10-Q 1 d711908d10q.htm FORM 10-Q 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, 2014

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: 001-13251

 

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-2013874

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

300 Continental Drive, Newark, Delaware   19713
(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

Common Stock, par value $0.01 per share

 

Outstanding at April 30, 2014

422,739,239

 

 

 


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      91   

Item 4.

   Controls and Procedures      95   

PART II. Other Information

  

Item 1.

   Legal Proceedings      96   

Item 1A.

   Risk Factors      98   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      98   

Item 3.

   Defaults Upon Senior Securities      98   

Item 4.

   Mine Safety Disclosures      98   

Item 5.

   Other Information      98   

Item 6.

   Exhibits      98   


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,
2014
    December 31,
2013
 

Assets

    

FFELP Loans (net of allowance for losses of $107 and $119, respectively)

   $ 102,635      $ 104,588   

Private Education Loans (net of allowance for losses of $2,059 and $2,097 respectively)

     38,157        37,512   

Investments

    

Available-for-sale

     135        109   

Other

     652        783   
  

 

 

   

 

 

 

Total investments

     787        892   

Cash and cash equivalents

     3,742        5,190   

Restricted cash and investments

     3,794        3,650   

Goodwill and acquired intangible assets, net

     421        424   

Other assets

     6,936        7,287   
  

 

 

   

 

 

 

Total assets

   $ 156,472      $ 159,543   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 11,626      $ 13,795   

Long-term borrowings

     136,177        136,648   

Other liabilities

     3,071        3,458   
  

 

 

   

 

 

 

Total liabilities

     150,874        153,901   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Preferred stock, par value $0.20 per share, 20 million shares authorized

    

Series A: 3.3 million and 3.3 million shares issued, respectively, at stated value of $50 per share

     165        165   

Series B: 4 million and 4 million shares issued, respectively, at stated value of $100 per share

     400        400   

Common stock, par value $0.20 per share, 1.125 billion shares authorized: 549 million and 545 million shares issued, respectively

     110        109   

Additional paid-in capital

     4,461        4,399   

Accumulated other comprehensive income (loss) (net of tax (expense) benefit of $(4) and $(7), respectively)

     7        13   

Retained earnings

     2,733        2,584   
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity before treasury stock

     7,876        7,670   

Less: Common stock held in treasury at cost: 127 million and 116 million shares, respectively

     (2,283     (2,033
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity

     5,593        5,637   

Noncontrolling interest

     5        5   
  

 

 

   

 

 

 

Total equity

     5,598        5,642   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 156,472      $ 159,543   
  

 

 

   

 

 

 

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

 

     March 31,
2014
     December 31,
2013
 

FFELP Loans

   $ 97,380       $ 99,254   

Private Education Loans

     25,139         25,530   

Restricted cash and investments

     3,618         3,395   

Other assets

     2,163         2,322   

Short-term borrowings

     1,694         3,655   

Long-term borrowings

     115,533         115,538   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 11,073       $ 11,308   
  

 

 

    

 

 

 

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,  
         2014             2013      

Interest income:

    

FFELP Loans

   $ 646      $ 735   

Private Education Loans

     644        623   

Other loans

     3        3   

Cash and investments

     3        5   
  

 

 

   

 

 

 

Total interest income

     1,296        1,366   

Total interest expense

     530        571   
  

 

 

   

 

 

 

Net interest income

     766        795   

Less: provisions for loan losses

     185        241   
  

 

 

   

 

 

 

Net interest income after provisions for loan losses

     581        554   
  

 

 

   

 

 

 

Other income (loss):

    

Gains on sales of loans and investments

            55   

Losses on derivative and hedging activities, net

     (8     (31

Servicing revenue

     61        70   

Contingency revenue

     111        99   

Gains on debt repurchases

            23   

Other

     6        34   
  

 

 

   

 

 

 

Total other income (loss)

     170        250   
  

 

 

   

 

 

 

Expenses:

    

Salaries and benefits

     142        125   

Other operating expenses

     224        110   
  

 

 

   

 

 

 

Total operating expenses

     366        235   

Goodwill and acquired intangible asset impairment and amortization expense

     4        3   

Restructuring and other reorganization expenses

     26        10   
  

 

 

   

 

 

 

Total expenses

     396        248   
  

 

 

   

 

 

 

Income from continuing operations, before income tax expense

     355        556   

Income tax expense

     136        211   
  

 

 

   

 

 

 

Net income from continuing operations

     219        345   

Income from discontinued operations, net of tax expense

            1   
  

 

 

   

 

 

 

Net income

     219        346   

Less: net loss attributable to noncontrolling interest

              
  

 

 

   

 

 

 

Net income attributable to Navient Corporation

     219        346   

Preferred stock dividends

     5        5   
  

 

 

   

 

 

 

Net income attributable to Navient Corporation common stock

   $ 214      $ 341   
  

 

 

   

 

 

 

Basic earnings per common share attributable to Navient Corporation:

    

Continuing operations

   $ .50      $ .76   

Discontinued operations

              
  

 

 

   

 

 

 

Total

   $ .50      $ .76   
  

 

 

   

 

 

 

Average common shares outstanding

     427        451   
  

 

 

   

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

    

Continuing operations

   $ .49      $ .74   

Discontinued operations

              
  

 

 

   

 

 

 

Total

   $ .49      $ .74   
  

 

 

   

 

 

 

Average common and common equivalent shares outstanding

     435        458   
  

 

 

   

 

 

 

Dividends per common share attributable to Navient Corporation

   $ .15      $ .15   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended March 31,  
         2014             2013      

Net income

   $ 219      $ 346   

Other comprehensive income (loss):

    

Unrealized gains (losses) on derivatives:

    

Unrealized hedging gains (losses) on derivatives

     (11     1   

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

     3        3   
  

 

 

   

 

 

 

Total unrealized gains (losses) on derivatives

     (8     4   

Unrealized gains (losses) on investments

            (1

Income tax (expense) benefit

     2        (1
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (6     2   
  

 

 

   

 

 

 

Total comprehensive income

   $ 213      $ 348   
  

 

 

   

 

 

 

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, 2012

    7,300,000        535,507,965        (82,910,021     452,597,944      $ 565      $ 107      $ 4,237      $ (6   $ 1,451      $ (1,294   $ 5,060      $ 6      $ 5,066   

Comprehensive income:

                         

Net income (loss)

                                                            346               346               346   

Other comprehensive income, net of tax

                                                     2                      2               2   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          348               348   

Cash dividends:

                         

Common stock ($.15 per share)

                                                            (68            (68            (68

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

           4,157,795               4,157,795               1        33                             34               34   

Tax benefit related to employee stock-based compensation plans

                                              2                             2               2   

Stock-based compensation expense

                                              19                             19               19   

Common stock repurchased

                  (10,220,804     (10,220,804                                        (199     (199            (199

Shares repurchased related to employee stock-based compensation plans

                  (2,324,575     (2,324,575                                        (42     (42            (42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

    7,300,000        539,665,760        (95,455,400     444,210,360      $ 565      $ 108      $ 4,291      $ (4   $ 1,723      $ (1,535   $ 5,148      $ 6      $ 5,154   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 (loss)

                                                            219               219               219   

Other comprehensive income, 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   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Three Months Ended March 31,  
     2014     2013  

Operating activities

    

Net income

   $ 219      $ 346   

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

    

Income from discontinued operations, net of tax

            (1

Gains on loans and investments, net

            (55

Gains on debt repurchases

            (23

Goodwill and acquired intangible asset impairment and amortization expense

     4        3   

Stock-based compensation expense

     18        19   

Unrealized gains on derivative and hedging activities

     (181     (138

Provisions for loan losses

     185        241   

Decrease (increase) in restricted cash — other

     5        (15

Decrease in accrued interest receivable

     109        19   

(Decrease) increase in accrued interest payable

     (69     2   

Decrease in other assets

     257        291   

Increase (decrease) in other liabilities

     11        (158
  

 

 

   

 

 

 

Cash provided by operating activities — continuing operations

     558        531   
  

 

 

   

 

 

 

Cash (used in) operating activities — discontinued operations

            (2
  

 

 

   

 

 

 

Total net cash provided by operating activities

     558        529   
  

 

 

   

 

 

 

Investing activities

    

Student loans acquired and originated

     (1,975     (1,559

Reduction of student loans:

    

Installment payments, claims and other

     3,090        3,349   

Proceeds from sales of student loans

            226   

Other investing activities, net

     119        65   

Purchases of available-for-sale securities

     (25     (14

Proceeds from maturities of available-for-sale securities

     2        9   

Purchases of held-to-maturity and other securities

     (65     (93

Proceeds from sales and maturities of held-to-maturity and other securities

     67        94   

(Increase) decrease in restricted cash — variable interest entities

     (221     107   
  

 

 

   

 

 

 

Total net cash provided by investing activities

     992        2,184   
  

 

 

   

 

 

 

Financing activities

    

Borrowings collateralized by loans in trust — issued

     2,649        2,588   

Borrowings collateralized by loans in trust — repaid

     (2,834     (3,182

Asset-backed commercial paper conduits, net

     (1,918     427   

ED Conduit Program facility, net

            (2,583

Other long-term borrowings issued

     834        1,489   

Other long-term borrowings repaid

     (1,535     (1,433

Other financing activities, net

     (11     (358

Retail and other deposits, net

     86        396   

Common stock repurchased

     (200     (199

Common stock dividends paid

     (64     (68

Preferred stock dividends paid

     (5     (5
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,998     (2,928
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,448     (215

Cash and cash equivalents at beginning of period

     5,190        3,900   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,742      $ 3,685   
  

 

 

   

 

 

 

Cash disbursements made (refunds received) for:

    

Interest

   $ 519      $ 568   
  

 

 

   

 

 

 

Income taxes paid

   $ 38      $ 15   
  

 

 

   

 

 

 

Income taxes received

   $ (1   $ (1
  

 

 

   

 

 

 

Noncash activity:

    

Investing activity — Student loans and other assets removed related to sale of Residual Interest in securitization

   $      $ (3,665
  

 

 

   

 

 

 

Financing activity — Borrowings removed related to sale of Residual Interest in securitization

   $      $ (3,681
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2014 and for the three months ended

March 31, 2014 and 2013 is unaudited)

 

1. Organization and Business

On May 29, 2013, SLM Corporation (“Existing SLM”) first announced its intent to separate into two distinct publicly traded entities — a loan management, servicing and asset recovery business and a consumer banking business. The loan management, servicing and asset recovery business, Navient Corporation (“Navient”), would be comprised primarily of Existing SLM’s portfolios of education loans not currently held in Sallie Mae Bank, as well as servicing and asset recovery activities on these loans and loans held by third parties. The consumer banking business would be comprised primarily of Sallie Mae Bank and its Private Education Loan origination business, the Private Education Loans it holds and a related servicing business, and would be a consumer banking franchise with expertise in helping families save, plan and pay for college.

On April 8, 2014, the board of directors of Existing SLM approved the distribution of all of the issued and outstanding shares of Navient common stock on the basis of one share of Navient common stock for each share of Existing SLM common stock issued and outstanding as of the close of business on April 22, 2014, the record date for the distribution. The distribution occurred on April 30, 2014. The distribution was preceded by an internal corporate reorganization of Existing SLM pursuant to which, on April 29, 2014, New BLC Corporation (“SLM BankCo”) replaced Existing SLM as the parent holding company of Sallie Mae pursuant to a holding company merger (the “Merger”). In accordance with Section 251(g) of the Delaware General Corporation Law, by action of the Existing SLM board of directors and without a shareholder vote, Existing SLM was merged into Navient, LLC, a wholly-owned subsidiary of SLM BankCo, with Navient, LLC surviving (“Existing SLM SurvivorCo”). Immediately following the effective time of the Merger, SLM BankCo changed its name to “SLM Corporation.” Following the Merger, the assets and liabilities associated with the education loan management, servicing and asset recovery business were transferred to Navient, and those assets and liabilities associated with the consumer banking business were transferred to Existing SLM. The internal corporate reorganization and the distribution of Navient common stock are sometimes collectively referred to herein as the “Spin-Off.” The separation and distribution is intended to be tax-free to stockholders of Sallie Mae. For further information on the Spin-Off, please refer to Navient’s Registration Statement on Form 10 (File No. 001-36228) filed with the Securities and Exchange Commission (“SEC”) on April 10, 2014 and declared effective on April 14, 2014 (the “Form 10”) and Existing SLM’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 19, 2014 (the “2013 Form 10-K”).

Due to the relative significance of Navient to Existing SLM, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to Existing SLM, notwithstanding the legal form of the Spin-Off. As a result, the historical financial statements of Existing SLM are the historical financial statements of Navient. For that reason, the historical financial information contained in this Quarterly Report on Form 10-Q is that of Existing SLM (which includes the consolidated results of both Navient and the consumer banking business). Navient will show the distribution of the approximate $1.7 billion of consumer banking business net assets as of the distribution date.

By virtue of Navient’s Form 10 registration statement being declared effective by the SEC on April 14, 2014, Navient is required to file this Form 10-Q for the quarter ended March 31, 2014.

On May 6, 2014, SLM BankCo, as reconstituted after the Spin Off, issued audited consolidated financial statements on a stand-alone basis for SLM BankCo and its subsidiaries for each of the three years ended December 31, 2013. These carve-out financial statements were presented on a basis of accounting that reflects a change in reporting entity. They reflected the results of the consumer banking business and did not include Navient’s results. As previously discussed, the historical financial statements of Existing SLM prior to the Spin-Off have become the historical financial statements of Navient.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. Organization and Business (Continued)

 

For purposes of this Quarterly Report on Form 10-Q, any references to “we,” “our,” “us,” or the “Company” with respect to any period on or prior to the date of the Spin-Off means and refers to Existing SLM and its consolidated subsidiaries as constituted prior to the Spin-Off, and any references to “Navient,” “we,” “our,” “us,” or the “Company” with respect to any period after the date of the Spin-Off means and refers to Navient and its consolidated subsidiaries.

 

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of Navient Corporation 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 Corporation 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 months ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in the Form 10 and the 2013 Form 10-K. Definitions for certain capitalized terms used in this document can be found in the Form 10 and the 2013 Form 10-K.

Consolidation

In first-quarter 2013, we sold the Residual Interest in a FFELP Loan securitization trust to a third party. We will continue to service the student loans in the trust under existing agreements. Prior to the sale of the Residual Interest, we had consolidated the trust as a VIE because we had met the two criteria for consolidation. We had determined we were the primary beneficiary because (1) as servicer to the trust we had the power to direct the activities of the VIE that most significantly affected its economic performance and (2) as the residual holder of the trust we had an obligation to absorb losses or receive benefits of the trust that could potentially be significant. Upon the sale of the Residual Interest we are no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trust. As a result of this transaction we removed trust assets of $3.8 billion and the related liabilities of $3.7 billion from the balance sheet and recorded a $55 million gain as part of “gains on sales of loans and investments.”

Reclassifications

Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2013 to be consistent with classifications adopted for 2014, and had no effect on net income, total assets, or total liabilities.

 

3. Allowance for Loan Losses

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

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

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.

Allowance for Loan Losses Metrics

 

     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  

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

     .10     2.72     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.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

     Three Months Ended March 31, 2013  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

   $ 159      $ 2,171      $ 47      $ 2,377   

Total provision

     16        225               241   

Charge-offs(1)

     (22     (232     (5     (259

Student loan sales

     (6                   (6

Reclassification of interest reserve(2)

            6               6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 147      $ 2,170      $ 42      $ 2,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,157      $ 31      $ 1,188   

Ending balance: collectively evaluated for impairment

   $ 147      $ 1,013      $ 11      $ 1,171   

Loans:

        

Ending balance: individually evaluated for impairment

   $      $ 8,018      $ 65      $ 8,083   

Ending balance: collectively evaluated for impairment

   $ 118,058      $ 32,389      $ 106      $ 150,553   

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

     .10     2.97     10.95  

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

     .09     2.87     10.95  

Allowance as a percentage of the ending total loan balance

     .12     5.37     24.55  

Allowance as a percentage of the ending loans in repayment

     .17     6.88     24.55  

Allowance coverage of charge-offs (annualized)

     1.6        2.3        2.1     

Ending total loans(3)

   $ 118,058      $ 40,407      $ 171     

Average loans in repayment

   $ 87,256      $ 31,645      $ 179     

Ending loans in repayment

   $ 85,304      $ 31,533      $ 171     

 

  (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.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

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.

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, 2014     December 31, 2013  

(Dollars in millions)

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

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 36,822         93   $ 36,140         93

Non-Traditional(1)

     2,778         7        2,860         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,600         100   $ 39,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 27,084         68   $ 26,321         67

Without cosigner

     12,516         32        12,679         33   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,600         100   $ 39,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 5,305         13   $ 5,171         14

13-24 payments

     5,282         13        5,511         14   

25-36 payments

     5,186         13        5,506         14   

37-48 payments

     5,038         13        5,103         13   

More than 48 payments

     11,714         30        11,181         29   

Not yet in repayment

     7,075         18        6,528         16   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 39,600         100   $ 39,000         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 due.

 

(3) 

Balance represents gross Private Education Loans.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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,
2014
    December 31,
2013
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 13,016        $ 13,678     

Loans in forbearance(2)

     15,650          13,490     

Loans in repayment and percentage of each status:

        

Loans current

     62,721        85.9     63,330        82.8

Loans delinquent 31-60 days(3)

     3,059        4.2        3,746        4.9   

Loans delinquent 61-90 days(3)

     1,784        2.4        2,207        2.9   

Loans delinquent greater than 90 days(3)

     5,497        7.5        7,221        9.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     73,061        100     76,504        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     101,727          103,672     

FFELP Loan unamortized premium

     1,015          1,035     
  

 

 

     

 

 

   

Total FFELP Loans

     102,742          104,707     

FFELP Loan allowance for losses

     (107       (119  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 102,635        $ 104,588     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       71.8       73.8
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       14.2       17.2
    

 

 

     

 

 

 

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

       17.6       15.0
    

 

 

     

 

 

 

 

(1) 

Loans for customers who may still be attending school or engaging in other permitted educational activities and are not 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)

 

3. Allowance for Loan Losses (Continued)

 

      Private Education Traditional Loan
Delinquencies
 
      March 31,
2014
    December 31,
2013
 

(Dollars in millions)

       Balance             %             Balance             %      

Loans in-school/grace/deferment(1)

   $ 6,637        $ 6,088     

Loans in forbearance(2)

     1,069          969     

Loans in repayment and percentage of each status:

        

Loans current

     27,364        94.0     26,977        92.8

Loans delinquent 31-60 days(3)

     550        1.9        674        2.3   

Loans delinquent 61-90 days(3)

     353        1.2        420        1.4   

Loans delinquent greater than 90 days(3)

     849        2.9        1,012        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans in repayment

     29,116        100     29,083        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     36,822          36,140     

Traditional loans unamortized discount

     (609       (629  
  

 

 

     

 

 

   

Total traditional loans

     36,213          35,511     

Traditional loans receivable for partially charged-off loans

     795          799     

Traditional loans allowance for losses

     (1,583       (1,592  
  

 

 

     

 

 

   

Traditional loans, net

   $ 35,425        $ 34,718     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       79.1       80.5
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       6.0       7.2
    

 

 

     

 

 

 

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

       3.5       3.2
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not 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)

 

3. Allowance for Loan Losses (Continued)

 

      Private Education Non-Traditional Loan
Delinquencies
 
      March 31,
2014
    December 31,
2013
 

(Dollars in millions)

       Balance             %             Balance             %      

Loans in-school/grace/deferment(1)

   $ 438        $ 440     

Loans in forbearance(2)

     147          133     

Loans in repayment and percentage of each status:

        

Loans current

     1,792        81.7     1,791        78.3

Loans delinquent 31-60 days(3)

     105        4.8        128        5.6   

Loans delinquent 61-90 days(3)

     77        3.5        93        4.1   

Loans delinquent greater than 90 days(3)

     219        10.0        275        12.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans in repayment

     2,193        100     2,287        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     2,778          2,860     

Non-traditional loans unamortized discount

     (72       (75  
  

 

 

     

 

 

   

Total non-traditional loans

     2,706          2,785     

Non-traditional loans receivable for partially charged-off loans

     502          514     

Non-traditional loans allowance for losses

     (476       (505  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 2,732        $ 2,794     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       79.0       80.0
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       18.3       21.7
    

 

 

     

 

 

 

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

       6.3       5.5
    

 

 

     

 

 

 

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not 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 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 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 defaulted between 2008 and 2013 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 $334 million and $209 million in the allowance for Private Education Loan losses at March 31, 2014 and 2013, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

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

 

     Three Months Ended
March 31,
 

(Dollars in millions)

     2014         2013    

Receivable at beginning of period

   $ 1,313      $ 1,347   

Expected future recoveries of current period defaults(1)

     71        78   

Recoveries(2)

     (61     (68

Charge-offs(3)

     (26     (18
  

 

 

   

 

 

 

Receivable at end of period

     1,297        1,339   

Allowance for estimated recovery shortfalls(4)

     (334     (209
  

 

 

   

 

 

 

Net receivable at end of period

   $ 963      $ 1,130   
  

 

 

   

 

 

 

 

  (1) 

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

 

  (2) 

Current period cash recoveries.

 

  (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 $2.1 billion and $2.2 billion overall allowance for Private Education Loan losses as of March 31, 2014 and 2013, respectively.

Troubled Debt Restructurings (“TDRs”)

We 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 46 percent and 45 percent of the loans granted forbearance have qualified as a TDR loan at March 31, 2014 and December 31, 2013, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of March 31, 2014 and December 31, 2013 was $1.7 billion and $1.5 billion, respectively.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

At March 31, 2014 and December 31, 2013, 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, 2014

        

Private Education Loans — Traditional

   $ 7,800       $ 7,856       $ 852   

Private Education Loans — Non-Traditional

     1,441         1,439         229   
  

 

 

    

 

 

    

 

 

 

Total

   $ 9,241       $ 9,295       $ 1,081   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Private Education Loans — Traditional

   $ 7,515       $ 7,559       $ 812   

Private Education Loans — Non-Traditional

     1,434         1,427         236   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,949       $ 8,986       $ 1,048   
  

 

 

    

 

 

    

 

 

 

 

  (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,  
     2014      2013  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 7,631       $ 118       $ 6,185       $ 96   

Private Education Loans — Non-Traditional

     1,434         29         1,315         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,065       $ 147       $ 7,500       $ 123   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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, 2014     December 31, 2013  

(Dollars in millions)

   Balance      %       Balance          %    

Loans in deferment(1)

   $ 997         $ 913      

Loans in forbearance(2)

     786           740      

Loans in repayment and percentage of each status:

          

Loans current

     6,045         80.5     5,613         76.5

Loans delinquent 31-60 days(3)

     413         5.5        469         6.4   

Loans delinquent 61-90 days(3)

     286         3.8        330         4.5   

Loans delinquent greater than 90 days(3)

     768         10.2        921         12.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     7,512         100     7,333         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 9,295         $ 8,986      
  

 

 

      

 

 

    

 

(1) 

Deferment includes customers who have returned to school or are engaged in other permitted educational activities and are not required to make payments on the 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 modified loans that resulted in a TDR in the periods presented. 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,  
     2014      2013  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 466       $ 100       $ 119       $ 545       $ 97       $ 216   

Private Education Loans — Non-Traditional

     57         34         29         90         34         57   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 523       $ 134       $ 148       $ 635       $ 131       $ 273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans. The table also discloses the amount of accrued interest on loans greater than 90 days past due as compared to our allowance for uncollectible interest. The allowance for uncollectible interest exceeds the amount of accrued interest on our 90 days past due portfolio for all periods presented.

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater Than
90 Days
Past Due
     Allowance for
Uncollectible
Interest
 

March 31, 2014

        

Private Education Loans — Traditional

   $ 939       $ 29       $ 41   

Private Education Loans — Non-Traditional

     85         11         18   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,024       $ 40       $ 59   
  

 

 

    

 

 

    

 

 

 

December 31, 2013

        

Private Education Loans — Traditional

   $ 926       $ 35       $ 46   

Private Education Loans — Non-Traditional

     97         13         20   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,023       $ 48       $ 66   
  

 

 

    

 

 

    

 

 

 

 

4. Borrowings

The following table summarizes our borrowings.

 

     March 31, 2014      December 31, 2013  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 1,046       $ 16,836       $ 17,882       $ 2,213       $ 16,056       $ 18,269   

Bank deposits

     5,964         2,755         8,719         6,133         2,807         8,940   

Other(1)

     684                 684         691                 691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     7,694         19,591         27,285         9,037         18,863         27,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             90,608         90,608                 90,756         90,756   

Private Education Loan securitizations

             18,861         18,861                 18,835         18,835   

FFELP Loans — other facilities

     3,919         4,400         8,319         4,715         5,311         10,026   

Private Education Loans — other facilities

             597         597                 843         843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     3,919         114,466         118,385         4,715         115,745         120,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     11,613         134,057         145,670         13,752         134,608         148,360   

Hedge accounting adjustments

     13         2,120         2,133         43         2,040         2,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,626       $ 136,177       $ 147,803       $ 13,795       $ 136,648       $ 150,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Borrowings (Continued)

 

Variable Interest Entities

We consolidate the following financing VIEs as of March 31, 2014 and December 31, 2013, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

 

     March 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

   $       $ 90,608       $ 90,608       $ 91,299       $ 3,055       $ 700       $ 95,054   

Private Education Loan securitizations

             18,861         18,861         23,880         390         428         24,698   

FFELP Loans — other facilities

     1,694         4,137         5,831         6,081         157         73         6,311   

Private Education Loans — other facilities

             597         597         1,259         16         24         1,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     1,694         114,203         115,897         122,519         3,618         1,225         127,362   

Hedge accounting adjustments

             1,330         1,330                         938         938   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,694       $ 115,533       $ 117,227       $ 122,519       $ 3,618       $ 2,163       $ 128,300   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     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

   $       $ 90,756       $ 90,756       $ 91,535       $ 2,913       $ 683       $ 95,131   

Private Education Loan securitizations

             18,835         18,835         23,947         338         540         24,825   

FFELP Loans — other facilities

     3,655         3,791         7,446         7,719         128         91         7,938   

Private Education Loans — other facilities

             843         843         1,583         16         30         1,629   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     3,655         114,225         117,880         124,784         3,395         1,344         129,523   

Hedge accounting adjustments

             1,313         1,313                         978         978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,655       $ 115,538       $ 119,193       $ 124,784       $ 3,395       $ 2,322       $ 130,501   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in the Form 10 and the 2013 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in the Form 10 and the 2013 Form 10-K for a full discussion.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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, 2014 and December 31, 2013, and their impact on other comprehensive income and earnings for the three months ended March 31, 2014 and 2013.

Impact of Derivatives on Consolidated Balance Sheet

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

 

Hedged Risk
Exposure

  Mar. 31,
2014
    Dec. 31,
2013
    Mar. 31,
2014
    Dec. 31,
2013
    Mar. 31,
2014
    Dec. 31,
2013
    Mar. 31,
2014
    Dec. 31,
2013
 

Fair Values(1)

                 

Derivative Assets:

                 

Interest rate swaps

  Interest rate   $ 16      $ 24      $ 753      $ 738      $ 47      $ 61      $ 816      $ 823   

Cross-currency interest rate swaps

  Foreign currency &
interest rate
                  1,118        1,185                      1,118        1,185   

Other(2)

  Interest rate                                 1        2        1        2   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

      16        24        1,871        1,923        48        63        1,935        2,010   

Derivative Liabilities:

                 

Interest rate swaps

  Interest rate                   (110     (149     (180     (215     (290     (364

Floor Income Contracts

  Interest rate                                 (1,206     (1,384     (1,206     (1,384

Cross-currency interest rate swaps

  Foreign currency &
interest rate
                  (142     (155     (25     (31     (167     (186

Other(2)

  Interest rate                                 (4     (23     (4     (23
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

                    (252     (304     (1,415     (1,653     (1,667     (1,957
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

    $ 16      $ 24      $ 1,619      $ 1,619      $ (1,367   $ (1,590   $ 268      $ 53   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 and back-to-back private credit floors.

 

(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,
2014
     December 31,
2013
     March 31,
2014
    December 31,
2013
 

Gross position

   $ 1,935       $ 2,010       $ (1,667   $ (1,957

Impact of master netting agreements

     (342      (386      342        386   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     1,593         1,624         (1,325     (1,571

Cash collateral (held) pledged

     (683      (687      645        777   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net position

   $ 910       $ 937       $ (680   $ (794
  

 

 

    

 

 

    

 

 

   

 

 

 

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, 2014 and December 31, 2013 by $87 million and $91 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)

 

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, 2014 and December 31, 2013 by $82 million and $84 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   Mar. 31,
2014
     Dec. 31,
2013
     Mar. 31,
2014
     Dec. 31,
2013
     Mar. 31,
2014
     Dec. 31,
2013
     Mar. 31,
2014
     Dec. 31,
2013
 

Notional Values:

                       

Interest rate swaps

   $ .7       $ .7       $ 17.2       $ 16.0       $ 46.3       $ 46.3       $ 64.2       $ 63.0   

Floor Income Contracts

                                     27.2         31.8         27.2         31.8   

Cross-currency interest rate swaps

                     10.7         11.1         .4         .3         11.1         11.4   

Other(1)

                                     3.8         3.9         3.8         3.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ .7       $ .7       $ 27.9       $ 27.1       $ 77.7       $ 82.3       $ 106.3       $ 110.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

“Other” includes embedded derivatives bifurcated from securitization debt, as well as derivatives related to our Total Return Swap Facility and back to back private credit floors.

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)

   2014     2013     2014     2013     2014     2013      2014     2013  

Fair Value Hedges:

                 

Interest rate swaps

   $ 53      $ (172   $ 100      $ 109      $ (53   $ 195       $ 100      $ 132   

Cross-currency interest rate swaps

     (53     (556     22        21        7        552         (24     17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total fair value derivatives

            (728     122        130        (46     747         76        149   

Cash Flow Hedges:

                 

Interest rate swaps

                   (3     (3                    (3     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total cash flow derivatives

                   (3     (3                    (3     (3

Trading:

                 

Interest rate swaps

     19        (19     12        24                       31        5   

Floor Income Contracts

     181        189        (198     (213                    (17     (24

Cross-currency interest rate swaps

     7        (47     (1     20                       6        (27

Other

     19        (4     (1                           18        (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total trading derivatives

     226        119        (188     (169                    38        (50
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     226        (609     (69     (42     (46     747         111        96   

Less: realized gains (losses) recorded in interest expense

                   119        127                       119        127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ 226      $ (609   $ (188   $ (169   $ (46   $ 747       $ (8   $ (31
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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)

 

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,
2014
     December 31,
2013
 

Collateral held:

     

Cash (obligation to return cash collateral is recorded in short-term borrowings)(1)

   $ 683       $ 687   

Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements)(2)

     633         629   
  

 

 

    

 

 

 

Total collateral held

   $ 1,316       $ 1,316   
  

 

 

    

 

 

 

Derivative asset at fair value including accrued interest

   $ 1,824       $ 1,878   
  

 

 

    

 

 

 

Collateral pledged to others:

     

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

   $ 645       $ 777   
  

 

 

    

 

 

 

Total collateral pledged

   $ 645       $ 777   
  

 

 

    

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

   $ 769       $ 948   
  

 

 

    

 

 

 

 

(1) 

At March 31, 2014 and December 31, 2013, $0 and $0 million, respectively, were held in restricted cash accounts.

 

(2) 

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 $581 million with our counterparties. Further downgrades 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 recent unsecured credit rating downgrades. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $133 million and have posted $118 million of collateral to these counterparties. If these two counterparties exercised their right to terminate, we would be required to deliver additional assets of $15 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, 2014     December 31, 2013  

(Dollars in millions)

   Ending
Balance
     % of
Balance
    Ending
Balance
     % of
Balance
 

Accrued interest receivable, net

   $ 2,052         30   $ 2,161         30

Derivatives at fair value

     1,593         23        1,624         22   

Income tax asset, net current and deferred

     1,212         17        1,299         18   

Accounts receivable

     810         12        881         12   

Benefit and insurance-related investments

     480         7        477         7   

Fixed assets, net

     244         4        237         3   

Other loans, net

     96         1        101         1   

Other

     449         6        507         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 6,936         100   $ 7,287         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Stockholders’ Equity

The following table summarizes Existing SLM’s common share repurchases and issuances.

 

     Three Months Ended
March 31,
 
             2014                      2013          

Common shares repurchased(1)

     8,368,300         10,220,804   

Average purchase price per share(2)

   $ 23.89       $ 19.49   

Shares repurchased related to employee stock-based compensation plans(3)

     2,115,470         2,324,575   

Average purchase price per share

   $ 23.56       $ 18.11   

Common shares issued(4)

     4,238,182         4,157,795   

 

  (1) 

Common shares purchased under Existing SLM’s share repurchase program, of which $0 million remained available as of March 31, 2014.

 

  (2) 

Average purchase price per share includes purchase commission costs.

 

  (3) 

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.

 

  (4) 

Common shares issued under Existing SLM’s various compensation and benefit plans.

The closing price of Existing SLM’s common stock on March 31, 2014 was $24.48.

Dividend and Share Repurchase Program

In the first-quarter 2014, Existing SLM paid a common stock dividend of $0.15 per common share.

In the first-quarter 2014, Existing SLM repurchased 8 million shares of common stock for $200 million, fully utilizing Existing SLM’s July 2013 share repurchase program authorization. In 2013, Existing SLM repurchased 27 million shares for an aggregate purchase price of $600 million.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

8. 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)

       2014              2013      

Numerator:

     

Net income attributable to Navient Corporation

   $ 219       $ 346   

Preferred stock dividends

     5         5   
  

 

 

    

 

 

 

Net income attributable to Navient Corporation common stock

   $ 214       $ 341   
  

 

 

    

 

 

 

Denominator:

     

Weighted average shares used to compute basic EPS

     427         451   

Effect of dilutive securities:

     

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

     8         7   
  

 

 

    

 

 

 

Dilutive potential common shares(2)

     8         7   
  

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     435         458   
  

 

 

    

 

 

 

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

     

Continuing operations

   $ .50       $ .76   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .50       $ .76   
  

 

 

    

 

 

 

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

     

Continuing operations

   $ .49       $ .74   

Discontinued operations

               
  

 

 

    

 

 

 

Total

   $ .49       $ .74   
  

 

 

    

 

 

 

 

(1) 

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

 

(2) 

For the three months ended March 31, 2014 and 2013, securities covering approximately 3 million and 5 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

 

9. 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 the Form 10 and the 2013 Form 10-K for a full discussion.

During the three months ended March 31, 2014, 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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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. 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, 2014     December 31, 2013  

(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

  $      $ 129      $      $ 129      $      $ 102      $      $ 102   

Guaranteed investment contracts

                                                       

Other

           6               6               7               7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

           135               135               109               109   

Derivative instruments:(1)

               

Interest rate swaps

           784        32        816               785        38        823   

Cross-currency interest rate swaps

           1        1,117        1,118               27        1,158        1,185   

Other

                  1        1                      2        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

           785        1,150        1,935               812        1,198        2,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $      $ 920      $ 1,150      $ 2,070      $      $ 921      $ 1,198      $ 2,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities(2)

               

Derivative instruments(1)