP Basis

 

     FFELP Loan Delinquencies  
     March 31,  
     2015     2014  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 10,555        $ 13,016     

Loans in forbearance(2)

     14,037          15,650     

Loans in repayment and percentage of each status:

        

Loans current

     64,522        84.1     62,721        85.9

Loans delinquent 31-60 days(3)

     3,656        4.8        3,059        4.2   

Loans delinquent 61-90 days(3)

     2,087        2.7        1,784        2.4   

Loans delinquent greater than 90 days(3)

     6,490        8.4        5,497        7.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     76,755        100     73,061        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     101,347          101,727     

FFELP Loan unamortized premium

     1,168          1,015     
  

 

 

     

 

 

   

Total FFELP Loans

     102,515          102,742     

FFELP Loan allowance for losses

     (91       (107  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 102,424        $ 102,635     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       75.7       71.8
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       15.9       14.2
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       15.5       17.6
    

 

 

     

 

 

 

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested extension of grace period during employment transition or who have temporarily ceased making payments due to hardship or other factors.

 

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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Table of Contents

FFELP Loan Delinquencies and Forbearance — “Core Earnings” Basis

 

     FFELP Loan Delinquencies  
     March 31,  
     2015     2014  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 10,555        $ 12,872     

Loans in forbearance(2)

     14,037          15,395     

Loans in repayment and percentage of each status:

        

Loans current

     64,522        84.1     62,105        86.2

Loans delinquent 31-60 days(3)

     3,656        4.8        2,952        4.1   

Loans delinquent 61-90 days(3)

     2,087        2.7        1,719        2.4   

Loans delinquent greater than 90 days(3)

     6,490        8.4        5,287        7.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     76,755        100     72,063        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     101,347          100,330     

FFELP Loan unamortized premium

     1,168          1,011     
  

 

 

     

 

 

   

Total FFELP Loans

     102,515          101,341     

FFELP Loan allowance for losses

     (91       (101  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 102,424        $ 101,240     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       75.7       71.8
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       15.9       13.8
    

 

 

     

 

 

 

FFELP Loans in forbearance as a percentage of loans in repayment and forbearance

       15.5       17.6
    

 

 

     

 

 

 

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on the loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested extension of grace period during employment transition or who have temporarily ceased making payments due to hardship or other factors.

 

(2) 

Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

67


Table of Contents

Allowance for FFELP Loan Losses — GAAP Basis

 

     Three Months Ended March 31,  

(Dollars in millions)

           2015                     2014          

Allowance at beginning of period

   $ 93      $ 119   

Provision for FFELP Loan losses

     5        10   

Charge-offs

     (7     (22

Student loan sales

              
  

 

 

   

 

 

 

Allowance at end of period

   $ 91      $ 107   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     .03     .12

Allowance as a percentage of ending total loans, gross

     .09     .10

Allowance as a percentage of ending loans in repayment

     .12     .15

Allowance coverage of charge-offs (annualized)

     3.6        1.2   

Ending total loans, gross

   $ 101,347      $ 101,727   

Average loans in repayment

   $ 77,474      $ 73,496   

Ending loans in repayment

   $ 76,755      $ 73,061   

Allowance for FFELP Loan Losses — “Core Earnings” Basis

 

     Three Months Ended March 31,  

(Dollars in millions)

           2015                     2014          

Allowance at beginning of period

   $ 93      $ 113   

Provision for FFELP Loan losses

     5        10   

Charge-offs

     (7     (22

Student loan sales

              
  

 

 

   

 

 

 

Allowance at end of period

   $ 91      $ 101   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     .03     .12

Allowance as a percentage of ending total loans, gross

     .09     .10

Allowance as a percentage of ending loans in repayment

     .12     .14

Allowance coverage of charge-offs (annualized)

     3.6        1.1   

Ending total loans, gross

   $ 101,347      $ 100,330   

Average loans in repayment

   $ 77,474      $ 72,486   

Ending loans in repayment

   $ 76,755      $ 72,063   

 

68


Table of Contents

Private Education Loan Portfolio Performance

Private Education Loan Delinquencies and Forbearance — GAAP Basis

 

     Private Education Loan Delinquencies  
     March 31,  
     2015     2014  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 2,894        $ 7,075     

Loans in forbearance(2)

     1,030          1,216     

Loans in repayment and percentage of each status:

        

Loans current

     24,451        93.1     29,156        93.1

Loans delinquent 31-60 days(3)

     528        2.0        655        2.1   

Loans delinquent 61-90 days(3)

     341        1.3        430        1.4   

Loans delinquent greater than 90 days(3)

     940        3.6        1,068        3.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     26,260        100     31,309        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     30,184          39,600     

Private Education Loan unamortized discount

     (581       (681  
  

 

 

     

 

 

   

Total Private Education Loans

     29,603          38,919     

Private Education Loan receivable for partially charged-off loans

     1,236          1,297     

Private Education Loan allowance for losses

     (1,849       (2,059  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 28,990        $ 38,157     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       87.0       79.1
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       6.9       6.9
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       3.8       3.7
    

 

 

     

 

 

 

Loans in repayment with more than 12 payments made

       92.6       84.2
    

 

 

     

 

 

 

Percentage of Private Education Loans with a cosigner

       64       68
    

 

 

     

 

 

 

Average FICO at origination

       719          723   
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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Private Education Loan Delinquencies and Forbearance — “Core Earnings” Basis

 

     Private Education Loan Delinquencies  
     March 31,  
     2015     2014  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 2,894        $ 4,090     

Loans in forbearance(2)

     1,030          1,205     

Loans in repayment and percentage of each status:

        

Loans current

     24,451        93.1     24,912        92.2

Loans delinquent 31-60 days(3)

     528        2.0        634        2.4   

Loans delinquent 61-90 days(3)

     341        1.3        416        1.5   

Loans delinquent greater than 90 days(3)

     940        3.6        1,068        3.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     26,260        100     27,030        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     30,184          32,325     

Private Education Loan unamortized discount

     (581       (686  
  

 

 

     

 

 

   

Total Private Education Loans

     29,603          31,639     

Private Education Loan receivable for partially charged-off loans

     1,236          1,297     

Private Education Loan allowance for losses

     (1,849       (1,987  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 28,990        $ 30,949     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       87.0       83.6
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       6.9       7.8
    

 

 

     

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

       3.8       4.3
    

 

 

     

 

 

 

Loans in repayment with more than 12 payments made

       92.6       90.3
    

 

 

     

 

 

 

Percentage of Private Education Loans with a cosigner

       64       64
    

 

 

     

 

 

 

Average FICO at origination

       719          718   
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation.

 

(2) 

Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors, consistent with established loan program servicing policies and procedures.

 

(3) 

The period of delinquency is based on the number of days scheduled payments are contractually past due.

 

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Allowance for Private Education Loan Losses — GAAP Basis

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015             2014      

Allowance at beginning of period

   $ 1,916      $ 2,097   

Provision for Private Education Loan losses

     120        175   

Charge-offs(1)

     (190     (218

Reclassification of interest reserve(2)

     3        5   
  

 

 

   

 

 

 

Allowance at end of period

   $ 1,849      $ 2,059   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     2.9     2.8

Allowance as a percentage of ending total loans

     5.9     5.0

Allowance as a percentage of ending loans in repayment

     7.0     6.6

Average coverage of charge-offs (annualized)

     2.4        2.3   

Ending total loans(3)

   $ 31,420      $ 40,897   

Average loans in repayment

   $ 26,644      $ 31,416   

Ending loans in repayment

   $ 26,260      $ 31,309   

Allowance for Private Education Loan Losses — “Core Earnings” Basis

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015             2014      

Allowance at beginning of period

   $ 1,916      $ 2,035   

Provision for Private Education Loan losses

     120        136   

Charge-offs(1)

     (190     (218

Reclassification of interest reserve(2 )

     3        5   

Loan sales and other transactions

            29   
  

 

 

   

 

 

 

Allowance at end of period

   $ 1,849      $ 1,987   
  

 

 

   

 

 

 

Charge-offs as a percentage of average loans in repayment (annualized)

     2.9     3.3

Allowance as a percentage of ending total loans

     5.9     5.9

Allowance as a percentage of ending loans in repayment

     7.0     7.4

Average coverage of charge-offs (annualized)

     2.4        2.2   

Ending total loans(3)

   $ 31,420      $ 33,622   

Average loans in repayment

   $ 26,644      $ 27,028   

Ending loans in repayment

   $ 26,260      $ 27,030   

 

(1) 

Charge-offs are reported net of expected recoveries. The expected recovery amount is transferred to the receivable for partially charged-off loan balance. Charge-offs include charge-offs against the receivable for partially charged-off loans which represents the difference between what was expected to be collected and any shortfalls in what was actually collected in the period. See “Receivable for Partially Charged-Off Private Education Loans” for further discussion.

 

(2) 

Represents the additional allowance related to the amount of uncollectible interest reserved within interest income that is transferred in the period to the allowance for loan losses when interest is capitalized to a loan’s principal balance.

 

(3) 

Ending total loans represents gross Private Education Loans, plus the receivable for partially charged-off loans.

 

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The following tables provide the detail for our traditional and non-traditional Private Education Loans for the quarters ended.

GAAP Basis:

 

     March 31, 2015     March 31, 2014  

(Dollars in millions)

   Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

   $ 28,504      $ 2,916      $ 31,420      $ 37,617      $ 3,280      $ 40,897   

Ending loans in repayment

     24,190        2,070        26,260        29,116        2,193        31,309   

Private Education Loan allowance for losses

     1,470        379        1,849        1,583        476        2,059   

Charge-offs as a percentage of average loans in repayment (annualized)

     2.4     8.1     2.9     2.3     9.5     2.8

Allowance as a percentage of ending total loan balance

     5.2     13.0     5.9     4.2     14.5     5.0

Allowance as a percentage of ending loans in repayment

     6.1     18.3     7.0     5.4     21.7     6.6

Average coverage of charge-offs (annualized)

     2.5        2.2        2.4        2.3        2.3        2.3   

Delinquencies as a percentage of Private Education Loans in repayment

     6.1     15.7     6.9     6.0     18.3     6.9

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

     3.1     9.0     3.6     2.9     10.0     3.4

Loans in forbearance as a percentage of loans in repayment and forbearance

     3.6     5.5     3.8     3.5     6.3     3.7

Loans that entered repayment during the period(2)

   $ 80      $ 5      $ 85      $ 528      $ 11      $ 539   

Percentage of Private Education Loans with a cosigner

     67     32     64     71     31     68

Average FICO at origination

     726        626        719        730        625        723   

 

(1) 

Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2) 

Includes loans that are required to make a payment for the first time.

 

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“Core Earnings” Basis:

 

     March 31, 2015     March 31, 2014  

(Dollars in millions)

   Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

   $ 28,504      $ 2,916      $ 31,420      $ 30,391      $ 3,231      $ 33,622   

Ending loans in repayment

     24,190        2,070        26,260        24,865        2,165        27,030   

Private Education Loan allowance for losses

     1,470        379        1,849        1,517        470        1,987   

Charge-offs as a percentage of average loans in repayment (annualized)

     2.4     8.1     2.9     2.7     9.6     3.3

Allowance as a percentage of ending total loan balance

     5.2     13.0     5.9     5.0     14.6     5.9

Allowance as a percentage of ending loans in repayment

     6.1     18.3     7.0     6.1     21.7     7.4

Average coverage of charge-offs (annualized)

     2.5        2.2        2.4        2.2        2.2        2.2   

Delinquencies as a percentage of Private Education Loans in repayment

     6.1     15.7     6.9     6.9     18.5     7.8

Delinquencies greater than 90 days as a percentage of Private Education Loans in repayment

     3.1     9.0     3.6     3.4     10.1     3.9

Loans in forbearance as a percentage of loans in repayment and forbearance

     3.6     5.5     3.8     4.1     6.3     4.3

Loans that entered repayment during the period(2)

   $ 80      $ 5      $ 85      $ 130      $ 8      $ 138   

Percentage of Private Education Loans with a cosigner

     67     32     64     66     31     64

Average FICO at origination

     726        626        719        726        626        718   

 

(1) 

Ending total loans represent gross Private Education Loans, plus the receivable for partially charged-off loans.

 

(2) 

Includes loans that are required to make a payment for the first time.

As part of determining the adequacy of the allowance for loan losses, we review key allowance and loan metrics. The most significant of these metrics considered are the allowance coverage of charge-offs ratio; the allowance as a percentage of total loans and of loans in repayment; and delinquency and forbearance percentages.

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 days or more past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. Private Education Loans which have defaulted since 2007 for which we have previously charged off estimated losses have, to varying degrees, not met our post-default recovery expectations to date and may continue not to do so. According to our policy, we have been charging off these periodic shortfalls in expected recoveries against our allowance for Private Education Loan losses and the related receivable for partially charged-off Private Education Loans and we will continue to do so. There was $380 million and $334 million in the allowance for Private Education Loan losses at March 31, 2015 and 2014, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

 

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The following table summarizes the activity in the receivable for partially charged-off Private Education Loans (GAAP basis and “Core Earnings” basis are the same).

 

     Three Months Ended March 31,  

(Dollars in millions)

       2015              2014      

Receivable at beginning of period

   $ 1,245       $ 1,313   

Expected future recoveries of current period defaults(1)

     62         71   

Recoveries(2)

     (52      (61

Charge-offs(3)

     (19      (26
  

 

 

    

 

 

 

Receivable at end of period

     1,236         1,297   

Allowance for estimated recovery shortfalls(4)

     (380      (334
  

 

 

    

 

 

 

Net receivable at end of period

   $ 856       $ 963   
  

 

 

    

 

 

 

 

  (1) 

Represents the difference between the loan balance and our estimate of the amount to be collected in the future.

 

  (2) 

Current period cash collections.

 

  (3) 

Represents the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” tables.

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $1.8 billion and $2.1 billion overall allowance for Private Education Loan losses as of March 31, 2015 and 2014, respectively.

Use of Forbearance as a Private Education Loan Collection Tool

Forbearance involves granting the customer a temporary cessation of payments (or temporary acceptance of smaller than scheduled payments) for a specified period of time. Using forbearance extends the original term of the loan. Forbearance does not grant any reduction in the total repayment obligation (principal or interest). While in forbearance status, interest continues to accrue and is capitalized to principal when the loan re-enters repayment status. Our forbearance policies include limits on the number of forbearance months granted consecutively and the total number of forbearance months granted over the life of the loan. In some instances, we require good-faith payments before granting forbearance. Exceptions to forbearance policies are permitted when such exceptions are judged to increase the likelihood of recovery of the loan. Forbearance as a recovery tool is used most effectively when applied based on a customer’s unique situation, including historical information and judgments. We leverage updated customer information and other decision support tools to best determine who will be granted forbearance based on our expectations as to a customer’s ability and willingness to repay their obligation. This strategy is aimed at mitigating the overall risk of the portfolio as well as encouraging cash resolution of delinquent loans.

Forbearance may be granted to customers who are exiting their grace period to provide additional time to obtain employment and income to support their obligations, or to current customers who are faced with a hardship and request forbearance time to provide temporary payment relief. In these circumstances, a customer’s loan is placed into a forbearance status in limited monthly increments and is reflected in the forbearance status at month-end during this time. At the end of their granted forbearance period, the customer will enter repayment status as current and is expected to begin making their scheduled monthly payments on a go-forward basis.

Forbearance may also be granted to customers who are delinquent in their payments. In these circumstances, the forbearance cures the delinquency and the customer is returned to a current repayment status. In more limited instances, delinquent customers will also be granted additional forbearance time.

The tables below show the composition and status of the Private Education Loan portfolio aged by the number of months for which a scheduled monthly payment was received. As indicated in the tables, the percentage of loans that are in forbearance status, are delinquent greater than 90 days or that are charged off decreases the longer the loans have been making scheduled monthly payments.

 

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At March 31, 2015, loans in forbearance status as a percentage of loans in repayment and forbearance were 11.2 percent for loans that have made less than 25 monthly payments. The percentage drops to 1.4 percent for loans that have made more than 48 monthly payments. Approximately 56 percent of our Private Education Loans in forbearance status have made less than 25 monthly payments.

At March 31, 2015, loans in repayment that are delinquent greater than 90 days as a percentage of loans in repayment were 9.6 percent for loans that have made less than 25 monthly payments. The percentage drops to 1.5 percent for loans that have made more than 48 monthly payments. Approximately 47 percent of our Private Education Loans in repayment that are delinquent greater than 90 days status have made less than 25 monthly payments.

For the three months ended March 31, 2015, charge-offs as a percentage of loans in repayment were 9.4 percent for loans that have made less than 25 monthly payments. The percentage drops to 0.9 percent for loans that have made more than 48 monthly payments. Approximately 60 percent of our Private Education Loan charge-offs occurring in first-quarter 2015 made less than 25 monthly payments.

GAAP Basis:

 

(Dollars in millions)

  Monthly Scheduled Payments Received     Not Yet in
Repayment
       

March 31, 2015

  0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

  $      $      $      $      $      $ 2,894      $ 2,894   

Loans in forbearance

    419        157        141        121        192               1,030   

Loans in repayment — current

    1,482        2,315        3,584        3,846        13,224               24,451   

Loans in repayment — delinquent 31-60 days

    111        85        94        79        159               528   

Loans in repayment — delinquent 61-90 days

    86        60        57        47        91               341   

Loans in repayment — delinquent greater than 90 days

    257        184        167        125        207               940   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,355      $ 2,801      $ 4,043      $ 4,218      $ 13,873      $ 2,894        30,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (581

Receivable for partially charged-off loans

                1,236   

Allowance for loan losses

                (1,849
             

 

 

 

Total Private Education Loans, net

              $ 28,990   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    17.8     5.6     3.5     2.9     1.4         3.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

    13.3     7.0     4.3     3.1     1.5         3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of loans in repayment

    15.2     5.0     2.7     1.9     .9         2.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

  Monthly Scheduled Payments Received     Not Yet in
Repayment
       

March 31, 2014

  0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

  $      $      $      $      $      $ 7,075      $ 7,075   

Loans in forbearance

    560        208        177        120        151               1,216   

Loans in repayment — current

    4,302        4,581        4,610        4,602        11,061               29,156   

Loans in repayment — delinquent 31-60 days

    169        133        119        90        144               655   

Loans in repayment — delinquent 61-90 days

    121        91        77        56        85               430   

Loans in repayment — delinquent greater than 90 days

    353        230        183        125        177               1,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,505      $ 5,243      $ 5,166      $ 4,993      $ 11,618      $ 7,075        39,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (681

Receivable for partially charged-off loans

                1,297   

Allowance for loan losses

                (2,059
             

 

 

 

Total Private Education Loans, net

              $ 38,157   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    10.2     4.0     3.4     2.4     1.3         3.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

    7.1     4.6     3.7     2.6     1.5         3.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of loans in repayment

    8.6     3.1     2.2     1.5     1.0         2.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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“Core Earnings” Basis:

 

(Dollars in millions)

  Monthly Scheduled Payments Received     Not Yet in
Repayment
       

March 31, 2015

  0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

  $      $      $      $      $      $ 2,894      $ 2,894   

Loans in forbearance

    419        157        141        121        192               1,030   

Loans in repayment — current

    1,482        2,315        3,584        3,846        13,224               24,451   

Loans in repayment — delinquent 31-60 days

    111        85        94        79        159               528   

Loans in repayment — delinquent 61-90 days

    86        60        57        47        91               341   

Loans in repayment — delinquent greater than 90 days

    257        184        167        125        207               940   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,355      $ 2,801      $ 4,043      $ 4,218      $ 13,873      $ 2,894        30,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (581

Receivable for partially charged-off loans

                1,236   

Allowance for loan losses

                (1,849
             

 

 

 

Total Private Education Loans, net

              $ 28,990   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    17.8     5.6     3.5     2.9     1.4         3.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

    13.3     7.0     4.3     3.1     1.5         3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of loans in repayment

    15.2     5.0     2.7     1.9     .9         2.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

  Monthly Scheduled Payments Received     Not Yet in
Repayment
       

March 31, 2014

  0 to 12     13 to 24     25 to 36     37 to 48     More than 48       Total  

Loans in-school/grace/deferment

  $      $      $      $      $      $ 4,090      $ 4,090   

Loans in forbearance

    552        206        176        120        151               1,205   

Loans in repayment — current

    1,985        3,567        4,095        4,240        11,025               24,912   

Loans in repayment — delinquent 31-60 days

    157        129        116        87        145               634   

Loans in repayment — delinquent 61-90 days

    112        89        75        55        85               416   

Loans in repayment — delinquent greater than 90 days

    353        230        182        125        178               1,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,159      $ 4,221      $ 4,644      $ 4,627      $ 11,584      $ 4,090        32,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                (686

Receivable for partially charged-off loans

                1,297   

Allowance for loan losses

                (1,987
             

 

 

 

Total Private Education Loans, net

              $ 30,949   
             

 

 

 

Loans in forbearance as a percentage of loans in repayment and forbearance

    17.5     4.9     3.8     2.6     1.3         4.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans in repayment — delinquent greater than 90 days as a percentage of loans in repayment

    13.5     5.7     4.1     2.8     1.6         3.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge-offs as a percentage of loans in repayment

    15.2     4.0     2.5     1.7     1.0         3.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Private Education Loan Repayment Options

Certain loan programs allow customers to select from a variety of repayment options depending on their loan type and their enrollment/loan status, which include the ability to extend their repayment term or change their monthly payment. The chart below provides the optional repayment offerings in addition to the standard level principal and interest payments as of March 31, 2015.

 

   

Loan Program

 

(Dollars in millions)

 

Signature and Other

 

Smart Option

 

Career Training

  Total  

$ in repayment

  $20,879   $4,459   $922   $ 26,260   

$ in total

  $24,198   $5,028   $958   $ 30,184   

Payment method by enrollment status:

       

In-school/grace

  Deferred(1)  

Deferred(1),

interest-only or fixed

$25/month

 

Interest-only or fixed

$25/month

 

Repayment

  Level principal and interest or graduated  

Level principal and

interest

 

Level principal and

interest

 

 

(1) 

“Deferred” includes loans for which no payments are required and interest charges are capitalized into the loan balance.

The graduated repayment program that is part of Signature and Other Loans includes an interest-only payment feature that may be selected at the option of the customer. Customers elect to participate in this program at the time they enter repayment following their grace period. This program is available to customers in repayment, after their grace period, who would like a temporary lower payment from the required principal and interest payment amount. Customers participating in this program pay monthly interest with no amortization of their principal balance for up to 48 payments after entering repayment (dependent on the loan product type). The maturity date of the loan is not extended when a customer participates in this program. On a “Core Earnings” basis, as of March 31, 2015 and 2014, customers in repayment owing approximately $2.9 billion (11 percent of loans in repayment) and $4.2 billion (15 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 7 percent and 9 percent were non-traditional loans as of March 31, 2015 and 2014, respectively.

Accrued Interest Receivable

The following tables provide information regarding accrued interest receivable on our Private Education Loans and our allowance for uncollectible interest.

GAAP Basis:

 

(Dollars in millions)

   Accrued Interest
Receivable
     Allowance for
Uncollectible
Interest
 

March 31, 2015

   $ 578       $ 33   

December 31, 2014

   $ 612       $ 40   

March 31, 2014

   $ 1,024       $ 59   

“Core Earnings” Basis:

 

(Dollars in millions)

   Accrued Interest
Receivable
     Allowance for
Uncollectible
Interest
 

March 31, 2015

   $ 578       $ 33   

December 31, 2014

   $ 612       $ 40   

March 31, 2014

   $ 652       $ 54   

 

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Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates on our FFELP Loans and Private Education Loans segments. Our Business Services and Other segments require minimal capital and funding.

We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for running the operations of our businesses (including derivative collateral requirements) throughout market cycles, including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include acquisitions of Private Education Loan and FFELP Loan portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of common stock under common share repurchase programs. To achieve these objectives, we analyze and monitor our liquidity needs, maintain excess liquidity and access diverse funding sources including the issuance of unsecured debt and the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.

We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses or invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risk relates to our ability to raise replacement debt at a reasonable cost as our unsecured debt matures. In addition, we must continue to obtain funding at reasonable rates to meet our other business obligations and to continue to grow our business. This ability to access the capital markets may be affected by our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change, from time to time, based on our financial performance, industry dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions.

We have unsecured debt that totaled $17.3 billion at March 31, 2015. Three credit rating agencies currently rate our long-term unsecured debt at below investment grade. These ratings could result in higher cost of funds, and our senior unsecured debt to trade with greater volatility. From May 1, 2014 (Spin-Off) to March 31, 2015, we issued $1.5 billion of unsecured debt at an average all-in cost of one-month LIBOR plus 3.88 percent and an average term to maturity of 7.3 years.

We expect to fund our ongoing liquidity needs, including the repayment of $2.5 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash and investment portfolio, the predictable operating cash flows provided by operating activities ($499 million in first-quarter 2015), the repayment of principal on unencumbered student loan assets, the distributions from our securitization trusts (including servicing fees which are priority payments within the trusts) and the issuance of additional unsecured debt. We may also draw down on our secured FFELP and Private Education Loan facilities or issue term ABS.

 

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Sources of Liquidity and Available Capacity

Ending Balances

 

(Dollars in millions)

   March 31,
2015
     December 31,
2014
 

Sources of primary liquidity:

     

Total unrestricted cash and liquid investments

   $ 2,058       $ 1,449   

Unencumbered FFELP Loans

     1,800         1,909   
  

 

 

    

 

 

 

Total GAAP basis

   $ 3,858       $ 3,358   
  

 

 

    

 

 

 

Average Balances

 

     Three Months Ended
March 31,
 

(Dollars in millions)

   2015      2014  

Sources of primary liquidity:

     

Total unrestricted cash and liquid investments

   $ 1,817       $ 2,180   

Unencumbered FFELP Loans

     2,032         1,670   
  

 

 

    

 

 

 

Total “Core Earnings” basis

     3,849         3,850   

SLM BankCo(1)

             2,910   
  

 

 

    

 

 

 

Total GAAP basis

   $ 3,849       $ 6,760   
  

 

 

    

 

 

 

 

  (1) 

For the three months ended March 31, 2014, includes $1.5 billion of cash and $1.4 billion of FFELP Loans.

Liquidity may also be available under secured credit facilities to the extent we have eligible collateral and capacity available. Maximum borrowing capacity under the FFELP Loan — other facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered FFELP Loans. As of March 31, 2015 and December 31, 2014, the maximum additional capacity under these facilities was $12.5 billion and $13.2 billion, respectively. For the three months ended March 31, 2015 and 2014, the average maximum additional capacity under these facilities was $12.9 billion and $12.3 billion, respectively.

In addition to the FFELP Loan — other facilities, liquidity may also be available from our Private Education Loan ABCP facility. This facility provides liquidity for Private Education Loan acquisitions and for the refinancing of loans presently on our balance sheet. The maximum capacity under this facility is $1 billion and it matures in June 2015. At March 31, 2015, the available capacity under this facility was $653 million.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans comprised $6.3 billion of our unencumbered assets of which $4.5 billion and $1.8 billion related to Private Education Loans and FFELP Loans, respectively. At March 31, 2015, we had a total of $11.9 billion of unencumbered assets inclusive of those described above as sources of primary liquidity and exclusive of goodwill and acquired intangible assets.

For further discussion of our various sources of liquidity, our continued access to the ABS market, our asset-backed financing facilities, and our issuance of unsecured debt, see “Note 6 — Borrowings” in our 2014 Form 10-K.

 

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The following table reconciles encumbered and unencumbered assets and their net impact on GAAP total tangible equity.

 

(Dollars in billions)

   March 31,
2015
     December 31,
2014
 

Net assets of consolidated variable interest entities (encumbered assets) — FFELP Loans

   $ 4.9       $ 4.9   

Net assets of consolidated variable interest entities (encumbered assets) — Private Education Loans

     6.7         6.5   

Tangible unencumbered assets(1)

     11.9         12.4   

Senior unsecured debt

     (17.3      (17.4

Mark-to-market on unsecured hedged debt(2)

     (1.0      (.9

Other liabilities, net

     (1.7      (1.7
  

 

 

    

 

 

 

Total tangible equity — GAAP Basis

   $ 3.5       $ 3.8   
  

 

 

    

 

 

 

 

  (1) 

Excludes goodwill and acquired intangible assets.

 

  (2) 

At March 31, 2015 and December 31, 2014, there were $913 million and $794 million, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

First-Quarter 2015 Financing Transactions

The following financing transactions have taken place in the first quarter of 2015:

Unsecured Financings:

 

   

On March 27, 2015, Navient issued $500 million in senior unsecured bonds.

 

   

Navient repurchased $530 million of unsecured debt.

FFELP Loan Financings:

 

   

On February 26, 2015, Navient issued $1.0 billion in FFELP Loan ABS.

Private Education Loan Financings:

 

   

On January 22, 2015, Navient issued $689 million in Private Education Loan ABS.

Shareholder Distributions

In March 2015, we paid a common stock dividend of $0.16 per share, up from $0.15 in the prior quarter.

We repurchased 14.7 million shares of common stock for $300 million in the first quarter of 2015. The shares were repurchased under our January 2015 share repurchase program that authorizes up to $1 billion of share repurchases, of which $700 million remained available at March 31, 2015.

Recent Second-Quarter 2015 Transactions

In April 2015, we issued $997 million in FFELP Loan ABS and repurchased $520 million of unsecured debt.

Counterparty Exposure

Counterparty exposure related to financial instruments arises from the risk that a lending, investment or derivative counterparty will not be able to meet its obligations to us. Risks associated with our lending portfolio are discussed in the section titled “Financial Condition — FFELP Loan Portfolio Performance” and “— Private Education Loan Portfolio Performance.”

Our investment portfolio is composed of very short-term securities issued by a diversified group of highly rated issuers, limiting our counterparty exposure. Additionally, our investing activity is governed by board of

 

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director approved limits on the amount that is allowed to be invested with any one issuer based on the credit rating of the issuer, further minimizing our counterparty exposure. Counterparty credit risk is considered when valuing investments and considering impairment.

Related to derivative transactions, protection against counterparty risk is generally provided by International Swaps and Derivatives Association, Inc. (“ISDA”) Credit Support Annexes (“CSAs”). CSAs require a counterparty to post collateral if a potential default would expose the other party to a loss. All corporate derivative contracts entered into by Navient are covered under such agreements and require collateral to be exchanged based on the net fair value of derivatives with each counterparty. Our securitization trusts require collateral in all cases if the counterparty’s credit rating is withdrawn or downgraded below a certain level. Additionally, securitizations involving foreign currency notes issued after November 2005 also require the counterparty to post collateral to the trust based on the fair value of the derivative, regardless of credit rating. The trusts are not required to post collateral to the counterparties. In all cases, our exposure is limited to the value of the derivative contracts in a gain position net of any collateral we are holding. We consider counterparties’ credit risk when determining the fair value of derivative positions on our exposure net of collateral.

We have liquidity exposure related to collateral movements between us and our derivative counterparties. Movements in the value of the derivatives, which are primarily affected by changes in interest rate and foreign exchange rates, may require us to return cash collateral held or may require us to access primary liquidity to post collateral to counterparties. See “Note 7 — Derivative Financial Instruments” in our 2014 Form 10-K for more information on the amount of cash that has been received and delivered to derivative counterparties.

The table below highlights exposure related to our derivative counterparties at March 31, 2015.

 

(Dollars in millions)

   Corporate
Contracts
    Securitization Trust
Contracts
 

Exposure, net of collateral

   $ 95      $ 2   

Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3

     60     0

Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3

     33     0

“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at March 31, 2015 and December 31, 2014, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three months ended March 31, 2015 and 2014. The average interest rates include derivatives that are economically hedging the underlying debt but do not qualify for hedge accounting treatment. (See “‘Core Earnings’ — Definition and Limitations — Differences between ‘Core Earnings’ and GAAP — Reclassification of Realized Gains (Losses) on Derivative and Hedging Activities” of this Item 2.)

 

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Ending Balances

 

     March 31, 2015      December 31, 2014  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 2,458       $ 14,830       $ 17,288       $ 1,066       $ 16,311       $ 17,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     2,458         14,830         17,288         1,066         16,311         17,377   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             84,579         84,579                 86,241         86,241   

Private Education Loan securitizations

             17,992         17,992                 17,997         17,997   

FFELP Loan — other facilities

             14,841         14,841                 15,358         15,358   

Private Education Loan — other facilities

     631                 631         653                 653   

Other(1)

     983                 983         937                 937   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     1,614         117,412         119,026         1,590         119,596         121,186   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” basis

     4,072         132,242         136,314         2,656         135,907         138,563   

Adjustment for GAAP accounting treatment

     18         88         106         7         959         966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

GAAP balances

   $     4,090       $     132,330       $     136,420       $     2,663       $     136,866       $     139,529   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

Secured borrowings comprised 87 percent of our “Core Earnings” basis debt outstanding at both March 31, 2015 and December 31, 2014.

Average Balances

 

     Three Months Ended March 31,  
     2015     2014  

(Dollars in millions)

   Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 

Unsecured borrowings:

          

Senior unsecured debt

   $ 17,177         3.87   $ 17,637         3.63
  

 

 

    

 

 

   

 

 

    

 

 

 

Total unsecured borrowings

     17,177         3.87        17,637         3.63   
  

 

 

    

 

 

   

 

 

    

 

 

 

Secured borrowings:

          

FFELP Loan securitizations

     85,225         .99        90,391         .99   

Private Education Loan securitizations

     18,164         2.12        18,664         2.02   

FFELP Loan — other facilities

     15,269         .88        9,264         .94   

Private Education Loan — other facilities

     645         1.96        768         1.30   

Other(1)

     1,008         .60        723         .11   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total secured borrowings

     120,311         1.15        119,810         1.14   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 137,488         1.49   $ 137,447         1.46
  

 

 

    

 

 

   

 

 

    

 

 

 
                                    

“Core Earnings” average balance and rate

   $ 137,488         1.49   $ 137,447         1.46

Adjustment for GAAP accounting treatment

             .03        8,927         1.53   
  

 

 

    

 

 

   

 

 

    

 

 

 

GAAP-basis average balance and rate

   $     137,488         1.52   $     146,374         1.47
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

“Other” primarily consists of the obligation to return cash collateral held related to derivative exposure.

 

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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with GAAP. A discussion of our critical accounting policies, which include allowance for loan losses, premium and discount amortization related to our loan portfolio, fair value measurement, transfers of financial assets and the VIE consolidation model and derivative accounting can be found in our 2014 Form 10-K. There were no significant changes to these critical accounting policies during the first three months of 2015.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at March 31, 2015 and December 31, 2014, based upon a sensitivity analysis performed by management assuming a hypothetical increase in market interest rates of 100 basis points and 300 basis points while funding spreads remain constant. Additionally, as it relates to the effect on earnings, a sensitivity analysis was performed assuming the funding index increases 25 basis points while holding the asset index constant, if the funding index and repricing frequency are different than the asset index. The earnings sensitivity is applied only to financial assets and liabilities, including hedging instruments that existed at the balance sheet date and does not take into account new assets, liabilities or hedging instruments that may arise over the next 12 months.

 

     As of March 31, 2015
Impact on Annual Earnings If:
    As of March 31, 2014
Impact on Annual Earnings If:
 
     Interest Rates     Funding
Indices
    Interest Rates      Funding
Indices
 

(Dollars in millions, except per share amounts)

   Increase
100 Basis
Points
    Increase
300 Basis
Points
    Increase
25  Basis
Points(1)
    Increase
100 Basis
Points
    Increase
300 Basis
Points
     Increase
25  Basis
Points(1)
 

Effect on Earnings:

             

Change in pre-tax net income before unrealized gains (losses) on derivative and hedging activities

   $ (29   $ (41   $ (318   $ (11   $ 37       $ (315

Unrealized gains (losses) on derivative and hedging activities

     129        120        3        214        331         1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase in net income before taxes

   $ 100      $ 79      $ (315   $ 203      $ 368       $ (314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Increase in diluted earnings per common share(2)

   $ .25      $ .19      $ (.78   $ .47      $ .85       $ (.72
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

If an asset is not funded with the same index/frequency reset of the asset then it is assumed the funding index increases 25 basis points while holding the asset index constant.

 

(2) 

Calculated based on “increase in net income before taxes.”

 

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Table of Contents
     At March 31, 2015  
     Fair Value      Interest Rates:  
        Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

              $                     %                     $                     %          

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 102,440       $ (505       $ (1,014     (1 )% 

Private Education Loans

     28,661                                

Other earning assets

     6,453                                

Other assets

     6,005         (377     (6     (475     (8 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 143,559       $ (882     (1 )%    $ (1,489     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 134,129       $ (778     (1 )%    $ (2,156     (2 )% 

Other liabilities

     3,361         (49     (1     625        19   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 137,490       $ (827     (1 )%    $ (1,531     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

     At December 31, 2014  
     Fair Value      Interest Rates:  
        Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

              $                     %                     $                     %          

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 104,419       $ (486       $ (977     (1 )% 

Private Education Loans

     29,433                                

Other earning assets

     6,002                                

Other assets

     6,033         (236     (4     (317     (5 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 145,887       $ (722       $ (1,294     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 136,862       $ (781     (1 )%    $ (2,164     (2 )% 

Other liabilities

     2,625         85        3        822        31   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 139,487       $ (696       $ (1,342     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate student loan portfolio with floating rate debt. However, due to the ability of some FFELP loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the student loan earns at the fixed borrower rate and the funding remains floating. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets.

During the three months ended March 31, 2015 and 2014, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of Floor Income Contracts. The result of these hedging transactions was to convert a portion of the fixed rate nature of student loans to variable rate, and to fix the relative spread between the student loan asset rate and the variable rate liability.

In the preceding tables, under the scenario in which interest rates increase 100 and 300 basis points, the change in pre-tax net income before the unrealized gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged loans being in a fixed-rate mode due to Floor Income, while being funded

 

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with variable debt in low interest rate environments; and (ii) a portion of our variable assets being funded with fixed rate liabilities and equity. Item (i) will generally cause income to decrease when interest rates increase from a low interest rate environment, whereas item (ii) will generally offset this decrease.

Under the scenario in the tables above labeled “Impact on Annual Earnings If: Funding Indices Increase 25 Basis Points,” the main driver of the decrease in pre-tax income before unrealized gains (losses) on derivative and hedging activities in both the March 31, 2015 and 2014 analyses is primarily the result of one-month LIBOR-indexed FFELP Loans being funded with three-month LIBOR and other non-discrete indexed liabilities. See “Asset and Liability Funding Gap” of this Item 3. for a further discussion. Increasing the spread between indices will also impact the unrealized gains (losses) on derivative and hedging activities as it relates to basis swaps that hedge the mismatch between the asset and funding indices.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross currency interest rate swaps in other assets or other liabilities. In the current economic environment, volatility in the spread between spot and forward foreign exchange rates has resulted in material mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero.

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2015. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (“Core Earnings” basis). Accordingly, we are also presenting the asset and liability funding gap on a “Core Earnings” basis in the table that follows the GAAP presentation.

 

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GAAP Basis:

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 5.0       $       $ 5.0   

Prime

   annual      .5                 .5   

Prime

   quarterly      3.2                 3.2   

Prime

   monthly      15.5                 15.5   

Prime

   daily              .1         (.1

PLUS Index

   annual      .3                 .3   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              72.9         (72.9

1-month LIBOR

   monthly      8.4         38.5         (30.1

1-month LIBOR daily

   daily      96.3                 96.3   

CMT/CPI Index

   monthly/quarterly              .6         (.6

Non-Discrete reset(3)

   monthly              17.7         (17.7

Non-Discrete reset(4)

   daily/weekly      6.4         1.0         5.4   

Fixed Rate(5)

        8.3         13.1         (4.8
     

 

 

    

 

 

    

 

 

 

Total

      $ 143.9       $ 143.9       $   
     

 

 

    

 

 

    

 

 

 

 

  (1) 

FFELP Loans of $42.8 billion ($39.8 billion LIBOR index and $3.0 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

 

  (2) 

Funding (by index) includes all derivatives that qualify as hedges.

 

 

  (3) 

Funding consists of auction rate ABS and FFELP and Private Education Loan — other facilities.

 

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes the obligation to return cash collateral held related to derivatives exposures.

 

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity.

 

The “Funding Gaps” in the above table are primarily interest rate mismatches in short-term indices between our assets and liabilities. We address this issue typically through the use of basis swaps that typically convert quarterly reset three-month LIBOR to other indices that are more correlated to our asset indices. These basis swaps do not qualify as effective hedges and, as a result, the effect on the funding index is not included in our interest margin and is therefore excluded from the GAAP presentation.

 

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“Core Earnings” Basis:

 

Index

(Dollars in billions)

   Frequency of
Variable
Resets
   Assets(1)      Funding(2)      Funding
Gap
 

3-month Treasury bill

   weekly    $ 5.0       $       $ 5.0   

Prime

   annual      .5                 .5   

Prime

   quarterly      3.2                 3.2   

Prime

   monthly      15.5                 15.5   

Prime

   daily              .1         (.1

PLUS Index

   annual      .3                 .3   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              73.5         (73.5

1-month LIBOR

   monthly      8.4         40.6         (32.2

1-month LIBOR

   daily      96.3                 96.3   

Non-Discrete reset(3)

   monthly              17.7         (17.7

Non-Discrete reset(4)

   daily/weekly      6.4         1.0         5.4   

Fixed Rate(5)

        7.1         9.8         (2.7
     

 

 

    

 

 

    

 

 

 

Total

      $ 142.7       $ 142.7       $   
     

 

 

    

 

 

    

 

 

 

 

  (1) 

FFELP Loans of $15.6 billion ($14.9 billion LIBOR index and $0.7 billion Treasury bill index) are currently earning a fixed rate of interest as a result of the low interest rate environment.

 

 

  (2) 

Funding (by index) includes all derivatives that management considers economic hedges of interest rate risk and reflects how we internally manage our interest rate exposure.

 

 

  (3) 

Funding consists of auction rate ABS and FFELP and Private Education Loan — other facilities.

 

 

  (4) 

Assets include restricted and unrestricted cash equivalents and other overnight type instruments. Funding includes the obligation to return cash collateral held related to derivatives exposures.

 

 

  (5) 

Assets include receivables and other assets (including goodwill and acquired intangibles). Funding includes other liabilities and stockholders’ equity.

 

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in recent years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.

 

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Weighted Average Life

The following table reflects the weighted average life of our GAAP and “Core Earning” assets and liabilities at March 31, 2015.

 

(Averages in Years)

   Weighted Average
Life
 

Earning assets

  

Student loans

     7.2   

Other loans

     7.8   

Cash and investments

     .1   
  

 

 

 

Total earning assets

     6.9   
  

 

 

 

Borrowings

  

Short-term borrowings

     .4   

Long-term borrowings

     6.3   
  

 

 

 

Total borrowings

     6.1   
  

 

 

 

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of March 31, 2015. Based on this evaluation, our chief principal executive and principal financial officers concluded that, as of March 31, 2015, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our chief principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

On March 18, 2011, a student loan borrower filed a putative class action complaint against Old SLM in the U.S. District Court for the Northern District of California. The complaint was captioned Tina M. Ubaldi v. SLM Corporation et. al., Case No. C-11-01320EDL. The plaintiff brought the complaint on behalf of a class consisting of other similarly situated California borrowers. The complaint alleged, among other things, that Old SLM’s practice of charging late fees proportional to the amount of missed payments constituted liquidated damages in violation of California law; and Old SLM engaged in unfair business practices by charging daily interest on private educational loans. Following motion practice and additional amendments to the complaint, which added usury claims under California state law and two additional defendants (Sallie Mae, Inc., now known as Navient Solutions, Inc. (“NSI”), and SLM PC Student Loan Trust 2004-A), a Modified Third Amended Complaint was filed on December 2, 2013. Plaintiffs sought restitution of late charges and interest paid by members of the class, injunctive relief, cancellation of all future interest payments, treble damages as permitted by law, as well as costs and attorneys’ fees, among other relief. Prior to the formation of Sallie Mae Bank in 2005, Old SLM followed prevalent capital market practices of acquiring and securitizing private education loans purchased in secondary transactions from banks who originated these loans. Plaintiffs alleged that the services provided by Old SLM and Sallie Mae, Inc. to the originating banks resulted in Old SLM and Sallie Mae, Inc. constituting lenders on these loans. Since 2006, Sallie Mae Bank originated the vast majority of all private education loans acquired by Old SLM. The claims at issue in this case expressly exclude loans originated by Sallie Mae Bank since its inception. Named defendants are subsidiaries of Navient and as such the Ubaldi litigation will remain the sole responsibility of Navient Corporation. Plaintiffs filed their Motion for Class Certification on October 22, 2013. On March 24, 2014, the Court denied plaintiffs’ Motion for Class Certification without prejudice, but granted plaintiffs leave to file an amended Motion for Class Certification. On June 20, 2014, a Complaint in Intervention was filed on behalf of two additional customers representing a proposed usury sub-class. On June 23, 2014, Plaintiffs filed a Renewed Motion for Class Certification. On December 19, 2014, the court granted plaintiffs’ Renewed Motion for Class Certification regarding the claims concerning late fees, but denied the motion as to the usury claims. On January 30, 2015, Plaintiffs filed a motion seeking leave to file another amended complaint. On March 24, 2015, the Court denied Plaintiffs’ motion, denying their request to amend the complaint again. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection therewith.

On November 26, 2014, Marlene Blyden filed a putative class action suit in the U.S. District Court for the Central District of California against Navient Corporation, Navient, LLC, Navient Solutions, Inc., Navient Credit Finance Corporation, Navient Investment Corporation, SLM Corporation, Bank of New York, and the Bank of New York Mellon Trust Company, N.A. The complaint was captioned Marlene Blyden v. Navient Corporation et. al., Case No. 5:14-CV-2456. On December 2, 2014, plaintiff filed a First Amended Complaint. The plaintiff purports to bring the First Amended Complaint on behalf of a class consisting of other similarly situated California borrowers. The First Amended Complaint alleged that plaintiff and members of the asserted class were charged and/or paid interest at a rate above that permitted under California law. On February 4, 2015, Plaintiff filed her Second Amended Complaint, which drops SLM Corporation as a defendant, adds various securitization trusts as defendants, and adds claims for conversion and for money had and received. Defendants filed Motions to Dismiss the Second Amended Complaint on March 6, 2015. The plaintiff filed her Opposition on April 16, 2015, and Defendants filed Replies on April 20, 2015. A hearing on the motions is set for June 15, 2015. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection therewith.

We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Most of

 

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these matters are claims against our servicing and collection subsidiaries by borrowers and debtors alleging the violation of state or federal laws in connection with servicing or collection activities on their student loans and other debts. In addition, our collection subsidiaries are routinely named in individual plaintiff or class action lawsuits in which the plaintiffs allege that those subsidiaries have violated a federal or state law in the process of collecting their accounts.

For a description of these items and other litigation to which we are a party, please see our 2014 Form 10-K.

Regulatory Matters

On May 2, 2014, Navient Solutions, Inc. (“NSI”), a wholly-owned subsidiary of Navient, and Sallie Mae Bank entered into consent orders with the Federal Deposit Insurance Corporation (the “FDIC”) (respectively, the “NSI Order” and the “Bank Order”; collectively, “the FDIC Orders”) to resolve matters related to certain cited violations of Section 5 of the Federal Trade Commission Act, including the disclosures and assessments of certain late fees, as well as alleged violations under the Servicemembers Civil Relief Act (“SCRA”). The FDIC Orders, which became effective upon the signing of the consent order with the United States Department of Justice (“DOJ”) by NSI and SLM BankCo on May 13, 2014, required NSI to pay $3.3 million in civil monetary penalties. NSI has paid its civil monetary penalties. In addition, the FDIC Orders required the establishment of a restitution reserve account totaling $30 million to provide restitution with respect to loans owned or originated by Sallie Mae Bank, from November 28, 2005 until the effective date of the FDIC Orders. Pursuant to the Separation and Distribution Agreement among SLM Corporation, SLM BankCo and Navient dated as of April 28, 2014 (the “Separation Agreement”), Navient funded the restitution reserve account in May 2014.

The NSI Order also required NSI to ensure proper servicing for service members and proper application of SCRA benefits under a revised and broader definition of eligibility than previously required by the statute and regulatory guidance and to make changes to billing statements and late fee practices. These changes to billing statements and late fee practices have already been implemented. NSI also decided to voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank. They were calculated in the same manner as that which was required under the FDIC Orders and are estimated to be $42 million. The process to refund these fees as well as amounts from the restitution fund is substantially complete.

With respect to alleged civil violations of the SCRA, NSI and Sallie Mae Bank entered into a consent order with the DOJ. The DOJ consent order (“DOJ Order”) covers all loans either owned by Sallie Mae Bank or serviced by NSI from November 28, 2005 until the effective date of the settlement. The DOJ Order required NSI to fund a $60 million settlement fund, which represents the total amount of compensation due to service members under the DOJ agreement, and to pay $55,000 in civil money penalties. The DOJ Order was approved by the United States District Court in Delaware on September 29, 2014. Shortly thereafter, Navient funded the settlement fund and paid the civil money penalties pursuant to the terms of the order. On April 15, 2015, the DOJ approved the distribution plan for the settlement fund and we anticipate disbursements will begin in the second quarter of 2015.

The total reserves established by the Company in 2013 and 2014 to cover these costs were $177 million, and as of March 31, 2015, $73 million of those reserves remained. The final cost of these proceedings will remain uncertain until all of the work under the various consent orders has been completed.

As previously disclosed, the Company and various of its subsidiaries are subject to the following investigations and inquiries:

 

   

In December 2013, Navient received a Civil Investigative Demand (“CID”) issued by the State of Illinois Office of Attorney General and the State of Washington Office of the Attorney General and multiple other state Attorneys General in connection with these investigations. According to the CIDs, the investigations were initiated to ascertain whether any practices declared to be unlawful under the Consumer Fraud and Deceptive Business Practices Act have occurred or are about to occur.

 

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In April 2014, NSI received a CID from the Consumer Financial Protection Bureau (the “CFPB”) as part of the CFPB’s separate investigation regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters. Navient has been in discussions with the CFPB and has received a series of supplemental CIDs on these matters.

 

   

In November 2014, NSI’s subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), received a CID from the CFPB as part of the CFPB’s investigation regarding Pioneer’s activities relating to rehabilitation loans and collection of defaulted student debt. Navient has been in discussions with the CFPB and has received a supplemental CID on these matters.

 

   

In December 2014, NSI received a subpoena from the New York Department of Financial Services (the “NY DFS”) as part of the NY DFS’s inquiry with regard to whether persons or entities have engaged in fraud or misconduct with respect to a financial product or service under New York Financial Services Law or other laws. Navient has been in discussions with the NY DFS relating to this matter.

In addition, Navient and its subsidiaries are subject to examination by the CFPB, FDIC, ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from those described above may arise during the course of those examinations.

We are cooperating with these investigations, inquiries or examinations and are committed to resolving any potential concerns. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established.

Under the terms of the Separation Agreement, Navient has agreed to be responsible and indemnify SLM BankCo for all claims, actions, damages, losses or expenses that may arise from the conduct of all activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in the Separation and Distribution Agreement. As a result, all liabilities arising out of the regulatory matters mentioned above, other than fines or penalties directly levied against Sallie Mae Bank, are the responsibility of, or assumed by, Navient or one of its subsidiaries, and Navient has agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank, therefrom. Navient has no additional reserves related to indemnification matters with SLM BankCo as of March 31, 2015 other than with respect to the FDIC Orders and the DOJ Order.

OIG Audit

The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance Payments (“SAP”) on September 10, 2007. On September 25, 2013, we received the final audit determination of Federal Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG on August 3, 2009 related to this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make adjustment to our government billing to reflect the policy determination. Navient remains in active discussions with ED on this matter and we also have the right to appeal the Final Audit Determination to the Administrative Actions and Appeals Service Group of ED. The last date to file an appeal in this matter has been extended by ED and is currently May 31, 2015. We continue to believe that our SAP billing practices were proper, considering then-existing ED guidance and lack of applicable regulations. The Company established a reserve for this matter in 2014 as part of the total reserve for pending regulatory matters discussed previously.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2014 Form 10-K.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

The following table provides information relating to our purchase of shares of our common stock in the three months ended March 31, 2015.

 

(In millions, except per share data)

   Total Number
of Shares
Purchased(1)
     Average Price
Paid per
Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(2)
     Approximate Dollar
Value of Shares
That May Yet Be
Purchased Under
Publicly Announced
Plans or
Programs(2)
 

Period:

           

January 1 — January 31, 2015

     1.3       $ 19.68         1.3       $ 976   

February 1 — February 28, 2015

     6.1         21.48         5.0       $ 867   

March 1 — March 31, 2015

     8.9         20.00         8.4       $ 700   
  

 

 

    

 

 

    

 

 

    

Total first-quarter 2015

     16.3       $ 20.52         14.7      
  

 

 

    

 

 

    

 

 

    

 

(1) 

The total number of shares purchased includes: (i) shares purchased under the stock repurchase program discussed below, and (ii) shares of our common stock tendered to us to satisfy the exercise price in connection with cashless exercise of stock options, and tax withholding obligations in connection with exercise of stock options and vesting of restricted stock and restricted stock units.

 

(2) 

In December 2014, our board of directors authorized us to purchase up to $1.0 billion of shares of our common stock, effective January 1, 2015.

The closing price of our common stock on the NASDAQ Global Select Market on March 31, 2015 was $20.33.

 

Item 3. Defaults upon Senior Securities

Nothing to report.

 

Item 4. Mine Safety Disclosures

Nothing to report.

 

Item 5. Other Information

Nothing to report.

 

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Item 6. Exhibits

The following exhibits are furnished or filed, as applicable:

 

  10.1†*    Navient Corporation 2014 Omnibus Incentive Plan, One-Year Bonus Restricted Stock Unit Agreement.
  10.2†*    Navient Corporation 2014 Omnibus Incentive Plan, Three-Year Bonus Restricted Stock Unit Agreement.
  10.3†*    Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Restricted Stock Agreement.
  10.4†*    Navient Corporation 2014 Omnibus Incentive Plan, Performance Stock Unit Agreement.
  10.5†*    Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Agreement.
  10.6†*    Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement.
  12.1*    Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Dividends.
  31.1*    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1*    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2*    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*    XBRL Instance Document.
101.SCH*    XBRL Taxonomy Extension Schema Document.
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

Management Contract or Compensatory Plan or Arrangement

 

* 

Filed herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

NAVIENT CORPORATION

(Registrant)

By:   /S/ SOMSAK CHIVAVIBUL
 

Somsak Chivavibul

Chief Financial Officer

(Principal Financial and Accounting Officer)

Date: April 30, 2015

 

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EX-10.1

Exhibit 10.1

Navient Corporation 2014 Omnibus Incentive Plan

One-Year Bonus Restricted Stock Unit Agreement

Pursuant to the terms and conditions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), the Compensation and Personnel Committee (the “Committee”) of the Navient Corporation Board of Directors (the “Board”) hereby grants to                      (the “Grantee”) on February 18, 2015 (the “Grant Date”) an award (the “Award”) of              shares of Bonus Restricted Stock Units (“Bonus RSUs”), which represent the right to acquire shares of common stock of Navient Corporation (the “Corporation”) subject to the following terms and conditions (this “Agreement”):

 

1. Restrictions on Transfer. The Award is fully vested at grant, but subject to transfer restrictions (“Transfer Restrictions”), with such restrictions to lapse on the first anniversary of the Grant Date and upon such lapsing the Award shall be settled in shares of the Corporation’s common stock.

 

2. Employment Termination; Death; Disability. If not previously lapsed, the Transfer Restrictions will remain, and the Award will be converted into shares of common stock on the original terms and dates set forth above in the event that (i) the Grantee’s employment is terminated by the Corporation (or a Subsidiary) for any reason other than for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) for any reason. For purposes of this Agreement, “Misconduct” is defined as an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Corporation (or a Subsidiary), breach of fiduciary duty or deliberate disregard of Corporation (or Subsidiary) rules; an unauthorized disclosure of any Corporation (or Subsidiary) trade secret or confidential information; any conduct constituting unfair competition; inducing any customer of the Corporation (or a Subsidiary) to breach a contract with the Corporation (or a Subsidiary) or any principal for whom the Corporation (or a Subsidiary) acts as agent to terminate such agency relationship; or engaging in any other act or conduct proscribed by the senior human resources officer as Misconduct.

If not previously lapsed, the Transfer Restrictions will lapse and the Award will be settled in shares of the Corporation’s common stock, upon death or Disability (provided that such Disability qualifies as a “disability” within the meaning of Treasury Regulation Section 1.409A-3(i)(4)).

The Award shall be forfeited upon termination of employment due to Misconduct or cause, as determined by the Corporation in its sole discretion.

Notwithstanding anything stated herein, the Plan or in the Navient Corporation Change in Control Severance Plan for Senior Officers, this Award shall not be subject to the terms set forth in the Navient Corporation Change in Control Severance Plan for Senior Officers.

 

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3. Taxes; Dividends. The Grantee of the Award shall make such arrangements as may reasonably be required by the Corporation, including transferring a sufficient number of shares of the Corporation’s stock, to satisfy the income and employment tax withholding requirements that accrue upon the Award becoming vested or, if applicable, settled in shares of the Corporation’s common stock (by approving this Agreement, the Committee hereby approves the transfer of such shares to the Corporation for purposes of SEC Rule 16b-3). Dividends declared on vested Awards subject to transfer restrictions will not be paid currently. Instead, amounts equal to such dividends will be credited to an account established on behalf of the Grantee and such amounts will be deemed to be invested in additional shares of the Corporation’s common stock (“Dividend Equivalents”). Such Dividend Equivalents will be subject to the same schedule regarding the lapsing of transfer restrictions to which the Award is subject. Upon such lapsing of any portion of the Award, the amount of Dividend Equivalents allocable to such Award (and any fractional share amount) will also be converted into shares of the Corporation’s common stock (provided that any fractional share amount shall be paid in cash).

 

4. Section 409A. For purposes of Section 409A of the Internal Revenue Code, the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”), each payment and benefit payable under this Agreement is hereby designated as a separate payment. The parties intend that all Bonus RSUs provided under this Agreement and shares issuable hereunder comply with the requirements of Section 409A so that none of the payments or benefits will be subject to the adverse tax penalties imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding anything in the Plan or this Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the Bonus RSUs is to be accelerated in connection with the Grantee’s termination of service, such accelerated Bonus RSUs will not be settled by virtue of such acceleration until and unless the Grantee has a “separation from service” within the meaning of Section Treasury Regulation 1.409A-1(h), as determined by the Corporation, in its sole discretion. Further, and notwithstanding anything in the Plan or this Agreement to the contrary, if (x) any of the Bonus RSUs to be provided in connection with the Grantee’s separation from service do not qualify for any reason to be exempt from Section 409A, (y) the Grantee is, at the time of such separation from service, a “specified employee” (as defined in Treasury Regulation Section 1.409A-1(i)) and (z) the settlement of such Bonus RSUs would result in the imposition of additional tax under Section 409A if such settlement occurs on or within the six (6) month period following the Grantee’s separation from service, then, to the extent necessary to avoid the imposition of such additional taxation, the settlement of any such Bonus RSUs during such six (6) month period will accrue and will not be settled until the date six (6) months and one (1) day following the date of the Grantee’s separation from service and on such date (or, if earlier, the date of the Grantee’s death), such Bonus RSUs will be settled.

 

5.

Clawback Provision. Notwithstanding anything to the contrary herein, if the Board of Directors of the Corporation, or an appropriate committee thereof, determines that, any material misstatement of financial results or a performance metric criteria has occurred as a result of the Grantee’s conduct or the Grantee has committed a material violation of corporate policy or has committed fraud or Misconduct, then the Board or committee shall consider all factors, with particular scrutiny when one of the top 20 members of management are involved, and the Board or such committee, may in its sole discretion

 

2


  require reimbursement of any compensation resulting from the vesting, exercise or settlement of Options and/or Restricted Stock/RSUs/Bonus RSUs and the cancellation of any outstanding Options and/or Restricted Stock/RSUs/Bonus RSUs from the Grantee (whether or not such individual is currently employed by the Corporation (or its subsidiaries)) during the three-year period following the date the Board first learns of the violation, fraud or Misconduct.

 

6. Securities Law Compliance. The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any transfer or sale by the Grantee of any shares of Common Stock, including without limitation (a) restrictions under an insider trading policy and (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the shares of the Corporation’s common stock. The sale of the shares must also comply with other applicable laws and regulations governing the sale of such shares.

 

7. Data Privacy. As an essential term of this award, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described herein for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award, the Grantee acknowledges that the Corporation holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of the Corporation’s common stock. Grantee acknowledges that Data may be held to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

8. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation (or its subsidiaries) and thereafter until withdrawn in writing by Grantee.

 

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9. Board Interpretation. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Committee concerning any questions arising under this Agreement or the Plan.

 

10. No Right to Continued Employment. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued employment with the Corporation or any of its subsidiaries or affiliates.

 

11. Amendments for Accounting Charges. The Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

13. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to (i) the last address maintained in the Corporation’s Human Resources files for the Grantee or (ii) the Grantee’s mail delivery code or place of work at the Corporation (or its subsidiaries).

 

14. Plan Controls; Entire Agreement; Capitalized Terms. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

15.

Miscellaneous. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of

 

4


reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

NAVIENT CORPORATION

 

By:  

Jack Remondi

President and Chief Executive Officer

 

Accepted by:

 

 

 

Date

 

5

EX-10.2

Exhibit 10.2

Navient Corporation 2014 Omnibus Incentive Plan

Three-Year Bonus Restricted Stock Unit Agreement

Pursuant to the terms and conditions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), the Compensation and Personnel Committee (the “Committee”) of the Navient Corporation Board of Directors (the “Board”) hereby grants to                      (the “Grantee”) on February 18, 2015 (the “Grant Date”) an award (the “Award”) of              shares of Bonus Restricted Stock Units (“Bonus RSUs”), which represent the right to acquire shares of common stock of Navient Corporation (the “Corporation”) subject to the following terms and conditions (this “Agreement”):

 

1. Restrictions on Transfer. The Award is fully vested at grant, but subject to transfer restrictions (“Transfer Restrictions”), with such restrictions to lapse in one-third increments on the first, second and third anniversary of the Grant Date, and upon such lapsing the subject portion of the Award shall be settled in shares of the Corporation’s common stock.

 

2. Employment Termination; Death; Disability. If not previously lapsed, the Transfer Restrictions will remain, and the Award will be converted into shares of common stock on the original terms and dates set forth above in the event that (i) the Grantee’s employment is terminated by the Corporation (or a Subsidiary) for any reason other than for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) for any reason. For purposes of this Agreement, “Misconduct” is defined as an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Corporation (or a Subsidiary), breach of fiduciary duty or deliberate disregard of Corporation (or Subsidiary) rules; an unauthorized disclosure of any Corporation (or a Subsidiary) trade secret or confidential information; any conduct constituting unfair competition; inducing any customer of the Corporation (or a Subsidiary) to breach a contract with the Corporation (or a Subsidiary) or any principal for whom the Corporation (or a Subsidiary) acts as agent to terminate such agency relationship; or engaging in any other act or conduct proscribed by the senior human resources officer as Misconduct.

If not previously lapsed, the Transfer Restrictions will lapse and the Award will be settled in shares of the Corporation’s common stock, upon death or Disability (provided that such Disability qualifies as a “disability” within the meaning of Treasury Regulation Section 1.409A-3(i)(4)).

The Award shall be forfeited upon termination of employment due to Misconduct or cause, as determined by the Corporation in its sole discretion.

Notwithstanding anything stated herein, the Plan or in the Navient Corporation Change in Control Severance Plan for Senior Officers, this Award shall not be subject to the terms set forth in the Navient Corporation Change in Control Severance Plan for Senior Officers.

 

1


3. Taxes; Dividends. The Grantee of the Award shall make such arrangements as may reasonably be required by the Corporation, including transferring a sufficient number of shares of the Corporation’s stock, to satisfy the income and employment tax withholding requirements that accrue upon the Award becoming vested or, if applicable, settled in shares of the Corporation’s common stock (by approving this Agreement, the Committee hereby approves the transfer of such shares to the Corporation for purposes of SEC Rule 16b-3). Dividends declared on vested Awards subject to transfer restrictions will not be paid currently. Instead, amounts equal to such dividends will be credited to an account established on behalf of the Grantee and such amounts will be deemed to be invested in additional shares of the Corporation’s common stock (“Dividend Equivalents”). Such Dividend Equivalents will be subject to the same schedule regarding the lapsing of transfer restrictions to which the Award is subject. Upon such lapsing of any portion of the Award, the amount of Dividend Equivalents allocable to such Award (and any fractional share amount) will also be converted into shares of the Corporation’s common stock (provided that any fractional share amount shall be paid in cash).

 

4. Section 409A. For purposes of section 409A of the Internal Revenue Code, the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”), each payment and benefit payable under this Agreement is hereby designated as a separate payment. The parties intend that all Bonus RSUs provided under this Agreement and shares issuable hereunder comply with the requirements of Section 409A so that none of the payments or benefits will be subject to the adverse tax penalties imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding anything in the Plan or this Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the Bonus RSUs is to be accelerated in connection with the Grantee’s termination of service, such accelerated Bonus RSUs will not be settled by virtue of such acceleration until and unless the Grantee has a “separation from service” within the meaning of Section Treasury Regulation 1.409A-1(h), as determined by the Corporation, in its sole discretion. Further, and notwithstanding anything in the Plan or this Agreement to the contrary, if (x) any of the Bonus RSUs to be provided in connection with the Grantee’s separation from service do not qualify for any reason to be exempt from Section 409A, (y) the Grantee is, at the time of such separation from service, a “specified employee” (as defined in Treasury Regulation Section 1.409A-1(i)) and (z) the settlement of such Bonus RSUs would result in the imposition of additional tax under Section 409A if such settlement occurs on or within the six (6) month period following the Grantee’s separation from service, then, to the extent necessary to avoid the imposition of such additional taxation, the settlement of any such Bonus RSUs during such six (6) month period will accrue and will not be settled until the date six (6) months and one (1) day following the date of the Grantee’s separation from service and on such date (or, if earlier, the date of the Grantee’s death), such Bonus RSUs will be settled.

 

5.

Clawback Provision. Notwithstanding anything to the contrary herein, if the Board of Directors of the Corporation, or an appropriate committee thereof, determines that, any material misstatement of financial results or a performance metric criteria has occurred as a result of the Grantee’s conduct or the Grantee has committed a material violation of corporate policy or has committed fraud or Misconduct, then the Board or committee

 

2


  shall consider all factors, with particular scrutiny when one of the top 20 members of management are involved, and the Board or such committee, may in its sole discretion require reimbursement of any compensation resulting from the vesting, exercise or settlement of Options and/or Restricted Stock/RSUs/Bonus RSUs and the cancellation of any outstanding Options and/or Restricted Stock/RSUs/Bonus RSUs from the Grantee (whether or not such individual is currently employed by the Corporation (or its subsidiaries)) during the three-year period following the date the Board first learns of the violation, fraud or Misconduct.

 

6. Securities Law Compliance. The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any transfer or sale by the Grantee of any shares of Common Stock, including without limitation (a) restrictions under an insider trading policy and (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the shares of the Corporation’s common stock. The sale of the shares must also comply with other applicable laws and regulations governing the sale of such shares.

 

7. Data Privacy. As an essential term of this award, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described herein for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award, the Grantee acknowledges that the Corporation holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of the Corporation’s common stock. Grantee acknowledges that Data may be held to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

8.

Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate

 

3


  in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation (or its subsidiaries) and thereafter until withdrawn in writing by Grantee.

 

9. Board Interpretation. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Committee concerning any questions arising under this Agreement or the Plan.

 

10. No Right to Continued Employment. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued employment with the Corporation or any of its subsidiaries or affiliates.

 

11. Amendments for Accounting Charges. The Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

13. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to (i) the last address maintained in the Corporation’s Human Resources files for the Grantee or (ii) the Grantee’s mail delivery code or place of work at the Corporation (or its subsidiaries).

 

14. Plan Controls; Entire Agreement; Capitalized Terms. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

15.

Miscellaneous. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be

 

4


affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

NAVIENT CORPORATION

 

By:  

Jack Remondi

President and Chief Executive Officer

 

Accepted by:

 

 

 

Date

 

5

EX-10.3

Exhibit 10.3

Navient Corporation 2014 Omnibus Incentive Plan

Independent Director Restricted Stock Agreement

Pursuant to the terms and conditions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), Navient Corporation (the “Corporation”) hereby grants to                      (the “Grantee”)              shares of common stock of the Corporation, par value $0.01 (the “Restricted Stock”), on February 18, 2015 (the “Grant Date”) subject to the terms and conditions below. All capitalized terms used herein that are not defined shall have the meanings as set forth in the Plan.

 

    100 percent of the Restricted Stock is subject to a risk of forfeiture and is non-transferable on the Grant Date.

 

    Upon the Grantee’s election to the Board of Directors of the Corporation at the 2015 annual meeting of shareholders, currently scheduled for May 21, 2015 (the “Vesting Event”), 100 percent of the Restricted Stock will vest and become transferable unless vested earlier as set forth below.

 

    The Restricted Stock will vest and become transferable prior to the Vesting Event upon any of the following events: (i) the Grantee’s death or Disability or (ii) upon a Change in Control.

 

    100 percent of the Restricted Stock will be forfeited if (i) the Grantee is no longer a director of the Corporation’s Board of Directors prior to the Vesting Event for reasons other than death, Disability (as defined below), or a Change in Control or (ii) the Vesting Event does not occur for any reason.

 

    The Restricted Stock will be held in an account in the Grantee’s name at the Corporation’s transfer agent, currently Computershare. The Grantee is entitled to vote the shares of Restricted Stock.

 

    Dividends declared on unvested shares of Restricted Stock will not be paid currently. Instead, amounts equal to such dividends will be credited to an account established on behalf of the Grantee and such amounts will be deemed to be invested in additional shares of the Corporation’s common stock (“Dividend Equivalents”). Such Dividend Equivalents will be subject to the same vesting schedule to which the Restricted Stock is subject. At the time that the underlying Restricted Stock vests, the amount of Dividend Equivalents allocable to such Restricted Stock will also vest and will be settled in shares of the Corporation’s common stock (provided that any fractional share amount shall be paid in cash). Dividend Equivalents declared on unvested shares of Restricted Stock are not subject to income tax until vesting, at which time they are taxed as ordinary income.

 

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    The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any transfer or sale by the Grantee of any shares of Common Stock, including without limitation (a) restrictions under an insider trading policy and (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the shares of the Corporation’s common stock. The sale of the shares must also comply with other applicable laws and regulations governing the sale of such shares.

 

    As an essential term of this award, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described herein for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award, the Grantee acknowledges that the Corporation holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of the Corporation’s common stock. Grantee acknowledges that Data may be held to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

    The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation and thereafter until withdrawn in writing by Grantee.

 

    “Disability” means the absence of the Grantee from the Corporation’s Board of Director’s duties for 180 consecutive days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Corporation or its insurers and reasonably acceptable to the Grantee or the Grantee’s legal representative.

 

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    The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Committee concerning any questions arising under this Agreement or the Plan.

 

    Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued service on the Board.

 

    The Board and/or the Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

    This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

    All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to the last address maintained in the Corporation’s files for the Grantee.

 

    In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

    In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

 

3


NAVIENT CORPORATION

 

By:  

Jack Remondi

President and Chief Executive Officer

 

Accepted by:

 

 

 

Date

 

4

EX-10.4

Exhibit 10.4

Navient Corporation 2014 Omnibus Incentive Plan

Performance Stock Unit Agreement

Pursuant to the terms and conditions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), the Compensation and Personnel Committee (the “Committee”) of the Navient Corporation Board of Directors (“Board”) hereby grants to                      (the “Grantee”) on February 18, 2015 (the “Grant Date”) an award (the “Award”) of              shares of Performance Stock Units (“PSUs”), which represent the right to acquire shares of common stock of Navient Corporation (the “Corporation”) subject to the following terms and conditions of this Performance Stock Unit Agreement (the “Agreement”):

 

1. Vesting Schedule. Unless vested earlier as set forth below, the PSUs will vest, and will be settled in shares of the Corporation’s common stock, based on the following vesting terms:

 

    Subject to the other provisions of this Section 1, a specified percentage of the total PSUs granted shall vest based on the amount of “Cumulative Core Net Income” (as that term is defined below) achieved by the Corporation for fiscal years 2015, 2016 and 2017 in the aggregate, as shown in the following performance chart:

 

Cumulative Core Net Income
2015-2017 (in billions)*

   Percentage of Target   Percentage of PSUs Vesting

Less than $2.250

   Less than 88%   0%

$2.250

   88%   50%

$2.280

   89%   60%

$2.325

   91%   70%

$2.385

   94%   80%

$2.460

   96%   90%

$2.550 (Target)

   100%   100%

$2.657

   104%   110%

$2.741

   107%   120%

$2.780 or more

   109% or more   130%

 

* For points between each performance level, the vesting percentages will be interpolated.

 

    If compensation paid to the Grantee might be subject to the tax deduction limitations of Section 162(m) of the Internal Revenue Code (“Section 162(m)”), vesting of the PSUs is contingent upon certification by the Committee that the applicable Section 162(m) performance targets (as pre-determined by the Committee) have been met on or prior to the applicable vesting event; provided, however, that in no event will the conversion of the PSUs into shares of the Corporation’s common stock occur after the end of the calendar year following the calendar year in which ends the performance period described in this Section 1.

 

   

The Committee shall retain the discretion to adjust the percentage of PSUs that otherwise would vest pursuant to the performance chart set forth above; provided, however, that the Committee may not adjust the vesting percentage in a manner that would be inconsistent with the requirements for qualified performance-based

 

1


 

compensation under Section 162(m). If this condition is satisfied, the Committee may adjust the vesting percentage by applying a vesting modifier based on the amount of “Strategic Growth Cumulative Core Net Income” (as that term is defined below) achieved by the Corporation for fiscal years 2015, 2016 and 2017 in the aggregate, as shown in the following performance chart:

 

Strategic Growth
Cumulative Core Net Income
2015-2017 (in millions)*

   Vesting Modifier

$35 or less

   -20%

$55

   -10%

$75 (Target)

   None

$95

   10%

$115 or more

   20%

 

* For points between each performance level, the vesting modifier will be interpolated.

For example, if Cumulative Core Net Income for fiscal years 2015, 2016 and 2017 equals or exceeds $2.780 billion, and Strategic Cumulative Core Net Income for the same period equals or exceeds $115 million, then 156% of the PSUs would vest.

 

    Each vested PSU will be settled in shares of the Corporation’s common stock. PSUs shall vest on the second business day after the Corporation’s annual report on Form 10-K for the fiscal year 2017 is filed, and in no event later than March 15, 2018.

 

    “Cumulative Core Net Income” shall mean the Corporation’s aggregate “core earnings” net income for the fiscal years 2015, 2016 and 2017, using yearly “core earnings” net income as shown in the segment reporting footnote in the Corporation’s audited financial statements as published in the Corporation’s annual report on Form 10-K; provided that any gains related to debt repurchases and the sale of student loans will be excluded, but all Board-approved loan portfolio acquisitions and corporate acquisitions will be included. In addition, regulatory remediation charges and other one-time event expenses may be excluded as determined by the Committee in its sole discretion.

 

    “Strategic Growth Cumulative Core Net Income” shall mean that portion of Cumulative Core Net Income derived from products and services in existing and new business lines that have been targeted for long-run growth, as identified by management and approved by the Committee.

 

2.

Employment Termination; Death; Disability. Except as provided below, if the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) for any reason, or his or her employment is terminated by the Corporation (or a Subsidiary) for Misconduct or cause, as determined by the Corporation in its sole discretion, he/she shall forfeit any portion of the Award that has not vested as of the date of such termination of employment. For purposes of this Agreement, “Misconduct” is defined as an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Corporation (or a Subsidiary), breach of fiduciary duty or deliberate disregard of Corporation (or Subsidiary) rules; an unauthorized disclosure of any Corporation (or Subsidiary) trade

 

2


  secret or confidential information; any conduct constituting unfair competition; inducing any customer of the Corporation (or a Subsidiary) to breach a contract with the Corporation (or a Subsidiary) or any principal for whom the Corporation (or a Subsidiary) acts as agent to terminate such agency relationship; or engaging in any other act or conduct proscribed by the senior human resources officer as Misconduct.

If not previously vested, the Award will continue to vest, and will be settled in shares of the Corporation’s common stock, subject to the original performance goals and performance period set forth above on the original vesting terms and vesting dates set forth above in the event that (i) the Grantee’s employment is terminated by the Corporation (or a Subsidiary) for any reason other than for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) and meets the Corporation’s retirement eligibility requirements under the Corporation’s then current retirement eligibility policy, which shall be determined by the Corporation in its sole discretion.

If not previously vested, the Award will vest, and will be settled in shares of the Corporation’s common stock, at the target levels set forth above, upon death or Disability (provided that such Disability qualifies as a “disability” within the meaning of Treasury Regulation Section 1.409A-3(i)(4)).

The Award shall be forfeited upon termination of employment due to Misconduct or cause, as determined by the Corporation in its sole discretion.

Notwithstanding anything stated herein, the Plan or in the Navient Corporation Change in Control Severance Plan for Senior Officers, this Award shall not be subject to the terms set forth in the Navient Corporation Change in Control Severance Plan for Senior Officers.

 

3. Change in Control. Notwithstanding anything to the contrary in this Agreement:

 

    In the event of a Change in Control in which the acquiring or surviving company in the transaction does not assume or continue outstanding Awards upon the Change in Control, then any portion of the Award that is not vested shall vest at the 100% target level set forth in the vesting schedules herein; provided, however, the settlement of the accelerated portion of the PSUs into shares of the Corporation’s common stock (i.e., the settlement of the Award) will nevertheless be made at the same time or times as if such PSUs had vested in accordance with the vesting schedule set forth in Section 1 or, if earlier, upon the termination of Grantee’s employment for reasons other than Misconduct or cause, as determined by the Corporation in its sole discretion.

 

   

If Grantee’s employment shall terminate within twenty-four months following a Change in Control for any reason other than (i) by the Corporation (or a Subsidiary) for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) by Grantee’s voluntary termination of employment that is not a Termination of

 

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Employment for Good Reason, as defined in the Change in Control Severance Plan for Senior Officers (if applicable to Grantee), any portion of the Award not previously vested shall immediately become vested at the 100% target level set forth in the vesting schedules herein, and shall be settled in shares of the Corporation’s common stock, upon such employment termination.

 

4. Taxes; Dividends. The Grantee of the Award shall make such arrangements as may reasonably be required by the Corporation, including transferring a sufficient number of shares of the Corporation’s stock, to satisfy the income and employment tax withholding requirements that accrue upon the Award becoming vested or, if applicable, settled in shares of the Corporation’s common stock (by approving this Agreement, the Committee hereby approves the transfer of such shares to the Corporation for purposes of SEC Rule 16b-3). Dividends declared on an unvested Award will not be paid currently. Instead, amounts equal to such dividends will be credited to an account established on behalf of the Grantee and such amounts will be deemed to be invested in additional shares of the Corporation’s common stock (“Dividend Equivalents”). Such Dividend Equivalents will be subject to the same vesting schedule to which the Award is subject. Upon vesting of any portion of the Award, the amount of Dividend Equivalents allocable to such Award (and any fractional share amount) will also vest and will be converted into shares of the Corporation’s common stock (provided that any fractional share amount shall be paid in cash).

 

5. Section 409A. For purposes of Section 409A of the Internal Revenue Code, the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”), each payment and benefit payable under this Agreement is hereby designated as a separate payment. The parties intend that all PSUs provided under this Agreement and shares issuable hereunder comply with the requirements of Section 409A so that none of the payments or benefits will be subject to the adverse tax penalties imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding anything in the Plan or this Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the PSUs is to be accelerated in connection with the Grantee’s termination of service, such accelerated PSUs will not be settled by virtue of such acceleration until and unless the Grantee has a “separation from service” within the meaning of Section Treasury Regulation 1-409A-1(h), as determined by the Corporation, in its sole discretion. Further, and notwithstanding anything in the Plan or this Agreement to the contrary, if (x) any of the PSUs to be provided in connection with the Grantee’s separation from service do not qualify for any reason to be exempt from Section 409A, (y) the Grantee is, at the time of such separation from service, a “specified employee” (as defined in Treasury Regulation Section 1.409A-1(i)) and (z) the settlement of such PSUs would result in the imposition of additional tax under Section 409A if such settlement occurs on or within the six (6) month period following the Grantee’s separation from service, then, to the extent necessary to avoid the imposition of such additional taxation, the settlement of any such PSUs during such six (6) month period will accrue and will not be settled until the date six (6) months and one (1) day following the date of the Grantee’s separation from service and on such date (or, if earlier, the date of the Grantee’s death), such PSUs will be settled.

 

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6. Clawback Provision. Notwithstanding anything to the contrary herein, if the Board of Directors of the Corporation, or an appropriate committee thereof, determines that, any material misstatement of financial results or a performance metric criteria has occurred as a result of the Grantee’s conduct or the Grantee has committed a material violation of corporate policy or has committed fraud or Misconduct, and the Grantee at the time of such violation, fraud or Misconduct (or at any time thereafter) was an officer of the Corporation (or its subsidiaries) at the Senior Vice President level or above, then the Board or committee shall consider all factors, with particular scrutiny when one of the top 20 members of management are involved, and the Board or such committee, may in its sole discretion require reimbursement of any compensation resulting from the vesting, exercise or settlement of Options and/or Restricted Stock/PSUs and the cancellation of any outstanding Options and/or Restricted Stock/PSUs from the Grantee (whether or not such individual is currently employed by the Corporation (or its subsidiaries)) during the three-year period following the date the Board first learns of the violation, fraud or Misconduct.

 

7. Securities Law Compliance. The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any transfer or sale by the Grantee of any shares of Common Stock, including without limitation (a) restrictions under an insider trading policy and (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the shares of the Corporation’s common stock. The sale of the shares must also comply with other applicable laws and regulations governing the sale of such shares.

 

8.

Data Privacy. As an essential term of this award, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described herein for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award, the Grantee acknowledges that the Corporation holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of the Corporation’s common stock. Grantee acknowledges that Data may be held

 

5


  to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

9. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation (or one of its subsidiaries) and thereafter until withdrawn in writing by Grantee.

 

10. Board Interpretation. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Committee concerning any questions arising under this Agreement or the Plan.

 

11. No Right to Continued Employment. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued employment with the Corporation or any of its subsidiaries or affiliates.

 

12. Amendments for Accounting Charges. The Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

14. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to (i) the last address maintained in the Corporation’s Human Resources files for the Grantee or (ii) the Grantee’s mail delivery code or place of work at the Corporation (or its subsidiaries).

 

6


15. Plan Controls; Entire Agreement; Capitalized Terms. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

16. Miscellaneous. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

NAVIENT CORPORATION

 

By:  

Jack Remondi

President and Chief Executive Officer

 

Accepted by:

 

 

 

Date

 

7

EX-10.5

Exhibit 10.5

Navient Corporation 2014 Omnibus Incentive Plan

Restricted Stock Unit Agreement

Pursuant to the terms and conditions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), the Compensation and Personnel Committee (the “Committee”) of the Navient Corporation Board of Directors (the “Board”) hereby grants to                      (the “Grantee”) on February 18, 2015 (the “Grant Date”) an award (the “Award”) of              Restricted Stock Units (“RSUs”), which represent the right to acquire shares of common stock of Navient Corporation (the “Corporation”) subject to the following terms and conditions of this Restricted Stock Unit Agreement (the “Agreement”):

 

1. Vesting Schedule. Unless vested earlier as set forth below, the Award will vest, and will be converted into shares of common stock, in one-third increments the first, second, and third anniversary of the Grant Date.

 

2. Employment Termination; Death; Disability. Except as provided below, if the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) for any reason or his or her employment is terminated by the Corporation (or a Subsidiary) for Misconduct or cause, as determined by the Corporation in its sole discretion, he/she shall forfeit any portion of the Award that has not vested as of the date of such termination of employment. For purposes of this Agreement, “Misconduct” is defined as an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Corporation (or a Subsidiary), breach of fiduciary duty or deliberate disregard of Corporation (or Subsidiary) rules; an unauthorized disclosure of any Corporation (or Subsidiary) trade secret or confidential information; any conduct constituting unfair competition; inducing any customer of the Corporation (or a Subsidiary) to breach a contract with the Corporation (or a Subsidiary) or any principal for whom the Corporation (or a Subsidiary) acts as agent to terminate such agency relationship; or engaging in any other act or conduct proscribed by the senior human resources officer as Misconduct.

If not previously vested, the Award will continue to vest, and will be converted into shares of common stock, on the original vesting terms and vesting dates set forth above in the event that (i) the Grantee’s employment is terminated by the Corporation (or a Subsidiary) for any reason other than for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) and meets the Corporation’s retirement eligibility requirements under the Corporation’s retirement eligibility policy in effect as of the Grant Date, which shall be determined by the Corporation in its sole discretion.

If not previously vested, the Award will vest, and will be converted into shares of common stock, upon death or Disability (provided that such Disability qualifies as a “disability” within the meaning of Treasury Regulation Section 1.409A-3(i)(4)).

The Award shall be forfeited upon termination of employment due to Misconduct or cause, as determined by the Corporation in its sole discretion.

 

1


Notwithstanding anything stated herein, the Plan or in the Navient Corporation Change in Control Severance Plan for Senior Officers, this Award shall not be subject to the terms set forth in the Navient Corporation Change in Control Severance Plan for Senior Officers.

 

3. Change in Control. Notwithstanding anything to the contrary in this Agreement:

 

  (a) In the event of a Change in Control in which the acquiring or surviving company in the transaction does not assume or continue outstanding Awards upon the Change in Control, then any portion of the Award that is not vested shall become 100 percent vested; provided, however, the conversion of the accelerated portion of the RSUs into shares of common stock (i.e., the settlement of the Award) will nevertheless be made at the same time or times as if such RSUs had vested in accordance with the vesting schedule set forth in Section 1 or, if earlier, upon the termination of Grantee’s employment for reasons other than Misconduct.

 

  (b) If Grantee’s employment shall terminate within twenty-four months following a Change in Control for any reason other than (i) by the Corporation (or a Subsidiary) for Misconduct or cause, as determined by the Corporation in its sole discretion, or (ii) by Grantee’s voluntary termination of employment that is not a Termination of Employment for Good Reason, as defined in the Change in Control Severance Plan for Senior Officers (if applicable to the Grantee), any portion of the Award not previously vested shall immediately become vested, and shall be converted into shares of common stock, upon such employment termination.

 

4. Taxes; Dividends. The Grantee of the Award shall make such arrangements as may reasonably be required by the Corporation, including transferring a sufficient number of shares of the Corporation’s stock, to satisfy the income and employment tax withholding requirements that accrue upon the Award becoming vested or, if applicable, settled in shares of the Corporation’s common stock (by approving this Agreement, the Committee hereby approves the transfer of such shares to the Corporation for purposes of SEC Rule 16b-3). Dividends declared on an unvested Award will not be paid currently. Instead, amounts equal to such dividends will be credited to an account established on behalf of the Grantee and such amounts will be deemed to be invested in additional shares of the Corporation’s common stock (“Dividend Equivalents”). Such Dividend Equivalents will be subject to the same vesting schedule to which the Award is subject. Upon vesting of any portion of the Award, the amount of Dividend Equivalents allocable to such Award (and any fractional share amount) will also vest and will be converted into shares of the Corporation’s common stock (provided that any fractional share amount shall be paid in cash).

 

5.

Section 409A. For purposes of Section 409A of the Internal Revenue Code, the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A”), each payment and benefit payable under this Agreement is hereby designated as a separate payment. The parties intend that all RSUs provided under this Agreement and shares issuable hereunder comply with or be exempt from the

 

2


requirements of Section 409A so that none of the payments or benefits will be subject to the adverse tax penalties imposed under Section 409A, and any ambiguities herein will be interpreted to so comply. Notwithstanding anything in the Plan or this Agreement to the contrary, if the vesting of the balance, or some lesser portion of the balance, of the RSUs is to be accelerated in connection with the Grantee’s termination of service, such accelerated RSUs will not be settled by virtue of such acceleration until and unless the Grantee has a “separation from service” within the meaning of Section Treasury Regulation 1-409A-1(h), as determined by the Corporation, in its sole discretion. Further, and notwithstanding anything in the Plan or this Agreement to the contrary, if (x) any of the RSUs to be provided in connection with the Grantee’s separation from service do not qualify for any reason to be exempt from Section 409A, (y) the Grantee is, at the time of such separation from service, a “specified employee” (as defined in Treasury Regulation Section 1.409A-1(i)) and (z) the settlement of such RSUs would result in the imposition of additional tax under Section 409A if such settlement occurs on or within the six (6) month period following the Grantee’s separation from service, then, to the extent necessary to avoid the imposition of such additional taxation, the settlement of any such RSUs during such six (6) month period will accrue and will not be settled until the date six (6) months and one (1) day following the date of the Grantee’s separation from service and on such date (or, if earlier, the date of the Grantee’s death), such RSUs will be settled.

 

6. Clawback Provision. Notwithstanding anything to the contrary herein, if the Board of Directors of the Corporation, or an appropriate committee thereof, determines that, any material misstatement of financial results or a performance metric criteria has occurred as a result of the Grantee’s conduct or the Grantee has committed a material violation of corporate policy or has committed fraud or Misconduct, then the Board or committee shall consider all factors, with particular scrutiny when one of the top 20 members of management are involved, and the Board or such committee, may in its sole discretion require reimbursement of any compensation resulting from the vesting, exercise or settlement of Options and/or Restricted Stock/RSUs and the cancellation of any outstanding Options and/or Restricted Stock/RSUs from the Grantee (whether or not such individual is currently employed by the Corporation) during the three-year period following the date the Board first learns of the violation, fraud or Misconduct.

 

7. Securities Law Compliance. The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any transfer or sale by the Grantee of any shares of the Corporation’s common stock, including without limitation (a) restrictions under an insider trading policy and (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the shares of the Corporation’s common stock. The sale of the shares must also comply with other applicable laws and regulations governing the sale of such shares.

 

8.

Data Privacy. As an essential term of this award, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described herein for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By accepting this award, the Grantee acknowledges that the Corporation

 

3


holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of the Corporation’s common stock. Grantee acknowledges that Data may be held to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

9. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation (or its subsidiaries) and thereafter until withdrawn in writing by Grantee.

 

10. Board Interpretation. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Committee concerning any questions arising under this Agreement or the Plan.

 

11. No Right to Continued Employment. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued employment with the Corporation or any of its subsidiaries or affiliates.

 

12. Amendments for Accounting Charges. The Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

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14. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to (i) the last address maintained in the Corporation’s Human Resources files for the Grantee or (ii) the Grantee’s mail delivery code or place of work at the Corporation (or its subsidiaries).

 

15. Plan Controls; Entire Agreement; Capitalized Terms. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

16. Miscellaneous. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

 

5


NAVIENT CORPORATION
By:  
Jack Remondi
President and Chief Executive Officer

 

Accepted by:
 
 
Date

 

6

EX-10.6

Exhibit 10.6

Navient Corporation 2014 Omnibus Incentive Plan

Stock Option Agreement

 

A. Option Grant. Net-Settled Stock Options (the “Options”) to purchase a total of                         shares of Common Stock, par value $.01 per share, of Navient Corporation (the “Corporation”) are hereby granted to                         (the “Grantee”), subject in all respects to the terms and provisions of the Navient Corporation 2014 Omnibus Incentive Plan (the “Plan”), which is incorporated herein by reference, and this Stock Option Agreement (the “Agreement”). The Options are non-qualified stock options and are not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended, and will be interpreted accordingly.

 

B. Option Price. The purchase price per share is $             (the “Option Price”), which is the fair market value per share of Common Stock on the Grant Date.

 

C. Grant Date. The date of grant of these Options is February 18, 2015 (the “Grant Date”).

 

D. Vesting; Exercisability. The Options are not vested as of the Grant Date. Unless vested earlier as set forth below, the Options will vest as follows: One-third of the Options will vest on each of the first, second, and third anniversary of the Grant Date, respectively.

 

    Except as set forth below, if the Grantee ceases to be an employee of the Corporation (or a Subsidiary) for any reason, he/she will forfeit any unvested Options as of the date of such termination of employment.

 

    Except as otherwise set forth herein, including Section H, if the Grantee’s employment with the Corporation (or a Subsidiary) is terminated by the Corporation (or a Subsidiary) for any reason other than for Misconduct or cause, as determined by the Corporation in its sole discretion, or if the Grantee voluntarily ceases to be an employee of the Corporation (or a Subsidiary) and meets the Corporation’s retirement eligibility requirements under the Corporation’s retirement eligibility policy in effect as of the Grant Date, which shall be determined by the Corporation in its sole discretion, all unvested Options will continue to vest based on their original vesting terms and each vested portion of the Options will be exercisable for one year from the date such portion vests, but in no event later than the Expiration Date (as defined below). For purposes of this Agreement, “Misconduct” is defined as an act of embezzlement, fraud, dishonesty, nonpayment of any obligation owed to the Corporation (or a Subsidiary), breach of fiduciary duty or deliberate disregard of Corporation (or Subsidiary) rules; an unauthorized disclosure of any Corporation (or Subsidiary) trade secret or confidential information; any conduct constituting unfair competition; inducing any customer of the Corporation (or a Subsidiary) to breach a contract with the Corporation (or a Subsidiary) or any principal for whom the Corporation (or a Subsidiary) acts as agent to terminate such agency relationship; or engaging in any other act or conduct proscribed by the senior human resources officer as Misconduct.

 

1


    Upon termination of employment for death, Disability or as provided for under the Navient Corporation Change in Control Severance Plan for Senior Officers, all unvested Options will vest and will be exercisable for one year from the date of such vesting.

 

    Except as otherwise set forth herein and except as otherwise provided in the Navient Corporation Change in Control Severance Plan, vested Options (taking into account any vesting acceleration, if any) are exercisable until the earlier of: (1) the Expiration Date; or (2) three months from the date of termination.

 

    Upon termination of employment for Misconduct or for cause, as determined by the Corporation in its sole discretion, all Options, vested or unvested, are forfeited.

 

E. Expiration. These Options expire five years from the Grant Date (the “Expiration Date”), subject to the provisions of the Plan and this Agreement, which may provide for earlier expiration in certain instances, including Grantee’s termination of employment.

 

F. Non-Transferable; Binding Effect. These Options may not be transferred except as provided for herein. All or any part of these Options may be transferred by the Grantee by will or by the laws of descent and distribution. In addition, Grantee may transfer all or any part of any Option to “Immediate Family Members.” “Immediate Family Members” means children, grandchildren, spouse or common law spouse, siblings or parents of the Grantee or bona fide trusts, partnerships or other entities controlled by and of which all beneficiaries are Immediate Family Members of the Grantee. Any Options that are transferred are further conditioned on the Grantee’s transferees and Immediate Family Members agreeing to abide by the Corporation’s then current stock option transfer guidelines. The terms of these Options shall be binding upon the executors, administrators, heirs, and successors of the Grantee.

 

G. Net-Settlement upon Option Exercise; Taxes. These Options shall be exercised only in accordance with the terms of this Agreement. Each exercise must be for no fewer than fifty (50) Options, other than an exercise for all remaining Options. Upon exercise of all or part of the Options, the Grantee shall receive from the Corporation the number of shares of Common Stock resulting from the following formula: the total number of Options exercised less the sum of “Shares for the Option Cost” and “Shares for Taxes”, rounded up to the nearest whole share. “Shares for the Option Cost” equals the Option Price multiplied by the number of Options exercised divided by the fair market value of Corporation’s common stock at the time of exercise. “Shares for Taxes” equals the tax liability (the statutory withholding minimum) divided by the fair market value of the Corporation’s common stock at the time of exercise. Grantee shall receive cash for any resulting fractional share amount. As a condition to the issuance of shares of Common Stock of the Corporation pursuant to these Options, the Grantee agrees to remit to the Corporation (through the procedure described in this paragraph) at the time of any exercise of these Options any taxes required to be withheld by the Corporation under federal, state, or local law as a result of the exercise of these Options.

 

2


H. Vesting Upon Change In Control. Notwithstanding anything to the contrary in this Agreement, including Section (D):

 

  (I) In the event of a Change in Control in which the acquiring or surviving company in the transaction does not assume or continue outstanding Awards upon the Change in Control, then any portion of these Options that were not vested shall become 100 percent vested and exercisable effective immediately prior to the consummation of such Change in Control; and

 

  (II) If Grantee’s employment shall terminate within twenty-four months following a Change in Control other than for (i) Misconduct or for cause, as determined by the Corporation in its sole discretion, or (ii) voluntary termination, any Options not previously vested shall immediately become vested and exercisable upon such employment termination and such Options shall be exercisable until the earlier of: (1) the Expiration Date; or (2) one year from the date of termination.

 

I. Clawback Provision. Notwithstanding anything to the contrary herein, if the Board of Directors (the “Board”) of the Corporation, or an appropriate committee thereof, determines that, any material misstatement of financial results or a performance metric criteria has occurred as a result of the Grantee’s conduct or the Grantee has committed a material violation of corporate policy or has committed fraud or Misconduct, then the Board or committee shall consider all factors, with particular scrutiny when one of the top 20 members of management are involved, and the Board or such committee, may in its sole discretion require reimbursement of any compensation resulting from the vesting and exercise of Options and the cancellation of any outstanding Options from the Grantee (whether or not such individual is currently employed by the Corporation (or its subsidiaries)) during the three-year period following the date the Board first learns of the violation, fraud or Misconduct.

 

J. Board Interpretation. The Grantee hereby agrees to accept as binding, conclusive, and final all decisions and interpretations of the Board and, where applicable, the Compensation and Personnel Committee of the Board concerning any questions arising under this Agreement or the Plan.

 

K. Stockholder Rights. The Grantee shall not be deemed a stockholder of the Corporation with respect to any of the shares of Common Stock subject to the Options, except to the extent that such shares shall have been purchased and transferred to the Grantee. The Corporation shall not be required to issue or transfer any shares of Common Stock purchased upon exercise of the Options until all applicable requirements of law have been complied with and such shares shall have been duly listed on any securities exchange on which the Common Stock may then be listed.

 

L. No Right to Continued Employment. Nothing in the Plan, in this Agreement or any other instrument executed pursuant thereto or hereto shall confer upon the Grantee any right to continued employment with the Corporation or any of its subsidiaries or affiliates.

 

3


M. Amendments for Accounting Charges. The Committee reserves the right to unilaterally amend this Agreement to reflect any changes in applicable law or financial accounting standards.

 

N. Securities Law Compliance; Restrictions on Resales of Option Shares. The Corporation may impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any exercise of the Option and/or any resales by the Grantee or other subsequent transfers by the Grantee of any shares of Common Stock issued as a result of the exercise of the Option, including without limitation (a) restrictions under an insider trading policy, (b) restrictions that may be necessary in the absence of an effective registration statement under the Securities Act of 1933, as amended, covering the Option and/or the Common Stock underlying the Option and (c) restrictions as to the use of a specified brokerage firm or other agent for exercising the Option and/or for such resales or other transfers. The sale of the shares of Common Stock underlying the Option must also comply with other applicable laws and regulations governing the sale of such shares.

 

O. Data Privacy. As an essential term of this Option, the Grantee consents to the collection, use and transfer, in electronic or other form, of personal data as described in this Agreement for the exclusive purpose of implementing, administering and managing Grantee’s participation in the Plan. By entering into this Agreement and accepting the Option, the Grantee acknowledges that the Corporation holds certain personal information about the Grantee, including, but not limited to, name, home address and telephone number, date of birth, social security number or other identification number, salary, tax rates and amounts, nationality, job title, any shares of stock held in the Corporation, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding, for the purpose of implementing, administering and managing the Plan (“Data”). Grantee acknowledges that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in jurisdictions that may have different data privacy laws and protections, and Grantee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Grantee or the Corporation may elect to deposit any shares of Common Stock acquired upon exercise of the Option. Grantee acknowledges that Data may be held to implement, administer and manage the Grantee’s participation in the Plan as determined by the Corporation, and that Grantee may request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, provided however, that refusing or withdrawing Grantee’s consent may adversely affect Grantee’s ability to participate in the Plan.

 

P. Electronic Delivery. The Corporation may, in its sole discretion, decide to deliver any documents related to any awards granted under the Plan by electronic means or to request Grantee’s consent to participate in the Plan by electronic means. Grantee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Corporation or another third party designated by the Corporation, and such consent shall remain in effect throughout Grantee’s term of service with the Corporation and thereafter until withdrawn in writing by Grantee.

 

4


Q. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law.

 

R. Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered, telefaxed or telecopied to, or, if mailed, when received by, the other party at the following addresses:

If to the Corporation to:

Navient Corporation

Attn: Human Resources, Equity Plan Administration

123 Justison Street

Wilmington, DE 19801

If to the Grantee, to (i) the last address maintained in the Corporation’s Human Resources files for the Grantee or (ii) the Grantee’s mail delivery code or place of work at the Corporation (or its subsidiaries).

 

S. Plan Controls; Entire Agreement; Capitalized Terms. In the event of any conflict between the provisions of this Agreement and the provisions of the Plan, the terms of the Plan control, except as expressly stated otherwise herein. This Agreement and the Plan together set forth the entire agreement and understanding between the parties as to the subject matter hereof and supersede all prior oral and written and all contemporaneous or subsequent oral discussions, agreements and understandings of any kind or nature. Capitalized terms not defined herein shall have the meanings as described in the Plan.

 

T. Miscellaneous. In the event that any provision of this Agreement is declared to be illegal, invalid or otherwise unenforceable by a court of competent jurisdiction, such provision shall be reformed, if possible, to the extent necessary to render it legal, valid and enforceable, or otherwise deleted, and the remainder of this Agreement shall not be affected except to the extent necessary to reform or delete such illegal, invalid or unenforceable provision. The headings in this Agreement are solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect. The Grantee shall cooperate and take such actions as may be reasonably requested by the Corporation in order to carry out the provisions and purposes of the Agreement. The Grantee is responsible for complying with all laws applicable to Grantee, including federal and state securities reporting laws.

The Grantee must contact Merrill Lynch to accept the terms of this grant. Merrill Lynch can be contacted at www.benefits.ml.com or by phone at 1-877-756-ESOP. If Grantee fails to accept the terms of this grant, the Options may not be exercised.

 

5


NAVIENT CORPORATION
By:  
Jack Remondi
President and Chief Executive Officer

 

Accepted by:
 

 

 

 

Date

 

6

EX-12.1

Exhibit 12.1

NAVIENT CORPORATION

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS

(Dollars in millions)

 

    

 

     Three Months Ended Mar 31,  
     2010      2011      2012      2013      2014      2014      2015  

Income (loss) from continuing operations before income taxes

   $ 1,229       $ 925       $ 1,437       $ 2,087       $ 1,837       $ 355       $ 473   

Add: Fixed charges

     2,279         2,404         2,565         2,213         2,066         530         514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total earnings

$ 3,508    $ 3,329    $ 4,002    $ 4,300    $ 3,903    $ 885    $ 987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

$ 2,275    $ 2,401    $ 2,561    $ 2,210    $ 2,063    $ 530    $ 514   

Rental expense, net of income

  4      3      4      3      3      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed charges

  2,279      2,404      2,565      2,213      2,066      530      514   

Preferred stock dividends

  121      28      31      31      10      8      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed charges and preferred stock dividends

$ 2,400    $ 2,432    $ 2,596    $ 2,244    $ 2,076    $ 538    $ 514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ratio of earnings to fixed charges(1)

  1.54      1.38      1.56      1.94      1.89      1.67      1.92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ratio of earnings to fixed charges and preferred stock dividends(1)

  1.46      1.37      1.54      1.92      1.88      1.65      1.92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For purposes of computing these ratios, earnings represent income (loss) from continuing operations before income tax expense plus fixed charges. Fixed charges represent interest expensed and capitalized plus one-third (the proportion deemed representative of the interest factor) of rents, net of income from subleases.
EX-31.1

Exhibit 31.1

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John F. Remondi, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Navient Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ JOHN F. REMONDI
John F. Remondi
Chief Executive Officer
(Principal Executive Officer)
April 30, 2015
EX-31.2

Exhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Somsak Chivavibul, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q of Navient Corporation;

 

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

  5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

/s/ SOMSAK CHIVAVIBUL
Somsak Chivavibul
Chief Financial Officer
(Principal Financial and Accounting Officer)
April 30, 2015
EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Navient Corporation (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John F. Remondi, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

/s/ JOHN F. REMONDI
John F. Remondi
Chief Executive Officer
(Principal Executive Officer)
April 30, 2015
EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Navient Corporation (the “Company”) on Form 10-Q for the quarter ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Somsak Chivavibul, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

 

/s/ SOMSAK CHIVAVIBUL
Somsak Chivavibul
Chief Financial Officer
(Principal Financial and Accounting Officer)
April 30, 2015