10-Q 1 d743153d10q.htm 10-Q 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 June 30, 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: 001-36228

 

 

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.)

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, $0.01 par value

 

Outstanding at June 30, 2014

419,438,459 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      43   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      101   

Item 4.

   Controls and Procedures      105   

PART II. Other Information

  

Item 1.

   Legal Proceedings      106   

Item 1A.

   Risk Factors      107   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      108   

Item 3.

   Defaults Upon Senior Securities      108   

Item 4.

   Mine Safety Disclosures      108   

Item 5.

   Other Information      108   

Item 6.

   Exhibits      109   


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)

 

     June 30,
2014
    December 31,
2013
 

Assets

    

FFELP Loans (net of allowance for losses of $96 and $119, respectively)

   $ 99,730      $ 104,588   

Private Education Loans (net of allowance for losses of $1,983 and $2,097 respectively)

     30,324        37,512   

Investments

    

Available-for-sale

     7        109   

Other

     651        783   
  

 

 

   

 

 

 

Total investments

     658        892   

Cash and cash equivalents

     1,636        5,190   

Restricted cash and investments

     3,613        3,650   

Goodwill and acquired intangible assets, net

     373        424   

Other assets

     6,642        7,287   
  

 

 

   

 

 

 

Total assets

   $ 142,976      $ 159,543   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 4,316      $ 13,795   

Long-term borrowings

     131,919        136,648   

Other liabilities

     2,720        3,458   
  

 

 

   

 

 

 

Total liabilities

     138,955        153,901   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

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

    

Series A: 0 million and 3.3 million shares issued, respectively, at stated value of $50 per share

            165   

Series B: 0 million and 4 million shares issued, respectively, at stated value of $100 per share

            400   

Common stock, par value $0.01 and $0.20 per share, respectively, 1.125 billion shares authorized: 424 million and 545 million shares issued, respectively

     4        109   

Additional paid-in capital

     2,868        4,399   

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

     7        13   

Retained earnings

     1,224        2,584   
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity before treasury stock

     4,103        7,670   

Less: Common stock held in treasury at cost: 5 million and 116 million shares, respectively

     (82     (2,033
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity

     4,021        5,637   

Noncontrolling interest

            5   
  

 

 

   

 

 

 

Total equity

     4,021        5,642   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 142,976      $ 159,543   
  

 

 

   

 

 

 

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

 

     June 30,
2014
     December 31,
2013
 

FFELP Loans

   $ 95,604       $ 99,254   

Private Education Loans

     24,198         25,530   

Restricted cash and investments

     3,394         3,395   

Other assets

     2,184         2,322   

Short-term borrowings

             3,655   

Long-term borrowings

     114,711         115,538   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 10,669       $ 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
June 30,
    Six Months Ended
June 30,
 
         2014              2013             2014              2013      

Interest income:

          

FFELP Loans

   $ 631       $ 703      $ 1,278       $ 1,439   

Private Education Loans

     539         627        1,183         1,249   

Other loans

     2         3        4         6   

Cash and investments

     3         4        6         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     1,175         1,337        2,471         2,702   

Total interest expense

     513         553        1,042         1,123   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     662         784        1,429         1,579   

Less: provisions for loan losses

     165         201        350         442   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income after provisions for loan losses

     497         583        1,079         1,137   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other income (loss):

          

Gains on sales of loans and investments

             251                307   

Gains (losses) on derivative and hedging activities, net

     61         18        53         (13

Servicing revenue

     73         69        136         139   

Asset recovery revenue

     132         109        243         208   

Gains on debt repurchases

             19                42   

Other

     9         24        13         59   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other income

     275         490        445         742   
  

 

 

    

 

 

   

 

 

    

 

 

 

Expenses:

          

Salaries and benefits

     116         128        257         253   

Other operating expenses

     95         116        321         228   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expenses

     211         244        578         481   

Goodwill and acquired intangible asset impairment and amortization expense

     2         3        6         6   

Restructuring and other reorganization expenses

     61         23        87         34   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

     274         270        671         521   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     498         803        853         1,358   

Income tax expense

     191         299        328         509   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income from continuing operations

     307         504        525         849   

Income from discontinued operations, net of tax expense

             38        1         39   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     307         542        526         888   

Less: net loss attributable to noncontrolling interest

             (1             (1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to Navient Corporation

     307         543        526         889   

Preferred stock dividends

     2         5        6         10   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income attributable to Navient Corporation common stock

   $ 305       $ 538      $ 520       $ 879   
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic earnings per common share attributable to Navient Corporation:

          

Continuing operations

   $ .72       $ 1.14      $ 1.22       $ 1.88   

Discontinued operations

             .08                .09   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ .72       $ 1.22      $ 1.22       $ 1.97   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average common shares outstanding

     422         440        424         445   
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

          

Continuing operations

   $ .71       $ 1.12      $ 1.20       $ 1.85   

Discontinued operations

             .08                .09   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ .71       $ 1.20      $ 1.20       $ 1.94   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average common and common equivalent shares outstanding

     430         448        432         453   
  

 

 

    

 

 

   

 

 

    

 

 

 

Dividends per common share attributable to Navient Corporation

   $ .15       $ .15      $ .30       $ .30   
  

 

 

    

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

2


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2014             2013             2014             2013      

Net income

   $ 307      $ 542      $ 526      $ 888   

Other comprehensive income (loss):

        

Unrealized gains (losses) on derivatives:

        

Unrealized hedging gains (losses) on derivatives

     (4     22        (15     23   

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

     1        2        4        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses) on derivatives

     (3     24        (11     28   

Unrealized gain (losses) on investments

     3        (3     3        (4

Income tax (expense) benefit

            (8     2        (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

            13        (6     15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     307        555        520        903   

Less: comprehensive loss attributable to noncontrolling interest

            (1            (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to Navient Corporation

   $ 307      $ 556      $ 520      $ 904   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 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   

Comprehensive income:

                         

Net income (loss)

                                                            543               543        (1     542   

Other comprehensive income, net of tax

                                                     13                      13               13   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          556        (1     555   

Cash dividends:

                         

Common stock ($.15 per share)

                                                            (66            (66            (66

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

                                                            (3            (3            (3

Preferred stock, series B ($.52 per share)

                                                            (2            (2            (2

Issuance of common shares

           4,115,424               4,115,424               1        50                             51               51   

Tax benefit related to employee stock-based compensation plans

                                              4                             4               4   

Stock-based compensation expense

                                              10                             10               10   

Common stock repurchased

                  (9,096,144     (9,096,144                                        (201     (201            (201

Shares repurchased related to employee stock-based compensation plans

                  (3,040,788     (3,040,788                                        (68     (68            (68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    7,300,000        543,781,184        (107,592,332     436,188,852      $ 565      $ 109      $ 4,355      $ 9      $ 2,195      $ (1,804   $ 5,429      $ 5      $ 5,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   

Comprehensive income:

                         

Net income (loss)

                                                            307               307               307   

Other comprehensive income, net of tax

                                                                                          
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          307               307   

Cash dividends:

                         

Common stock ($.15 per share)

                                                            (63            (63            (63

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

                                                            (1            (1            (1

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

                                                            (1            (1            (1

Issuance of common shares

           1,867,844               1,867,844               (81     94                             13               13   

Retirement of common stock in treasury

           (126,963,268     126,963,268                      (25     (2,263                   2,288                        

Tax benefit related to employee stock-based compensation plans

                                              1                             1               1   

Stock-based compensation expense

                                              10                             10               10   

Common stock repurchased

                  (3,862,214     (3,862,214                                        (65     (65            (65

Shares repurchased related to employee stock-based compensation plans

                  (1,270,458     (1,270,458                                        (22     (22            (22

Deconsolidation of subsidiary

                                                                                 (5     (5

Distribution of consumer banking business

    (7,300,000                          (565            565               (1,751            (1,751            (1,751
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

           424,353,699        (4,915,240     419,438,459      $      $ 4      $ 2,868      $ 7      $ 1,224      $ (82   $ 4,021      $      $ 4,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


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)

                                                            889               889        (1     888   

Other comprehensive income, net of tax

                                                     15                      15               15   
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          904        (1     903   

Cash dividends:

                         

Common stock ($.30 per share)

                                                            (134            (134            (134

Preferred stock, series A ($1.74 per share)

                                                            (6            (6            (6

Preferred stock, series B ($1.01 per share)

                                                            (4            (4            (4

Dividend equivalent units related to employee stock-based compensation plans

                                                            (1            (1            (1

Issuance of common shares

           8,273,219               8,273,219               2        84                             86               86   

Tax benefit related to employee stock-based compensation plans

                                              5                             5               5   

Stock-based compensation expense

                                              29                             29               29   

Common stock repurchased

                  (19,316,948     (19,316,948                                        (400     (400            (400

Shares repurchased related to employee stock-based compensation plans

                  (5,365,363     (5,365,363                                        (110     (110            (110
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    7,300,000        543,781,184        (107,592,332     436,188,852      $ 565      $ 109      $ 4,355      $ 9      $ 2,195      $ (1,804   $ 5,429      $ 5      $ 5,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

                                                            526               526               526   

Other comprehensive income, net of tax

                                                     (6                   (6            (6
                     

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                                          520               520   

Cash dividends:

                         

Common stock ($.30 per share)

                                                            (127            (127            (127

Preferred stock, series A ($1.74 per share)

                                                            (4            (4            (4

Preferred stock, series B ($.98 per share)

                                                            (2            (2            (2

Dividend equivalent units related to employee stock-based compensation plans

                                                            (2            (2            (2

Issuance of common shares

           6,106,026               6,106,026               (80     127                             47               47   

Retirement of common stock in treasury

           (126,963,268     126,963,268                      (25     (2,263                   2,288                        

Tax benefit related to employee stock-based compensation plans

                                              12                             12               12   

Stock-based compensation expense

                                              28                             28               28   

Common stock repurchased

                  (12,230,514     (12,230,514                                        (265     (265            (265

Shares repurchased related to employee stock-based compensation plans

                  (3,385,928     (3,385,928                                        (72     (72            (72

Deconsolidation of subsidiary

                                                                                 (5     (5

Distribution of consumer banking business

    (7,300,000                          (565            565               (1,751            (1,751            (1,751
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

           424,353,699        (4,915,240     419,438,459      $      $ 4      $ 2,868      $ 7      $ 1,224      $ (82   $ 4,021      $      $ 4,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Six Months Ended June 30,  
             2014                     2013          

Operating activities

    

Net income

   $ 526      $ 888   

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

    

Income from discontinued operations, net of tax

     (1     (39

Gains on loans and investments, net

            (307

Gains on debt repurchases

            (42

Goodwill and acquired intangible asset impairment and amortization expense

     6        6   

Stock-based compensation expense

     28        29   

Unrealized (gains) losses on derivative and hedging activities

     (397     (330

Provisions for loan losses

     350        442   

Increase in restricted cash — other

     (45     (3

Decrease (increase) in accrued interest receivable

     63        (42

(Decrease) increase in accrued interest payable

     (32     6   

Decrease in other assets

     177        504   

Increase (decrease) in other liabilities

     437        (198
  

 

 

   

 

 

 

Cash provided by operating activities — continuing operations

     1,112        914   
  

 

 

   

 

 

 

Cash provided by operating activities — discontinued operations

     1        40   
  

 

 

   

 

 

 

Total net cash provided by operating activities

     1,113        954   
  

 

 

   

 

 

 

Investing activities

    

Student loans acquired and originated

     (2,917     (2,078

Reduction of student loans:

    

Installment payments, claims and other

     6,005        6,265   

Proceeds from sales of student loans

            707   

Other investing activities, net

     108        115   

Purchases of available-for-sale securities

     (28     (24

Proceeds from maturities of available-for-sale securities

     3        20   

Purchases of other securities

     (104     (144

Proceeds from maturities of other securities

     107        133   

Decrease in restricted cash — variable interest entities

     54        611   
  

 

 

   

 

 

 

Total net cash provided by investing activities

     3,228        5,605   
  

 

 

   

 

 

 

Financing activities

    

Distribution of consumer banking business

     (2,217       

Borrowings collateralized by loans in trust — issued

     3,393        6,187   

Borrowings collateralized by loans in trust — repaid

     (6,108     (6,439

Asset-backed commercial paper conduits, net

     (2,243     4,349   

ED Conduit Program facility, net

            (9,551

Other long-term borrowings issued

     834        1,489   

Other long-term borrowings repaid

     (2,040     (2,296

Other financing activities, net

     158        (766

Retail and other deposits, net

     726        439   

Common stock repurchased

     (265     (400

Common stock dividends paid

     (127     (134

Preferred stock dividends paid

     (6     (10
  

 

 

   

 

 

 

Net cash used in financing activities

     (7,895     (7,132
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (3,554     (573

Cash and cash equivalents at beginning of period

     5,190        3,900   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,636      $ 3,327   
  

 

 

   

 

 

 

Cash disbursements made (refunds received) for:

    

Interest

   $ 1,005      $ 1,121   
  

 

 

   

 

 

 

Income taxes paid

   $ 192      $ 282   
  

 

 

   

 

 

 

Income taxes received

   $ (70   $ (18
  

 

 

   

 

 

 

Noncash activity:

    

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

   $      $ (11,802
  

 

 

   

 

 

 

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

   $      $ (12,084
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2014 and for the three and six months ended

June 30, 2014 and 2013 is unaudited)

 

1. The Separation

Presentation of Information

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to:

 

   

“We,” “our,” “us,” or the “Company” with respect to any period on or prior to the date of the Spin-Off refers to Old 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 refers to Navient and its consolidated subsidiaries.

 

   

“Old SLM” refers to SLM Corporation, as it existed prior to the Spin-Off, and its consolidated subsidiaries. As part of an internal corporate reorganization of Old SLM, Old SLM was merged into a limited liability company and became a subsidiary of Navient, changing its name to “Navient, LLC.”

 

   

Navient’s historical business and operations refer to Old SLM’s portfolio of FFELP and Private Education Loans not held by Sallie Mae Bank, together with the servicing and asset recovery businesses that were retained by or transferred to Navient in connection with the internal corporate reorganization.

 

   

“SLM BankCo” refers to New BLC Corporation, which became the publicly traded successor to Old SLM on April 29, 2014 by virtue of a merger pursuant to Section 251(g) of the Delaware General Corporation Law (“DGCL”), and its consolidated subsidiaries. Following consummation of the merger, New BLC Corporation changed its name to SLM Corporation. After the Spin-Off, SLM BankCo’s business consists primarily of the consumer banking business previously operated by Old SLM, which includes Sallie Mae Bank and its portfolio of Private Education Loans, a new Private Education Loan servicing business and the Upromise Rewards business.

 

   

“Spin-Off” collectively refers to the internal reorganization of Old SLM on April 29, 2014 and the distribution on April 30, 2014 of all of the shares of common stock of Navient to the holders of shares of SLM BankCo.

Spin-Off of Navient

On April 30, 2014, the previously announced separation of Navient from SLM BankCo was completed. The separation was effected through the distribution by SLM BankCo of all the shares of common stock of Navient, on a one-to-one basis, to the holders of shares of SLM BankCo common stock as of the close of business on April 22, 2014, the record date for the distribution. As a result of the distribution, Navient is an independent, publicly traded company that operates the education loan management, servicing and asset recovery business previously operated by Old SLM. Navient is comprised primarily of Old SLM’s portfolios of education loans that were not held in Sallie Mae Bank at the time of the separation, as well as servicing and asset recovery activities on those loans and loans held by third parties. The consumer banking business, SLM BankCo, is comprised primarily of Sallie Mae Bank and its Private Education Loan origination business, the Private Education Loans it holds and a related servicing business.

To implement the separation and distribution of Navient, an internal corporate reorganization of Old SLM was effected, pursuant to which, on April 29, 2014, SLM BankCo replaced Old SLM as the parent holding company pursuant to a holding company merger. In accordance with Section 251(g) of the DGCL, by action of the Old SLM board of directors and without a shareholder vote, Old SLM was merged into Navient, LLC, a wholly owned subsidiary of Old SLM, with Navient, LLC surviving. Immediately following the effective time of the merger, SLM BankCo changed its name to “SLM Corporation.” As part of the internal corporate reorganization and pursuant to the merger, all of the outstanding shares of Old SLM Series A preferred stock and

 

7


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

1. The Separation (Continued)

 

Series B preferred stock were converted, on a one-to-one basis, into substantially identical shares of SLM BankCo preferred stock. 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 were transferred to SLM BankCo. The Spin-Off is intended to be tax-free and on July 9, 2014, Navient received a private letter ruling from the Internal Revenue Service confirming the tax-free status of the Spin-Off and the related internal reorganization transactions. For further information on the Spin-Off and all related matters, please refer to our Registration Statement on Form 10, as amended (our “Form 10”), filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2014, and declared effective on April 14, 2014.

Due to the relative significance of Navient to Old SLM, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to Old SLM, notwithstanding the legal form of the Spin-Off. As a result, the historical financial statements of Old SLM prior to the distribution on April 30, 2014 are the historical financial statements of Navient. For that reason the historical financial information related to periods on or prior to April 30, 2014 contained in this Quarterly Report on Form 10-Q is that of Old SLM, which includes the consolidated results of both the loan management, servicing and asset recovery business (Navient) and the consumer banking business (SLM BankCo).

Since Navient is the “accounting spinnor,” the financial statements of Navient reflect the deemed distribution of SLM BankCo to SLM BankCo’s stockholders on April 30, 2014, notwithstanding the legal form of the Spin-Off in which Navient common stock was distributed to the stockholders of SLM BankCo.

The following table shows the condensed balance sheet of SLM BankCo that the financial statements of Navient reflect as a shareholder distribution on April 30, 2014:

 

(Dollars in millions)

   April 30, 2014  

Assets

  

FFELP Loans, net

   $ 1,380   

Private Education Loans, net

     7,204   

Investments

     139   

Cash and cash equivalents

     2,170   

Other assets

     883   
  

 

 

 

Total assets

   $ 11,776   
  

 

 

 

Liabilities

  

Short-term borrowings

   $ 6,491   

Long-term borrowings

     2,750   

Other liabilities

     825   
  

 

 

 

Total liabilities

     10,066   
  

 

 

 

Equity

  

Preferred stock

  

Series A

     165   

Series B

     400   

Common equity

     1,145   
  

 

 

 

Total equity(1)

     1,710   
  

 

 

 

Total liabilities and equity

   $ 11,776   
  

 

 

 

 

  (1) 

In addition to the $1,710 million of consumer banking business net assets distributed, we also removed $41 million of goodwill from our balance sheet as required under Accounting Standards Codification (“ASC”) 350, “Intangibles—Goodwill and Other,” in connection with the distribution. This goodwill was allocated to the consumer banking business based on relative fair value. This total of $1,751 million is the amount that appears on our consolidated statement of changes in stockholders’ equity in connection with the deemed distribution of the consumer banking business.

 

8


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 and six month periods ended June 30, 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 our Form 10. Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our Form 10.

Consolidation

In the first six months of 2013, we sold Residual Interests in FFELP Loan securitization trusts to third parties. We continue to service the student loans in the trust under existing agreements. Prior to the sale of the Residual Interests, we had consolidated the trusts as VIEs 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 Interests, we are no longer the residual holder, thus we determined we no longer met criterion (2) above and deconsolidated the trusts. As a result of these transactions, we removed securitization trust assets of $12.5 billion and the related liabilities of $12.1 billion from the balance sheet and recorded a $312 million gain as part of “gains on sales of loans and investments” for the six months ended June 30, 2013.

Goodwill

We account for goodwill in accordance with the applicable accounting guidance. Under this guidance, goodwill is not amortized but is tested periodically for impairment. We test goodwill for impairment annually as of October 1 at the reporting unit level, which is the same as or one level below a business segment. Goodwill is also tested at interim periods if an event occurs or circumstances change that would indicate the carrying amount may be impaired.

As a result of the separation of Navient from SLM BankCo, we assessed relevant qualitative factors impacting the reporting units that have goodwill, including the FFELP Loans, Private Education Loans, Servicing and Asset Recovery reporting units, to determine whether it is “more-likely-than-not” that the fair values of the individual reporting units, after taking into account the distribution of the consumer banking business, are less than their individual carrying values. The “more-likely-than-not” threshold is defined in the guidance as having a likelihood of more than 50 percent. Based on this qualitative assessment, we determined that it is “more-likely-than-not” that the fair values of the FFELP Loans, Private Education Loans, Servicing and Asset Recovery reporting units exceed their carrying values. Accordingly, no further impairment assessment is warranted in accordance with the applicable guidance.

 

9


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

2. Significant Accounting Policies (Continued)

 

Reclassifications

Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2013 to be consistent with classifications adopted for 2014, and had no effect on net income, total assets, or total liabilities.

Recently Issued Accounting Pronouncements

Revenue Recognition

On May 28, 2014, the Financial Accounting Standards Board 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 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. See the table in “Note 1 — The Separation” which shows the related asset and liabilities that were deemed to be distributed. 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 June 30, 2014 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.

 

10


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

Allowance for Loan Losses Metrics

 

     Three Months Ended June 30, 2014  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

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

Total provision

     10        155               165   

Charge-offs(1)

     (15     (166     (1     (182

Reclassification of interest reserve(2)

            4               4   

Distribution of SLM BankCo

     (6     (69            (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 26      $ 2,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,063      $ 20      $ 1,083   

Ending balance: collectively evaluated for impairment

   $ 96      $ 920      $ 6      $ 1,022   

Loans:

        

Ending balance: individually evaluated for impairment(3)

   $      $ 10,015      $ 43      $ 10,058   

Ending balance: collectively evaluated for impairment(3)

   $ 98,837      $ 22,966      $ 74      $ 121,877   

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

     .08     2.33     3.73  

Allowance as a percentage of the ending total loan balance

     .10     6.01     21.91  

Allowance as a percentage of the ending loans in repayment

     .13     7.31     21.91  

Allowance coverage of charge-offs (annualized)

     1.6        3.0        5.7     

Ending total loans(3)

   $ 98,837      $ 32,981      $ 117     

Average loans in repayment

   $ 72,621      $ 28,599      $ 119     

Ending loans in repayment

   $ 72,114      $ 27,136      $ 117     

 

  (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.

 

11


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

     Three Months Ended June 30, 2013  

(Dollars in millions)

   FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

        

Beginning balance

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

Total provision

     14        187               201   

Charge-offs(1)

     (20     (212     (7     (239

Student loan sales

     (8                   (8

Reclassification of interest reserve(2)

            4               4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 133      $ 2,149      $ 35      $ 2,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,181      $ 26      $ 1,207   

Ending balance: collectively evaluated for impairment

   $ 133      $ 968      $ 9      $ 1,110   

Loans:

        

Ending balance: individually evaluated for impairment(3)

   $      $ 8,416      $ 57      $ 8,473   

Ending balance: collectively evaluated for impairment(3)

   $ 107,538      $ 31,601      $ 96      $ 139,235   

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

     .10     2.69     17.57  

Allowance as a percentage of the ending total loan balance

     .12     5.37     22.93  

Allowance as a percentage of the ending loans in repayment

     .17     6.80     22.93  

Allowance coverage of charge-offs (annualized)

     1.7        2.5        1.2     

Ending total loans(3)

   $ 107,538      $ 40,017      $ 153     

Average loans in repayment

   $ 81,423      $ 31,618      $ 161     

Ending loans in repayment

   $ 77,063      $ 31,627      $ 153     

 

  (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)

 

3. Allowance for Loan Losses (Continued)

 

     Six Months Ended June 30, 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

     20        330               350   

Charge-offs(1)

     (37     (385     (2     (424

Reclassification of interest reserve(2)

            10               10   

Distribution of SLM BankCo

     (6     (69            (75
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 26      $ 2,105   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,063      $ 20      $ 1,083   

Ending balance: collectively evaluated for impairment

   $ 96      $ 920      $ 6      $ 1,022   

Loans:

        

Ending balance: individually evaluated for impairment(3)

   $      $ 10,015      $ 43      $ 10,058   

Ending balance: collectively evaluated for impairment(3)

   $ 98,837      $ 22,966      $ 74      $ 121,877   

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

     .10     2.59     3.67  

Allowance as a percentage of the ending total loan balance

     .10     6.01     21.91  

Allowance as a percentage of the ending loans in repayment

     .13     7.31     21.91  

Allowance coverage of charge-offs (annualized)

     1.3        2.6        5.7     

Ending total loans(3)

   $ 98,837      $ 32,981      $ 117     

Average loans in repayment

   $ 73,056      $ 29,999      $ 123     

Ending loans in repayment

   $ 72,114      $ 27,136      $ 117     

 

  (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)

 

3. Allowance for Loan Losses (Continued)

 

     Six Months Ended June 30, 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

     30        412               442   

Charge-offs(1)

     (42     (444     (12     (498

Student loan sales

     (14                   (14

Reclassification of interest reserve(2)

            10               10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 133      $ 2,149      $ 35      $ 2,317   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

        

Ending balance: individually evaluated for impairment

   $      $ 1,181      $ 26      $ 1,207   

Ending balance: collectively evaluated for impairment

   $ 133      $ 968      $ 9      $ 1,110   

Loans:

        

Ending balance: individually evaluated for impairment(3)

   $      $ 8,416      $ 57      $ 8,473   

Ending balance: collectively evaluated for impairment(3)

   $ 107,538      $ 31,601      $ 96      $ 139,235   

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

     .10     2.83     14.11  

Allowance as a percentage of the ending total loan balance

     .12     5.37     22.93  

Allowance as a percentage of the ending loans in repayment

     .17     6.80     22.93  

Allowance coverage of charge-offs (annualized)

     1.6        2.4        1.5     

Ending total loans(3)

   $ 107,538      $ 40,017      $ 153     

Average loans in repayment

   $ 84,323      $ 31,631      $ 170     

Ending loans in repayment

   $ 77,063      $ 31,627      $ 153     

 

  (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)

 

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
 
     June 30, 2014     December 31, 2013  

(Dollars in millions)

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

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 29,042         92   $ 36,140         93

Non-Traditional(1)

     2,670         8        2,860         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,712         100   $ 39,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 20,133         64   $ 26,321         67

Without cosigner

     11,579         36        12,679         33   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,712         100   $ 39,000         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 3,012         9   $ 5,171         14

13-24 payments

     4,082         13        5,511         14   

25-36 payments

     4,576         14        5,506         14   

37-48 payments

     4,640         15        5,103         13   

More than 48 payments

     12,027         38        11,181         29   

Not yet in repayment

     3,375         11        6,528         16   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 31,712         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  
      June 30,
2014
    December 31,
2013
 

(Dollars in millions)

       Balance             %             Balance             %      

Loans in-school/grace/deferment(1)

   $ 11,794        $ 13,678     

Loans in forbearance(2)

     14,929          13,490     

Loans in repayment and percentage of each status:

        

Loans current

     61,438        85.2     63,330        82.8

Loans delinquent 31-60 days(3)

     3,531        4.9        3,746        4.9   

Loans delinquent 61-90 days(3)

     2,112        2.9        2,207        2.9   

Loans delinquent greater than 90 days(3)

     5,033        7.0        7,221        9.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     72,114        100     76,504        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     98,837          103,672     

FFELP Loan unamortized premium

     989          1,035     
  

 

 

     

 

 

   

Total FFELP Loans

     99,826          104,707     

FFELP Loan allowance for losses

     (96       (119  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 99,730        $ 104,588     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       73.0       73.8
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       14.8       17.2
    

 

 

     

 

 

 

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

       17.2       15.0
    

 

 

     

 

 

 

 

(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)

 

3. Allowance for Loan Losses (Continued)

 

      Private Education Traditional Loan
Delinquencies
 
      June 30,
2014
    December 31,
2013
 

(Dollars in millions)

       Balance             %             Balance             %      

Loans in-school/grace/deferment(1)

   $ 3,036        $ 6,088     

Loans in forbearance(2)

     1,059          969     

Loans in repayment and percentage of each status:

        

Loans current

     23,367        93.7     26,977        92.8

Loans delinquent 31-60 days(3)

     561        2.2        674        2.3   

Loans delinquent 61-90 days(3)

     322        1.3        420        1.4   

Loans delinquent greater than 90 days(3)

     697        2.8        1,012        3.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans in repayment

     24,947        100     29,083        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     29,042          36,140     

Traditional loans unamortized discount

     (605       (629  
  

 

 

     

 

 

   

Total traditional loans

     28,437          35,511     

Traditional loans receivable for partially charged-off loans

     782          799     

Traditional loans allowance for losses

     (1,546       (1,592  
  

 

 

     

 

 

   

Traditional loans, net

   $ 27,673        $ 34,718     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       85.9       80.5
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       6.3       7.2
    

 

 

     

 

 

 

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

       4.1       3.2
    

 

 

     

 

 

 

 

(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)

 

3. Allowance for Loan Losses (Continued)

 

      Private Education Non-Traditional
Loan Delinquencies
 
      June 30,
2014
    December 31,
2013
 

(Dollars in millions)

       Balance             %             Balance             %      

Loans in-school/grace/deferment(1)

   $ 339        $ 440     

Loans in forbearance(2)

     142          133     

Loans in repayment and percentage of each status:

        

Loans current

     1,835        83.8     1,791        78.3

Loans delinquent 31-60 days(3)

     109        5.0        128        5.6   

Loans delinquent 61-90 days(3)

     69        3.2        93        4.1   

Loans delinquent greater than 90 days(3)

     176        8.0        275        12.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans in repayment

     2,189        100     2,287        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     2,670          2,860     

Non-traditional loans unamortized discount

     (69       (75  
  

 

 

     

 

 

   

Total non-traditional loans

     2,601          2,785     

Non-traditional loans receivable for partially charged-off loans

     487          514     

Non-traditional loans allowance for losses

     (437       (505  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 2,651        $ 2,794     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       82.0       80.0
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       16.2       21.7
    

 

 

     

 

 

 

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

       6.1       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 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 2007 and 2014 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 $402 million and

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

$217 million in the allowance for Private Education Loan losses at June 30, 2014 and 2013, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans (see “Private Education Loans Segment — Private Education Loan Provision for Loan Losses” for a further discussion).

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Receivable at beginning of period

   $ 1,297      $ 1,339      $ 1,313      $ 1,347   

Expected future recoveries of current period defaults(1)

     53        70        124        148   

Recoveries(2)

     (58     (54     (119     (122

Charge-offs(3)

     (23     (21     (49     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Receivable at end of period

     1,269        1,334        1,269        1,334   

Allowance for estimated recovery shortfalls(4)

     (402     (217     (402     (217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net receivable at end of period

   $ 867      $ 1,117      $ 867      $ 1,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (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 $2.0 billion and $2.1 billion overall allowance for Private Education Loan losses as of June 30, 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 48 percent and 45 percent of the loans granted forbearance have qualified as a TDR loan at June 30, 2014 and December 31, 2013, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of June 30, 2014 and December 31, 2013 was $2.0 billion and $1.5 billion, respectively.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

3. Allowance for Loan Losses (Continued)

 

At June 30, 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
 

June 30, 2014

        

Private Education Loans — Traditional

   $ 8,187       $ 8,249       $ 841   

Private Education Loans — Non-Traditional

     1,463         1,463         222   
  

 

 

    

 

 

    

 

 

 

Total

   $ 9,650       $ 9,712       $ 1,063   
  

 

 

    

 

 

    

 

 

 

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 June 30,  
     2014      2013  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 8,002       $ 122       $ 6,556       $ 100   

Private Education Loans — Non-Traditional

     1,451         29         1,351         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,453       $ 151       $ 7,907       $ 127   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     2014      2013  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 7,818       $ 240       $ 6,371       $ 196   

Private Education Loans — Non-Traditional

     1,442         58         1,333         54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,260       $ 298       $ 7,704       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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  
     June 30, 2014     December 31, 2013  

(Dollars in millions)

   Balance      %       Balance            %      

Loans in deferment(1)

   $ 851         $ 913      

Loans in forbearance(2)

     846           740      

Loans in repayment and percentage of each status:

          

Loans current

     6,682         83.3     5,613         76.5

Loans delinquent 31-60 days(3)

     432         5.4        469         6.4   

Loans delinquent 61-90 days(3)

     270         3.4        330         4.5   

Loans delinquent greater than 90 days(3)

     631         7.9        921         12.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     8,015         100     7,333         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 9,712         $ 8,986      
  

 

 

      

 

 

    

 

(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 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 June 30,  
     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

   $ 533       $ 74       $ 102       $ 491       $ 84       $ 159   

Private Education Loans — Non-Traditional

     59         23         23         75         31         45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 592       $ 97       $ 125       $ 566       $ 115       $ 204   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     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

   $ 999       $ 174       $ 221       $ 1,036       $ 181       $ 375   

Private Education Loans — Non-Traditional

     116         57         52         165         65         101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,115       $ 231       $ 273       $ 1,201       $ 246       $ 476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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
 

June 30, 2014

        

Private Education Loans — Traditional

   $ 558       $ 25       $ 36   

Private Education Loans — Non-Traditional

     75         9         13   
  

 

 

    

 

 

    

 

 

 

Total

   $ 633       $ 34       $ 49   
  

 

 

    

 

 

    

 

 

 

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.

 

     June 30, 2014      December 31, 2013  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 1,189       $ 16,311       $ 17,500       $ 2,213       $ 16,056       $ 18,269   

Bank deposits

                             6,133         2,807         8,940   

Other(1)

     912                 912         691                 691   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     2,101         16,311         18,412         9,037         18,863         27,900   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             89,036         89,036                 90,756         90,756   

Private Education Loan securitizations

             18,190         18,190                 18,835         18,835   

FFELP Loan — other facilities

     2,190         5,573         7,763         4,715         5,311         10,026   

Private Education Loan — other facilities

             565         565                 843         843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     2,190         113,364         115,554         4,715         115,745         120,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

     4,291         129,675         133,966         13,752         134,608         148,360   

Hedge accounting adjustments

     25         2,244         2,269         43         2,040         2,083   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,316       $ 131,919       $ 136,235       $ 13,795       $ 136,648       $ 150,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

22


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

4. Borrowings (Continued)

 

Variable Interest Entities

We consolidated the following financing VIEs as of June 30, 2014 and December 31, 2013, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

 

     June 30, 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

   $       $ 89,036       $ 89,036       $ 89,746       $ 2,959       $ 711       $ 93,416   

Private Education Loan securitizations

             18,190         18,190         22,955         329         409         23,693   

FFELP Loans — other facilities

             5,573         5,573         5,858         92         75         6,025   

Private Education Loans — other facilities

             565         565         1,243         14         23         1,280   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total before hedge accounting adjustments

             113,364         113,364         119,802         3,394         1,218         124,414   

Hedge accounting adjustments

             1,347         1,347                         966         966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $ 114,711       $ 114,711       $ 119,802       $ 3,394       $ 2,184       $ 125,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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 our Form 10. Please refer to “Note 7 — Derivative Financial Instruments” in our Form 10 for a full discussion.

 

23


Table of Contents

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 June 30, 2014 and December 31, 2013, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2014 and 2013.

Impact of Derivatives on Consolidated Balance Sheet

 

        Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

 

Hedged Risk
Exposure

  June 30,
2014
    Dec. 31,
2013
    June 30,
2014
    Dec. 31,
2013
    June 30,
2014
    Dec. 31,
2013
    June 30,
2014
    Dec. 31,
2013
 

Fair Values(1)

                 

Derivative Assets:

                 

Interest rate swaps

  Interest rate   $      $ 24      $ 813      $ 738      $ 50      $ 61      $ 863      $ 823   

Cross-currency interest rate swaps

  Foreign currency &
interest rate
                  1,072        1,185                      1,072        1,185   

Other(2)

  Interest rate                                 1        2        1        2   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

             24        1,885        1,923        51        63        1,936        2,010   

Derivative Liabilities:

                 

Interest rate swaps

  Interest rate                   (53     (149     (149     (215     (202     (364

Floor Income Contracts

  Interest rate                                 (1,077     (1,384     (1,077     (1,384

Cross-currency interest rate swaps

  Foreign currency &
interest rate
                  (33     (155     (17     (31     (50     (186

Other(2)

  Interest rate                                 (7     (23     (7     (23
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

                    (86     (304     (1,250     (1,653     (1,336     (1,957
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net total derivatives

    $      $ 24      $ 1,799      $ 1,619      $ (1,199   $ (1,590   $ 600      $ 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)

   June 30,
2014
     December 31,
2013
     June 30,
2014
    December 31,
2013
 

Gross position

   $ 1,936       $ 2,010       $ (1,336   $ (1,957

Impact of master netting agreements

     (284      (386      284        386   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     1,652         1,624         (1,052     (1,571

Cash collateral (held) pledged

     (912      (687      646        777   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net position

   $ 740       $ 937       $ (406   $ (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.

 

24


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Derivative Financial Instruments (Continued)

 

The net adjustments decreased the overall net asset positions at June 30, 2014 and December 31, 2013 by $75 million and $91 million, respectively. In addition, the above fair values reflect adjustments for illiquid 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 June 30, 2014 and December 31, 2013 by $77 million and $84 million, respectively.

 

     Cash Flow      Fair Value      Trading      Total  

(Dollars in billions)

   June 30,
2014
     Dec. 31,
2013
     June 30,
2014
     Dec. 31,
2013
     June 30,
2014
     Dec. 31,
2013
     June 30,
2014
     Dec. 31,
2013
 

Notional Values:

                       

Interest rate swaps

   $       $ 0.7       $ 14.6       $ 16.0       $ 44.1       $ 46.3       $ 58.7       $ 63.0   

Floor Income Contracts

                                     27.2         31.8         27.2         31.8   

Cross-currency interest rate swaps

                     9.6         11.1         0.4         0.3         10.0         11.4   

Other(1)

                                     4.0         3.9         4.0         3.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $       $ 0.7       $ 24.2       $ 27.1       $ 75.7       $ 82.3       $ 99.9       $ 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 June 30,  
     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

   $ 112      $ (404   $ 99      $ 104      $ (112   $ 443      $ 99      $ 143   

Cross-currency interest rate swaps

     63        34        16        26        (17     (80     62        (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value derivatives

     175        (370     115        130        (129     363        161        123   

Cash Flow Hedges:

                

Interest rate swaps

                   (1     (2                   (1     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow derivatives

                   (1     (2                   (1     (2

Trading:

                

Interest rate swaps

     34        (58     12        14                      46        (44

Floor Income Contracts

     132        297        (166     (198                   (34     99   

Cross-currency interest rate swaps

     7        (32     (1     10                      6        (22

Other

     (3     (8                                 (3     (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total trading derivatives

     170        199        (155     (174                   15        25   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     345        (171     (41     (46     (129     363        175        146   

Less: realized gains (losses) recorded in interest expense

                   114        128                      114        128   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ 345      $ (171   $ (155   $ (174   $ (129   $ 363      $ 61      $ 18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.”

 

25


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

5. Derivative Financial Instruments (Continued)

 

     Six Months Ended June 30,  
     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

   $ 166       $ (576   $ 199      $ 214      $ (165   $ 638       $ 200      $ 276   

Cross-currency interest rate swaps

     9         (522     38        46        (9     473         38        (3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total fair value derivatives

     175         (1,098     237        260        (174     1,111         238        273   

Cash Flow Hedges:

                  

Interest rate swaps

                    (3     (5                    (3     (5
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total cash flow derivatives

                    (3     (5                    (3     (5

Trading:

                  

Interest rate swaps

     53         (77     23        37                       76        (40

Floor Income Contracts

     313         486        (365     (411                    (52     75   

Cross-currency interest rate swaps

     14         (79     (1     31                       13        (48

Other

     16         (13     (1                           15        (13
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total trading derivatives

     396         317        (344     (343                    52        (26
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     571         (781     (110     (88     (174     1,111         287        242   

Less: realized gains (losses) recorded in interest expense

                    234        255                       234        255   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Gains (losses) on derivative and hedging activities, net

   $ 571       $ (781   $ (344   $ (343   $ (174   $ 1,111       $ 53      $ (13
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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.”

 

26


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)

   June 30,
2014
     December 31,
2013
 

Collateral held:

     

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

   $ 912       $ 687   

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

     502         629   
  

 

 

    

 

 

 

Total collateral held

   $ 1,414       $ 1,316   
  

 

 

    

 

 

 

Derivative asset at fair value including accrued interest

   $ 1,951       $ 1,878   
  

 

 

    

 

 

 

Collateral pledged to others:

     

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

   $ 646       $ 777   
  

 

 

    

 

 

 

Total collateral pledged

   $ 646       $ 777   
  

 

 

    

 

 

 

Derivative liability at fair value including accrued interest and premium receivable

   $ 670       $ 948   
  

 

 

    

 

 

 

 

(1) 

At June 30, 2014 and December 31, 2013, $62 million 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 $563 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 current unsecured credit rating. We currently have a liability position with these derivative counterparties (including accrued interest and net of premiums receivable) of $120 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 $2 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.

 

     June 30, 2014     December 31, 2013  

(Dollars in millions)

   Ending
Balance
     % of
Balance
    Ending
Balance
     % of
Balance
 

Accrued interest receivable, net

   $ 1,683         25   $ 2,161         30

Derivatives at fair value

     1,652         25        1,624         22   

Income tax asset, net current and deferred

     1,493         23        1,299         18   

Accounts receivable

     654         10        881         12   

Benefit and insurance-related investments

     483         7        477         7   

Fixed assets, net

     159         2        237         3   

Other loans, net

     91         1        101         1   

Other

     427         7        507         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 6,642         100   $ 7,287         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

27


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

7. Stockholders’ Equity

The following table summarizes common share repurchases and issuances by Navient and Old SLM.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
             2014                      2013                      2014                      2013          

Common shares repurchased(1)

     3,862,214         9,096,144         12,230,514         19,316,948   

Average purchase price per share(2)

   $ 16.81       $ 22.12       $ 21.65       $ 20.72   

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

     1,270,458         3,040,788         3,385,928         5,365,363   

Average purchase price per share

   $ 17.75       $ 22.35       $ 21.38       $ 20.51   

Common shares issued(4)

     1,867,844         4,115,424         6,106,026         8,273,219   

 

  (1) 

Common shares purchased under board approved share repurchase programs. In May 2014, Navient authorized $400 million to be utilized in a new common share repurchase program, of which $335 million remained available as of June 30, 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 our various compensation and benefit plans.

The closing price of our common stock on June 30, 2014 was $17.71.

In April 2014, in connection with the Spin-Off, Old SLM retired 127 million shares of common stock held in treasury. This retirement decreased the balance in treasury stock by $2.3 billion, with corresponding decreases of $25 million in common stock and $2.3 billion in additional paid-in capital. There was no impact to total equity from this retirement.

The par value of Navient common stock is $0.01 per share, while the par value of the common stock of Old SLM, our accounting predecessor, was $0.20 per share.

Dividend and Share Repurchase Program

In June 2014, we paid a common stock dividend of $0.15 per share.

In May 2014, we authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. We repurchased 3.9 million shares of common stock for $65 million in the second quarter of 2014.

 

28


Table of Contents

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
June 30,
     Six Months Ended
June 30,
 

(In millions, except per share data)

       2014              2013              2014              2013      

Numerator:

           

Net income attributable to Navient Corporation

   $ 307       $ 543       $ 526       $ 889   

Preferred stock dividends

     2         5         6         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Navient Corporation common stock

   $ 305       $ 538       $ 520       $ 879   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Weighted average shares used to compute basic EPS

     422         440         424         445   

Effect of dilutive securities:

           

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

     8         8         8         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dilutive potential common shares(2)

     8         8         8         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used to compute diluted EPS

     430         448         432         453   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Continuing operations

   $ .72       $ 1.14       $ 1.22       $ 1.88   

Discontinued operations

             .08                 .09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ .72       $ 1.22       $ 1.22       $ 1.97   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Continuing operations

   $ .71       $ 1.12       $ 1.20       $ 1.85   

Discontinued operations

             .08                 .09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ .71       $ 1.20       $ 1.20       $ 1.94   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 June 30, 2014 and 2013, securities covering approximately 3 million and 4 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive. For the six months ended June 30, 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. Stock-Based Compensation Plans and Arrangements

In connection with the Spin-Off, SLM BankCo assumed the equity incentive plans of Old SLM and outstanding awards granted thereunder. Following the Spin-Off, Navient established a new equity incentive plan with respect to its common stock. In order to maintain the intrinsic value of outstanding equity awards prior to the distribution, certain adjustments to the exercise price and number of awards were made. In general, holders of awards granted prior to 2014 received both adjusted SLM BankCo and new Navient equity awards, and holders of awards granted in 2014 received solely equity awards of their post-distribution employer. Outstanding stock options, restricted stock, restricted stock units and dividend equivalent units were adjusted into equity in the new companies by a specific conversion ratio per company, which was based upon the volume weighted average prices for each company leading up to the time of the separation, to keep the intrinsic value of the equity awards

 

29


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

9. Stock-Based Compensation Plans and Arrangements (Continued)

 

constant. These adjustments were accounted for as modifications to the original awards. In general, the SLM BankCo and Navient awards are subject to substantially the same terms and conditions as the original Old SLM awards. A comparison of the fair value of the modified awards with the fair value of the original awards immediately before the modification resulted in an immaterial amount of incremental compensation expense which was recorded immediately.

 

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 Form 10 for a full discussion.

During the three and six months ended June 30, 2014, there were no significant transfers of financial instruments between levels, or changes in our methodology or assumptions used to value our financial instruments.

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  
    June 30, 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

  $  —      $ 1      $      $ 1      $  —      $ 102      $      $ 102   

Guaranteed investment contracts

                                                       

Other

           6               6               7               7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale investments

           7               7               109               109   

Derivative instruments:(1)

               

Interest rate swaps

           824        39        863               785        38        823   

Cross-currency interest rate swaps

           1        1,071        1,072               27        1,158        1,185   

Other

                  1        1                      2        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

           825        1,111        1,936               812        1,198        2,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $  —      $ 832      $ 1,111      $ 1,943      $  —      $ 921      $ 1,198      $ 2,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities(2)

               

Derivative instruments(1)

               

Interest rate swaps

  $  —      $ (89   $ (113   $ (202   $      $ (239   $ (125   $ (364

Floor Income Contracts

           (1,077            (1,077            (1,384            (1,384

Cross-currency interest rate swaps

           (21     (29     (50            (35     (151     (186

Other

                  (7     (7                   (23     (23
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities(3)

           (1,187     (149     (1,336            (1,658     (299     (1,957
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $  —      $ (1,187   $ (149   $ (1,336   $  —      $ (1,658   $ (299   $ (1,957
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

30


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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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 June 30,  
    2014     2013  
    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

  $ (87   $ 980      $ (3   $ 890      $ (76   $ 470      $      $ 394   

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

               

Included in earnings(1)

    13        77        (3     87        (10     48        (8     30   

Included in other comprehensive income

                                                       

Settlements

           (15            (15     (2     (32     (7     (41

Transfers in and/or out of level 3

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ (74   $ 1,042      $ (6   $ 962      $ (88   $ 486      $ (15   $ 383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 13      $ (30   $ (3   $ (20   $ (12   $ 61      $ (10   $ 39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Six Months Ended June 30,  
    2014     2013  
    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

  $ (87   $ 1,007      $ (21   $ 899      $ (73   $ 1,053      $ 4      $ 984   

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

               

Included in earnings(1)

    13        67        14        94        (4     (499     (13     (516

Included in other comprehensive income

                                                       

Settlements

           (32     1        (31     (11     (68     (6     (85

Transfers in and/or out of level 3

                                                       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

  $ (74   $ 1,042      $ (6   $ 962      $ (88   $ 486      $ (15   $ 383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 13      $ (65   $ 15      $ (37   $ (15   $ (430   $ (12   $ (457
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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
June 30,
     Six Months Ended
June 30,
 

(Dollars in millions)

       2014              2013              2014              2013      

Gains (losses) on derivative and hedging activities, net

   $ 73       $ 9       $ 62       $ (553

Interest expense

     14         21         32         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 87       $ 30       $ 94       $ (516
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

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

 

31


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

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
June 30, 2014
    Valuation
Technique
    Input   Range
(Weighted Average)

Derivatives

       

Consumer Price Index/
LIBOR basis swaps

  $ 35        Discounted cash flow      Bid/ask adjustment

to discount rate

  0.08% — 0.02%

(0.04%)

Prime/LIBOR basis
swaps

    (109     Discounted cash flow      Constant prepayment rate   4.5%
      Bid/ask adjustment to
discount rate
  0.08% — 0.08%

(0.08%)

Cross-currency interest
rate swaps

    1,042        Discounted cash flow      Constant prepayment rate   2.6%

Other

    (6      
 

 

 

       

Total

  $ 962         
 

 

 

       

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 you increase the term. The opposite is true for an increase in the input.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

10. Fair Value Measurements (Continued)

 

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

 

    June 30, 2014     December 31, 2013  

(Dollars in millions)

  Fair
Value
    Carrying
Value
    Difference     Fair
Value
    Carrying
Value
    Difference  

Earning assets

           

FFELP Loans

  $ 100,517      $ 99,730      $ 787      $ 104,481      $ 104,588      $ (107

Private Education Loans

    30,941        30,324        617        37,485        37,512        (27

Cash and investments(1)

    5,907        5,907               9,732        9,732          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

    137,365        135,961        1,404        151,698        151,832        (134
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities

           

Short-term borrowings

    4,312        4,316        4        13,807        13,795        (12

Long-term borrowings

    130,909        131,919        1,010        133,578        136,648        3,070   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    135,221        136,235        1,014        147,385        150,443        3,058   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative financial instruments

           

Floor Income Contracts

    (1,077     (1,077            (1,384     (1,384       

Interest rate swaps

    661        661               459        459          

Cross-currency interest rate swaps

    1,022        1,022               999        999          

Other

    (6     (6            (21     (21       
     

 

 

       

 

 

 

Excess of net asset fair value over carrying value

      $ 2,418          $ 2,924   
     

 

 

       

 

 

 

 

(1) 

“Cash and investments” includes available-for-sale investments that consist of investments that are primarily agency securities whose cost basis is $6 million and $113 million at June 30, 2014 and December 31, 2013, respectively, versus a fair value of $7 million and $109 million at June 30, 2014 and December 31, 2013, respectively.

 

11. Commitments and Contingencies

On May 2, 2014, Navient Solutions, Inc. (“NSI”) (formerly Sallie Mae, Inc.), 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 previously disclosed 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 Navient and SLM BankCo on May 13, 2014, required each of Sallie Mae Bank and 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 is responsible for funding the restitution reserve account. We funded the account in May 2014.

The NSI Order requires 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 have already been implemented. In order to treat all customers in a similar manner, NSI will voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank on the same basis and in the same manner as that which would be required by the FDIC. These refunds are estimated at $42 million.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Commitments and Contingencies (Continued)

 

With respect to alleged civil violations of the SCRA, NSI and Sallie Mae Bank have entered into a consent order with the DOJ, in its capacity as the agency having primary authority for enforcement of such matters. 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 requires NSI to fund a $60 million settlement fund, which would represent the total amount of compensation due to service members under the DOJ agreement and pay $55,000 in civil money penalties. The DOJ Order is currently on the docket of the United States District Court in Delaware awaiting Court approval.

As of December 31, 2013, a reserve of $65 million was established for estimated amounts and costs that were probable of being incurred for the FDIC and DOJ matters discussed above. In the first quarter of 2014, an additional reserve of $103 million was recorded for pending regulatory matters based on the progression of settlement discussions with the regulators and as a result, as of March 31, 2014, the related regulatory reserve was $168 million. The final cost of these proceedings remains uncertain until the DOJ Order is approved by the Court and all of the work under the various consent orders has been completed.

NSI has also received Civil Investigative Demands (“CIDs”) 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 relating to these matters and is cooperating with the investigation. We are not in a position at this time to predict the duration or outcome of this investigation and reserves have not been established for this matter.

Navient has received CIDs issued by the State of Illinois Office of Attorney General and the State of Washington Office of Attorney General and continues to cooperate with multiple state Attorneys General in connection with these investigations. According to the CIDs, the investigation was 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. Navient is cooperating with this investigation. We are not in a position at this time to predict the duration or the outcome of this investigation and reserves have not been established for this matter.

Pursuant to the Separation Agreement entered into in connection with the Spin-Off, 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. Please see our Form 10 for a discussion of these indemnifications. As a result, all liabilities arising out of the aforementioned regulatory matters, 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 retained $165 million of the $168 million total regulatory reserve in connection with the Spin-Off. There are no additional reserves Navient has related to other indemnification matters with SLM BankCo as of June 30, 2014.

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.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

11. Commitments and Contingencies (Continued)

 

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.

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, Navient acquires and finances FFELP Loans. Even though FFELP Loans are no longer originated, we continue to seek to acquire FFELP Loan portfolios to leverage our servicing scale to 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 cash as the portfolio amortizes.

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

 

(Dollars in millions)

   June 30, 2014      December 31, 2013  

FFELP Loans, net

   $ 99,730       $ 104,588   

Cash and investments(1)

     3,793         4,473   

Other

     2,855         3,587   
  

 

 

    

 

 

 

Total assets

   $ 106,378       $ 112,648   
  

 

 

    

 

 

 

 

  (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 seek to acquire Private Education Loan portfolios to leverage our servicing scale to 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)

   June 30, 2014      December 31, 2013  

Private Education Loans, net

   $ 30,324       $ 37,512   

Cash and investments(1)

     105         2,555   

Other

     2,901         2,934   
  

 

 

    

 

 

 

Total assets

   $ 33,330       $ 43,001   
  

 

 

    

 

 

 

 

  (1) 

Includes restricted cash and investments.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

Business Services Segment

Our Business Services segment generates the majority of its revenue from servicing our FFELP Loan portfolio. We also provide servicing and asset recovery services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED.

At June 30, 2014 and December 31, 2013, the Business Services segment had total assets of $503 million and $892 million, respectively, on a GAAP basis.

Other Segment

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

At June 30, 2014 and December 31, 2013, the Other segment had total assets of $2.8 billion and $3.0 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 the consumer banking business (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. 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 resulting in unrealized, mark-to-market gains/losses; and

 

  3. The accounting for goodwill and acquired intangible assets.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

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, rating agencies, lenders and investors to assess performance.

Old SLM’s definition of “Core Earnings” did not exclude the financial results attributable to the operations of the consumer banking business and related restructuring and reorganization expense incurred in connection with the Spin-Off. In the second quarter of 2014, in connection with the Spin-Off, Navient included this additional adjustment as a part of “Core Earnings” to allow better comparability of Navient’s results to pre-Spin-Off historical periods. All “Core Earnings” financial results for prior periods in this Quarterly Report on Form 10-Q have been restated to conform to Navient’s revised definition of “Core Earnings.”

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

Segment Results and Reconciliations to GAAP

 

    Quarter Ended June 30, 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

  $ 522      $ 490      $      $      $      $ 1,012      $ 166      $ (8   $ 158      $ 1,170   

Other loans

                         2               2                             2   

Cash and investments

    1                      1               2               1        1        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    523        490               3               1,016        166        (7     159        1,175   

Total interest expense

    291        173               30               494        12        7        19        513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    232        317               (27            522        154        (14     140        662   

Less: provisions for loan losses

    10        145                             155               10        10        165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    222        172               (27            367        154        (24     130        497   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    15        7        166               (115     73                             73   

Asset recovery revenue

                  132                      132                             132   

Gains on debt repurchases

                                                                     

Other income

                  1        8               9        (154     215        61        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    15        7        299        8        (115     214        (154     215        61        275   

Expenses:

                   

Direct operating expenses

    121        42        93        2        (115     143               11        11        154   

Overhead expenses

                         52               52               5        5        57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    121        42        93        54        (115     195               16        16        211   

Goodwill and acquired intangible asset impairment and amortization

                                                     2        2        2   

Restructuring and other reorganization expenses

                                                     61        61        61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    121        42        93        54        (115     195               79        79        274   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    116        137        206        (73            386               112        112        498   

Income tax expense (benefit)(3)

    44        51        76        (26            145               46        46        191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    72        86        130        (47   $        241               66        66        307   

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

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    72        86        130        (47   $        241               66        66        307   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 72      $ 86      $ 130      $ (47   $      $ 241      $      $ 66      $ 66      $ 307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Quarter Ended June 30, 2014  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 35       $ 95       $       $ 130   

Total other income

     6         55                 61   

Operating expenses

     16                         16   

Goodwill and acquired intangible asset impairment and amortization

                     2         2   

Restructuring and other reorganization expenses

     61                         61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (36    $ 150       $ (2      112   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              46   
           

 

 

 

Net income

            $ 66   
           

 

 

 

 

(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)

 

12. Segment Reporting (Continued)

 

    Quarter Ended June 30, 2013  

(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

  $ 573      $ 513      $      $      $      $ 1,086      $ 198      $ 46      $ 244      $ 1,330   

Other loans

                         3               3                             3   

Cash and investments

    2                      1               3               1        1        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    575        513               4               1,092        198        47        245        1,337   

Total interest expense

    319        187               10               516        13        24        37        553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    256        326               (6            576        185        23        208        784   

Less: provisions for loan losses

    13        189                             202               (1     (1     201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    243        137               (6            374        185        24        209        583   

Other income (loss):

                   

Gains on sales of loans and investments

    257                      (6            251                             251   

Servicing revenue

    16        10        180               (137     69                             69   

Asset recovery revenue

                  109                      109                             109   

Gains on debt repurchases

                         19               19                             19   

Other income

                                              (185     227        42        42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    273        10        289        13        (137     448        (185     227        42        490   

Expenses:

                   

Direct operating expenses

    143        51        88        3        (137     148               38        38        186   

Overhead expenses

                         37               37               21        21        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    143        51        88        40        (137     185               59        59        244   

Goodwill and acquired intangible asset impairment and amortization

                                                     3        3        3   

Restructuring and other reorganization expenses

                                                     23        23        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    143        51        88        40        (137     185               85        85        270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    373        96        201        (33            637               166        166        803   

Income tax expense (benefit)(3)

    135        35        72        (13            229               70        70        299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    238        61        129        (20   $        408               96        96        504   

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

                  39                      39               (1     (1     38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    238        61        168        (20   $        447               95        95        542   

Less: net loss attributable to noncontrolling interest

                                                     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 238      $ 61      $ 168      $ (20   $      $ 447      $      $ 96      $ 96      $ 543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Quarter Ended June 30, 2013  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired

Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 100       $ 109       $       $ 209   

Total other income

     8         34                 42   

Operating expenses

     59                         59   

Goodwill and acquired intangible asset impairment and amortization

                     3         3   

Restructuring and other reorganization expenses

     23                         23   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 26       $ 143       $ (3      166   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              70   

Income (loss) from discontinued operations

              (1

Net loss attributable to noncontrolling interest

              (1
           

 

 

 

Net income

            $ 96   
           

 

 

 

 

(3) 

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

 

39


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

    Six Months Ended June 30, 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

  $ 1,033      $ 985      $      $      $      $ 2,018      $ 365      $ 78      $ 443      $ 2,461   

Other loans

                         5               5               (1     (1     4   

Cash and investments

    2                      2               4               2        2        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,035        985               7               2,027        365        79        444        2,471   

Total interest expense

    578        358               55               991        22        29        51        1,042   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    457        627               (48            1,036        343        50        393        1,429   

Less: provisions for loan losses

    20        281                             301               49        49        350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    437        346               (48            735        343        1        344        1,079   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    26        8        335               (233     136                             136   

Asset recovery revenue

                  243                      243                             243   

Gains on debt repurchases

                                                                     

Other income

                         11               11        (343     398        55        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    26        8        578        11        (233     390        (343     398        55        445   

Expenses:

                   

Direct operating expenses

    245        98        188        115        (233     413               36        36        449   

Overhead expenses

                         101               101               28        28        129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    245        98        188        216        (233     514               64        64        578   

Goodwill and acquired intangible asset impairment and amortization

                                                     6        6        6   

Restructuring and other reorganization expenses

                                                     87        87        87   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    245        98        188        216        (233     514               157        157        671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    218        256        390        (253            611               242        242        853   

Income tax expense (benefit)(3)

    83        95        146        (95            229               99        99        328   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    135        161        244        (158   $        382               143        143        525   

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

                  1                      1                             1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    135        161        245        (158   $        383               143        143        526   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 135      $ 161      $ 245      $ (158   $      $ 383      $      $ 143      $ 143      $ 526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Six Months Ended June 30, 2014  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired

Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 136       $ 208       $       $ 344   

Total other income

     14         41                 55   

Operating expenses

     64                         64   

Goodwill and acquired intangible asset impairment and amortization

                     6         6   

Restructuring and other reorganization expenses

     87                         87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (1    $ 249       $ (6      242   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              99   
           

 

 

 

Net income

            $ 143   
           

 

 

 

 

(3) 

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

 

40


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

    Six Months Ended June 30, 2013  

(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

  $ 1,163      $ 1,013      $      $      $      $ 2,176      $ 410      $ 102      $ 512      $ 2,688   

Other loans

                         6               6                             6   

Cash and investments

    4                      2               6               2        2        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,167        1,013               8               2,188        410        104        514        2,702   

Total interest expense

    654        371               25               1,050        31        42        73        1,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    513        642               (17            1,138        379        62        441        1,579   

Less: provisions for loan losses

    29        394                             423               19        19        442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    484        248               (17            715        379        43        422        1,137   

Other income (loss):

                   

Gains on sales of loans and investments

    312                      (5            307                             307   

Servicing revenue

    39        19        366        1        (286     139                             139   

Asset recovery revenue

                  208                      208                             208   

Gains on debt repurchases

                         48               48        (6            (6     42   

Other income

                                              (373     419        46        46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    351        19        574        44        (286     702        (379     419        40        742   

Expenses:

                   

Direct operating expenses

    300        97        173        5        (286     289               70        70        359   

Overhead expenses

                         78               78               44        44        122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    300        97        173        83        (286     367               114        114        481   

Goodwill and acquired intangible asset impairment and amortization

                                                     6        6        6   

Restructuring and other reorganization expenses

                                                     34        34        34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    300        97        173        83        (286     367               154        154        521   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    535        170        401        (56            1,050               308        308        1,358   

Income tax expense (benefit)(3)

    194        62        146        (21            381               128        128        509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    341        108        255        (35   $        669               180        180        849   

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

                  40                      40               (1     (1     39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    341        108        295        (35   $        709               179        179        888   

Less: net loss attributable to noncontrolling interest

                                                     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 341      $ 108      $ 295      $ (35   $      $ 709      $      $ 180      $ 180      $ 889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired

Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 194       $ 228       $       $ 422   

Total other income

     16         24                 40   

Operating expenses

     114                         114   

Goodwill and acquired intangible asset impairment and amortization

                     6         6   

Restructuring and other reorganization expenses

     34                         34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 62       $ 252       $ (6      308   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              128   

Income (loss) from discontinued operations

              (1

Net loss attributable to noncontrolling interest

              (1
           

 

 

 

Net income

            $ 180   
           

 

 

 

 

(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

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

12. Segment Reporting (Continued)

 

Summary of “Core Earnings” Adjustments to GAAP

 

     Three Months Ended
June  30,
    Six Months Ended
June  30,
 

(Dollars in millions)

       2014             2013             2014             2013      

“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)

   $ (36   $ 26      $ (1   $ 62   

Net impact of derivative accounting(2)

     150        143        249        252   

Net impact of goodwill and acquired intangibles assets(3)

     (2     (3     (6     (6

Net tax effect(4)

     (46     (70     (99     (128
  

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 66      $ 96      $ 143      $ 180   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)

SLM BankCo’s operations and restructuring and reorganization expense in connection with the Spin-Off: For “Core Earnings,” we assume 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 Old SLM 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 are removed as SLM BankCo succeeded Old SLM 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 Registration Statement on Form 10, as amended (our “Form 10”), filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2014, and declared effective on April 14, 2014.

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 this Quarterly Report on Form 10-Q, our Form 10 and our subsequent filings with the 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; 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, including those of third-party vendors; damage to our reputation; failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business; risks associated with the recently completed 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 Form 10.

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.

Presentation of Information

Unless the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 Old 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.

 

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Table of Contents
   

“Old SLM” refers to SLM Corporation, as it existed prior to the Spin-Off, and its consolidated subsidiaries. As part of an internal corporate reorganization of Old SLM, Old SLM was merged into a limited liability company and became a subsidiary of Navient, changing its name to “Navient, LLC.”

 

   

Navient’s historical business and operations refer to Old SLM’s portfolio of FFELP and Private Education Loans not held by Sallie Mae Bank, together with the servicing and asset recovery businesses that were retained by or transferred to Navient in connection with the internal corporate reorganization.

 

   

“SLM BankCo” refers to New BLC Corporation, which became the publicly traded successor to Old SLM on April 29, 2014 by virtue of a merger pursuant to Section 251(g) of the Delaware General Corporation Law (“DGCL”), and its consolidated subsidiaries. Following consummation of the merger, New BLC Corporation changed its name to SLM Corporation. After the Spin-Off, SLM BankCo’s business consists primarily of the consumer banking business previously operated by Old SLM, which includes Sallie Mae Bank and its portfolio of Private Education Loans, a new Private Education Loan servicing business and the Upromise Rewards business.

 

   

“Spin-Off” collectively refers to the internal reorganization of Old SLM on April 29, 2014 and the distribution of all of the shares of common stock of Navient to the holders of shares of SLM BankCo on April 30, 2014.

Spin-Off of Navient

On April 30, 2014, the previously announced separation of Navient from SLM BankCo was completed. The separation was effected through the distribution by SLM BankCo, on a one-to-one basis, of all the shares of common stock of Navient to the holders of shares of SLM Bank Co common stock, as of the close of business on April 22, 2014, the record date for the distribution. As a result of the distribution, Navient is an independent, publicly traded company that operates the education loan management, servicing and asset recovery business previously operated by Old SLM. Navient is comprised primarily of Old SLM’s portfolios of education loans that were not held in Sallie Mae Bank at the time of the separation, as well as servicing and asset recovery activities on those loans and loans held by third parties. The consumer banking business, SLM BankCo, is comprised primarily of Sallie Mae Bank and its Private Education Loan origination business, the Private Education Loans it holds and a related servicing business.

To implement the separation and distribution of Navient, an internal corporate reorganization of Old SLM was effected, pursuant to which, on April 29, 2014, SLM BankCo replaced Old SLM as the parent holding company pursuant to a holding company merger. In accordance with Section 251(g) of the DGCL, by action of the Old SLM board of directors and without a shareholder vote, Old SLM was merged into Navient, LLC, a wholly owned subsidiary of Old SLM, with Navient, LLC surviving. Immediately following the effective time of the merger, SLM BankCo changed its name to “SLM Corporation.” As part of the internal corporate reorganization and pursuant to the merger, all of the outstanding shares of Old SLM Series A preferred stock and Series B preferred stock were converted, on a one-to-one basis, into substantially identical shares of SLM BankCo preferred stock. 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 were transferred to SLM BankCo. The Spin-Off is intended to be tax-free and on July 9, 2014, Navient received a private letter ruling from the Internal Revenue Service confirming the tax-free status of the Spin-Off and the related internal reorganization transactions. For further information on the Spin-Off and all related matters, please refer to our Form 10.

Due to the relative significance of Navient to Old SLM, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to Old SLM, notwithstanding the legal form of the Spin-Off. As a result, the historical financial statements of Old SLM prior to the distribution on April 30, 2014 are the historical financial statements of Navient. For that reason the historical financial information related to periods on or prior to April 30, 2014 contained in this Quarterly Report on Form 10-Q is that of Old SLM, which includes the consolidated results of both the loan management, servicing and asset recovery business (Navient) and the consumer banking business (SLM BankCo). Since

 

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Navient is 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, notwithstanding the legal form of the Spin-Off in which Navient common stock was distributed to the stockholders of SLM BankCo.

The following table shows the condensed balance sheet of SLM BankCo that the financial statements of Navient reflect as a shareholder distribution on April 30, 2014:

 

(Dollars in millions)

   April 30, 2014  

Assets

  

FFELP Loans, net

   $ 1,380   

Private Education Loans, net

     7,204   

Investments

     139   

Cash and cash equivalents

     2,170   

Other assets

     883   
  

 

 

 

Total assets

   $ 11,776   
  

 

 

 

Liabilities

  

Short-term borrowings

   $ 6,491   

Long-term borrowings

     2,750   

Other liabilities

     825   
  

 

 

 

Total liabilities

     10,066   
  

 

 

 

Equity

  

Preferred stock

  

Series A

     165   

Series B

     400   

Common equity

     1,145   
  

 

 

 

Total equity(1)

     1,710   
  

 

 

 

Total liabilities and equity

   $ 11,776   
  

 

 

 

 

  (1) 

In addition to the $1,710 million of consumer banking business net assets distributed, we also removed $41 million of goodwill from our balance sheet as required under ASC 350 in connection with the distribution. This goodwill was allocated to the consumer banking business based on relative fair value. This total of $1,751 million is the amount that appears on our consolidated statement of changes in stockholders’ equity in connection with the deemed distribution of the consumer banking business.

Navient’s Business

Navient is a loan management, servicing and asset recovery company.

Navient holds the largest portfolio of education loans insured or guaranteed under the FFELP, as well as the largest portfolio of Private Education Loans. FFELP Loans are insured or guaranteed by state or not-for-profit agencies and are also protected by contractual rights to recovery from the United States pursuant to guaranty agreements among ED and these agencies. Private Education Loans are education loans to students or their families that are non-federal loans and not insured or guaranteed under FFELP. Private Education Loans bear the full credit risk of the customer and any cosigner and 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. As of June 30, 2014 approximately 86 percent of the FFELP Loans and 59 percent of the Private Education Loans held by Navient were funded to term with non-recourse, long-term securitization debt through the use of securitization trusts.

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”). It provides asset recovery services on its own portfolio (consisting of both education loans as well as other asset classes), and for guaranty agencies (which serve as intermediaries between the U.S. federal

 

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government and FFELP lenders and are responsible for paying claims on defaulted FFELP Loans), ED and other clients.

As of June 30, 2014, Navient’s principal assets consisted of:

 

   

$99.7 billion in FFELP Loans, with a student loan spread of 0.98 percent for the quarter ended June 30, 2014 on a “Core Earnings” basis and a weighted average life of 7.6 years;

 

   

$30.3 billion in Private Education Loans, with a student loan spread of 4.10 percent for the quarter ended June 30, 2014 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 FFELP Loan, DSLP loan and Private Education Loan customers (including cosigners), including 5.8 million customer accounts serviced under Navient’s contract with ED; and

 

   

a leading student loan asset recovery platform with an outstanding inventory of contingent asset recovery receivables of approximately $16.3 billion, of which approximately $13.5 billion was student loans and the remainder was other debt.

Navient’s Strengths and Opportunities

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

Large, high quality asset base with predictable cash flows. At June 30, 2014, Navient’s $130 billion student loan portfolio is 80 percent funded to term and is expected to produce consistent and predictable cash flows over the remaining life of the portfolio. Navient’s $100 billion portfolio of FFELP Loans bears a maximum three-percent loss exposure due to the federal guarantee. Navient’s $30 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 more than 12 million customers with over $300 billion of loans. 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 Education and other loan portfolios.

Superior operating performance. Navient has demonstrated superior default prevention performance and industry leading asset recovery services. Navient ranks first in cumulative default prevention performance according to an analysis of ED’s servicing contract results statistics since the start of the contract in 2009. Federal loan customers with loans serviced by Navient default at a rate 30 percent lower than the national average. Navient prides itself on a robust compliance culture driven by a “customer first” approach.

Strong capital return. As a result of the significant cash flow and capital generation, Navient expects to return excess capital to stockholders through dividends and share repurchases.

Meaningful growth opportunities. Navient will pursue opportunistic acquisitions of FFELP and Private Education Loan portfolios as well as additional ED and third-party servicing and asset recovery fee income opportunities. 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 these and other growth opportunities.

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

Navient has a leading student loan servicing platform that services loans for more than 12 million FFELP Loan, DSLP loan and Private Education Loan customers (including cosigners), including 5.8 million customer accounts serviced under Navient’s contract with ED. Employee emphasis is placed on providing service with

 

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accuracy, courtesy, consistency and empathy. If we fall short, we make it a priority to correct our mistake, and we make it a priority to prevent it from happening again.

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. A key indicator of future success in loan repayment is graduation. Navient encourages customers to plan for the full cost of their education to increase their likelihood of completing their course of study because we know that those who drop out or do not complete their course of study are more likely to default on their education loans.

When it comes to repaying education loans, 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 making and carrying out a financial plan. For many, this is 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. Contact and counseling keep customers on track, and we believe we go beyond what is required in our efforts to assist customers with past-due student loan payments. That outreach pays off: approximately 90 percent of federal loan customers we reach successfully utilize the options available to them to resolve their delinquency. As a result of our outreach, the federal education loans Navient services default at rates 30 percent better than the national average.

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 Old SLM. 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 Old SLM, which is the accounting predecessor of Navient. For a discussion of how “Core Earnings” results are different than GAAP results, see “‘Core Earnings’ — Definitions and Limitations” and “Differences between ‘Core Earnings’ and GAAP.”

 

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     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(In millions, except per share data)

   2014     2013     2014     2013  

GAAP Basis

        

Net income attributable to Navient Corporation

   $ 307      $ 543      $ 526      $ 889   

Diluted earnings per common share attributable to Navient Corporation

   $ .71      $ 1.20      $ 1.20      $ 1.94   

Weighted average shares used to compute diluted earnings per common share

     430        448        432        453   

Return on assets

     .87     1.35     .72     1.08

Ending FFELP Loans, net

   $ 99,730      $ 108,491      $ 99,730      $ 108,491   

Ending Private Education Loans, net

     30,324        37,116        30,324        37,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending total student loans, net

   $ 130,054      $ 145,607      $ 130,054      $ 145,607   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average FFELP Loans

   $ 100,926      $ 113,981      $ 102,322      $ 117,896   

Average Private Education Loans

     33,811        38,154        36,364        38,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average total student loans

   $ 134,737      $ 152,135      $ 138,686      $ 156,175   
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” Basis(1)

        

Net income attributable to Navient Corporation

   $ 241      $ 447      $ 383      $ 709   

Diluted earnings per common share attributable to Navient Corporation

   $ .56      $ 1.00      $ .89      $ 1.56   

Weighted average shares used to compute diluted earnings per common share

     430        448        432        453   

Return on assets

     .70     1.17     .56     .91

Ending FFELP Loans, net

   $ 99,730      $ 107,331      $ 99,730      $ 107,331   

Ending Private Education Loans, net

     30,324        31,781        30,324        31,781   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending total student loans, net

   $ 130,054      $ 139,112      $ 130,054      $ 139,112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average FFELP Loans

   $ 100,467      $ 112,891      $ 101,393      $ 116,831   

Average Private Education Loans

     31,408        32,619        31,467        32,411   
  

 

 

   

 

 

   

 

 

   

 

 

 

Average total student loans

   $ 131,875      $ 145,510      $ 132,860      $ 149,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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

Navient is a loan management, servicing and asset recovery company. Navient holds the largest portfolio of student loans issued or guaranteed under the FFELP. Navient is also the largest holder of Private Education Loans. Navient services and performs asset recovery services on these loans for its own accounts, for guaranty agencies, and for loans owned by ED, financial institutions, banks, credit unions and non-profit education lenders.

The following discussion and analysis presents a review of our business and operations as of and for the quarter and six months ended June 30, 2014.

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, we continue to seek to acquire FFELP Loan portfolios to leverage our servicing scale to 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 cash 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 seek to acquire Private Education Loan portfolios to leverage our servicing scale to 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.

Other

Our Other segment primarily consists of activities of our holding company, including the repurchase of debt, the corporate liquidity portfolio and all 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 (which include financing costs), provision for loan losses, the revenues and expenses generated by our service 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 Form 10.

Second-Quarter 2014 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.”

Second-quarter 2014 GAAP net income was $307 million ($0.71 diluted earnings per share), versus net income of $543 million ($1.20 diluted earnings per share) in the second-quarter 2013. 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 Spin-Off on April 30, 2014 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. Second-quarter 2014 GAAP results included gains of $150 million from derivative accounting treatment that are excluded from “Core Earnings” results, compared with gains of $143 million in the year-ago

 

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period. See “Differences between ‘Core Earnings’ and GAAP” for a complete reconciliation between GAAP net income and “Core Earnings.”

“Core Earnings” for the second-quarter 2014 were $241 million ($0.56 diluted earnings per share), compared with $447 million ($1.00 diluted earnings per share) for the year-ago quarter.

Last year, management undertook a series of actions to improve shareholder value, including the sale of residual interests in several FFELP securitization trusts, the divestiture of two subsidiaries, debt repurchases, and the strategic separation of Navient from Old SLM, which was completed on April 30, 2014. Adjusting for these transactions, second quarter 2014 “Core Earnings” increased $0.04 per share compared to the year-ago quarter, primarily due to increased servicing and asset recovery revenue and lower provisions for loan losses. The table below summarizes the impact of these items on “Core Earnings”:

Impact of items related to improving shareholder value

 

(Dollars in millions)

   Three Months
Ended
June 30, 2014
     Three Months
Ended
June 30, 2013
     Increase
(Decrease)  in

“Core Earnings”
 

Gains from sales of residual interests in FFELP securitization trusts

   $       $ 257       $ (257

Gains from sales of subsidiaries, net of tax

             38         (38

Debt repurchase gains

             19         (19

Other items

 

(Dollars in millions)

   Three Months
Ended
June 30, 2014
     Three Months
Ended
June 30, 2013
     Increase
(Decrease)  in

“Core Earnings”
 

Servicing, asset recovery and other revenue

   $ 214       $ 178       $ 36   

Provisions for loan losses

     155         202         47   

Operating expenses

     195         185         (10

Net interest income before provisions for loan losses

     522         576         (54

In addition, during the first six months of 2014, we:

 

   

issued $2.7 billion of FFELP asset-backed securities (“ABS”), $676 million of Private Education Loan ABS and $850 million of unsecured bonds;

 

   

closed on a new $8 billion FFELP Loan asset-backed commercial paper (“ABCP”) facility that matures in January 2016. This facility replaced an existing $5.5 million FFELP ABCP facility which was retired in January 2014;

 

   

closed a $1.0 billion Private Education Loan ABS commercial paper facility. The facility, which matures in June 2015, will be available for Private Education Loan refinancing and acquisitions;

 

   

repurchased 12.2 million common shares for $265 million on the open market (8.3 million common shares for $200 million pre-Spin-Off, and 3.9 million common shares for $65 million post-Spin-Off); and

 

   

authorized $400 million in May 2014 to be utilized in a new common share repurchase program.

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 Months
Ended

June  30,
    Increase
(Decrease)
    Six Months
Ended

June 30,
    Increase
(Decrease)
 

(In millions, except per share data)

  2014     2013     $     %     2014     2013     $     %  

Interest income:

               

FFELP Loans

  $ 631      $ 703      $ (72     (10 )%    $ 1,278      $ 1,439      $ (161     (11 )% 

Private Education Loans

    539        627        (88     (14     1,183        1,249        (66     (5

Other loans

    2        3        (1     (33     4        6        (2     (33

Cash and investments

    3        4        (1     (25     6        8        (2     (25
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,175        1,337        (162     (12     2,471        2,702        (231     (9

Total interest expense

    513        553        (40     (7     1,042        1,123        (81     (7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    662        784        (122     (16     1,429        1,579        (150     (9

Less: provisions for loan losses

    165        201        (36     (18     350        442        (92     (21
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

    497        583        (86     (15     1,079        1,137        (58     (5

Other income (loss):

               

Gains on sales of loans and investments

           251        (251     (100            307        (307     (100

Gains (losses) on derivative and hedging activities, net

    61        18        43        239        53        (13     66        508   

Servicing revenue

    73        69        4        6        136        139        (3     (2

Asset recovery revenue

    132        109        23        21        243        208        35        17   

Gains on debt repurchases

           19        (19     (100            42        (42     (100

Other income

    9        24        (15     (63     13        59        (46     (78
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    275        490        (215     (44     445        742        (297     (40

Expenses:

               

Operating expenses

    211        244        (33     (14     578        481        97        20   

Goodwill and acquired intangible asset impairment and amortization expense

    2        3        (1     (33     6        6                 

Restructuring and other reorganization expenses

    61        23        38        165        87        34        53        156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    274        270        4        1        671        521        150        29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

    498        803        (305     (38     853        1,358        (505     (37

Income tax expense

    191        299        (108     (36     328        509        (181     (36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    307        504        (197     (39     525        849        (324     (38

Income from discontinued operations, net of tax expense

           38        (38     (100     1        39        (38     (97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    307        542        (235     (43     526        888        (362     (41

Less: net loss attributable to noncontrolling interest

           (1     1        (100            (1     1        (100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation

    307        543        (236     (43     526        889        (363     (41

Preferred stock dividends

    2        5        (3     (60     6        10        (4     (40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation common stock

  $ 305      $ 538      $ (233     (43 )%    $ 520      $ 879      $ (359     (41 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to Navient Corporation:

               

Continuing operations

  $ .72      $ 1.14      $ (.42     (37 )%    $ 1.22      $ 1.88      $ (.66     (35 )% 

Discontinued operations

           .08        (.08     (100            .09        (.09     (100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ .72      $ 1.22      $ (.50     (41 )%    $ 1.22      $ 1.97      $ (.75     (38 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

               

Continuing operations

  $ .71      $ 1.12      $ (.41     (37 )%    $ 1.20      $ 1.85      $ (.65     (35 )% 

Discontinued operations

           .08        (.08     (100            .09        (.09     (100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ .71      $ 1.20      $ (.49     (41 )%    $ 1.20      $ 1.94      $ (.74     (38 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to Navient Corporation

  $ .15      $ .15      $          $ .30      $ .30      $       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP-basis

Three Months Ended June 30, 2014 Compared with Three Months Ended June 30, 2013

For the three months ended June 30, 2014, net income was $307 million, or $0.71 diluted earnings per common share, compared with net income of $543 million, or $1.20 diluted earnings per common share, for the three months ended June 30, 2013. The decrease in net income was primarily due to $257 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts that occurred in the year-ago quarter, a $38 million after-tax gain from the sale of the Campus Solutions business in the year-ago quarter, a $122 million decline in net interest income, a $19 million decrease in debt repurchase gains, a $15 million decrease in other income, and higher restructuring and other reorganization costs of $38 million, which was partially offset by a $36 million decline in the provision for loan losses, lower operating expenses of $33 million, a $43 million increase in net gains on derivative and hedging activities and a $27 million increase in servicing and asset recovery revenue.

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 $122 million due to a reduction in FFELP net interest income resulting from a $13 billion decline in average FFELP Loans outstanding. This decline in FFELP Loans was due, in part, to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts at the time of sale. Also contributing to the decrease was SLM BankCo’s net interest income attributable to the Company declining $54 million between the periods primarily as a result of the deemed distribution on April 30, 2014.

 

   

Provisions for loan losses declined $36 million primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

 

   

Gains on sales of loans and investments decreased by $251 million as the result of a $257 million gain on the sale of the Residual Interests in FFELP Loan securitization trusts in the year-ago quarter. There were no sales in the current quarter.

 

   

Gains (losses) on derivative and hedging activities, net, increased $43 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 increased $27 million primarily as a result of an increase in the number of accounts serviced and an increase in asset recovery volumes.

 

   

Gains on debt repurchases decreased $19 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

   

Other income decreased $15 million primarily due to a $21 million decrease in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by the “gains (losses) on derivative and hedging activities, net” line item on the income statement related to the derivatives used to economically hedge these debt instruments.

 

   

Operating expenses decreased $33 million primarily as a result of SLM BankCo’s operating expenses attributable to the Company declining $44 million between the periods primarily as a result of the deemed distribution on April 30, 2014. This was partially offset primarily by increases in our third-party servicing and asset recovery activities.

 

   

Restructuring and other reorganization expenses increased $38 million to $61 million. These expenses were primarily related to third-party costs incurred in connection with the Spin-Off.

 

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We repurchased 3.9 million shares and 9.1 million shares of our common stock during the three months ended June 30, 2014 and 2013, 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 18 million common shares from the year-ago quarter.

Six Months Ended June 30, 2014 Compared with Six Months Ended June 30, 2013

For the six months ended June 30, 2014, net income was $526 million, or $1.20 diluted earnings per common share, compared with net income of $889 million, or $1.94 diluted earnings per common share, for the six months ended June 30, 2013. The decrease in net income was primarily due to $312 million in gains from the sale of Residual Interests in FFELP Loan securitization trusts that occurred in the first half of 2013, a $38 million after-tax gain from the sale of the Campus Solutions business in the year-ago period, a $150 million decline in net interest income, a $42 million decrease in debt repurchase gains, a $46 million decrease in other income, higher operating expenses of $97 million and higher restructuring and other reorganization costs of $53 million, which was partially offset by a $92 million decline in the provision for loan losses, a $66 million increase in net gains on derivative and hedging activities and a $32 million increase in servicing and asset recovery revenue.

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

 

   

Net interest income decreased by $150 million due to a reduction in FFELP net interest income resulting from a $16 billion decline in average FFELP Loans outstanding. This decline in FFELP Loans was due, in part, to the sale of Residual Interests in FFELP Loan securitization trusts in the first half of 2013. There were approximately $12 billion of FFELP Loans in these trusts at the time of sale. Also contributing to the decrease was SLM BankCo’s net interest income attributable to the Company declining $27 million between the periods primarily as a result of the deemed distribution on April 30, 2014.

 

   

Provisions for loan losses declined $92 million primarily as a result of the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

 

   

Gains on sales of loans and investments decreased by $307 million as the result of $312 million in gains on the sales of the Residual Interests in FFELP Loan securitization trusts in the first-half of 2013. There were no sales in the current six-month period.

 

   

Gains (losses) on derivative and hedging activities, net, increased $66 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 increased $32 million primarily as a result of an increase in the number of accounts serviced and an increase in asset recovery volumes.

 

   

Gains on debt repurchases decreased $42 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

   

Other income decreased $46 million primarily due to a $55 million decrease in foreign currency translation gains. The foreign currency translation gains relate to a portion of our foreign currency denominated debt that does not receive hedge accounting treatment. These gains were partially offset by the “gains (losses) on derivative and hedging activities, net” line item on the income statement related to the derivatives used to economically hedge these debt instruments.

 

   

The primary driver of the increase in direct operating expenses for the six months ended June 30, 2014 compared with the prior-year period was $103 million of additional reserve recorded in first-quarter 2014 for pending regulatory matters. During the second quarter, Navient entered into agreements with the

 

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United States Department of Justice (“DOJ”) and Federal Deposit Insurance Corporation (the “FDIC”) to resolve these previously reported regulatory matters.

Operating expenses excluding the regulatory reserve discussed above decreased $6 million, primarily due to SLM BankCo’s operating expenses attributable to the Company declining $50 million between the periods primarily as a result of the deemed distribution on April 30, 2014. This was partially offset primarily by increases in our third-party servicing and asset recovery activities.

 

   

Restructuring and other reorganization expenses increased $53 million to $87 million. These expenses were primarily related to third-party costs incurred in connection with the Spin-Off.

We repurchased 12.2 million shares and 19.3 million shares of our common stock during the six months ended June 30, 2014 and 2013, 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 21 million common shares from the year-ago period.

“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 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 the consumer banking business (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. 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 resulting in unrealized, mark-to-market gains/losses; 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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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.

Old SLM’s definition of “Core Earnings” did not exclude the financial results attributable to the operations of the consumer banking business and related restructuring and reorganization expense incurred in connection with the Spin-Off. In the second quarter of 2014, in connection with the Spin-Off, Navient included this additional adjustment as a part of “Core Earnings” to allow better comparability of Navient’s results to pre-Spin-Off historical periods. All prior periods in this Quarterly Report on Form 10-Q have been restated to conform to Navient’s revised definition of “Core Earnings.”

 

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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.”

 

    Quarter Ended June 30, 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

  $ 522      $ 490      $      $      $      $ 1,012      $ 166      $ (8   $ 158      $ 1,170   

Other loans

                         2               2                             2   

Cash and investments

    1                      1               2               1        1        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    523        490               3               1,016        166        (7     159        1,175   

Total interest expense

    291        173               30               494        12        7        19        513   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    232        317               (27            522        154        (14     140        662   

Less: provisions for loan losses

    10        145                             155               10        10        165   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    222        172               (27            367        154        (24     130        497   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    15        7        166               (115     73                             73   

Asset recovery revenue

                  132                      132                             132   

Gains on debt repurchases

                                                                     

Other income

                  1        8               9        (154     215        61        70   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    15        7        299        8        (115     214        (154     215        61        275   

Expenses:

                   

Direct operating expenses

    121        42        93        2        (115     143               11        11        154   

Overhead expenses

                         52               52               5        5        57   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    121        42        93        54        (115     195               16        16        211   

Goodwill and acquired intangible asset impairment and amortization

                                                     2        2        2   

Restructuring and other reorganization expenses

                                                     61        61        61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    121        42        93        54        (115     195               79        79        274   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    116        137        206        (73            386               112        112        498   

Income tax expense (benefit)(3)

    44        51        76        (26            145               46        46        191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    72        86        130        (47   $        241               66        66        307   

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

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    72        86        130        (47   $        241               66        66        307   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 72      $ 86      $ 130      $ (47   $      $ 241      $      $ 66      $ 66      $ 307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Quarter Ended June 30, 2014  

(Dollars in millions)

   Net Impact of
SLM  BankCo
    Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired

Intangibles
    Total  

Net interest income after provisions for loan losses

   $ 35      $ 95       $      $ 130   

Total other income

     6        55                61   

Operating expenses

     16                       16   

Goodwill and acquired intangible asset impairment and amortization

                    2        2   

Restructuring and other reorganization expenses

     61                       61   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (36   $ 150       $ (2     112   
  

 

 

   

 

 

    

 

 

   

Income tax expense

            46   
         

 

 

 

Net income

          $ 66   
         

 

 

 

 

(3) 

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

 

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    Quarter Ended June 30, 2013  

(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

  $ 573      $ 513      $      $      $      $ 1,086      $ 198      $ 46      $ 244      $ 1,330   

Other loans

                         3               3                             3   

Cash and investments

    2                      1               3               1        1        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    575        513               4               1,092        198        47        245        1,337   

Total interest expense

    319        187               10               516        13        24        37        553   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    256        326               (6            576        185        23        208        784   

Less: provisions for loan losses

    13        189                             202               (1     (1     201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    243        137               (6            374        185        24        209        583   

Other income (loss):

                   

Gains on sales of loans and investments

    257                      (6            251                             251   

Servicing revenue

    16        10        180               (137     69                             69   

Asset recovery revenue

                  109                      109                             109   

Gains on debt repurchases

                         19               19                             19   

Other income

                                              (185     227        42        42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    273        10        289        13        (137     448        (185     227        42        490   

Expenses:

                   

Direct operating expenses

    143        51        88        3        (137     148               38        38        186   

Overhead expenses

                         37               37               21        21        58   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    143        51        88        40        (137     185               59        59        244   

Goodwill and acquired intangible asset impairment and amortization

                                                     3        3        3   

Restructuring and other reorganization expenses

                                                     23        23        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    143        51        88        40        (137     185               85        85        270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    373        96        201        (33            637               166        166        803   

Income tax expense (benefit)(3)

    135        35        72        (13            229               70        70        299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    238        61        129        (20   $        408               96        96        504   

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

                  39                      39               (1     (1     38   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    238        61        168        (20   $        447               95        95        542   

Less: net loss attributable to noncontrolling interest

                                                     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 238      $ 61      $ 168      $ (20   $      $ 447      $      $ 96      $ 96      $ 543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Quarter Ended June 30, 2013  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired

Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 100       $ 109       $       $ 209   

Total other income

     8         34                 42   

Operating expenses

     59                         59   

Goodwill and acquired intangible asset impairment and amortization

                     3         3   

Restructuring and other reorganization expenses

     23                         23   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 26       $ 143       $ (3      166   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              70   

Income (loss) from discontinued operations

              (1

Net loss attributable to noncontrolling interest

              (1
           

 

 

 

Net income

            $ 96   
           

 

 

 

 

(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

 

    Six Months Ended June 30, 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

  $ 1,033      $ 985      $      $      $      $ 2,018      $ 365      $ 78      $ 443      $ 2,461   

Other loans

                         5               5               (1     (1     4   

Cash and investments

    2                      2               4               2        2        6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,035        985               7               2,027        365        79        444        2,471   

Total interest expense

    578        358               55               991        22        29        51        1,042   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    457        627               (48            1,036        343        50        393        1,429   

Less: provisions for loan losses

    20        281                             301               49        49        350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    437        346               (48            735        343        1        344        1,079   

Other income (loss):

                   

Gains on sales of loans and investments

                                                                     

Servicing revenue

    26        8        335               (233     136                             136   

Asset recovery revenue

                  243                      243                             243   

Gains on debt repurchases

                                                                     

Other income

                         11               11        (343     398        55        66   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    26        8        578        11        (233     390        (343     398        55        445   

Expenses:

                   

Direct operating expenses

    245        98        188        115        (233     413               36        36        449   

Overhead expenses

                         101               101               28        28        129   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    245        98        188        216        (233     514               64        64        578   

Goodwill and acquired intangible asset impairment and amortization

                                                     6        6        6   

Restructuring and other reorganization expenses

                                                     87        87        87   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    245        98        188        216        (233     514               157        157        671   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    218        256        390        (253            611               242        242        853   

Income tax expense (benefit)(3)

    83        95        146        (95            229               99        99        328   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    135        161        244        (158   $        382               143        143        525   

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

                  1                      1                             1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    135        161        245        (158   $        383               143        143        526   

Less: net loss attributable to noncontrolling interest

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 135      $ 161      $ 245      $ (158   $      $ 383      $      $ 143      $ 143      $ 526   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Six Months Ended June 30, 2014  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 136       $ 208       $       $ 344   

Total other income

     14         41                 55   

Operating expenses

     64                         64   

Goodwill and acquired intangible asset impairment and amortization

                     6         6   

Restructuring and other reorganization expenses

     87                         87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (1    $ 249       $ (6      242   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              99   
           

 

 

 

Net income

            $ 143   
           

 

 

 

 

(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
    Six Months Ended June 30, 2013  

(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

  $ 1,163      $ 1,013      $      $      $      $ 2,176      $ 410      $ 102      $ 512      $ 2,688   

Other loans

                         6               6                             6   

Cash and investments

    4                      2               6               2        2        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,167        1,013               8               2,188        410        104        514        2,702   

Total interest expense

    654        371               25               1,050        31        42        73        1,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    513        642               (17            1,138        379        62        441        1,579   

Less: provisions for loan losses

    29        394                             423               19        19        442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    484        248               (17            715        379        43        422        1,137   

Other income (loss):

                   

Gains on sales of loans and investments

    312                      (5            307                             307   

Servicing revenue

    39        19        366        1        (286     139                             139   

Asset recovery revenue

                  208                      208                             208   

Gains on debt repurchases

                         48               48        (6            (6     42   

Other income

                                              (373     419        46        46   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    351        19        574        44        (286     702        (379     419        40        742   

Expenses:

                   

Direct operating expenses

    300        97        173        5        (286     289               70        70        359   

Overhead expenses

                         78               78               44        44        122   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    300        97        173        83        (286     367               114        114        481   

Goodwill and acquired intangible asset impairment and amortization

                                                     6        6        6   

Restructuring and other reorganization expenses

                                                     34        34        34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    300        97        173        83        (286     367               154        154        521   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    535        170        401        (56            1,050               308        308        1,358   

Income tax expense (benefit)(3)

    194        62        146        (21            381               128        128        509   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    341        108        255        (35   $        669               180        180        849   

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

                  40                      40               (1     (1     39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    341        108        295        (35   $        709               179        179        888   

Less: net loss attributable to noncontrolling interest

                                                     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 341      $ 108      $ 295      $ (35   $      $ 709      $      $ 180      $ 180      $ 889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

   Net Impact of
SLM  BankCo
     Net Impact  of
Derivative
Accounting
     Net Impact  of
Acquired
Intangibles
     Total  

Net interest income after provisions for loan losses

   $ 194       $ 228       $       $ 422   

Total other income

     16         24                 40   

Operating expenses

     114                         114   

Goodwill and acquired intangible asset impairment and amortization

                     6         6   

Restructuring and other reorganization expenses

     34                         34   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ 62       $ 252       $ (6      308   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              128   

Income (loss) from discontinued operations

              (1

Net loss attributable to noncontrolling interest

              (1
           

 

 

 

Net income

            $ 180   
           

 

 

 

 

(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

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
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

“Core Earnings” net income attributable to Navient Corporation

   $ 241      $ 447      $ 383      $ 709   

“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

     (36     26        (1     62   

Net impact of derivative accounting

     150      $ 143      $ 249      $ 252   

Net impact of goodwill and acquired intangible assets

     (2     (3     (6     (6

Net tax effect

     (46     (70     (99     (128
  

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

     66        96        143        180   
  

 

 

   

 

 

   

 

 

   

 

 

 

GAAP net income attributable to Navient Corporation

   $ 307      $ 543      $ 526      $ 889   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Old SLM was completed and Navient is now an independent, publicly-traded company. Due to the relative significance of Navient to Old SLM 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 Old SLM 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 assume 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 Old SLM 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 are removed as SLM BankCo succeeded Old SLM as the issuer of the preferred stock in connection with the Spin-Off.

 

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Table of Contents
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

SLM BankCo net income, before income tax expense

   $ 25      $ 49      $ 86      $ 96   

Restructuring and reorganization expense in connection with the Spin-Off

     (61     (23     (87     (34
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net impact of SLM BankCo

   $ (36   $ 26      $ (1   $ 62   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 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 premiums received on the Floor Income Contracts. The amortization of the net 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

 

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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.

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

“Core Earnings” derivative adjustments:

        

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

   $ 61      $ 18      $ 53      $ (13

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

     154        185        343        373   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     215        203        396        360   

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

     (59     (76     (135     (152

Other derivative accounting adjustments(3)

     (6     16        (12     44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net impact of derivative accounting(4)

   $ 150      $ 143      $ 249      $ 252   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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
June 30,
     Six Months Ended
June 30,
 

(Dollars in millions)

       2014              2013              2014              2013      

Floor Income Contracts

   $ 132       $ 297       $ 313       $ 486   

Basis swaps

     12         (15      11         (19

Foreign currency hedges

     54         (67      15         (99

Other

     17         (12      57         (8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized gains on derivative and hedging activities, net

   $ 215       $ 203       $ 396       $ 360   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

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

 

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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
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

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

        

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

   $ (166   $ (198   $ (365   $ (410

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

     12        13        22        31   

Foreign exchange derivatives gains reclassified to other income

                            

Net realized gains on terminated derivative contracts reclassified to other income

                          6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total reclassifications of realized losses on derivative and hedging activities

   $ (154   $ (185   $ (343   $ (373
  

 

 

   

 

 

   

 

 

   

 

 

 

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

As of June 30, 2014, derivative accounting has reduced GAAP equity by approximately $760 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
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

Beginning impact of derivative accounting on GAAP equity

   $ (854   $ (1,027   $ (926   $ (1,080

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

     94        104        166        157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending impact of derivative accounting on GAAP equity

   $ (760   $ (923   $ (760   $ (923
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

  (1) 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

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

   $ 150      $ 143      $ 249      $ 252   

Tax impact of derivative accounting adjustments recognized in net income

     (54     (54     (76     (113

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

     (2     15        (7     18   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 94      $ 104      $ 166      $ 157   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) 

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

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

 

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Earnings” in future periods. As of June 30, 2014, the remaining amortization term of the net floor premiums was approximately 2.00 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.

 

(Dollars in millions)

   June 30,
2014
    June 30,
2013
 

Unamortized net Floor premiums (net of tax)(1)

   $ (274   $ (452

 

  (1) 

$(433) million and $(720) million on a pre-tax basis as of June 30, 2014 and 2013, 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
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

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

   $ (3   $ (3   $ (6   $ (6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

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
June 30,
     % Increase
(Decrease)
    Six Months Ended
June 30,
     % Increase
(Decrease)
 

(Dollars in millions)

       2014              2013          2014 vs. 2013         2014              2013          2014 vs. 2013  

“Core Earnings” interest income:

                

FFELP Loans

   $ 522       $ 573         (9 )%    $ 1,033       $ 1,163         (11 )% 

Cash and investments

     1         2         (50     2         4         (50
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     523         575         (9     1,035         1,167         (11

Total “Core Earnings” interest expense

     291         319         (9     578         654         (12
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     232         256         (9     457         513         (11

Less: provision for loan losses

     10         13         (23     20         29         (31
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

     222         243         (9     437         484         (10

Gains on sales of loans and investments

             257         (100             312         (100

Servicing revenue

     15         16         (6     26         39         (33
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total other income

     15         273         (95     26         351         (93

Direct operating expenses

     121         143         (15     245         300         (18

Restructuring and other reorganization expenses

                                        
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     121         143         (15     245         300         (18
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before income tax expense

     116         373         (69     218         535         (59

Income tax expense

     44         135         (67     83         194         (57
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 72       $ 238         (70 )%    $ 135       $ 341         (60 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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“Core Earnings” from the FFELP Loans segment were $72 million in the second quarter of 2014, compared with $238 million in the year-ago quarter. The decrease is primarily due to the $257 million gain from the sale of Residual Interests in FFELP Loan securitization trusts in the year-ago quarter, as well as a reduction in net interest income due to the decrease in FFELP Loans outstanding. “Core Earnings” key performance metrics are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

FFELP Loan spread

     .98     .97     .96     .95

Net interest margin

     .89     .87     .88     .85

Provision for loan losses

   $ 10      $ 13      $ 20      $ 29   

Charge-offs

   $ 15      $ 20      $ 37      $ 42   

Charge-off rate

     .08     .10     .10     .10

Total delinquency rate

     14.8     15.7     14.8     15.7

Greater than 90-day delinquency rate

     7.0     8.1     7.0     8.1

Forbearance rate

     17.2     16.5     17.2     16.5

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
June 30,
    Six Months Ended
June 30,
 
         2014             2013             2014             2013      

“Core Earnings” basis FFELP Loan yield

     2.49     2.59     2.53     2.61

Hedged Floor Income

     .24        .27        .27        .26   

Unhedged Floor Income

     .24        .09        .14        .07   

Consolidation Loan Rebate Fees

     (.65     (.65     (.65     (.67

Repayment Borrower Benefits

     (.11     (.11     (.11     (.11

Premium amortization

     (.13     (.16     (.12     (.15
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan net yield

     2.08        2.03        2.06        2.01   

“Core Earnings” basis FFELP Loan cost of funds

     (1.10     (1.06     (1.10     (1.06
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis FFELP Loan spread

     .98        .97        .96        .95   

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

     (.09     (.10     (.08     (.10
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     .89     .87     .88     .85
  

 

 

   

 

 

   

 

 

   

 

 

 
                                  

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

     .89     .87     .88     .85

Adjustment for GAAP accounting treatment(2)

     .38        .38        .41        .39   
  

 

 

   

 

 

   

 

 

   

 

 

 

GAAP-basis FFELP Loan net interest margin(1)

     1.27     1.25     1.29     1.24
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in millions)

   2014      2013      2014      2013  

FFELP Loans

   $ 100,467       $ 112,891       $ 101,393       $ 116,831   

Other interest-earning assets

     3,949         5,264         3,922         5,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 104,416       $ 118,155       $ 105,315       $ 122,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (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 — Difference between ‘Core Earnings’ and GAAP” above.

 

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As of June 30, 2014, our FFELP Loan portfolio totaled approximately $100 billion, comprised of $38 billion of FFELP Stafford loans and $62 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios is 5 years and 9 years, respectively, assuming a Constant Prepayment Rate (“CPR”) of 4 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 June 30, 2014 and 2013, based on interest rates as of those dates.

 

     June 30, 2014     June 30, 2013  

(Dollars in billions)

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

Student loans eligible to earn Floor Income

   $ 86.0      $ 12.4      $ 98.4      $ 92.0      $ 13.9      $ 105.9   

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

     (43.4     (0.9     (44.3     (46.5     (1.0     (47.5

Less: economically hedged Floor Income Contracts

     (27.2            (27.2     (31.7            (31.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans eligible to earn Floor Income

   $ 15.4      $ 11.5      $ 26.9      $ 13.8      $ 12.9      $ 26.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Student loans earning Floor Income

   $ 15.3      $ 0.6      $ 15.9      $ 13.8      $ 0.7      $ 14.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We have sold Floor Income Contracts to hedge the potential Floor Income from specifically identified pools of FFELP Consolidation Loans that are eligible to earn Floor Income.

The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged through Floor Income Contracts for the period July 1, 2014 to June 30, 2016. The hedges related to these loans do not qualify as accounting hedges.

 

(Dollars in billions)

   July 1, 2014 to
December 31, 2014
     2015      2016  

Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged(1)

   $ 27.2       $ 27.2       $ 10.4   
  

 

 

    

 

 

    

 

 

 

 

  (1) 

The remaining projected unamortized net Floor premium balance (pre-tax) related to Floor Income Contracts as of December 31, 2014, 2015 and 2016 is $314 million, $77 million, and $0 million, respectively.

Gains on Sales of Loans and Investments

The decrease in gains on sales of loans and investments from the year-ago quarter and the first six months of 2013 was the result of $257 million and $312 million, respectively, in gains from the sale of Residual Interests in FFELP Loan securitization trusts in the year-ago periods. There were no similar transactions in the current periods.

We will continue to service the student loans in the trusts that were sold under existing agreements. The sales removed securitization trust assets of $12.5 billion and related liabilities of $12.1 billion from the balance sheet during the six months ended June 30, 2013.

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

 

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Business Services segment and included in those amounts was $115 million and $137 million for the quarters ended June 30, 2014 and 2013, respectively, and $233 million and $286 million for the six months ended June 30, 2014 and 2013, respectively. These amounts exceed the actual cost of servicing the loans. Operating expenses were 48 basis points and 51 basis points of average FFELP Loans in the quarters ended June 30, 2014 and 2013, respectively, and 49 basis points and 52 basis points of average FFELP Loans in the six months ended June 30, 2014 and 2013, respectively. The decrease in operating expenses from the prior-year quarter was primarily the result of the reduction in the average outstanding balance of our FFELP Loan portfolio.

Private Education Loans Segment

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

 

     Three Months Ended
June 30,
     % Increase
(Decrease)
    Six Months Ended
June 30,
     % Increase
(Decrease)
 

(Dollars in millions)

       2014              2013          2014 vs. 2013         2014              2013          2014 vs. 2013  

“Core Earnings” interest income:

                

Private Education Loans

   $ 490       $ 513         (4 )%    $ 985       $ 1,013         (3 )% 

Cash and investments

                                              
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total “Core Earnings” interest income

     490         513         (4     985         1,013         (3

Total “Core Earnings” interest expense

     173         187         (7     358         371         (4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net “Core Earnings” interest income

     317         326         (3     627         642         (2

Less: provision for loan losses

     145         189         (23     281         394         (29
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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

     172         137         26        346         248         40   

Servicing revenue

     7         10         (30     8         19         (58

Direct operating expenses

     42         51         (18     98         97         1   

Restructuring and other reorganization expenses

                                              
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     42         51         (18     98         97         1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before income tax expense

     137         96         43        256         170         51   

Income tax expense

     51         35         46        95         62         53   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 86       $ 61         41   $ 161       $ 108         49
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Quarterly “Core Earnings” were $86 million compared with $61 million in the year-ago quarter. The increase is primarily the result of a $44 million decrease in the provision for Private Education Loan losses. “Core Earnings” key performance metrics are as follows:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

Private Education Loan spread

     4.10     4.10     4.05     4.09

Net interest margin

     4.00     3.86     3.96     3.84

Provision for loan losses

   $ 145      $ 189      $ 281 (1)    $ 394   

Charge-offs

   $ 166      $ 212      $ 385      $ 444   

Charge-off rate

     2.5     3.0     2.9     3.2

Total delinquency rate

     7.1     8.4     7.1     8.4

Greater than 90-day delinquency rate

     3.2     4.0     3.2     4.0

Forbearance rate

     4.2     3.9     4.2     3.9

Loans in repayment greater than 12 months

     90.9     82.6     90.9     82.6

Cosigner rate

     64     62     64     62

Average FICO

     718        717        718        717   

 

  (1) 

Prior to the Spin-Off, Sallie Mae Bank sold $666 million of loans to Old SLM in the quarter ended March 31, 2014 for (1) securitization transactions at Old SLM and (2) to enable Old SLM to manage loans either granted forbearance or were 90 days or more past due. In the quarter ended March 31, 2014, $29 million of the allowance for loan loss balance was transferred from Sallie Mae Bank to Old SLM. As a result, Old SLM did not need to provide additional provision for loan losses for these loans in the quarter ended March 31, 2014. Had the allowance not transferred from Sallie Mae Bank to Old SLM, the provision would have been $310 million for the six months ended June 30, 2014.

 

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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
June 30,
    Six Months Ended
June 30,
 
       2014         2013         2014         2013    

“Core Earnings” basis Private Education Loan yield

     6.27     6.31     6.31     6.30

“Core Earnings” basis Private Education Loan cost of funds

     (2.17     (2.21     (2.26     (2.21
  

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” basis Private Education Loan spread

     4.10        4.10        4.05        4.09   

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

     (.10     (.24     (.09     (.25
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4.00     3.86     3.96     3.84
  

 

 

   

 

 

   

 

 

   

 

 

 
                                  

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

     4.00     3.86     3.96     3.84

Adjustment for GAAP accounting treatment(2)

     .11        .22        .26        .26   
  

 

 

   

 

 

   

 

 

   

 

 

 

GAAP basis Private Education Loan net interest margin(1)

     4.11     4.08     4.22     4.10
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in millions)

     2014          2013          2014          2013    

Private Education Loans

   $ 31,408       $ 32,619       $ 31,467       $ 32,411   

Other interest-earning assets

     491         1,245         492         1,339   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 31,899       $ 33,864       $ 31,959       $ 33,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (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 — Difference between ‘Core Earnings’ and GAAP” above.

Private Education Loan Provision for Loan Losses

In establishing the allowance for Private Education Loan losses as of June 30, 2014, 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 7.1 percent from 8.4 percent in the year-ago quarter. Loans greater than 90 days delinquent (as a percentage of loans in repayment) have decreased to 3.2 percent from 4.0 percent in the year-ago quarter. The charge-off rate decreased to 2.5 percent from 3.0 percent in the year-ago quarter. Loans in forbearance (as a percentage of loans in repayment and forbearance) increased to 4.2 percent from 3.9 percent in the year-ago quarter.

Apart from the overall improvements discussed above that had the effect of reducing the provision for loan losses in the second-quarter 2014 compared to the year-ago quarter, Private Education Loans that have defaulted between 2007 and 2014 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 to not do so. Our allowance for loan losses takes into account these potential recovery uncertainties. In the second-quarter 2014, we increased our allowance related to these potential recovery shortfalls by approximately $68 million.

The Private Education Loan provision for loan losses on a “Core Earnings” basis was $145 million in the second quarter of 2014, down $44 million from the second quarter of 2013, and $281 million for the first six months of 2014, down $113 million from the year-ago period. The decline in both periods was primarily a result

 

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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 23 percent and 35 percent in the quarters ended June 30, 2014 and 2013, respectively, and 28 percent and 36 percent in the six months ended June 30, 2014 and 2013, respectively.

Business Services Segment

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

 

     Three Months Ended
June 30,
     % Increase
(Decrease)
    Six Months Ended
June 30,
     % Increase
(Decrease)
 

(Dollars in millions)

       2014              2013          2014 vs. 2013         2014              2013          2014 vs. 2013  

Net interest income

   $       $           $       $        

Servicing revenue:

                

Intercompany loan servicing

     115         137         (16     234         286         (18

Third-party loan servicing

     42         33         27        83         60         38   

Guarantor servicing

     9         10         (10     18         20         (10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total servicing revenue

     166         180         (8     335         366         (8

Asset recovery revenue

     132         109         21        243         208         17   

Other Business Services revenue

     1                 100                          
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total other income

     299         289         3        578         574         1   

Direct operating expenses

     93         88         6        188         173         9   

Restructuring and other reorganization expenses

                                              
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses

     93         88         6        188         173         9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income from continuing operations, before income tax expense

     206         201         2        390         401         (3

Income tax expense

     76         72         6        146         146           
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income from continuing operations

     130         129         1        244         255         (4

Income from discontinued operations, net of tax expense

             39         (100     1         40         (98
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings”

   $ 130       $ 168         (23 )%    $ 245       $ 295         (17 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

“Core Earnings” were $130 million in the second quarter of 2014, compared with $168 million in the year-ago quarter. The decrease is primarily due to the $38 million after-tax gain recognized on the Campus Solutions sale in the year-ago quarter. Key segment metrics are:

 

     As of
June 30,
 

(Dollars in billions)

   2014      2013  

Asset recovery receivables

   $ 16.3       $ 14.6   

Number of accounts serviced for ED (in millions)

     5.8         5.2   

Total federal loans serviced

   $ 272       $ 245   

 

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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 $100 billion and $116 billion for the quarters ended June 30, 2014 and 2013, respectively, and $102 billion and $119 billion for the six months ended June 30, 2014 and 2013, respectively. The decline in the average balance of FFELP Loans outstanding along with the related intercompany loan servicing revenue from the year-ago period is primarily the result of normal amortization of the portfolio, as well as the sale of our Residual Interests in $12 billion of securitized FFELP Loans in the first half of 2013.

Third-party loan servicing income increased $9 million from the year-ago quarter and $23 million for the first six months compared with the prior-year period primarily due to the increase in ED servicing revenue (discussed below) as well as a result of the sale of Residual Interests in FFELP Loan securitization trusts in 2013. (See “FFELP Loans Segment” for further discussion.) When we sold the Residual Interests, we retained the right to service the trusts. As such, servicing income that had previously been recorded as intercompany loan servicing income is now recognized as third-party loan servicing income.

We are servicing approximately 5.8 million accounts under the ED Servicing Contract as of June 30, 2014, compared with 5.2 million accounts serviced at June 30, 2013. Third-party loan servicing fees in the quarters ended June 30, 2014 and 2013 included $31 million and $26 million, respectively, of servicing revenue related to the ED Servicing Contract.

Our asset recovery revenue consists of fees we receive for asset recovery of delinquent debt on behalf of third-party clients performed on a contingent basis. Asset recovery revenue increased $23 million in the current quarter compared with the year-ago quarter and $35 million for the first six months of 2014 compared with the prior-year period as a result of the higher asset recovery volume.

In second-quarter 2013, we sold our Campus Solutions and 529 college savings plan administration businesses, which resulted in a $38 million after-tax gain. The results related to these businesses for all periods presented have been reclassified as discontinued operations and are shown on an after-tax basis.

Revenues related to services performed on FFELP Loans accounted for 78 percent and 80 percent, respectively, of total segment revenues for the quarters ended June 30, 2014 and 2013, and 78 percent and 81 percent, respectively, of total segment revenues for the six months ended June 30, 2014 and 2013.

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 increase in operating expenses in the quarter ended June 30, 2014 compared with the year-ago quarter was primarily the result of an increase in our third-party servicing and asset recovery activities. This increase in activity resulted in a $32 million increase in related revenue from second-quarter 2013 to second-quarter 2014.

 

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Other Segment

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

 

    Three Months Ended
June 30,
    % Increase
(Decrease)
    Six Months Ended
June 30,
    % Increase
(Decrease)
 

(Dollars in millions)

    2014         2013       2014 vs. 2013       2014         2013       2014 vs. 2013  

Net interest loss after provision for loan losses

  $ (27   $ (6     350   $ (48   $ (17     182

Losses on sales of loans and investments

           (6     (100            (5     (100

Gains on debt repurchases

           19        (100            48        (100

Other

    8               100        11        1        1,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    8        13        (38     11        44        (75

Direct operating expenses

    2        3        (33     115        5        2,200   

Overhead expenses:

           

Corporate overhead

    27        18        50        53        39        36   

Unallocated information technology costs

    25        19        32        48        39        23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total overhead expenses

    52        37        41        101        78        29   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    54        40        35        216        83        160   

Restructuring and other reorganization expenses

                                         
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    54        40        35        216        83        160   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax benefit

    (73     (33     121        (253     (56     352   

Income tax benefit

    (26     (13     100        (95     (21     352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

“Core Earnings” (loss)

  $ (47   $ (20     135   $ (158   $ (35     351
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

Gains on Debt Repurchases

We repurchased $5 million and $70 million face amount of our debt for the quarters ended June 30, 2014 and 2013, respectively, and $5 million and $997 million face amount of our debt for the six months ended June 30, 2014 and 2013, respectively. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

Direct Operating Expenses — Other Segment

The primary driver of the increase in direct operating expenses for the six months ended June 30, 2014 compared with the prior-year period was $111 million of additional reserve recorded in first-quarter 2014 for regulatory matters. During the second quarter of 2014, Navient entered into agreements with the DOJ and FDIC to resolve previously reported regulatory matters.

Overhead — Other Segment

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 the three and six months ended June 30, 2014 compared with the year-ago periods is primarily due to temporary information technology costs incurred to provide related support to SLM BankCo under various transition services

 

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agreements entered into in connection with the Spin-Off as well as stock-based compensation expense 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 June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  

(Dollars in millions)

   Balance      Rate     Balance      Rate     Balance      Rate     Balance      Rate  

Average Assets

                    

FFELP Loans

   $ 100,926         2.51   $ 113,981         2.48   $ 102,322         2.52   $ 117,896         2.46

Private Education Loans

     33,811         6.40        38,154         6.59        36,364         6.56        38,279         6.58   

Other loans

     93         9.36        123         9.64        96         9.52        128         9.50   

Cash and investments

     7,014         .13        9,395         .17        7,543         .15        9,636         .17   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-earning assets

     141,844         3.32     161,653         3.32     146,325         3.41     165,939         3.28
     

 

 

      

 

 

      

 

 

      

 

 

 

Non-interest-earning assets

     3,411           4,287           3,766           4,426      
  

 

 

      

 

 

      

 

 

      

 

 

    

Total assets

   $ 145,255         $ 165,940         $ 150,091         $ 170,365      
  

 

 

      

 

 

      

 

 

      

 

 

    

Average Liabilities and Equity

                    

Short-term borrowings

   $ 7,678         .67   $ 17,122         .98   $ 10,452         .76   $ 18,091         1.00

Long-term borrowings

     130,534         1.54        140,170         1.46        131,819         1.53        143,554         1.45   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     138,212         1.49     157,292         1.41     142,271         1.48     161,645         1.40
     

 

 

      

 

 

      

 

 

      

 

 

 

Non-interest-bearing liabilities

     2,537           3,390           2,758           3,531      

Equity

     4,506           5,258           5,062           5,189      
  

 

 

      

 

 

      

 

 

      

 

 

    

Total liabilities and equity

   $ 145,255         $ 165,940         $ 150,091         $ 170,365      
  

 

 

      

 

 

      

 

 

      

 

 

    

Net interest margin

        1.87        1.94        1.97        1.92
     

 

 

      

 

 

      

 

 

      

 

 

 

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 June 30, 2014 vs. 2013

      

Interest income

   $ (162   $ 2      $ (164

Interest expense

     (40     29        (69
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (122   $ (28   $ (94
  

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2014 vs. 2013

      

Interest income

   $ (231   $ 97      $ (328

Interest expense

     (81     58        (139
  

 

 

   

 

 

   

 

 

 

Net interest income

   $ (150   $ 40      $ (190
  

 

 

   

 

 

   

 

 

 

 

  (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.

 

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Summary of our Student Loan Portfolio

Ending Student Loan Balances, net — GAAP Basis

 

     June 30, 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)

   $ 536      $      $ 536      $ 344      $ 880   

Grace, repayment and other(2)

     36,761        61,540        98,301        31,368        129,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     37,297        61,540        98,837        31,712        130,549   

Unamortized premium/(discount)

     571        418        989        (674     315   

Receivable for partially charged-off loans

                          1,269        1,269   

Allowance for loan losses

     (62     (34     (96     (1,983     (2,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     38     62     100    

% of total

     29     48     77     23     100

 

     December 31, 2013  

(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)

   $ 742      $      $ 742      $ 2,629      $ 3,371   

Grace, repayment and other(2)

     38,752        64,178        102,930        36,371        139,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     39,494        64,178        103,672        39,000        142,672   

Unamortized premium/(discount)

     602        433        1,035        (704     331   

Receivable for partially charged-off loans

                          1,313        1,313   

Allowance for loan losses

     (75     (44     (119     (2,097     (2,216
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     38     62     100    

% of total

     28     46     74     26     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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Ending Student Loan Balances, net — “Core Earnings” Basis

 

     June 30, 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)

   $ 536      $      $ 536      $ 344      $ 880   

Grace, repayment and other(2)

     36,761        61,540        98,301        31,368        129,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     37,297        61,540        98,837        31,712        130,549   

Unamortized premium/(discount)

     571        418        989        (674     315   

Receivable for partially charged-off loans

                          1,269        1,269   

Allowance for loan losses

     (62     (34     (96     (1,983     (2,079
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     38     62     100    

% of total

     29     48     77     23     100

 

     December 31, 2013  

(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)

   $ 739      $      $ 739      $ 438      $ 1,177   

Grace, repayment and other(2)

     38,232        63,274        101,506        31,999        133,505   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total, gross

     38,971        63,274        102,245        32,437        134,682   

Unamortized premium/(discount)

     601        430        1,031        (709     322   

Receivable for partially charged-off loans

                          1,313        1,313   

Allowance for loan losses

     (73     (40     (113     (2,035     (2,148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total student loan portfolio

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total FFELP

     38     62     100    

% of total

     30     47     77     23     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.

 

74


Table of Contents

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

 

     Three Months Ended June 30, 2014  

(Dollars in millions)

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

Total

   $ 38,408      $ 62,518      $ 100,926      $ 33,811      $ 134,737   

% of FFELP

     38     62     100    

% of total

     29     46     75     25     100

 

     Three Months Ended June 30, 2013  

(Dollars in millions)

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

Total

   $ 42,516      $ 71,465      $ 113,981      $ 38,154      $ 152,135   

% of FFELP

     37     63     100    

% of total

     28     47     75     25     100

 

     Six Months Ended June 30, 2014  

(Dollars in millions)

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

Total

   $ 39,041      $ 63,281      $ 102,322      $ 36,364      $ 138,686   

% of FFELP

     38     62     100    

% of total

     28     46     74     26     100

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

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

Total

   $ 43,115      $ 74,781      $ 117,896      $ 38,279      $ 156,175   

% of FFELP

     37     63     100    

% of total

     27     48     75     25     100

 

75


Table of Contents

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

 

     Three Months Ended June 30, 2014  

(Dollars in millions)

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

Total

   $ 38,408      $ 62,059      $ 100,467      $ 31,408      $ 131,875   

% of FFELP

     38     62     100    

% of total

     29     47     76     24     100

 

     Three Months Ended June 30, 2013  

(Dollars in millions)

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

Total

   $ 42,516      $ 70,375      $ 112,891      $ 32,619      $ 145,510   

% of FFELP

     38     62     100    

% of total

     29     49     78     22     100

 

     Six Months Ended June 30, 2014  

(Dollars in millions)

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

Total

   $ 39,041      $ 62,352      $ 101,393      $ 31,467      $ 132,860   

% of FFELP

     39     61     100    

% of total

     29     47     76     24     100

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

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

Total

   $ 43,115      $ 73,716      $ 116,831      $ 32,411      $ 149,242   

% of FFELP

     37     63     100    

% of total

     29     49     78     22     100

 

76


Table of Contents

Student Loan Activity — GAAP Basis

 

     Three Months Ended June 30, 2014  

(Dollars in millions)

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

Beginning balance

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

Acquisitions and originations

     344        474        818        123        941   

Capitalized interest and premium/discount amortization

     281        271        552        157        709   

Consolidations to third parties

     (418     (349     (767     (26     (793

Sales

                                   

Distribution of SLM BankCo

     (495     (885     (1,380     (7,204     (8,584

Repayments and other

     (994     (1,134     (2,128     (883     (3,011
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended June 30, 2013  

(Dollars in millions)

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

Beginning balance

   $ 43,005      $ 76,190      $ 119,195      $ 37,465      $ 156,660   

Acquisitions and originations

     57        74        131        390        521   

Capitalized interest and premium/discount amortization

     285        272        557        210        767   

Consolidations to third parties

     (378     (235     (613     (25     (638

Sales(1)

     (30     (8,398     (8,428            (8,428

Repayments and other

     (1,065     (1,286     (2,351     (924     (3,275
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 41,874      $ 66,617      $ 108,491      $ 37,116      $ 145,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30, 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

     622        650        1,272        1,645        2,917   

Capitalized interest and premium/discount amortization

     588        575        1,163        368        1,531   

Consolidations to third parties

     (822     (626     (1,448     (59     (1,507

Sales

                                   

Distribution of SLM BankCo

     (495     (885     (1,380     (7,204     (8,584

Repayments and other

     (2,108     (2,357     (4,465     (1,938     (6,403
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

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

Beginning balance

   $ 44,289      $ 81,323      $ 125,612      $ 36,934      $ 162,546   

Acquisitions and originations

     158        127        285        1,795        2,080   

Capitalized interest and premium/discount amortization

     580        585        1,165        410        1,575   

Consolidations to third parties

     (823     (510     (1,333     (49     (1,382

Sales(2)

     (102     (12,147     (12,249            (12,249

Repayments and other

     (2,228     (2,761     (4,989     (1,974     (6,963
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 41,874      $ 66,617      $ 108,491      $ 37,116      $ 145,607   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $8.3 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

(2) 

Includes $12.0 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

77


Table of Contents

Student Loan Activity — “Core Earnings” Basis

 

     Three Months Ended June 30, 2014  

(Dollars in millions)

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

Beginning balance

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

Acquisitions

     344        474        818        93        911   

Capitalized interest and premium/discount amortization

     280        269        549        153        702   

Consolidations to third parties

     (416     (347     (763     (25     (788

Sales

                                   

Repayments and other

     (987     (1,127     (2,114     (846     (2,960
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended June 30, 2013  

(Dollars in millions)

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

Beginning balance

   $ 42,634      $ 75,483      $ 118,117      $ 31,633      $ 149,750   

Acquisitions

     20        3        23        828        851   

Capitalized interest and premium/discount amortization

     282        265        547        192        739   

Consolidations to third parties

     (373     (229     (602     (21     (623

Sales(1)

     (30     (8,398     (8,428            (8,428

Repayments and other

     (1,051     (1,275     (2,326     (851     (3,177
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 41,482      $ 65,849      $ 107,331      $ 31,781      $ 139,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30, 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

     623        649        1,272        765        2,037   

Capitalized interest and premium/discount amortization

     581        564        1,145        336        1,481   

Consolidations to third parties

     (815     (621     (1,436     (51     (1,487

Sales

                                   

Repayments and other

     (2,082     (2,332     (4,414     (1,732     (6,146
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 37,806      $ 61,924      $ 99,730      $ 30,324      $ 130,054   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30, 2013  

(Dollars in millions)

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

Beginning balance

   $ 43,932      $ 80,640      $ 124,572      $ 31,486      $ 156,058   

Acquisitions

     98        26        124        1,714        1,838   

Capitalized interest and premium/discount amortization

     574        573        1,147        374        1,521   

Consolidations to third parties

     (815     (501     (1,316     (42     (1,358

Sales(2)

     (102     (12,147     (12,249            (12,249

Repayments and other

     (2,205     (2,742     (4,947     (1,751     (6,698
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 41,482      $ 65,849      $ 107,331      $ 31,781      $ 139,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $8.3 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

(2) 

Includes $12.0 billion of student loans in connection with the sale of Residual Interests in FFELP Loan securitization trusts.

 

78


Table of Contents

Student Loan Allowance for Loan Losses Activity — GAAP Basis

 

     Three Months Ended June 30,  
     2014     2013  

(Dollars in millions)

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

Beginning balance

   $ 107      $ 2,059      $ 2,166      $ 147      $ 2,170      $ 2,317   

Less:

            

Charge-offs(1)

     (15     (166     (181     (20     (212     (232

Student loan sales

                          (8            (8

Distribution of SLM BankCo

     (6     (69     (75                     

Plus:

            

Provision for loan losses

     10        155        165        14        187        201   

Reclassification of interest reserve(2)

            4        4               4        4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 2,079      $ 133      $ 2,149      $ 2,282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 9,650      $ 9,650      $      $ 8,094      $ 8,094   

 

     Six Months Ended June 30,  
     2014     2013  

(Dollars in millions)

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

Beginning balance

   $ 119      $ 2,097      $ 2,216      $ 159      $ 2,171      $ 2,330   

Less:

            

Charge-offs(1)

     (37     (385     (422     (42     (444     (486

Student loan sales

                          (14            (14

Distribution of SLM BankCo

     (6     (69     (75                     

Plus:

            

Provision for loan losses

     20        330        350        30        412        442   

Reclassification of interest reserve(2)

            10        10               10        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 2,079      $ 133      $ 2,149      $ 2,282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 9,650      $ 9,650      $      $ 8,094      $ 8,094   

 

(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) 

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

 

79


Table of Contents

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

 

     Three Months Ended June 30,  
     2014     2013  

(Dollars in millions)

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

Beginning balance

   $ 101      $ 1,987      $ 2,088      $ 143      $ 2,105      $ 2,248   

Less:

            

Charge-offs(1)

     (15     (166     (181     (20     (212     (232

Student loan sales

                          (8            (8

Plus:

            

Provision for loan losses

     10        145        155        13        189        202   

Reclassification of interest reserve(2)

            4        4               4        4   

Other transactions

            13        13               12        12   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 2,079      $ 128      $ 2,098      $ 2,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 9,650      $ 9,650      $      $ 8,094      $ 8,094   

 

     Six Months Ended June 30,  
     2014     2013  

(Dollars in millions)

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

Beginning balance

   $ 113      $ 2,035      $ 2,148      $ 155      $ 2,106      $ 2,261   

Less:

            

Charge-offs(1)

     (37     (385     (422     (42     (444     (486

Student loan sales

                          (14            (14

Plus:

            

Provision for loan losses

     20        281        301        29        394        423   

Reclassification of interest reserve(2)

            10        10               10        10   

Other transactions

            42        42               32        32   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 96      $ 1,983      $ 2,079      $ 128      $ 2,098      $ 2,226   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructuring(3)

   $      $ 9,650      $ 9,650      $      $ 8,094      $ 8,094   

 

(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) 

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

 

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FFELP Loan Portfolio Performance

FFELP Loan Delinquencies and Forbearance – GAAP Basis

 

     FFELP Loan Delinquencies  
     June 30,  
     2014     2013  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 11,794        $ 15,239     

Loans in forbearance(2)

     14,929          15,236     

Loans in repayment and percentage of each status:

        

Loans current

     61,438        85.2     64,801        84.1

Loans delinquent 31-60 days(3)

     3,531        4.9        3,750        4.9   

Loans delinquent 61-90 days(3)

     2,112        2.9        2,156        2.8   

Loans delinquent greater than 90 days(3)

     5,033        7.0        6,356        8.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     72,114        100     77,063        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     98,837          107,538     

FFELP Loan unamortized premium

     989          1,086     
  

 

 

     

 

 

   

Total FFELP Loans

     99,826          108,624     

FFELP Loan allowance for losses

     (96       (133  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 99,730        $ 108,491     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       73.0       71.7
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       14.8       15.9
    

 

 

     

 

 

 

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

       17.2       16.5
    

 

 

     

 

 

 

 

(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 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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FFELP Loan Delinquencies and Forbearance — “Core Earnings” Basis

 

     FFELP Loan Delinquencies  
     June 30,  
     2014     2013  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 11,794        $ 15,120     

Loans in forbearance(2)

     14,929          15,018     

Loans in repayment and percentage of each status:

        

Loans current

     61,438        85.2     64,261        84.3

Loans delinquent 31-60 days(3)

     3,531        4.9        3,682        4.8   

Loans delinquent 61-90 days(3)

     2,112        2.9        2,109        2.8   

Loans delinquent greater than 90 days(3)

     5,033        7.0        6,186        8.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     72,114        100     76,238        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     98,837          106,376     

FFELP Loan unamortized premium

     989          1,084     
  

 

 

     

 

 

   

Total FFELP Loans

     99,826          107,460     

FFELP Loan allowance for losses

     (96       (128  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 99,730        $ 107,332     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       73.0       71.7
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       14.8       15.7
    

 

 

     

 

 

 

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

       17.2       16.5
    

 

 

     

 

 

 

 

(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 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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Allowance for FFELP Loan Losses — GAAP Basis

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

       2014             2013             2014             2013      

Allowance at beginning of period

   $ 107      $ 147      $ 119      $ 159   

Provision for FFELP Loan losses

     10        14        20        30   

Charge-offs

     (15     (20     (37     (42

Student loan sales

            (8            (14

Distribution of SLM BankCo

     (6            (6       
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 96      $ 133      $ 96      $ 133   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     .08     .10     .10     .10

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

     .07     .08     .09     .09

Allowance as a percentage of ending total loans, gross

     .10     .12     .10     .12

Allowance as a percentage of ending loans in repayment

     .13     .17     .13     .17

Allowance coverage of charge-offs (annualized)

     1.6        1.7        1.3        1.6   

Ending total loans, gross

   $ 98,837      $ 107,538      $ 98,837      $ 107,538   

Average loans in repayment

   $ 72,621      $ 81,423      $ 73,056      $ 84,323   

Ending loans in repayment

   $ 72,114      $ 77,063      $ 72,114      $ 77,063   

Allowance for FFELP Loan Losses — “Core Earnings” Basis

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Allowance at beginning of period

   $ 101      $ 143      $ 113      $ 155   

Provision for FFELP Loan losses

     10        13        20        29   

Charge-offs

     (15     (20     (37     (42

Student loan sales

            (8            (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 96      $ 128      $ 96      $ 128   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     .08     .10     .10     .10

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

     .07     .08     .08     .08

Allowance as a percentage of ending total loans, gross

     .10     .12     .10     .12

Allowance as a percentage of ending loans in repayment

     .13     .17     .13     .17

Allowance coverage of charge-offs (annualized)

     1.6        1.6        1.3        1.5   

Ending total loans, gross

   $ 98,837      $ 106,376      $ 98,837      $ 106,376   

Average loans in repayment

   $ 72,297      $ 80,621      $ 72,391      $ 85,530   

Ending loans in repayment

   $ 72,114      $ 76,238      $ 72,114      $ 76,238   

 

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Private Education Loans Portfolio Performance

Private Education Loan Delinquencies and Forbearance — GAAP Basis

 

     Private Education Loan Delinquencies  
     June 30,  
     2014     2013  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 3,375        $ 5,896     

Loans in forbearance(2)

     1,201          1,160     

Loans in repayment and percentage of each status:

        

Loans current

     25,202        92.9     29,196        92.3

Loans delinquent 31-60 days(3)

     670        2.5        792        2.5   

Loans delinquent 61-90 days(3)

     391        1.4        495        1.6   

Loans delinquent greater than 90 days(3)

     873        3.2        1,144        3.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     27,136        100     31,627        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     31,712          38,683     

Private Education Loan unamortized discount

     (674       (752  
  

 

 

     

 

 

   

Total Private Education Loans

     31,038          37,931     

Private Education Loan receivable for partially charged-off loans

     1,269          1,334     

Private Education Loan allowance for losses

     (1,983       (2,149  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 30,324        $ 37,116     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       85.6       81.8
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       7.1       7.7
    

 

 

     

 

 

 

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

       4.2       3.5
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment(4)

       90.9       79.3
    

 

 

     

 

 

 

Percentage of Private Education Loans with a cosigner

       64       66
    

 

 

     

 

 

 

Average FICO at origination

       718          721   
    

 

 

     

 

 

 

 

(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.

 

(4) 

Based on number of months in an active repayment status for which a scheduled monthly payment was due.

 

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

 

     Private Education Loan Delinquencies  
     June 30,  
     2014     2013  

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 3,375        $ 3,599     

Loans in forbearance(2)

     1,201          1,156     

Loans in repayment and percentage of each status:

        

Loans current

     25,202        92.9     26,141        91.6

Loans delinquent 31-60 days(3)

     670        2.5        774        2.7   

Loans delinquent 61-90 days(3)

     391        1.4        486        1.7   

Loans delinquent greater than 90 days(3)

     873        3.2        1,144        4.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans in repayment

     27,136        100     28,545        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Private Education Loans, gross

     31,712          33,300     

Private Education Loan unamortized discount

     (674       (755  
  

 

 

     

 

 

   

Total Private Education Loans

     31,038          32,545     

Private Education Loan receivable for partially charged-off loans

     1,269          1,334     

Private Education Loan allowance for losses

     (1,983       (2,098  
  

 

 

     

 

 

   

Private Education Loans, net

   $ 30,324        $ 31,781     
  

 

 

     

 

 

   

Percentage of Private Education Loans in repayment

       85.6       85.7
    

 

 

     

 

 

 

Delinquencies as a percentage of Private Education Loans in repayment

       7.1       8.4
    

 

 

     

 

 

 

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

       4.2       3.9
    

 

 

     

 

 

 

Loans in repayment greater than 12 months as a percentage of loans in repayment(4)

       90.9       82.6
    

 

 

     

 

 

 

Percentage of Private Education Loans with a cosigner

       64       62
    

 

 

     

 

 

 

Average FICO at origination

       718          717   
    

 

 

     

 

 

 

 

(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.

 

(4) 

Based on number of months in an active repayment status for which a scheduled monthly payment was due.

 

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Allowance for Private Education Loan Losses — GAAP Basis

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Allowance at beginning of period

   $ 2,059      $ 2,170      $ 2,097      $ 2,171   

Provision for Private Education Loan losses

     155        187        330        412   

Charge-offs(1)

     (166     (212     (385     (444

Reclassification of interest reserve(2)

     4        4        10        10   

Distribution of SLM BankCo

     (69            (69       
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 1,983      $ 2,149      $ 1,983      $ 2,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     2.3     2.7     2.6     2.8

Allowance as a percentage of ending total loans

     6.0     5.4     6.0     5.4

Allowance as a percentage of ending loans in repayment

     7.3     6.8     7.3     6.8

Average coverage of charge-offs (annualized)

     3.0        2.5        2.6        2.4   

Ending total loans(3)

   $ 32,981      $ 40,017      $ 32,981      $ 40,017   

Average loans in repayment

   $ 28,599      $ 31,618      $ 29,999      $ 31,631   

Ending loans in repayment

   $ 27,136      $ 31,627      $ 27,136      $ 31,627   

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Allowance at beginning of period

   $ 1,987      $ 2,105      $ 2,035      $ 2,106   

Provision for Private Education Loan losses

     145        189        281        394   

Charge-offs(1)

     (166     (212     (385     (444

Reclassification of interest reserve(2 )

     4        4        10        10   

Other transactions

     13        12        42        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance at end of period

   $ 1,983      $ 2,098      $ 1,983      $ 2,098   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     2.5     3.0     2.9     3.2

Allowance as a percentage of ending total loans

     6.0     6.1     6.0     6.1

Allowance as a percentage of ending loans in repayment

     7.3     7.4     7.3     7.4

Average coverage of charge-offs (annualized)

     3.0        2.5        2.6        2.3   

Ending total loans(3)

   $ 32,981      $ 34,634      $ 32,981      $ 34,634   

Average loans in repayment

   $ 27,181      $ 28,382      $ 27,105      $ 28,004   

Ending loans in repayment

   $ 27,136      $ 28,545      $ 27,136      $ 28,545   

 

(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 table provides the detail for our traditional and non-traditional Private Education Loans for the quarters ended.

GAAP Basis:

 

    June 30, 2014     June 30, 2013  

(Dollars in millions)

  Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

  $ 29,824      $ 3,157      $ 32,981      $ 36,445      $ 3,572      $ 40,017   

Ending loans in repayment

    24,947        2,189        27,136        29,155        2,472        31,627   

Private Education Loan allowance for losses

    1,546        437        1,983        1,629        520        2,149   

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

    2.0     6.8     2.3     2.1     9.1     2.7

Allowance as a percentage of ending total loan balance

    5.2     13.8     6.0     4.5     14.6     5.4

Allowance as a percentage of ending loans in repayment

    6.2     19.9     7.3     5.6     21.0     6.8

Average coverage of charge-offs (annualized)

    3.0        2.9        3.0        2.6        2.3        2.5   

Delinquencies as a percentage of Private Education Loans in repayment

    6.3     16.2     7.1     6.6     20.0     7.7

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

    2.8     8.0     3.2     3.1     10.2     3.6

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

    4.1     6.1     4.2     3.4     5.5     3.5

Loans that entered repayment during the period(2)

  $ 85      $ 5      $ 90      $ 481      $ 24      $ 505   

Percentage of Private Education Loans with a cosigner

    67     31     64     69     30     66

Average FICO at origination

    726        626        718        728        624        721   

 

(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:

 

    June 30, 2014     June 30, 2013  

(Dollars in millions)

  Traditional     Non-
Traditional
    Total     Traditional     Non-
Traditional
    Total  

Ending total loans(1)

  $ 29,824      $ 3,157      $ 32,981      $ 31,125      $ 3,509      $ 34,634   

Ending loans in repayment

    24,947        2,189        27,136        26,110        2,435        28,545   

Private Education Loan allowance for losses

    1,546        437        1,983        1,584        514        2,098   

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

    2.1     6.8     2.5     2.4     9.2     3.0

Allowance as a percentage of ending total loan balance

    5.2     13.8     6.0     5.1     14.6     6.1

Allowance as a percentage of ending loans in repayment

    6.2     19.9     7.3     6.1     21.1     7.4

Average coverage of charge-offs (annualized)

    3.0        2.9        3.0        2.5        2.3        2.5   

Delinquencies as a percentage of Private Education Loans in repayment

    6.3     16.2     7.1     7.3     20.2     8.4

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

    2.8     8.0     3.2     3.4     10.4     4.0

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

    4.1     6.1     4.2     3.7     5.6     3.9

Loans that entered repayment during the period(2)

  $ 85      $ 5      $ 90      $ 219      $ 17      $ 236   

Percentage of Private Education Loans with a cosigner

    67     31     64     65     31     62

Average FICO at origination

    726        626        718        725        625        717   

 

(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 concluding on 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 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 2007 and 2014 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 $402 million and $217 million in the allowance for Private Education Loan losses at June 30, 2014 and 2013, respectively, providing for possible additional future charge-offs related to the receivable for partially charged-off Private Education Loans (see “Private Education Loans Segment — Private Education Loan Provision for Loan Losses” for a further discussion).

 

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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
June 30,
    Six Months Ended
June 30,
 

(Dollars in millions)

   2014     2013     2014     2013  

Receivable at beginning of period

   $ 1,297      $ 1,339      $ 1,313      $ 1,347   

Expected future recoveries of current period defaults(1)

     53        70        124        148   

Recoveries(2)

     (58     (54     (119     (122

Charge-offs(3)

     (23     (21     (49     (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Receivable at end of period

     1,269        1,334        1,269        1,334   

Allowance for estimated recovery shortfalls(4)

     (402     (217     (402     (217
  

 

 

   

 

 

   

 

 

   

 

 

 

Net receivable at end of period

   $ 867      $ 1,117      $ 867      $ 1,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

Represents the difference between the defaulted 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” table.

 

  (4) 

The allowance for estimated recovery shortfalls of the receivable for partially charged-off Private Education Loans is a component of the $2.0 billion and $2.1 billion overall allowance for Private Education Loan losses as of June 30, 2014 and 2013, 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 table below reflects on a “Core Earnings” basis the historical effectiveness of using forbearance. Our experience has shown that three years after being granted forbearance for the first time, 66 percent of the loans are current, paid in full, or receiving an in-school grace or deferment, and 20 percent have defaulted. The default experience associated with loans which utilize forbearance is considered in our allowance for loan losses. On a “Core Earnings” basis, the number of loans in a forbearance status as a percentage of loans in repayment and forbearance increased to 4.2 percent in the second quarter of 2014 compared with 3.9 percent in the year-ago

 

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quarter. As of June 30, 2014, 1 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current as of June 30, 2014 (customers made payments on approximately 30 percent of these loans as a prerequisite to being granted forbearance).

 

Tracking by First Time in Forbearance Compared to All Loans Entering Repayment —

Portfolio data through June 30, 2013

 
     Status distribution
36 months after
being granted
forbearance
for the first time
    Status distribution
36 months after
entering repayment
(all loans)
    Status distribution
36 months after
entering repayment for
loans never entering
forbearance
 

In-school/grace/deferment

     9.8     10.1     6.2

Current

     51.2        57.7        65.7   

Delinquent 31-60 days

     3.1        2.0        0.3   

Delinquent 61-90 days

     1.9        1.2        0.1   

Delinquent greater than 90 days

     4.7        2.9        0.2   

Forbearance

     3.8        3.2          

Defaulted

     20.3        12.6        8.6   

Paid

     5.2        10.3        18.9   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

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

At June 30, 2014, loans in forbearance status as a percentage of loans in repayment and forbearance were 10.4 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.4 percent for loans that have been in active repayment status for more than 48 months. Approximately 61 percent of our Private Education Loans in forbearance status has been in active repayment status less than 25 months.

At June 30, 2014, loans in repayment that are delinquent greater than 90 days as a percentage of loans in repayment were 6.2 percent for loans that have been in active repayment status for less than 25 months. The percentage drops to 1.6 percent for loans that have been in active repayment status for more than 48 months. Approximately 45 percent of our Private Education Loans in repayment that are delinquent greater than 90 days status has been in active repayment status less than 25 months.

 

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GAAP Basis:

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment
       

June 30, 2014

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

Loans in-school/grace/deferment

   $      $      $      $      $      $ 3,375      $ 3,375   

Loans in forbearance

     537        200        169        125        170               1,201   

Loans in repayment — current

     2,069        3,463        4,048        4,233        11,389               25,202   

Loans in repayment — delinquent 31-60 days

     141        131        122        100        176               670   

Loans in repayment — delinquent 61-90 days

     80        81        75        56        99               391   

Loans in repayment — delinquent greater than 90 days

     185        207        162        126        193               873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,012      $ 4,082      $ 4,576      $ 4,640      $ 12,027      $ 3,375        31,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (674

Receivable for partially charged-off loans

                 1,269   

Allowance for loan losses

                 (1,983
              

 

 

 

Total Private Education Loans, net

               $ 30,324   
              

 

 

 

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

     17.8     4.9     3.7     2.7     1.4         4.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     7.5     5.3     3.7     2.8     1.6         3.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment
       

June 30, 2013

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

Loans in-school/grace/deferment

   $      $      $      $      $      $ 5,896      $ 5,896   

Loans in forbearance

     584        192        162        96        126               1,160   

Loans in repayment — current

     5,671        4,996        5,303        4,455        8,771               29,196   

Loans in repayment — delinquent 31-60 days

     254        152        137        99        150               792   

Loans in repayment — delinquent 61-90 days

     181        95        86        54        79               495   

Loans in repayment — delinquent greater than 90 days

     442        246        190        118        148               1,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,132      $ 5,681      $ 5,878      $ 4,822      $ 9,274      $ 5,896        38,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (752

Receivable for partially charged-off loans

                 1,334   

Allowance for loan losses

                 (2,149
              

 

 

 

Total Private Education Loans, net

               $ 37,116   
              

 

 

 

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

     8.2     3.4     2.8     2.0     1.4         3.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     6.8     4.5     3.3     2.5     1.6         3.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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“Core Earnings” Basis:

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment
       

June 30, 2014

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

Loans in-school/grace/deferment

   $      $      $      $      $      $ 3,375      $ 3,375   

Loans in forbearance

     537        200        169        125        170               1,201   

Loans in repayment — current

     2,069        3,463        4,048        4,233        11,389               25,202   

Loans in repayment — delinquent 31-60 days

     141        131        122        100        176               670   

Loans in repayment — delinquent 61-90 days

     80        81        75        56        99               391   

Loans in repayment — delinquent greater than 90 days

     185        207        162        126        193               873   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,012      $ 4,082      $ 4,576      $ 4,640      $ 12,027      $ 3,375        31,712   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (674

Receivable for partially charged-off loans

                 1,269   

Allowance for loan losses

                 (1,983
              

 

 

 

Total Private Education Loans, net

               $ 30,324   
              

 

 

 

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

     17.8     4.9     3.7     2.7     1.4         4.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     7.5     5.3     3.7     2.8     1.6         3.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(Dollars in millions)

   Monthly Scheduled Payments Due     Not Yet in
Repayment
       

June 30, 2013

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

Loans in-school/grace/deferment

   $      $      $      $      $      $ 3,599      $ 3,599   

Loans in forbearance

     582        191        161        96        126               1,156   

Loans in repayment — current

     4,092        4,165        4,708        4,416        8,760               26,141   

Loans in repayment — delinquent 31-60 days

     245        148        133        99        149               774   

Loans in repayment — delinquent 61-90 days

     176        93        84        54        79               486   

Loans in repayment — delinquent greater than 90 days

     442        246        190        118        148               1,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 5,537      $ 4,843      $ 5,276      $ 4,783      $ 9,262      $ 3,599        33,300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Unamortized discount

                 (755

Receivable for partially charged-off loans

                 1,334   

Allowance for loan losses

                 (2,098
              

 

 

 

Total Private Education Loans, net

               $ 31,781   
              

 

 

 

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

     10.5     3.9     3.1     2.0     1.4         3.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     8.9     5.3     3.7     2.5     1.6         4.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The table below stratifies the portfolio of Private Education Loans in forbearance by the cumulative number of months the customer has used forbearance as of the dates indicated.

 

     June 30, 2014     June 30, 2013  

(Dollars in millions)

   Forbearance
Balance
     % of
Total
    Forbearance
Balance
     % of
Total
 

Cumulative number of months customer has used forbearance

          

Up to 12 months

   $ 916         76   $ 883         76

13 to 24 months

     188         16        197         17   

More than 24 months

     97         8        80         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,201         100   $ 1,160         100
  

 

 

    

 

 

   

 

 

    

 

 

 

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 June 30, 2014.

 

   

Loan Program

 

(Dollars in millions)

 

Signature and
Other

 

Smart Option

 

Career
Training

  Total  

$ in repayment

  $21,806   $4,250   $1,080   $ 27,136   

$ in total

  $25,895   $4,690   $1,127   $ 31,712   

Payment method by enrollment status:

  Deferred(1)      

In-school/grace

    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.

 

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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 June 30, 2014 and 2013, customers in repayment owing approximately $3.9 billion (14 percent of loans in repayment) and $5.8 billion (20 percent of loans in repayment), respectively, were enrolled in the interest-only program. Of these amounts, 8 percent and 10 percent were non-traditional loans as of June 30, 2014 and 2013, respectively.

Accrued Interest Receivable

The following tables provide information regarding accrued interest receivable on our Private Education Loans. The tables also disclose 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.

GAAP Basis:

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater Than
90 Days
Past Due
     Allowance for
Uncollectible
Interest
 

June 30, 2014

   $ 633       $ 34       $ 49   

December 31, 2013

   $ 1,023       $ 48       $ 66   

June 30, 2013

   $ 928       $ 44       $ 69   

“Core Earnings” Basis:

 

     Accrued Interest Receivable  

(Dollars in millions)

   Total      Greater Than
90 Days
Past Due
     Allowance for
Uncollectible
Interest
 

June 30, 2014

   $ 633       $ 34       $ 49   

December 31, 2013

   $ 689       $ 48       $ 62   

June 30, 2013

   $ 648       $ 44       $ 65   

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. As part of the Spin-Off, Navient neither originates Private Education Loans nor maintains bank deposits. As a result, Navient no longer has liquidity risks associated with the origination of Private Education Loans and the maintenance of bank deposits.

We define liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities or invest in future asset growth and business operations at reasonable market rates. Our two primary liquidity needs include our ongoing ability to meet our funding needs for our businesses throughout market cycles, including during periods of financial stress, and servicing our indebtedness. 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.

 

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We define liquidity as cash and high-quality liquid securities that we can use to meet our funding requirements. Our primary liquidity risk relates to our ability to raise replacement funding 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, as of June 30, 2014, approximately $17.5 billion. On April 30, 2014, three rating agencies took negative ratings actions with regard to our long-term unsecured debt ratings. Fitch lowered its rating one notch to BB and changed its rating outlook to stable. Moody’s lowered its rating two notches to Ba3 and changed its rating outlook to stable. S&P lowered its rating two notches to BB and changed its rating outlook to stable. As a result of S&P’s action, all three credit rating agencies now 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.

The negative actions taken by the credit rating agencies were based on concerns that the Spin-Off will have a negative impact on the holders of our senior unsecured debt. According to their ratings reports, these concerns primarily focus on Navient’s loss of access to the earnings, cash flow, equity and potential market value of Sallie Mae Bank, the run-off of the FFELP Loan portfolio and the growth of other fee businesses to replace the earnings that are in run-off, refinancing risk, and the potential for new and more onerous rules and regulations.

We expect to fund our ongoing liquidity needs, including the repayment of $1.2 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 earnings, 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 facilities or issue term asset-backed securities (“ABS”).

While we no longer originate Private Education Loans or FFELP Loans and therefore no longer have liquidity requirements for new originations, we will continue to opportunistically purchase Private Education Loan and FFELP Loan portfolios from others.

 

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Sources of Liquidity and Available Capacity

Ending Balances

 

(Dollars in millions)

   June 30,
2014
     December 31,
2013
 

Sources of primary liquidity:

     

Total unrestricted cash and liquid investments

   $ 1,643       $ 3,015   

Unencumbered FFELP Loans

     1,766         1,259   
  

 

 

    

 

 

 

Total “Core Earnings” basis

     3,409         4,274   

SLM BankCo(1)

             3,709   
  

 

 

    

 

 

 

Total GAAP basis

   $ 3,409       $ 7,983   
  

 

 

    

 

 

 

 

  (1) 

As of December 31, 2013, includes $2.3 billion of cash and $1.4 billion of FFELP Loans which were transferred to or retained by SLM BankCo following the Spin-Off.

Average Balances

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

(Dollars in millions)

   2014      2013      2014      2013  

Sources of primary liquidity:

           

Total unrestricted cash and liquid investments

   $ 1,988       $ 2,250       $ 2,083       $ 2,534   

Unencumbered FFELP Loans

     1,854         801         1,763         728   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” basis

     3,842         3,051         3,846         3,262   

SLM BankCo

     1,039         2,780         1,969         2,525   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total GAAP basis

   $ 4,881       $ 5,831       $ 5,815       $ 5,787   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) 

For the three months ended June 30, 2014 and 2013, includes $580 million and $1.7 billion of cash, respectively, and $459 million and $1.1 billion of FFELP Loans, respectively. For the six months ended June 30, 2014 and 2013, includes $1.0 billion and $1.5 billion of cash, respectively, and $929 million and $1.1 billion of FFELP Loans, respectively.

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 June 30, 2014 and 2013, the maximum additional capacity under these facilities was $10.7 billion and $11.9 billion, respectively. For the three months ended June 30, 2014 and 2013, the average maximum additional capacity under these facilities was $11.8 billion and $11.1 billion, respectively. For the six months ended June 30, 2014 and 2013, the average maximum additional capacity under these facilities was $12.0 billion and $10.9 billion, respectively.

In addition to the FFELP Loan – other facilities, funding may also be available from our Private Education Loan asset-backed commercial paper facility which we closed in June 2014. The new facility will provide liquidity for Private Education Loan acquisitions and for the refinancing of loans presently on our balance sheet or in other short–term facilities. The maximum capacity under this facility is $1 billion. It matures in June 2015.

We also hold a number of other unencumbered assets, consisting primarily of Private Education Loans and other assets. Total unencumbered student loans comprised $7.9 billion of our unencumbered assets of which $6.1 billion and $1.8 billion related to Private Education Loans and FFELP Loans, respectively. At June 30, 2014, we had a total of $13.5 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 Form 10.

 

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

 

(Dollars in billions)

   June 30,
2014
    December 31,
2013
 

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

   $ 4.5      $ 4.6   

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

     6.1        6.7   

Tangible unencumbered assets(1)

     13.4        23.8   

Unsecured debt

     (18.4     (27.9

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

     (0.9     (0.8

Other liabilities, net

     (1.1     (1.2
  

 

 

   

 

 

 

Total tangible equity – GAAP Basis

   $ 3.6      $ 5.2   
  

 

 

   

 

 

 

 

  (1) 

Excludes goodwill and acquired intangible assets.

 

  (2) 

At June 30, 2014 and December 31, 2013, there were $756 million billion and $612 million, respectively, of net gains on derivatives hedging this debt in unencumbered assets, which partially offset these losses.

The $1.6 billion decrease in total tangible equity from December 31, 2013 to June 30, 2014 is primarily the result of the deemed distribution of the $1.7 billion of consumer banking business net assets on April 30, 2014.

Financing Transactions during the Six Months Ended June 30, 2014

The following financing transactions have taken place in the first six months of 2014:

Unsecured Financings:

 

   

March 27, 2014 — issued $850 million senior unsecured bonds.

FFELP Loan Financings:

 

   

January 28, 2014 — issued $994 million FFELP Loan ABS.

 

   

March 27, 2014 — issued $992 million FFELP Loan ABS.

 

   

May 29, 2014 — issued $747 million FFELP Loan ABS.

Private Education Loan Financings:

 

   

March 6, 2014 — issued $676 million Private Education Loan ABS.

FFELP ABCP Facility:

On January 10, 2014, we closed on a new $8 billion asset-backed commercial paper (“ABCP”) facility that matures in January 2016. This facility replaces an existing $5.5 billion FFELP ABCP facility which was retired in January 2014. The additional $2.5 billion will be available for FFELP acquisition or refinancing. The maximum amount that can be financed steps down to $7 billion in March 2015. The new facility’s maturity date is January 8, 2016.

Private Education Loan Facility:

On June 25, 2014, Navient closed a $1.0 billion Private Education Loan ABCP facility that is supported by four banks. The facility, which matures on June 24, 2015, will be available for Private Education Loan refinancing and acquisitions.

 

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Shareholder Distributions

In June 2014, we paid a common stock dividend of $0.15 per share.

In May 2014, we authorized $400 million to be utilized in a new common share repurchase program that does not have an expiration date. We repurchased 3.9 million shares of common stock for $65 million in the second quarter of 2014.

Recent Third-Quarter 2014 Transactions

Private Education Loan Financings:

 

   

July 24, 2014 – issued $463 million Private Education Loan ABS.

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 Loans Portfolio Performance” and “— Private Education Loans 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 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 derivative contracts entered into by us 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. If our credit ratings are downgraded from current levels, we may be required to segregate additional unrestricted cash collateral into restricted accounts.

 

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The table below highlights exposure related to our derivative counterparties at June 30, 2014.

 

(Dollars in millions)

   Corporate
Contracts
    Securitization Trust
Contracts
 

Exposure, net of collateral(1)

   $ 98      $ 897   

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

     64     27

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

     34     0

 

  (1) 

Our securitization trusts had total net exposure of $733 million related to financial institutions located in France; of this amount, $578 million carries a guaranty from the French government. The total exposure relates to $5.0 billion notional amount of cross-currency interest rate swaps held in our securitization trusts, of which $3.2 billion notional amount carries a guaranty from the French government. Counterparties to the cross currency interest rate swaps are required to post collateral when their credit rating is withdrawn or downgraded below a certain level. As of June 30, 2014, no collateral was required to be posted and we are not holding any collateral related to these contracts. Adjustments are made to our derivative valuations for counterparty credit risk. The adjustments made at June 30, 2014 related to derivatives with French financial institutions (including those that carry a guaranty from the French government) decreased the derivative asset value by $49 million. Credit risks for all derivative counterparties are assessed internally on a continual basis.

“Core Earnings” Basis Borrowings

The following tables present the ending balances of our “Core Earnings” basis borrowings at June 30, 2014 and December 31, 2013, and average balances and average interest rates of our “Core Earnings” basis borrowings for the three and six months ended June 30, 2014 and 2013. 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).

Ending Balances

 

     June 30, 2014      December 31, 2013  

(Dollars in millions)

   Short
Term
     Long
Term
     Total      Short
Term
     Long
Term
     Total  

Unsecured borrowings:

                 

Senior unsecured debt

   $ 1,189       $ 16,311       $ 17,500       $ 2,213       $ 16,056       $ 18,269   

Other(1)

     912                 912         686                 686   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unsecured borrowings

     2,101         16,311         18,412         2,899         16,056         18,955   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured borrowings:

                 

FFELP Loan securitizations

             89,036         89,036                 90,756         90,756   

Private Education Loan securitizations

             18,190         18,190                 18,835         18,835   

FFELP Loan – other facilities

     2,190         5,573         7,763         4,715         5,311         10,026   

Private Education Loan — other facilities

             565         565                 843         843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total secured borrowings

     2,190         113,364         115,554         4,715         115,745         120,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

“Core Earnings” balances

     4,291         129,675         133,966         7,614         131,801         139,415   

Adjustment for GAAP accounting treatment

     25         2,244         2,269         6,181         4,847         11,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

GAAP balances

   $ 4,316       $ 131,919       $ 136,235       $ 13,795       $ 136,648       $ 150,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

Secured borrowings comprised 86 percent and 86 percent of our “Core Earnings” basis debt outstanding at June 30, 2014 and December 31, 2013, respectively.

 

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Average Balances

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2014     2013     2014     2013  

(Dollars in millions)

  Average
Balance
    Average
Rate
    Average
Balance
    Average
Rate
    Average
Balance
    Average
Rate
    Average
Balance
    Average
Rate
 

Unsecured borrowings:

               

Senior unsecured debt

  $ 17,662        3.72   $ 17,848        3.22   $ 17,649        3.68   $ 18,085        3.19

Other(1)

    845        .44        1,157        .13        785        .29        1,261        .18   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unsecured borrowings

    18,507        3.57        19,005        3.03        18,434        3.53        19,346        2.99   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Secured borrowings:

               

FFELP Loan securitizations

    89,594        .98        96,656        .98        89,990        .99        99,578        .97   

Private Education Loan securitizations

    18,455        1.99        20,600        2.05        18,559        2.01        20,159        2.06   

FFELP Loan — other facilities

    8,061        .81        13,383        .99        8,659        .88        14,491        1.01   

Private Education Loan — other facilities

    584        1.13        183        2.48        676        1.23        549        1.86   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured borrowings

    116,694        1.13        130,822        1.15        117,884        1.14        134,777        1.14   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 135,201        1.47   $ 149,827        1.39   $ 136,318        1.46   $ 154,123        1.37
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   

“Core Earnings” average balance and rate

  $ 135,201        1.47   $ 149,827        1.39   $ 136,318        1.46   $ 154,123        1.37

Adjustment for GAAP accounting treatment

    3,011        2.53        7,465        1.90        5,953        1.78        7,522        2.00   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GAAP basis average balance and rate

  $ 138,212        1.49   $ 157,292        1.41   $ 142,271        1.48   $ 161,645        1.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

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, derivative accounting and goodwill and intangible assets can be found in our Form 10. There were no significant changes to these critical accounting policies during the first half of 2014.

 

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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 June 30, 2014 and December 31, 2013, 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 is 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 in 2014.

 

    As of June 30, 2014     As of June 30, 2013  
    Impact on Annual Earnings If:     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

  $ (23   $ (6   $ (202   $ (15   $ 16      $ (246

Unrealized gains (losses) on derivative and hedging activities

    189        273        2        293        476        (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in net income before taxes

  $ 166      $ 267      $ (200   $ 278      $ 492      $ (247
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in diluted earnings per common share

  $ .38      $ .62      $ (.46   $ .61      $ 1.09      $ (.54
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

     At June 30, 2014  
            Interest Rates:  
            Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

   Fair Value              $                     %                     $             %          

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 100,517       $ (565     (1 )%    $ (1,133     (1 )% 

Private Education Loans

     30,941                                

Other earning assets

     5,907                                

Other assets

     7,015         (362     (5     (685     (10 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 144,380       $ (927     (1 )%    $ (1,818     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 135,221       $ (795     (1 )%    $ (2,206     (2 )% 

Other liabilities

     2,720         83        3        821        30   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 137,941       $ (712     (1 )%    $ (1,385     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     At December 31, 2013  
            Interest Rates:  
        Change from
Increase of
100 Basis
Points
    Change from
Increase of
300 Basis
Points
 

(Dollars in millions)

   Fair Value              $                     %                     $                     %          

Effect on Fair Values:

           

Assets

           

FFELP Loans

   $ 104,481       $ (566     (1 )%    $ (1,126     (1 )% 

Private Education Loans

     37,485                                

Other earning assets

     9,732                       (1       

Other assets

     7,711         (278     (4     (435     (6 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets gain/(loss)

   $ 159,409       $ (844     (1 )%    $ (1,562     (1 )% 
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Interest-bearing liabilities

   $ 147,385       $ (859     (1 )%    $ (2,393     (2 )% 

Other liabilities

     3,458         58        2        805        23   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities (gain)/loss

   $ 150,843       $ (801     (1 )%    $ (1,588     (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 June 30, 2014 and 2013, 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 where 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 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 June 30, 2014 and June 30, 2013 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 7A. 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

 

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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 June 30, 2014. 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.

GAAP Basis:

 

Index

(Dollars in billions)

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

3-month Treasury bill

   weekly    $ 5.1       $       $ 5.1   

Prime

   annual      0.6                 0.6   

Prime

   quarterly      3.7                 3.7   

Prime

   monthly      18.1                 18.1   

Prime

   daily              0.1         (0.1

PLUS Index

   annual      0.3                 0.3   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              79.7         (79.7

1-month LIBOR

   monthly      8.9         37.3         (28.4

1-month LIBOR daily

   daily      93.7                 93.7   

CMT/CPI Index

   monthly/quarterly              0.8         (0.8

Non-Discrete reset(3)

   monthly              10.4         (10.4

Non-Discrete reset(4)

   daily/weekly      5.9         0.9         5.0   

Fixed Rate(5)

        6.7         13.8         (7.1
     

 

 

    

 

 

    

 

 

 

Total

      $ 143.0       $ 143.0       $   
     

 

 

    

 

 

    

 

 

 

 

 

  (1) 

FFELP Loans of $43.1 billion ($40.0 billion LIBOR index and $3.1 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 asset-backed securities and FFELP 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.

 

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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.

“Core Earnings” Basis:

 

Index

(Dollars in billions)

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

3-month Treasury bill

   weekly    $ 5.1       $       $ 5.1   

Prime

   annual      0.6                 0.6   

Prime

   quarterly      3.7                 3.7   

Prime

   monthly      18.1         1.5         16.6   

Prime

   daily              0.1         (0.1

PLUS Index

   annual      0.3                 0.3   

3-month LIBOR

   daily                        

3-month LIBOR

   quarterly              64.2         (64.2

1-month LIBOR

   monthly      8.9         48.9         (40.0

1-month LIBOR

   daily      93.7         5.0         88.7   

Non-Discrete reset(3)

   monthly              10.4         (10.4

Non-Discrete reset(4)

   daily/
weekly
     5.9         0.9         5.0   

Fixed Rate(5)

        4.5         9.8         (5.3
     

 

 

    

 

 

    

 

 

 

Total

      $ 140.8       $ 140.8       $   
     

 

 

    

 

 

    

 

 

 

 

 

  (1) 

FFELP Loans of 15.9 billion ($15.1 billion LIBOR index and $0.8 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 asset-backed securities and FFELP 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 June 30, 2014.

 

(Averages in Years)

   Weighted Average
Life
 

Earning assets

  

Student loans

     7.4   

Other loans

     7.5   

Cash and investments

       
  

 

 

 

Total earning assets

     7.1   
  

 

 

 

Borrowings

  

Short-term borrowings

     0.3   

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 June 30, 2014. Based on this evaluation, our chief principal executive and principal financial officers concluded that, as of June 30, 2014, 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 June 30, 2014 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

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 these matters are claims against our servicing and asset recovery subsidiaries by borrowers and debtors alleging the violation of state or federal laws in connection with servicing or asset recovery activities on their student loans and other debts. In addition, our asset recovery 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 Form 10.

Tina Ubaldi v. SLM Corporation

On March 18, 2011, a student loan borrower filed a putative class action complaint against Old SLM (now known as Navient, LLC) in the U.S. District Court for the Northern District of California. The complaint is captioned Tina M. Ubaldi v. SLM Corporation et. al., Case No. C-11-01320EDL. The plaintiff purports to bring the complaint on behalf of a class consisting of other similarly situated California borrowers. The complaint alleges, 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), the operative complaint (Modified Third Amended Complaint) was filed on December 2, 2013. Plaintiffs filed their Motion for Class Certification on October 22, 2013. On March 24, 2014, the Court denied plantiffs’ Motion for Class Certification without prejudice, but granted plantiffs 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, which is scheduled for hearing on October 14, 2014. Plaintiffs seek 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 allege 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. 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.

Regulatory Matters

On May 2, 2014, NSI, a wholly-owned subsidiary of Navient, and Sallie Mae Bank entered into consent orders with the FDIC (respectively, the “NSI Order” and the “Bank Order”; collectively, “the FDIC Orders”) to resolve previously disclosed 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 DOJ by Navient and SLM BankCo on May 13, 2014, required each of Sallie Mae Bank and 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

 

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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 Agreement, Navient is responsible for funding the restitution reserve account. We funded the account in May 2014.

The NSI Order requires 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 have already been implemented. In order to treat all customers in a similar manner, NSI expects to voluntarily make restitution of certain late fees to all other customers whose loans were neither owned nor originated by Sallie Mae Bank on the same basis and in the same manner as that which would be required by the FDIC. These refunds are estimated at $42 million.

With respect to alleged civil violations of the SCRA, NSI and Sallie Mae Bank have entered into a consent order with the DOJ, in its capacity as the agency having primary authority for enforcement of such matters. 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 requires NSI to fund a $60 million settlement fund, which would represent the total amount of compensation due to service members under the DOJ agreement and pay $55,000 in civil money penalties. The DOJ Order is currently on the docket of the United States District Court in Delaware awaiting Court approval.

As of December 31, 2013, a reserve of $65 million was established for estimated amounts and costs that were probable of being incurred for the FDIC and DOJ matters discussed above. In the first quarter of 2014, an additional reserve of $103 million was recorded for pending regulatory matters based on the progression of settlement discussions with the regulators and as a result, as of March 31, 2014, the related regulatory reserve was $168 million. The final cost of these proceedings remains uncertain until the DOJ Order is approved by the Court and all of the work under the various consent orders has been completed.

NSI has also received Civil Investigative Demands (“CIDs”) 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 relating to these matters and is cooperating with the investigation. We are not in a position at this time to predict the duration or the outcome of this investigation and reserves have not been established for this matter.

Navient has received CIDs issued by the State of Illinois Office of Attorney General and the State of Washington Office of Attorney General and continues to cooperate with multiple state Attorneys General in connection with these investigations. According to the CIDs, the investigation was 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. Navient is cooperating with this investigation. We are not in a position at this time to predict the duration or the outcome of this investigation and reserves have not been established for this matter.

Pursuant to the Separation Agreement entered into in connection with the Spin-Off, 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. Please see our Form 10 for a discussion of these indemnifications. As a result, all liabilities arising out of the aforementioned regulatory matters, 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 retained $165 million of the $168 million total regulatory reserve in connection with the Spin-Off. There are no additional reserves Navient has related to other indemnification matters with SLM BankCo as of June 30, 2014.

 

Item 1A. Risk Factors

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

 

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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 June 30, 2014.

 

(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:

           

April 1 — April 30, 2014

     .2       $ 25.58               $   

May 1 — May 31, 2014

     1.3         16.01         .4       $ 394   

June 1 — June 30, 2014

     3.6         16.90         3.5       $ 335   
  

 

 

    

 

 

    

 

 

    

Total second-quarter 2014

     5.1       $ 17.04         3.9      
  

 

 

    

 

 

    

 

 

    

 

 

(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 May 2014, our board of directors authorized us to purchase up to $400 million of shares of our common stock.

The closing price of our common stock on the NASDAQ Global Select Market on June 30, 2014 was $17.71.

 

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:

 

    2.1    Separation and Distribution Agreement, by and among, SLM Corporation, SLM BankCo and Navient Corporation, dated as of April 28, 2014 (incorporated by reference to Exhibit 2.1 to Navient Corporation’s Current Report on Form 8-K filed on May 2, 2014).
    3.1    Amended and Restated Certificate of Incorporation of Navient Corporation (incorporated by reference to Exhibit 3.1 of Amendment No. 3 to Navient Corporation’s Registration Statement on Form 10 (File No. 001-36228) filed on March 27, 2014).
    3.2    Amended and Restated By-Laws of Navient Corporation (incorporated by reference to Exhibit 3.2 of Amendment No. 3 to Navient Corporation’s Registration Statement on Form 10 (File No. 001-36228) filed on March 27, 2014).
  10.1    Transition Services Agreement by and between Navient Corporation and SLM Corporation, dated as of April 29, 2014 (incorporated by reference to Exhibit 10.1 to Navient Corporation’s Current Report on Form 8-K filed on May 2, 2014).
  10.2    Employee Matters Agreement, by and among SLM Corporation, New BLC Corporation and Navient Corporation, dated as of April 28, 2014 (incorporated by reference to Exhibit 10.2 to Navient Corporation’s Current Report on Form 8-K filed on May 2, 2014).
  10.3    Tax Sharing Agreement, by and between Navient Corporation and New BLC Corporation, dated as of April 28, 2014 (incorporated by reference to Exhibit 10.2 to Navient Corporation’s Current Report on Form 8-K filed on May 2, 2014).
  10.4†    Navient Deferred Compensation Plan for Key Employees (incorporated by reference to Exhibit 4.3 to Navient Corporation’s Registration Statement on Form S-8 (File No. 333-195539) filed on April 28, 2014).
  10.5†    Navient Deferred Compensation Plan for Directors (incorporated by reference to Exhibit 4.3 to Navient Corporation’s Registration Statement on Form S-8 (File No. 333-195538) filed on April 28, 2014).
  10.6†    Navient Corporation 2014 Omnibus Incentive Plan (incorporated by reference to Exhibit 4.3 to Navient Corporation’s Registration Statement on Form S-8 (File No. 333-195529) filed on April 28, 2014).
  10.7†    Navient Corporation Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.3 to Navient Corporation’s Registration Statement on Form S-8 (File No. 333-195533) filed on April 28, 2014).
  10.8†    Navient Supplemental 401(k) Savings Plan (incorporated by reference to Exhibit 4.3 to Navient Corporation’s Registration Statement on Form S-8 (File No. 333-195535) filed on April 28, 2014).
  10.9†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet — 2012 PSU Conversion.
  10.10†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet — 2013 PSU Conversion.
  10.11†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet — 2014.
  10.12†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Bonus Restricted Stock Unit Term Sheet (Two-Year Restriction) — 2014.
  10.13†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Bonus Restricted Stock Unit Term Sheet (Three-Year Restriction) — 2014.

 

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  10.14†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options — 2014.
  10.15†*    Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet for John F. Remondi — 2013.
  10.16†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet — 2013.
  10.17†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options — 2013.
  10.18†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Restricted Stock Unit Term Sheet — 2012.
  10.19†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Bonus Restricted Stock Unit Term Sheet (Two-Year Restriction) — 2012.
  10.20†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Bonus Restricted Stock Unit Term Sheet (Three-Year Restriction) — 2012.
  10.21†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options — 2012.
  10.22†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options — 2011.
  10.23†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement, Net Settled Options — 2010.
  10.24†*    Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement for John M. Kane — 2008.
  10.25†*    Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Agreement for Timothy J. Hynes — 2008.
  10.26†*    Navient Corporation 2014 Omnibus Incentive Plan, Stock Option Notice for John F. Remondi — 2008.
  10.27†*    Navient Corporation 2014 Omnibus Incentive Plan, Additional Stock Option Notice for John F. Remondi — 2008.
  10.28†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Award Agreement — 2014.
  10.29†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2013.
  10.30†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2012.
  10.31†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2011.
  10.32†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2010.
  10.33†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2009.
  10.34†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2008.

 

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  10.35†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2007.
  10.36†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2006.
  10.37†*    Form of Navient Corporation 2014 Omnibus Incentive Plan, Independent Director Stock Option Agreement — 2005.
  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.

 

* Filed herewith.

 

 

Management Contract or Compensatory Plan or Arrangement

 

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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 Officer)

Date: August 1, 2014

 

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