10-K 1 d35213d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2015

or

 

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

For the transition period from                  to                 

Commission file numbers 001-36228

 

 

Navient Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   46-4054283

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

123 Justison Street, Wilmington, Delaware 19801   (302) 283-8000
(Address of Principal Executive Offices)   (Telephone Number)

Securities registered pursuant to Section 12(b) of the Act

 

Title of Each Class

 

Name of Exchange on which Listed

Common stock, par value $.01 per share   The NASDAQ Global Select Market
Medium Term Notes, Series A, CPI-Linked Notes due 2017   The NASDAQ Global Select Market
Medium Term Notes, Series A, CPI-Linked Notes due 2018   The NASDAQ Global Select Market
6% Senior Notes due December 15, 2043   The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None.

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  ¨        No  þ

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  ¨

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2015 was $6.8 billion (based on closing sale price of $18.21 per share as reported for the NASDAQ Global Select Market).

As of January 31, 2016, there were 342,817,020 shares of common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement relating to the Registrant’s 2016 Annual Meeting of Stockholders, currently scheduled to be held on May 26, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

NAVIENT CORPORATION

TABLE OF CONTENTS

 

           

Page

Number

Forward-Looking and Cautionary Statements

   1

Available Information

   3

PART I

  

Item 1.

     Business    4

Item 1A.

     Risk Factors    15

Item 1B.

     Unresolved Staff Comments    30

Item 2.

     Properties    31

Item 3.

     Legal Proceedings    31

Item 4.

     Mine Safety Disclosures    35

PART II

  

Item 5.

     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    36

Item 6.

     Selected Financial Data    38

Item 7.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations    39

Item 7A.

     Quantitative and Qualitative Disclosures about Market Risk    107

Item 8.

     Financial Statements and Supplementary Data    111

Item 9.

     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    111

Item 9A.

     Controls and Procedures    111

Item 9B.

     Other Information    112

PART III

  

Item 10.

     Directors, Executive Officers and Corporate Governance    113

Item 11.

     Executive Compensation    113

Item 12.

     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    113

Item 13.

     Certain Relationships and Related Transactions, and Director Independence    113

Item 14.

     Principal Accounting Fees and Services    113

PART IV

       

Item 15.

     Exhibits, Financial Statement Schedules    114

Appendix A – Description of Federal Family Education Loan Program

   A-1

Glossary

   G-1


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FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This report contains “forward-looking” statements and other information that is based on management’s current expectations as of the date of this report. 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 and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” or “target.” 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.

For us, these factors include, among others, the risks and uncertainties associated with:

 

   

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 marketplaces we compete in (including changes in demand or 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 the availability of that funding;

 

   

reductions to our credit ratings or the credit ratings of the United States of America;

 

   

failures of our operating systems or infrastructure, or those of third-party vendors;

 

   

risks related to cybersecurity including the potential disruption of our systems or potential disclosure of confidential customer information;

 

   

damage to our reputation;

 

   

failures to successfully implement cost-cutting initiatives and adverse effects of such initiatives on our business;

 

   

errors in the conversion to our servicing platform of the Wells Fargo portfolio of Federal Family Education Loan Program (“FFELP”) loans or failures, delays or errors in the conversion to our servicing platform of any other FFELP or Private Education Loan portfolio acquisitions;

 

   

risks associated with restructuring initiatives;

 

   

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;

 

   

our ability to successfully effectuate any acquisitions and other strategic initiatives;

 

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changes in general economic conditions; and

 

   

the other factors that are described in the “Risk Factors” section of this Annual Report on Form 10-K and in our future reports filed with the Securities and Exchange Commission (“SEC”).

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 and actual results could differ materially. 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 except as required by law.

Definitions for certain capitalized terms used but not otherwise defined in this Annual Report on Form 10-K can be found in the “Glossary” at the end of this report.

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

 

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AVAILABLE INFORMATION

Our website address is www.navient.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are filed with the Securities and Exchange Commission (the “SEC”). We are subject to the informational requirements of the Exchange Act and file or furnish reports, proxy statements and other information with the SEC. Copies of these reports, as well as any amendments to these reports, are available free of charge through our website at www.navient.com/about/investors/stockholderinfo/secfilings, as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The public may also read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov.

In addition, copies of our Board Governance Guidelines, Code of Business Conduct (which includes the code of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) and the governing charters for each committee of our Board of Directors are available free of charge on our website at www.navient.com/about/investors/corp_governance, as well as in print to any stockholder upon request. We intend to disclose any amendments to or waivers from our Code of Business Conduct (to the extent applicable to our Principal Executive Officer or Principal Financial Officer) by posting such information on our website.

Information contained or referenced on the foregoing websites is not incorporated by reference into and does not form a part of this Annual Report on Form 10-K. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

 

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PART I.

 

Item 1. Business

Overview

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

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

Navient services its own portfolio of education loans, as well as education loans owned by banks, credit unions, other financial institutions, non-profit education lenders and ED. Navient is one of four Title IV Additional Servicers (“TIVAS”) to ED under its Direct Student Loan Program (“DSLP”). Navient also provides asset recovery services on its own portfolio (consisting of both education loans and other asset classes), and on behalf of guaranty agencies, higher education institutions, and federal, state, court and municipal clients. In addition, we provide business processing services on behalf of municipalities, public authorities and hospitals.

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

 

   

$96.5 billion in FFELP Loans, with a net interest margin of 0.84 percent for the year ended December 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.2 years;

 

   

$26.4 billion in Private Education Loans, with a net interest margin of 3.67 percent for the year ended December 31, 2015 on a “Core Earnings” basis and a weighted average life of 7.0 years;

 

   

a leading education loan servicing platform that services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers (including cosigners), including 6.3 million customer accounts serviced under Navient’s contract with ED; and

 

   

a leading asset recovery and business processing platform where we currently provide services for over 1,000 public and private sector clients.

Strengths and Opportunities

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

Large, high quality asset base generating significant and predictable cash flows. At December 31, 2015, Navient’s $122.9 billion education loan portfolio is 74 percent funded to term and is expected to produce consistent and predictable cash flows over the remaining life of the portfolio. Navient’s $96.5 billion portfolio of FFELP Loans bears a maximum 3 percent loss exposure due to the federal guaranty. Navient’s $26.4 billion

 

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portfolio of Private Education Loans bears the full credit risk of the borrower and any 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 operating platforms. Navient is the largest servicer of education loans, servicing over $300 billion in education loans for more than 12 million customers. Navient’s inventory of contingent asset recovery receivables is $20.2 billion as of December 31, 2015 and provides services to over 1,000 public and private sector clients. Navient has demonstrated scalable infrastructure with capacity to add volume at a low cost. Navient’s premier market share and tested infrastructure make it well-positioned to expand its businesses to additional clients and asset types.

Superior performance. Navient has demonstrated superior default prevention performance and industry leading asset recovery services. The combined portfolio of federal loans serviced by Navient experienced a Cohort Default Rate (“CDR”) of 8 percent, which is 38 percent lower than their peers, as calculated from the most recent CDR released by ED in September 2015. We are consistently a top performer in our asset recovery business and deliver superior service to our public and private sector clients.

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

Strong capital return. As a result of our significant cash flow and capital generation, Navient expects to return excess capital to stockholders through dividends and share repurchases. In December 2014, Navient’s board of directors authorized $1 billion to be utilized in a new common share repurchase program effective January 1, 2015, and in December 2015, our board authorized an additional $700 million for common share repurchases. Navient increased its quarterly dividend amount from $0.15 per share to $0.16 per share effective for its first-quarter 2015 dividends. For the year ended December 31, 2015, we paid $240 million in dividends on shares of our common stock and repurchased $945 million of shares of our common stock. As of December 31, 2015, the remaining common share repurchase authority was $755 million.

Meaningful growth opportunities. Navient will pursue opportunistic acquisitions of FFELP and Private Education Loan portfolios. During the year ended December 31, 2015, Navient acquired $3.7 billion of education loans. Navient will also pursue additional third-party servicing, asset recovery and business processing contracts. In February 2015, Navient completed the acquisition of Gila LLC (commonly known as Municipal Services Bureau, or MSB), an asset recovery and business processing firm. The firm provides receivables management services and account processing solutions for state governments, agencies, court systems and municipalities. In October 2015, Navient completed the acquisition of Xtend Healthcare, a health care revenue cycle management company. The firm provides health insurance claims billing and account resolution, as well as patient billing and customer service. The acquisition leverages Navient’s asset recovery and business processing capabilities into the health care payments sector. Navient intends to leverage its large-scale operating platforms, superior default prevention and asset recovery performance, operating efficiency and regulatory compliance and risk management infrastructure in growing these businesses and in pursuing other growth opportunities.

Navient’s Approach to Helping Education Loan Borrowers Achieve Success

Navient services loans for more than 12 million DSLP Loan, FFELP Loan and Private Education Loan customers, including 6.3 million customers whose accounts are serviced under Navient’s contract with ED. We help our customers navigate the path to financial success through proactive outreach and emphasis on identifying the payment plan that best fits their individual budgets and financial goals.

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.

 

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

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

We have been a partner in ED’s campaign to inform federal education loan customers about various income-driven repayment (“IDR”) plans, and have played a leadership role in helping customers understand their options so they can make an informed choice. We promote awareness of federal repayment plan options through more than 170 million communications annually, including mail, email, phone calls, videos, and text messages. At the end of 2015, nearly one in five federal borrowers and more than one-third of dollar volume serviced by Navient (excluding Parent PLUS loans that are not eligible for IDR) were enrolled in an IDR plan.

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

For those who need it, Navient launched its highly successful private loan modification program in 2009. As of December 31, 2015, $2.5 billion of our Private Education Loans were enrolled in the interest rate reduction component of our modification program, helping customers have a more affordable monthly payment while making progress in repaying the principal loan balance. Approximately 80 percent of enrolled borrowers successfully complete the program.

As of December 31, 2015, Navient’s total delinquency rates were at the lowest year-ending levels for both FFELP and Private Education Loans since 2005.

In 2015, we made additional and substantial investments designed to help our customers, drawing from a variety of inputs including customer surveys, analysis of customer inquiries and complaint data, regulator commentary, and website activity. For example, we launched a new customer website making it easier for customers to manage their loans. In addition, beginning in 2015, customers who need to renew their income-driven repayment plans have access to the services of a specially trained group of service representatives to assist them. We also established customer and employee research panels to gather real-time feedback to inform enhancements underway.

Our Office of the Customer Advocate, established in 1997, offers escalated assistance to customers who need it. We are committed to working with customers and appreciate customer comments, which, combined with our own customer communication channels, help us improve the ways we assist our customers.

Navient takes seriously its commitment to serve military customers and has developed what it believes is a best-in-class system to assist them. Navient was the first student loan servicer to launch a dedicated military benefits customer service team, and was also the first student loan servicer to launch a dedicated military benefits website, Navient.com/military, and a toll-free number dedicated to military customers. Navient’s military benefits team offers a single point of contact for all calls from service members and their families to help them access the benefits designed for them, including interest rate benefits, deferment and other options.

We also continue to offer free resources to help customers and the general public build knowledge on personal finance topics. In 2015, for example, we released the top habits of successful student loan

 

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borrowers and added online resources to encourage financial literacy including such topics as military financial education, income-driven repayment plans, and budgeting. We also launched a signature national research study, “Money Under 35,” to study and promote financial wellness among Americans ages 22 to 35.

Business Segments

We have three primary reportable business segments: FFELP Loans, Private Education Loans and Business Services. A fourth segment — Other — primarily consists of financial results of our holding company, including activities related to repurchases of debt, our corporate liquidity portfolio, unallocated overhead and regulatory-related costs. Each of these business segments are discussed below.

FFELP Loans Segment

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

We are currently the largest holder of FFELP Loans. Navient’s portfolio of FFELP Loans as of December 31, 2015 was $96.5 billion and we anticipate that this FFELP Loan portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life. Navient’s goal is to maximize and optimize the timing of the cash flows generated by its FFELP Loan portfolio. Navient also seeks to acquire FFELP Loan portfolios from third parties to add net interest income and servicing revenue. During the year ended December 31, 2015, Navient acquired $3.7 billion of FFELP 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. These guaranty agreements generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest for loans disbursed. For more discussion of the FFELP and related credit support mechanisms, see Appendix A “Description of Federal Family Education Loan Program.”

As a result of the long-term funding used in the FFELP Loan portfolio and the insurance and guarantees provided on these loans, the portfolio generates consistent and predictable cash flows and the capital we choose to allocate to the segment is modest. As of December 31, 2015, approximately 78 percent of the FFELP Loans held by Navient were funded to term with non-recourse, long-term securitization debt.

The Higher Education Act of 1965 (“HEA”) continues to regulate every aspect of FFELP Loans, including ongoing communications with borrowers and default aversion requirements. Failure to service FFELP Loans properly could jeopardize the insurance, guarantees and federal support on these loans. The insurance and guarantees on Navient’s existing FFELP Loans were not affected by the termination of FFELP originations.

Private Education Loans Segment

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

We are currently the largest holder of Private Education Loans. Navient’s portfolio of Private Education Loans as of December 31, 2015 was $26.4 billion and we anticipate that this Private Education Loan portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life. Navient’s goal is to maximize and optimize the timing of the cash flows generated by its Private Education Loan portfolio.

 

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Navient also seeks to acquire Private Education Loan portfolios from third parties to add net interest income. As of December 31, 2015, approximately 62 percent of the Private Education Loans held by Navient were funded to term with non-recourse, long-term securitization debt.

Unlike FFELP Loans, the holder of a Private Education Loan bears the full credit risk of the borrower and any cosigner. Navient believes the credit risk of the Private Education Loans it owns is well managed through the rigorous underwriting practices and risk-based pricing utilized when the loans were originated, the continued high levels of qualified cosigners and our internal servicing and risk mitigation practices, as well as our careful use of forbearance and loan modification programs. Navient believes that the existence of these elements and the use of these practices when taken together reduces the risk of payment interruptions and defaults on its Private Education Loan portfolio. In the second quarter of 2015, we changed our assumptions related to estimated recoveries and as a result, the portion of the loan amount charged off at default increased from 73 percent to 79 percent. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans. Excluding this amount, on a “Core Earnings” basis the 2015 charge-off rate for Private Education Loans as a percentage of loans in repayment was 2.6 percent.

Business Services Segment

Our Business Services segment generates revenue from servicing, asset recovery and business processing activities. Within this segment, we primarily generate revenue from servicing our FFELP Loan portfolio as well as servicing education loans for Guarantors of FFELP Loans and other institutions, including ED. We provide asset recovery services for loans and receivables on behalf of Guarantors of FFELP Loans, higher education institutions and federal, state, court and municipal clients. In addition, we provide business processing services on behalf of municipalities, public authorities and hospitals.

In February 2015, Navient completed the acquisition of Gila LLC, an asset recovery and business processing firm. The firm provides receivables management services and account processing solutions for state governments, agencies, court systems and municipalities. In October 2015, Navient completed the acquisition of Xtend Healthcare, a health care revenue cycle management company. The firm provides health insurance claims billing and account resolution, as well as patient billing and customer service. The acquisitions of Gila LLC and Xtend Healthcare expanded Navient’s capabilities into new geographies and sectors.

We provide asset recovery and business processing services for over 1,000 clients, working with a broad spectrum of asset classes. This market is highly fragmented and provides attractive organic growth opportunities. As of December 31, 2015, Navient had an outstanding inventory of asset recovery receivables of approximately $20.2 billion, of which $9.9 billion was attributable to asset classes unrelated to education loans, an increase of $7.0 billion from December 31, 2014. Non-federal education loan related asset recovery revenues increased from $49 million in 2014 to $118 million in 2015.

Federal Education Loan Related Revenues

In 2015, federal education loan (FFELP and ED) related revenues in the business services segment accounted for 87 percent of total Business Services segment revenues compared with 94 percent in 2014. Total Business Services segment revenues were $1.02 billion for the year ended December 31, 2015, down from $1.06 billion for the year ended December 31, 2014.

Navient is currently the largest servicer and collector of loans made under the FFELP program, and the majority of our income has been derived, directly or indirectly, from our portfolio of FFELP Loans and the servicing and asset recovery we have provided for Guarantors and third-party owners of FFELP Loans. In 2010, Congress passed legislation ending the origination of education loans under FFELP. The terms and conditions of

 

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existing FFELP Loans were not affected by this legislation. We anticipate that the revenue we earn from providing servicing and asset recovery services on FFELP Loans will decline over time.

 

   

Servicing revenues from the FFELP Loans we own represent intercompany charges to the FFELP Loans segment at rates paid to us by the securitization trusts which own the loans. These fees are contractually the first payment priority of the trusts after the payment of the trustee fees and exceed the actual cost of servicing the loans. Intercompany loan servicing revenues declined to $427 million in 2015 from $456 million in 2014. Intercompany loan servicing revenues will continue to decline as our FFELP Loan portfolio amortizes.

 

   

In 2015, we earned account maintenance fees on FFELP Loans serviced for Guarantors of $33 million, down from $36 million in 2014. These fees will continue to decline as the underlying FFELP Loan portfolio serviced for Guarantors amortizes.

 

   

As of December 31, 2015, we provide asset recovery (default aversion, post-default collections and claims processing) to 11 of the 29 Guarantor agencies that serve as intermediaries between the U.S. federal government and FFELP lenders and are responsible for paying the claims made on defaulted loans. In 2015, asset recovery revenue from Guarantor clients totaled $209 million, compared to $275 million the prior year. As FFELP Loans are no longer originated, these revenues will decline over time unless we add additional Guarantor clients. The rate at which these revenues will decrease has also been affected by the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount to be paid to Guarantor agencies for assisting customers to rehabilitate their defaulted FFELP Loans under Section 428F of the HEA. This aspect of the Budget Act reduced our revenue by approximately $79 million in 2015 compared to 2014.

Since 2009 when we were selected through a competitive bidding process, Navient has been one of four TIVAS that provides customer service for federal loans owned by ED. This contract has been extended through 2019. Under the terms of the contract extension, the allocation of new borrower volume is determined twice each year based on the relative performance of the servicers of five metrics: borrowers in current repayment status (30 percent), borrowers more than 90 but less than 271 days delinquent (15 percent), borrowers 271 days or more up to 360 days delinquent (15 percent), a survey of borrowers (35 percent), and a survey of ED personnel (5 percent). In 2015, other state-based not-for-profit servicers that had previously received a contract through a legislative, no-bid process began to receive a 26 percent allocation of total new borrowers, leaving a 74 percent allocation to the TIVAS. In the last allocation, Navient received 15 percent of new loan volume. In December 2015, Congress passed legislation that requires an allocation system to award new loan volume to all the servicers including both TIVAS and the not-for-profit servicers on the basis of their performance utilizing established common metrics, and on the basis of the capacity of each servicer to process new and existing accounts. ED has previously indicated that the portfolios of the not-for-profit servicers and the TIVAS cannot be compared due to differences in the borrower composition of the portfolios. ED has not yet announced how it will implement the requirement to ensure capacity and common metrics. It is possible that Navient’s market share of new borrowers would decline. Under this servicing contract as of December 31, 2015, we service approximately 6.3 million accounts or $186.0 billion in loans. We earned $139 million of revenue under the contract for the year ended December 31, 2015. We continually strive to help our customers succeed and seek to improve on the performance metrics that determine the allocation of new accounts under the servicing contract with ED. ED has said that it intends to start a rebidding process for these servicing contracts sometime in 2016.

Other Segment

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

Employees

At December 31, 2015, we had approximately 7,300 employees. None of our employees are covered by collective bargaining agreements.

 

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Spin-Off of Navient

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

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

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(1)

     825   
  

 

 

 

Total liabilities

     10,066   
  

 

 

 

Equity

  

Preferred stock

  

Series A

     165   

Series B

     400   

Common equity

     1,145   
  

 

 

 

Total equity(2)

     1,710   
  

 

 

 

Total liabilities and equity

   $ 11,776   
  

 

 

 

 

  (1) 

“Other liabilities” include net income tax liabilities of $383 million, which were presented as net income tax assets within “Other assets” on the consolidated financial statements of Navient.

 

  (2) 

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.

As previously reported, in connection with the Spin-Off, three publicly-traded series of senior unsecured notes listed on NASDAQ and originally issued by SLM Corporation (and its predecessors in interest) became obligations of Navient. These notes are commonly known as (a) Medium Term Notes, Series A, CPI-Linked

 

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Notes due 2017, (NASDAQ: OSM / CUSIP: 78442P403), (b) Medium Term Notes, Series A, CPI-Linked Notes due 2018 (NASDAQ: ISM / CUSIP: 78442P601), and (c) 6% Senior Notes due December 15, 2043 (NASDAQ: JSM / CUSIP: 78442P304). Navient’s status as the successor to the original issuer of these notes has been previously reported, however, one of the Company’s prior filings with the SEC inadvertently (a) omitted a reference to these notes as listed securities of the Company, and (b) included a reference to two other series of senior unsecured notes issued by the Company that are in fact not listed, commonly known as 5% Senior Notes due October 26, 2020 and 5.875% Senior Notes due October 25, 2024.

Supervision and Regulation

The Dodd-Frank Act

The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. The Dodd-Frank Act contains comprehensive provisions to govern the practices and oversight of financial institutions (including large non-bank financial institutions) and other participants in the financial markets. It imposed significant regulations, additional requirements and oversight on almost every aspect of the U.S. financial services industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory authority. Some of these provisions apply to Navient and its various businesses.

The Consumer Financial Protection Act established the Consumer Financial Protection Bureau (“CFPB”), which has broad authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and examine financial institutions for compliance. The CFPB is authorized to impose fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. It has authority to prevent unfair, deceptive or abusive practices by issuing regulations that define the same or by using its enforcement authority without first issuing regulations. The CFPB has been active in its supervision, examination and enforcement of financial services companies, most notably bringing enforcement actions, imposing fines and mandating large refunds to customers of several large banking institutions, auto financing companies and debt collection companies.

The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptive and abusive practices.

Regulatory Outlook

In general, the number and scope of regulatory and enforcement actions in 2015, as well as the amounts of fines and penalties levied against banking institutions, were significant. The types and numbers of class and stockholder derivative actions arising from allegations of violations of consumer protection and regulatory provisions also continued to increase. A number of prominent themes appear to be emerging from these actions:

 

   

The number and configuration of regulators bringing actions often adds to the complexity, cost and unpredictability of timing for resolution of particular regulatory issues.

 

   

The regulatory compliance and risk control structures of financial institutions subject to enforcement actions are frequently cited, regardless of whether past practices have been changed, and enforcement orders have often included detailed demands for increased compliance, audit and board supervision, as well as the use of third-party consultants or monitors to recommend further changes or monitor remediation efforts.

 

   

Issues first identified with respect to one consumer product class or distribution channel are often applied to other product classes or channels.

 

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Navient is subject to oversight from several regulatory entities. We expect that the regulators overseeing our businesses will continue to be active and that consumer protection regulations, standards, supervision, examination and enforcement practices will continue to evolve in both detail and scope. This evolution may significantly add to Navient’s compliance, servicing and operating costs. We have invested in compliance through multiple steps including realignment of Navient’s compliance management system to a servicing, collections and business services business model rather than a loan originations business model; dedicated compliance resources for certain topics (such as the Servicemembers Civil Relief Act (“SCRA”); the Telephone Consumer Protection Act (“TCPA”); unfair, deceptive, or abusive acts and practices (“UDAAP”); and third-party vendor management) to focus on regulator and consumer expectations; formation of business support operations to enhance risk, control and compliance functions in each business area; additional regulatory training for front-line employees to ensure obligations are understood and followed during interactions with customers as well as additional regulatory training for our board of directors to enhance their ability to oversee the Company’s risk framework and compliance as it and the regulatory environment changes; and expanded oversight and analysis of complaint trends to identify and remediate if necessary, areas of potential consumer harm.

While current operations and compliance processes may or may not satisfy heightened, evolving regulatory standards, they cannot provide assurance that past practices or products will not be the focus of examinations, inquiries or lawsuits.

As described in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management,” Navient has implemented a coordinated, formal enterprise risk management system aimed at reducing business and regulatory risks.

Listed below are some of the most significant recent and pending regulatory changes that have the potential to affect Navient.

Consumer Financial Protection Bureau. The CFPB has oversight of the private education loan industry as well as education loan servicers. The CFPB has been active in the education loan industry and undertook a number of initiatives in 2013, 2014 and 2015 relative to the private education loan market and education loan servicing, including:

 

   

In February 2013, the CFPB published a notice soliciting information on potential options to offer more affordable repayment options to borrowers having difficulty repaying their private education loans. Based on the more than 28,000 comments received, on May 8, 2013, the CFPB published a report highlighting the ways in which private education loan debt can be a roadblock to financial soundness for consumers. The report analyzes the impact of private education loan burdens on the broader economy, assesses recent actions of policymakers in the education loan market and discusses policy options put forth by the public regarding private education loans. Reports such as these may continue to influence regulatory developments in the education loan market. The report proposes a number of considerations for policymakers and market participants, such as refinancing relief and monthly payments more closely correlated with a borrower’s debt-to-income ratio. Certain of these CFPB recommendations in the report could negatively affect our private education loan portfolio if implemented. For a discussion on Navient’s approach to helping its customers, see “— Navient’s Approach to Helping Education Loan Borrowers Achieve Success” above.

 

   

On December 3, 2013, the CFPB issued a final rule defining larger participants of the education loan servicing market. The rule, which became effective on March 1, 2014, allows the CFPB to federally supervise certain nonbank education loan servicers for the first time. Under the final rule, the CFPB has supervisory authority over any nonbank education loan servicer that services more than one million borrower accounts, including accounts for both private and federal education loans. Our education loan servicing subsidiaries will be subject to this new oversight. The CFPB’s supervision will include gathering reports, conducting examinations for compliance with federal consumer financial laws and taking enforcement actions as appropriate.

 

   

On October 16, 2014, the Student Loan Ombudsman within the CFPB submitted his annual report based on private education loan inquiries and complaints received through the CFPB portal from October 1,

 

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2013 through September 30, 2014. The CFPB does not seek to resolve or substantiate the inquiry or complaint but merely provides a gateway between the consumer and the lender or servicer to attempt to address consumer concerns. The Dodd-Frank Act created the Student Loan Ombudsman within the CFPB to receive and attempt to informally resolve inquiries about private education loans. The Student Loan Ombudsman reports to Congress annually on the trends and issues that he identifies through this process. The report offers analysis, commentary and recommendations to address issues reported by consumers. The report’s key observations included: (1) approximately 41 percent of all private education loan inquiries and complaints received were related to consumers seeking a loan modification or other option to reduce their monthly payment; (2) 57 percent related to consumers having difficulties dealing with their servicer or repaying their loan; and (3) many of the private education loan inquiries mirror the problems experienced by consumers in the mortgage market and that recent changes to mortgage servicing and credit card servicing practices might be applicable to the private education loan market.

 

   

On May 14, 2015, the CFPB issued a Request for Information (“RFI”) about student loan servicing practices. The RFI identified a number of potential systemic problems with student loan servicing, and sought public comment from market participants regarding issues that the CFPB believe were identified through consumer complaints including: (1) delays in payment posting, which can result in increased accrued interest; (2) application of overpayments across all loans, instead of to the loans with the highest interest rates; (3) application of partial payments in a manner that maximizes late fees; (4) failure to correct payment processing or other errors in a timely fashion; (5) lost paperwork submitted to process applications for forbearance or alternative payments plans; and (6) issues related to servicing transfers, including failure to notify borrowers of servicing transfers, interruptions in receiving billing statements and other communications, and imposition of late fees when borrowers send payments to their prior servicers. In addition, the RFI focused on the payment arrangements between lenders and loan servicing companies. The CFPB expressed concern that these contracts create economic incentives for servicers to spend as little time as possible on each account, and to keep borrowers in repayment for as long as possible. Finally, the RFI also sought public comment regarding application of consumer protection regulations in the mortgage and credit card industries to student loan servicing. Based on the perceived similarities between student loan servicing and other consumer loan servicing, the RFI suggested that implementation of regulations designed to protect consumers in the mortgage and credit card markets may be the appropriate response to the purported problems in the student loan servicing market.

 

   

In October 2015, the Student Loan Ombudsman within the CFPB issued its annual report analyzing complaints submitted by consumers with student loans from October 1, 2014 through September 30, 2015. This report highlighted problems experienced by student loan borrowers with older federal student loans made by private lenders. Borrowers continued to submit complaints describing servicing and debt collection practices that create barriers to enroll in alternative repayment plans, including income-driven repayment plans for borrowers with federal loans. The Ombudsman noted that private student loan borrowers report that they encounter servicing problems, including lack of access to timely and accurate information on availability or eligibility criteria to enroll in alternative repayment programs. Complaints from borrowers with federal student loans describe how borrowers attempt to avoid default during a period of financial hardship, but have difficulty finding information about repayment options, including income-driven repayment plans with some borrowers reporting that they did not know they were eligible. The Bureau also received complaints that borrowers who apply for an income-driven repayment plan are held up by paperwork processing delays, receive inconsistent instructions from servicers, or experience difficulty enrolling in these programs. Additionally, the Ombudsman discussed analysis from a voluntary request sent by the Bureau’s Student Loan Ombudsman to certain market participants, asking for data about loans originated under FFELP and held by private investors. The report also recommends compiling regular performance metrics on student loan servicing, including data on delinquencies and defaults as well as data on borrower performance in income-driven repayment plans and that data be compiled and published on a periodic basis to facilitate comparison in performance among student loan servicers.

 

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Debt Collection Supervision. Consistent with the authority granted to it under the Dodd-Frank Act, the CFPB also maintains supervisory authority over larger consumer debt collectors. On October 24, 2012, the CFPB issued its final debt collection larger participant rule and examination procedures that will allow the agency to federally supervise larger consumer debt collectors. The rule, which became effective January 2, 2013, defines larger participants as third-party debt collectors, debt buyers and collection attorneys with more than $10 million in annual receipts resulting from consumer debt collection. Under the rule, Navient’s collection subsidiaries are considered larger participants and are subject to supervision. The issuance of the CFPB’s rules does not preempt the various and varied levels of state consumer and collection regulations to which the activities of Navient’s subsidiaries are currently subject. Navient also utilizes third-party debt collectors to collect defaulted and charged-off education loans and will continue to be responsible for oversight of their procedures and controls.

Oversight of Derivatives. The Dodd-Frank Act created a comprehensive new regulatory framework for derivatives transactions, to be implemented by the Commodity Futures Trading Commission (“CFTC”) and the SEC. This framework, among other things, subjects certain swap participants to new capital and margin requirements, recordkeeping and business conduct standards and imposes registration and regulation of swap dealers and major swap participants. The scope of potential exemptions continues to be defined through agency rulemakings. Even where Navient qualifies for an exemption, many of its derivatives counterparties are subject to the new capital, margin and business conduct requirements and therefore Navient’s business may be impacted.

Other Significant Sources of Regulation

Many aspects of Navient’s businesses are subject to federal and state regulation and administrative oversight. Some of the most significant of these are described below.

Higher Education Act. Navient is subject to the HEA and its education loan operations are periodically reviewed by ED and Guarantors. As a servicer of federal education loans, Navient is subject to ED regulations regarding financial responsibility and administrative capability that govern all third-party servicers of insured education loans. In connection with its servicing operations on behalf of Guarantor clients, Navient must comply with ED regulations that govern Guarantor activities as well as agreements for reimbursement between ED and our Guarantor clients.

Federal Financial Institutions Examination Council. As a third-party service provider to financial institutions, Navient is also subject to periodic examination by the Federal Financial Institutions Examination Council (“FFIEC”). FFIEC is a formal interagency body of the U.S. government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Federal Reserve Banks (the “FRB”), the Federal Deposit Insurance Corporation (the “FDIC”), the National Credit Union Administration, the Office of the Comptroller of the Currency and the CFPB and to make recommendations to promote uniformity in the supervision of financial institutions.

Consumer Protection and Privacy. Navient’s business servicing FFELP Loans, Private Education Loans and DSLP Loans is subject to federal and state consumer protection, privacy and related laws and regulations and is subject to examination by the CFPB. Some of the more significant federal laws and regulations include:

 

   

various laws governing unfair, deceptive or abusive acts or practices;

 

   

the Truth-In-Lending Act and Regulation Z issued by the FRB, which governs disclosures of credit terms to consumer borrowers;

 

   

the Fair Credit Reporting Act and Regulation V issued by the CFPB, which governs the use and provision of information to consumer reporting agencies;

 

   

the Equal Credit Opportunity Act and Regulation B issued by the CFPB, which prohibit discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

   

the SCRA which applies to all debts incurred prior to commencement of active military service (including education loans) and limits the amount of interest, including certain fees or charges that are related to the obligation or liability; and

 

   

the TCPA, which governs communication methods that may be used to contact customers.

 

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Navient’s servicing and asset recovery businesses are subject to federal and state consumer protection, privacy and related laws and regulations, including supervision by the CFPB of larger consumer debt collectors as discussed above. Some of the more significant federal statutes are the Fair Debt Collection Practices Act and additional provisions of the acts listed above, as well as the HEA and the various laws and regulations that govern government contractors. These activities are also subject to state laws and regulations similar to the federal laws and regulations listed above.

 

Item 1A. Risk Factors

In this section, we describe some of the important strategic, economic, operational, market, compliance, legal, governance, and reputational/political risks faced by Navient. Our risk framework, risk policies, guidelines and review mechanism operate at the business and functional level and are designed to identify, evaluate and mitigate risk within the categories described below.

These are not the only risks facing our Company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or results of operations in future periods. In addition, our reaction to material future developments as well as our competitors’ and regulators’ reactions to these developments will affect our future results.

In addition to the other information set forth in this report including any forward-looking statements, you should carefully consider the following factors because these factors could cause our business, actual results of operations or financial condition to be materially different from our historic results or from our anticipated results of operations, cash flows or financial condition for future periods.

STRATEGIC RISK. Strategic risk is the risk to results of operations, cash flow or financial condition arising from our potential inability to successfully carry out our strategy. This risk can arise due to both our own acts or omissions, and the acts or omissions of other industry participants or other third parties, and it is inherent in all of our businesses. The success of our business plans depends upon achieving our strategic objectives, including through acquisition, joint ventures, dispositions and restructurings.

Acquisitions or strategic investments that Navient pursues may not be successful and could disrupt its business, harm its financial condition or reduce its earnings.

Navient’s growth strategy includes making opportunistic acquisitions of, or material investments in, loan portfolios, complementary businesses and products. Navient may not be able to identify suitable opportunities and, if not, this strategy could fail. Even if it is able to identify suitable opportunities, Navient may not be able to obtain financing necessary to allow Navient to make such acquisitions or investments on satisfactory terms or at all or obtain necessary regulatory approvals, or be able to complete the transactions on satisfactory terms. If the purchase price of any acquisition or investment is paid in cash, it may have an adverse effect on Navient’s financial condition; if the purchase price is paid with Navient stock, it could be dilutive to stockholders. Navient may assume liabilities, including unrecorded liabilities that are not discovered at the time of the transaction, and the repayment of those liabilities may have an adverse effect on our results of operations, cash flow or financial condition.

In addition to the financial risks, acquisitions involve operational risks and Navient may not be able to successfully integrate personnel, operations, businesses, products or technologies acquired in an acquisition. There may be additional risks if Navient enters into a line of business in which it has limited experience or which operates in a legal, regulatory or competitive environment with which Navient is not familiar. Navient may not have or be able to maintain the expertise needed to manage the new business. The expected benefits of acquisitions and investments also may not be realized for various reasons, including the loss of key personnel, customers or vendors. If Navient fails to integrate or realize the expected benefits of its acquisitions or

 

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investments, it may lose the return on these acquisitions or investments or incur additional transaction costs, and its business and financial condition may be harmed as a result.

Under the separation and distribution agreement, Navient is precluded from conducting certain activities until May 1, 2019, including originating Private Education Loans As a result, interest income and fee-based servicing revenue derived from its existing Private Education Loan portfolio is anticipated to decline. If Navient is unable to replace its existing Private Education Loan portfolio with new loans, it may not be able to develop revenue streams to replace the declining revenue from Private Education Loans.

Navient is not presently originating new Private Education Loans and as part of its Spin-Off transaction agreed not to originate certain of these loans until May 1, 2019. As a result, interest income on Navient’s Private Education Loan portfolio and fee-based revenue on that portfolio are anticipated to decline over time as the loans are paid down, refinanced or charged off. If Navient does not begin to originate Private Education Loans as permitted under its separation and distribution agreement, acquire additional Private Education Loans or otherwise grow or develop new revenue streams to replace or supplement its Private Education Loan net interest and servicing revenue, Navient’s consolidated revenue and operating income will continue to decrease which could materially and adversely impact our results of operations, cash flow or financial condition.

Navient’s businesses operate in competitive environments and could lose market share and revenues if competitors compete more aggressively or effectively.

Navient competes with for-profit and not-for-profit servicing, asset recovery and business processing businesses, many with strong records of performance. Navient competes based on effectiveness and customer service metrics. To the extent its competitors compete aggressively or more effectively than Navient, Navient could lose market share to them or Navient’s service offerings may not prove to be profitable.

Since the second quarter of 2009, Navient has been one of four large servicers (TIVAS) awarded a servicing contract by ED to service federal loans owned by ED. On August 27, 2014, ED extended its servicing contract with Navient to service federal loans for five more years. Under the terms of the contract extension, the allocation of additional volume will be determined twice each year based on the relative performance of the servicers utilizing five performance metrics. Quarterly scores in each metric are be averaged together twice each year to calculate the final result for each metric. Beginning on January 1, 2015, ED increased the aggregate allocation for not-for-profit servicers to 25 percent of all new DSLP borrowers.

If Navient is unable to improve its performance and increase its relative standing compared to the three other servicing companies with whom it competes, its ability to maintain or increase its servicing business with ED may be materially adversely affected.

Legislation passed by Congress in 2010 ended new loan originations under the FFELP program, and, as a result, net income on Navient’s existing FFELP Loan portfolio is anticipated to decline over time. Navient may not be able to develop revenue streams to fully replace the declining revenue from FFELP Loans.

In 2010, Congress passed legislation ending the origination of education loans under the FFELP program. All federal education loans are now originated through the DSLP of the ED. The law did not alter or affect the terms and conditions of existing FFELP Loans. As a result of this legislation, net income on Navient’s FFELP Loan portfolio is anticipated to decline over time as existing FFELP Loans are paid down, refinanced or repaid after default by Guarantors. If Navient does not acquire additional FFELP Loans or otherwise grow or develop new revenue streams to replace or supplement its existing, and declining, FFELP Loan net income, Navient’s consolidated revenue and operating income will continue to decrease which could materially and adversely impact our results of operations, cash flow or financial condition.

 

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OPERATIONAL RISKS. Operational risk relates to risks arising from systems, process, people and external events that affect the operation of our business, it includes information management, data protection and cybersecurity, business disruption and other risks including human resources.

If Navient does not effectively and continually align its cost structure with its business operations, its results of operations and financial condition could be materially adversely affected.

Navient continually needs to align its cost structure with its business operations. Navient’s ability to properly size its cost structure is dependent upon a number of variables, including its ability to successfully execute on its business plans and growth initiatives and future legislative or regulatory changes. If Navient undertakes cost reductions based on its business plan, those reductions could be too dramatic and could cause disruptions in its business, reductions in the quality of the services it provides or cause it to fail to comply with applicable regulatory standards. Alternatively, Navient may fail to implement, or be unable to achieve, necessary cost savings commensurate with its business and prospects. In either case, Navient’s business, results of operations and financial condition could be adversely affected.

A failure of the operating systems or infrastructure of Navient could disrupt its business, cause significant losses, result in regulatory action or damage its reputation.

A failure of Navient’s operating systems or infrastructure could disrupt its business. Navient’s business is dependent on its ability to process and monitor large numbers of daily transactions in compliance with legal and regulatory standards and its own product specifications, both currently and in the future. As Navient’s processing demands and loan portfolios change, both in volume and in terms and conditions, Navient’s ability to develop and maintain its operating systems and infrastructure will become increasingly challenging. There is no assurance that Navient has adequately or efficiently developed, maintained or acquired such systems and infrastructure or will do so in the future.

The servicing, financial, accounting, data processing and other operating systems and facilities that support Navient’s business may fail to operate properly or become disabled as a result of events that are beyond Navient’s control, adversely affecting its ability to timely process transactions. Any such failure could adversely affect Navient’s ability to service its clients, result in financial loss or liability to its clients, disrupt its business, and result in regulatory action or cause reputational damage.

Despite the plans and facilities Navient has in place, its ability to conduct business may be adversely affected by a disruption in the infrastructure that supports its business. This may include a disruption involving electrical, communications, Internet, transportation or other services used by Navient or third parties with which it conducts business. Notwithstanding efforts to maintain business continuity, a disruptive event impacting Navient’s processing locations could adversely affect its business, financial condition and results of operations.

Navient depends on secure information technology, and a breach of its information technology systems could result in significant losses, disclosure of confidential customer information and reputational damage, which would adversely affect Navient’s business.

Navient’s operations rely on the secure processing, storage and transmission of personal, confidential and other information in its computer systems and networks. Although Navient takes protective measures it deems reasonable and appropriate, its computer systems, software and networks may be vulnerable to unauthorized access, computer viruses, malicious attacks and other events that could have a security impact beyond Navient’s control. These technologies, systems and networks, and those of third parties, may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of Navient’s or its customers’ confidential, proprietary and other information, or otherwise disrupt Navient’s business operations or those of its customers or other third parties. Information security risks for institutions that handle large numbers of financial transactions on a daily basis such as Navient

 

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have generally increased in recent years, in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists and other external parties.

If one or more of such events occur, personal, confidential and other information processed and stored in, and transmitted through, Navient’s computer systems and networks could be jeopardized or could cause interruptions or malfunctions in Navient’s operations that could result in significant losses or reputational damage. Navient routinely transmits and receives personal, confidential and proprietary information, some of it through third parties. Navient put in place secure transmission capability and works to ensure that third parties follow similar procedures. Nevertheless, an interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, regulatory action and reputational harm. In the event personal, confidential or other information is jeopardized, intercepted, misused or mishandled, Navient may need to expend significant additional resources to modify its protective measures or to investigate and remediate vulnerabilities or other exposures, and it may be subject to fines, penalties, litigation and settlement costs and financial losses that may either not be insured against or not be fully covered through insurance. If one or more of such events occur, Navient’s business, financial condition or results of operations could be significantly and adversely affected.

Navient depends on third parties for a wide array of services, systems and information technology applications, and a breach or violation of law by one of these third parties could disrupt Navient’s business or provide its competitors with an opportunity to enhance their position at Navient’s expense.

Navient depends on third parties for a wide array of services, systems and information technology applications. Third-party vendors are significantly involved in aspects of Navient’s software and systems development, the timely transmission of information across its data communication network, and for other telecommunications, processing, remittance and technology-related services in connection with Navient’s payment services businesses. Navient also utilizes various third-party debt collectors in the collection of defaulted Private Education Loans and in other areas. If a service provider fails to provide the services required or expected, or fails to meet applicable contractual or regulatory requirements such as service levels or compliance with applicable laws, the failure could negatively impact Navient’s business by adversely affecting its ability to process customers’ transactions in a timely and accurate manner, otherwise hampering Navient’s ability to serve its customers, or subjecting Navient to litigation and regulatory risk for matters as diverse as poor vendor oversight or improper release or protection of personal information. Such a failure could also adversely affect the perception of the reliability of Navient’s networks and services and the quality of its brands, which could materially adversely affect Navient’s business and results of operations.

Navient’s work with government clients exposes it to additional risks inherent in the government contracting environment.

Navient’s clients include federal, state and local governmental entities. This work carries various risks inherent in the government contracting process. These risks include, but are not limited to, the following:

 

   

Government entities in the United States often reserve the right to audit contract costs and conduct inquiries and investigations of business practices. These entities also conduct reviews and investigations and make inquiries regarding systems, including systems of third parties, used in connection with the performance of the contracts. Negative findings from audits, investigations or inquiries could affect the contractor’s future revenues and profitability by preventing them, by operation of law or in practice, (i) from receiving new government contracts for some period of time or (ii) from being paid at the rate they believe is warranted.

 

   

If improper or illegal activities are found in the course of government audits or investigations, the contractor may become subject to various civil and criminal penalties, including those under the civil U.S. False Claims Act. Additionally, Navient may be subject to administrative sanctions, which may include termination or non-renewal of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government. Due to the inherent limitations of internal controls, it may not be possible to detect or prevent all improper or illegal activities.

 

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The occurrences or conditions described above could affect not only Navient’s business with the particular government entities involved, but also its business or potential future business with other entities of the same or other governmental bodies or with commercial clients, and could have a material adverse effect on its business or its results of operations.

If Navient is unable to attract and retain professionals with strong leadership skills, its business, results of operations and financial condition may be materially adversely affected.

Navient’s success is dependent, in large part, on its ability to attract and retain personnel with the knowledge and skills to lead its business. Experienced personnel in its industry are in high demand, and competition for talent is very high. Navient must hire, retain and motivate appropriate numbers of talented people with diverse skills in order to serve its clients, respond quickly to rapid and ongoing technology, industry and macroeconomic developments, and grow and manage its business. As Navient expands its services and solutions, it must also hire and retain an increasing number of professionals with different skills and professional expectations than those of the professionals it has historically hired and retained. If Navient is unable to successfully integrate, motivate and retain these professionals, its ability to continue to secure work in those industries and for its services and solutions may suffer.

MARKET, FUNDING & LIQUIDITY RISK. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as interest rates, index mismatches or credit spreads. Navient is exposed to various types of market risk, in particular the risk of loss resulting in a mismatch between the maturity/duration of assets and liabilities, interest rate risk and other risks that arise through the management of our investment, debt and education loan portfolios. Funding and liquidity risk is the risk to earnings, capital or the conduct of our business arising from the inability to meet our obligations when they become due, such as the ability to access the unsecured or asset backed securities credit markets to fund liability maturities or invest in future asset growth and business operations at reasonable market rates.

Navient’s business is affected by the cost and availability of funding in the capital markets.

The capital markets are now and have from time to time experienced periods of significant volatility. This volatility can dramatically and adversely affect financing costs when compared to historical norms or make funding unavailable at any costs. Additional factors that could make financing more expensive or unavailable to Navient include, but are not limited to, financial losses, events that have an adverse impact on Navient’s reputation, changes in the activities of Navient’s business partners, events that have an adverse impact on the financial services industry generally, counterparty availability, changes affecting Navient’s assets, corporate and regulatory actions, absolute and comparative interest rate changes, general economic conditions and the legal, regulatory and tax environments governing funding transactions. If financing is difficult, expensive or unavailable, Navient’s results of operations, cash flow or financial condition could be materially and adversely affected.

Higher or lower than expected prepayments of loans could change the expected net interest income the Company receives as the holder of the Residual Interests of securitization trusts holding education loans or cause the bonds issued by the securitization trust to be paid at a different speed than originally anticipated. These factors could materially alter our net interest margin or the value of our Residual Interests.

The rate at which borrowers prepay their loans can have a material impact on our net interest margin or the value of our Residual Interests. Prepayment rates and levels are subject to a variety of economic, social, competitive and other factors, including changes in interest rates, availability of alternative financings, regulatory changes affecting the education loan market and the general economy.

FFELP Loans and Private Education Loans may be voluntarily prepaid without penalty by the borrower or consolidated with the borrower’s other education loans through refinancing. FFELP Loans may also be repaid

 

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after default by the Guarantors of FFELP Loans. On the other hand, borrowers might not choose to prepay their education loans or the education loans may be extended as a result of grace periods, deferment periods, income-driven repayment plans or other repayment term or monthly payment amount modifications agreed to by the servicer, for example. FFELP Loan borrowers may be eligible for various existing income-based repayment programs under which borrowers can qualify for reduced or zero monthly payment or even debt forgiveness after a certain number of years of repayment.

Future initiatives by ED or by Congress to encourage or force consolidation, create additional income-based repayment or debt forgiveness programs or establish other factors affecting borrowers’ repayment of their loans, could also affect prepayments on education loans. Additionally, several recent entrants into the student loan refinancing market may increase the rate at which borrowers prepay their loans. These companies specialize in refinancing student loans and may have certain advantages including lower cost structures, fewer regulatory constraints and the ability to be highly selective in choosing borrowers who are eligible to refinance. The ability to focus on borrowers with high incomes, high credit scores or other credit indices may adversely impact our remaining portfolio.

While we anticipate some variability in prepayment levels, extraordinary or extended increases or decreases in prepayment rates could materially affect our liquidity, interest income, net interest margin and the value of those Residual Interests. When, as a result of unanticipated prepayment levels, education loans within a securitization trust amortize faster than originally contracted, the trust’s pool balance may decline at a rate faster than the prepayment rate assumed when the trust’s bonds were originally issued. If the trust’s pool balance declines faster than originally anticipated, in most of our securitization structures, the bonds issued by that trust will also be repaid faster than originally anticipated. In such cases, the Company’s net interest income may decrease and the value of any retained Residual Interest in the trust may similarly decline.

Conversely, when education loans within a securitization trust amortize more slowly than originally contracted, the trust’s pool balance may decline more slowly than the prepayment rate assumed when the trust’s bonds were originally issued and the bonds may be repaid more slowly than originally anticipated. In these cases, the Company’s net interest income increases and the value of any retained Residual Interest in the trust may increase. In addition, if the prepayment rate is especially slow and certain rights of the sellers or the servicer are not exercised or are insufficient or other action is not taken to counter the slower prepayment rate, the trust’s bonds may not be repaid by their legal final maturity date(s), which could result in an event of default under the underlying securitization agreements.

Finally, rating agencies may place bonds on watch or change their ratings on (or their ratings methodology for) the bonds issued by a securitization trust, possibly raising or lowering their ratings, based upon these prepayment rates and their perception of the risk posed by those rates to the timing of the trust cash flows. Placing bonds on watch, or changing ratings negatively or proposing or making changes to ratings methodology could: (i) affect our liquidity; (ii) impede our access to the securitization markets; (iii) make us change our securitization structures; (iv) impact our net interest margins; and/or (v) raise or lower the value of our Residual Interests of our future securitization transactions.

High or increasing interest rate environments may cause Navient’s Floor Income to decline, which may adversely affect its earnings.

FFELP Loans disbursed before April 1, 2006, generally earn interest at the higher of either the borrower rate, which is fixed over a period of time, or a floating rate based on a SAP formula set by ED. Navient has generally financed its FFELP Loans with floating rate debt whose interest is matched closely to the floating nature of the applicable SAP formula. If a decline in interest rates causes the borrower rate to exceed the SAP formula rate, Navient will continue to earn interest on the loan at the fixed borrower rate while the floating rate interest on Navient debt will continue to decline. The additional spread earned between the fixed borrower rate and the SAP formula rate is referred to as “Floor Income.”

Depending on the type of FFELP Loan and when it was originated, the borrower rate is either fixed to term or is reset to a market rate on July 1 of each year. For loans where the borrower rate is fixed to term, Navient may

 

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earn Floor Income for an extended period of time; for those loans where the borrower interest rate is reset annually on July 1, Navient may earn Floor Income to the next reset date. In accordance with legislation enacted in 2006, holders of FFELP Loans are required to rebate Floor Income to ED for all FFELP Loans disbursed on or after April 1, 2006.

Floor Income can be volatile as rates on the underlying education loans move up and down. Navient generally hedges this risk by using derivatives to lock in the value of the Floor Income over the term of the contract. A rise in interest rates will reduce the amount of Floor Income received on the FFELP Loans not presently hedged with Floor Income Contracts, which will compress Navient’s net interest margins.

Navient’s credit ratings are important to its liquidity. A reduction in its credit ratings could adversely affect its liquidity, increase its borrowing costs or limit its access to the capital markets.

As of December 31, 2015, all three credit rating agencies rate Navient’s long term unsecured debt at below investment grade. This has resulted in a higher cost of funds for the Company, and has caused our senior unsecured debt to trade with greater volatility. In addition, the capital markets for below investment grade companies are not as liquid as those involving investment grade entities. Moreover, during the first quarter of 2016 the market for high yield debt has been under significant stress.

Navient’s unsecured debt totaled $15.1 billion at December 31, 2015, and Navient utilizes the unsecured debt markets to help fund its business and refinance outstanding debt. The amount, type and cost of its funding directly affects the cost of operating its business and growing its assets and is dependent upon outside factors, including its credit rating from rating agencies. There can be no assurance that the Company’s credit ratings will not be reduced further. A reduction in the credit ratings of the Company’s senior unsecured debt could adversely affect Navient’s liquidity, increase its borrowing costs, limit its access to the capital markets and place incremental pressure on its net interest income.

Adverse market conditions or an inability to effectively manage its liquidity risk could negatively impact Navient’s ability to meet its liquidity and funding needs, which could materially and adversely impact its results of operations, cash flow or financial condition.

Navient must effectively manage the liquidity risk to which it is exposed. Navient requires liquidity to meet cash requirements such as day-to-day operating expenses, required payments of principal and interest on borrowings, and distributions to stockholders. We expect to fund our ongoing liquidity needs, including the repayment of $1.1 billion of senior unsecured notes that mature in the next twelve months, primarily through our current cash, investments and unencumbered FFELP Loan portfolio, the predictable operating cash flows provided by operating activities ($1.9 billion in the year ended December 31, 2015), the repayment of principal on unencumbered education loan assets, and the distribution of overcollateralization from our securitization trusts. We may also draw down on our secured FFELP Loan and Private Education Loan facilities, issue term ABS, enter into additional Private Education Loan ABS repurchase facilities, or issue additional unsecured debt. Navient may maintain too much liquidity, which can be costly, or may be too illiquid, which could result in financial distress during times of financial stress or capital market disruptions.

The interest rate characteristics of Navient’s earning assets do not always match the interest rate characteristics of its funding arrangements, which may increase the price of, or decrease Navient’s ability to obtain, necessary liquidity.

Net interest income will be the primary source of cash flow generated by Navient’s portfolios of FFELP Loans and Private Education Loans. At the present, interest earned on FFELP Loans and Private Education Loans is primarily indexed to one-month LIBOR rates and either one-month LIBOR rates or the one-month Prime rate, respectively, but Navient’s cost of funds is primarily indexed to three-month LIBOR.

The different interest rate characteristics of Navient’s loan portfolios and liabilities funding these loan portfolios result in basis risk and repricing risk. It is not economically feasible to hedge all of Navient’s exposure

 

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to such risks. While the asset and hedge indices are short-term with rate movements that are typically highly correlated, there can be no assurance that the historically high correlation will not be disrupted by capital market dislocations or other factors not within our control. In these circumstances, Navient’s earnings could be materially adversely affected.

Navient’s use of derivatives to manage interest rate and foreign currency sensitivity exposes it to credit and market risk that could have a material adverse effect on its earnings and liquidity.

Navient intends to maintain an overall strategy that uses derivatives to minimize the economic effect of interest rate and/or foreign currency changes. However, developing an effective strategy for dealing with these movements is complex, and no strategy can completely avoid the risks associated with these fluctuations. For example, Navient’s education loan portfolio remains subject to prepayment risk that could result in its being under- or over-hedged, which could result in material losses. In addition, Navient’s use of derivatives in its risk management activities could expose it to mark-to-market losses if interest rates or foreign currencies move in a materially different way than was expected when Navient entered into the related derivative contracts. As a result, there can be no assurance that hedging activities using derivatives will effectively manage Navient’s interest rate or foreign currency sensitivity, have the desired beneficial impact on its results of operations or financial condition or not adversely impact its liquidity and earnings.

Navient’s use of derivatives also exposes it to market risk and credit risk. Market risk is the chance of financial loss resulting from changes in interest rates, foreign exchange rates and market liquidity. Navient’s Floor Income Contracts and some of the basis swaps it uses to manage earnings variability caused by different reset characteristics on interest-earning assets and interest-bearing liabilities do not qualify for hedge accounting treatment. Therefore, the change in fair value, called the “mark-to-market,” of these derivative instruments is included in Navient’s statement of income. A decline in the fair value of these derivatives could have a material adverse effect on Navient’s reported earnings.

Credit risk is the risk that a counterparty will not perform its obligations under a contract. Credit risk is limited to the loss of the fair value gain in a derivative that the counterparty or clearinghouse owes Navient and therefore exists for derivatives with a positive fair value. If a counterparty or clearinghouse fails to perform its obligations, Navient could, depending on the type of counterparty arrangement, experience a loss of liquidity or an economic loss. In addition, Navient might not be able to cost effectively replace the derivative position depending on the type of derivative and the current economic environment.

Navient’s securitization trusts, which it is required to consolidate on its balance sheet, had $9.0 billion of Euro and British Pound Sterling denominated bonds outstanding as of December 31, 2015. To convert these non-U.S. dollar denominated bonds into U.S. dollar liabilities, the trusts have entered into foreign-currency swaps with highly rated counterparties. A failure by a swap counterparty to perform its obligations could, if the swap has a positive fair value to Navient, materially and adversely affect Navient’s earnings.

CREDIT RISK. Credit risk is the risk to earnings or capital resulting from an obligor’s failure to meet the terms of any contract with us or otherwise fail to perform as agreed. Credit risk is found in all activities where success depends on counterparty, issuer or borrower performance.

Economic conditions and the creditworthiness of third parties could have a material adverse effect on Navient’s business, results of operations, financial condition and stock price.

We anticipate that, for a period of time, Navient’s earnings will be largely dependent on the expected future creditworthiness of its education loan customers, especially with respect to its Private Education Loan portfolio. High unemployment rates and the failure of its in-school borrowers to graduate or otherwise complete their education are two of the most significant macroeconomic factors that could increase loan delinquencies, defaults and forbearance or the use or performance of its payment modifications programs, or otherwise negatively affect

 

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performance of its FFELP Loan and Private Education Loan portfolios. Forbearance programs may have the effect of delaying default emergence as customers are granted a temporary waiver from having to make payments on their loans. Therefore, deterioration in the economy could adversely affect the credit quality of its borrowers. Higher credit-related losses and weaker credit quality could negatively affect Navient’s business, financial condition and results of operations and limit its funding options, including Navient’s access to the capital markets, which could also adversely impact its liquidity position.

Defaults on education loans held by Navient, particularly Private Education Loans, could adversely affect Navient’s earnings.

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. These guarantees generally cover at least 97 percent of a FFELP Loan’s principal and accrued interest and, in limited circumstances, 100 percent of the loan’s principal and accrued interest. Nevertheless, Navient is exposed to credit risk on the non-guaranteed portion of the FFELP Loans in its portfolio and to the possible loss of the insurance or guarantee due to a failure by Navient to comply with HEA and related regulations.

Navient bears the full credit exposure on Private Education Loans. Navient believes that delinquencies are an important indicator of the potential future credit performance for Private Education Loans. Navient’s delinquencies as a percentage of Private Education Loans in repayment were 7.2 percent at December 31, 2015. For a complete discussion of Navient’s loan delinquencies, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Private Education Loan Portfolio Performance.”

In addition, the evaluation of Navient’s allowance for loan losses is inherently subjective, as it requires estimates that may be subject to significant changes. However, future defaults could be higher than anticipated due to a variety of factors outside of Navient’s control, such as downturns in the economy, regulatory or operational changes and other unforeseen future trends. Losses on Private Education Loans are also determined by risk characteristics such as school type, loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months in which a payment has been made by a customer), underwriting criteria (e.g., credit scores), existence of a cosigner and the current economic environment. General economic and employment conditions, including employment rates for recent college graduates, during the recent recession led to higher rates of education loan defaults. If actual loan performance is worse than currently estimated, it could materially affect Navient’s estimate of the allowance for loan losses and the related provision for loan losses in Navient’s statements of income and as a result adversely affect Navient’s results of operations.

REGULATORY, COMPLIANCE, LEGAL & GOVERNANCE RISK. Compliance risk is the risk to earnings or capital or reputation arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Legal risk is the risk to earnings, capital or reputation manifested by claims made through the legal system and may arise from a product or service, a transaction, a business relationship, property (real, personal or intellectual), conduct of an employee or change in law or regulation. Governance risk is the risk of not establishing and maintaining a control environment that aligns with stakeholder and regulatory expectations, including our relationship with the regulators as well as compliance environment within the Company and board oversight. These risks are inherent in all of our businesses.

Navient’s businesses are subject to a wide variety of laws, rules, regulations and government policies that may change in significant ways and changes to such laws and regulations or changes in existing regulatory guidance or their interpretation or enforcement could materially adversely impact Navient’s business and results of operations.

Our businesses are subject to regulation under a wide variety of U.S. federal and state and non U.S. laws, rules, regulations and policies. There can be no assurance that these laws, rules, regulations and policies will not

 

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be changed in ways that will require us to modify our business models or objectives or in ways that affect our returns on investment by restricting existing activities or services, subjecting them to escalating costs or prohibiting them outright.

In particular, the CFPB has broad authority with respect to Navient’s loan servicing business. It has authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and examine Navient for compliance. The CFPB also has examination and enforcement authority with respect to various federal consumer financial laws for some providers of consumer financial products and services, including Navient. In December 2013, the CFPB issued a final rule, effective March 1, 2014, defining “larger participants” in the education loan servicing market that will be subject to supervision and examination by the CFPB, a category that includes Navient’s education loan servicing subsidiaries. The CFPB has also announced that it intends to issue new rules that apply to debt collection in 2016 and to student loans and student loan servicers sometime in 2016 or 2017.

The CFPB is authorized to impose monetary penalties, collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. The CFPB has authority to prevent unfair, deceptive or abusive acts or practices and to ensure that all consumers have access to fair, transparent and competitive markets for consumer financial products and services. The review of products and practices to prevent unfair, deceptive or abusive conduct will be a continuing focus of the CFPB. The ultimate impact of this heightened scrutiny is uncertain, but it has resulted in, and could continue to result in, changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties.

Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. If the CFPB or one or more state attorneys general or state regulators believe that Navient has violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on Navient or its business.

Loans serviced under the FFELP are subject to the HEA and related laws, rules, regulations and policies. Navient’s servicing operations are designed and monitored to comply with the HEA, related regulations and program guidance; however, ED could determine that Navient is not in compliance for a variety of reasons, including that it misinterpreted ED guidance or incorrectly applied the HEA and its related laws, rules, regulations and policies. Failure to comply could result in fines, the loss of the insurance and related federal guarantees on affected FFELP Loans, expenses required to cure servicing deficiencies, suspension or termination of its right to participate as a FFELP servicer, negative publicity and potential legal claims. The imposition of significant fines, the loss of the insurance and related federal guarantees on a material number of FFELP Loans, the incurrence of additional expenses and/or the loss of its ability to participate as a FFELP servicer could individually or in the aggregate have a material, negative impact on its business, financial condition or results of operations.

Navient’s asset recovery business is subject to regulation and oversight by various state and federal agencies, particularly in the area of consumer protection, and is subject to numerous state and federal laws and regulations. Failure to comply with these laws and regulations may result in significant costs, including litigation costs, and/or business sanctions including but not limited to termination or non-renewal of contracts.

Expanded regulatory and governmental oversight of Navient’s businesses will increase its costs and risks.

Navient’s businesses and operations are increasingly subject to heightened governmental and regulatory oversight and scrutiny. Navient is now and may be subject in the future, to inquiries and audits from state and federal regulators as well as litigation from private plaintiffs. In recent years, Navient has entered into consent orders and other settlements with the FDIC, the United States Department of Justice (“DOJ”) and other banking and state regulators. Navient has paid fines and penalties or provided monetary and other relief in connection

 

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with many of these actions and settlements. We have also enhanced our procedures and controls, expanded the risk and control functions within each line of business, invested in technology and hired additional risk, control and compliance personnel.

If Navient fails to successfully address the requirements of the Consent Orders or other settlements it is currently subject, or more generally to effectively enhance its risk and control procedures and processes to meet the heightened expectations of its regulators and other government agencies, it could be required to enter into further orders and settlements, pay additional fines, penalties or judgments, or accept material regulatory restrictions on its businesses, which could adversely affect its operations and, in turn, its financial results.

Navient expects heightened regulatory scrutiny and governmental investigations and enforcement actions to continue for it and for the financial services industry as a whole. Navient anticipates that regulators will continue to take formal enforcement action, rather than taking informal supervisory actions, more frequently than they have done historically. Such actions can have significant consequences for a financial institution such as Navient, including loss of customers and business and the inability to operate certain businesses.

Due to the uncertainty engendered by these new regulations, guidance and actions, coupled with the likelihood of additional changes or additions to the statutes, regulations and practices applicable to its business, Navient is not able to estimate the ultimate impact of changes in law on its financial results, business operations or strategies. Navient believes that the cost of responding to and complying with these evolving laws and regulations, as well as any guidance from enforcement actions, will continue to increase, as will the risk of penalties and fines from any enforcement actions that may be imposed on its businesses. Navient’s profitability, results of operations, financial condition, cash flows or future business prospects could be materially and adversely affected as a result.

Navient’s framework for managing risks may not be effective in mitigating the risk of loss.

Navient’s risk management framework seeks to mitigate risk and appropriately balance risk and returns. Navient has established processes and procedures intended to identify, measure, monitor, control and report the types of risk to which it is subject. Navient seeks to monitor and control risk exposure through a framework of policies, procedures, limits and reporting requirements. Management of risks in some cases depends upon the use of analytical and forecasting models. If the models that Navient uses to mitigate these risks are inadequate, it may incur increased losses. In addition, there may be risks that exist, or that develop in the future, that Navient has not appropriately anticipated, identified or mitigated. If Navient’s risk management framework does not effectively identify or mitigate risks, Navient could suffer unexpected losses, and its results of operations, cash flow or financial condition could be materially adversely affected.

We are subject to various legal proceedings and some of these legal proceedings or other contingencies may materially adversely affect our business, financial condition or results from operations.

We are subject to a variety of legal proceedings in virtually every part of our businesses including the legal proceedings described in the Legal proceedings section of this Annual Report on Form 10-K. While we believe we have adopted appropriate legal and risk management and compliance programs, the diverse nature of our operations, including operations of business we have recently acquired, means that legal and compliance risks will continue to exist and additional legal proceedings and other contingencies, the outcome of which cannot be predicted with certainty, will arise from time to time. Some of these legal proceedings or other contingencies may materially adversely affect our business, financial condition or results from operations

Navient is subject to evolving and complex tax laws, which may result in additional liabilities that may affect its results of operations.

Navient is subject to evolving and complex federal and state tax laws. Significant judgment is required for determining Navient’s tax liabilities, and SLM Corporation’s tax returns have been, and Navient’s tax returns

 

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will continue to be, periodically examined by various tax authorities. Navient will have, among other tax liabilities, risks for future tax contingencies arising from operations post-Spin-Off. Due to the complexity of tax contingencies, the ultimate resolution of any tax matters related to operations post-Spin-Off may result in payments greater or less than amounts accrued.

In addition, Navient may be impacted by changes in tax laws, including tax rate changes, changes to the laws related to the treatment and remittance of foreign earnings, new tax laws and subsequent interpretations of tax laws by federal and state tax authorities.

Incorrect estimates and assumptions by management in connection with the preparation of Navient’s consolidated financial statements could adversely affect Navient’s reported assets, liabilities, income, revenue or expenses.

The preparation of Navient’s consolidated financial statements requires management to make critical accounting estimates and assumptions that affect the reported amounts of assets, liabilities, income, revenue or expenses during the reporting periods. Incorrect estimates and assumptions by management could adversely affect Navient’s reported amounts of assets, liabilities, income, revenue and expenses during the reporting periods. If Navient makes incorrect assumptions or estimates, it may under- or overstate reported financial results, which could materially and adversely affect its business, financial condition and results of operations.

Certain provisions of Delaware law and Navient’s amended and restated certificate of incorporation and amended and restated by-laws prevent or delay an acquisition of Navient, which could decrease the trading price of Navient’s common stock.

Certain provisions of Delaware law and of Navient’s amended and restated certificate of incorporation and amended and restated by-laws are intended to deter coercive takeover practices and inadequate takeover bids by, among other things, encouraging prospective acquirors to negotiate directly with Navient’s board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

   

limitations on the ability of Navient’s stockholders to call a special meeting such that stockholder-requested special meetings will only be called upon the request of the holders of at least one-third of Navient’s capital stock issued and outstanding and entitled to vote at an election of directors;

 

   

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

 

   

the right of Navient’s board of directors to issue one or more series of preferred stock without stockholder approval;

 

   

the inability of Navient’s stockholders to fill vacancies on Navient’s board of directors;

 

   

the requirement that the affirmative vote of the holders of at least 75 percent in voting power of Navient’s stock entitled to vote thereon is required for stockholders to amend Navient’s amended and restated by-laws; and

 

   

the inability of Navient stockholders to cumulate their votes in the election of directors.

In addition, Navient’s amended and restated certificate of incorporation makes it subject to Section 203 of the Delaware General Corporation Law. Section 203 generally provides that, with limited exceptions, persons who acquire, or are affiliated with a person that acquires 15 percent or more of the outstanding voting stock of a Delaware corporation shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the time at which that person or its affiliates becomes the holder of 15 percent or more of the corporation’s outstanding voting stock. Being subject to Section 203 could cause a delay in or completely prevent a change of control that stockholders may favor.

 

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Navient believes these provisions protect its stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with Navient’s board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make the Company immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that Navient’s board of directors determines is not in the best interests of Navient and Navient’s stockholders.

Stockholders’ percentage ownership in Navient may be diluted in the future.

In the future, stockholders’ percentage ownership in Navient may be diluted as a result of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that Navient may grant to its directors, officers and employees. Navient’s and SLM BankCo’s employees will continue to have options to purchase shares of Navient common stock after the Spin-Off as a result of conversion of a portion of their SLM Corporation stock options to Navient stock options. From time to time, Navient will issue additional stock options or other equity-based awards to its employees under Navient’s employee benefits plans. Such awards will have a dilutive effect on Navient’s earnings per share, which could adversely affect the market price of shares of Navient common stock.

In addition, Navient’s amended and restated certificate of incorporation authorizes Navient to issue, without the approval of Navient’s stockholders, one or more series of preferred stock. Navient’s board of directors generally may determine the rights of preferred stockholders including their powers, preferences and relative, participating, optional and other special rights, including preferences over Navient’s common stock with respect to dividends and distributions. If Navient’s board were to approve the issuance of preferred stock in the future, the terms of one or more series of such preferred stock could dilute the voting power or reduce the value of Navient’s common stock. For example, Navient could grant the holders of preferred stock the right to elect some number of Navient’s directors in all circumstances or upon the happening of specified events, or the right to veto specified transactions. Similarly, it could grant the preferred stockholders certain repurchase or redemption rights or liquidation preferences that could affect the value of the common stock.

REPUTATIONAL/POLITICAL RISK. Reputational risk is the risk to earnings or capital arising from damage to our reputation in the view of, or loss of the trust of, customers and the general public. Political risk is the closely related risk to earnings or capital arising from damage to our relationships with governmental entities, regulators and political leaders and candidates. These risks can arise due to both our own acts and omissions (both real and perceived), and the acts and omissions of other industry participants or other third parties, and they are inherent in all of our businesses.

Federal funding constraints and spending policy changes triggered by associated federal spending deadlines and ongoing lawmaker and regulatory efforts to change the student lending sector may result in disruption of federal payments for services Navient provides to the government, which could materially and adversely affect Navient’s business strategy or future business prospects.

Navient receives payments from the federal government on its FFELP Loan portfolio and for other services it provides, including servicing loans under the DSLP and providing default aversion and contingency collections to ED. Payments for these services may be affected by various factors, including the following:

 

   

The Budget Act enacted on December 26, 2013, includes several provisions that will have or could have an effect on Navient’s business. First, the Budget Act reduced the amount paid to guaranty agencies for defaulted FFELP Loans rehabilitated under Section 428F of the HEA, beginning on July 1, 2014. In addition, the Budget Act eliminated funding for the Direct Loan servicing performed by not-for-profit servicers. The Budget Act requires that all servicing funding be provided through the annual appropriations process which is subject to certain limitations. Although the payments for Navient’s DSLP servicing contract is already funded from annual appropriations, the requirement to fund all servicing from the limited appropriated funding could have an effect on its future business in ways the Company cannot predict at this time.

 

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Other Higher Education Legislation: As Congress considers the reauthorization of the Higher Education Act, it may consider legislation that would reduce the payments to Guarantors or change the consolidation program to incentivize education loan borrowers to refinance their existing education loans, both private and federal. Such reforms could reduce Navient’s cash flows from servicing and interest income as well as its net interest margin.

It is possible that the Administration and Congress in the future could engage in a prolonged debate linking the federal deficit, debt ceiling and other budget issues. If U.S. lawmakers in the future fail to reach agreement on these issues, the federal government could stop or delay payment on its obligations, including those on services Navient provides. Navient cannot predict how or what programs will be impacted by any actions that the Administration, Congress or the federal government may take. Further, legislation to address the federal deficit and spending could include proposals that would adversely affect FFELP and DSLP-related servicing businesses. A protracted reduction, suspension or cancellation of the demand for the services Navient provides, or proposed changes to the terms or pricing of services provided under existing contracts with the federal government, including its contract with ED, could have a material adverse effect on Navient’s revenues, cash flows, profitability and business outlook, and, as a result, could materially adversely affect its business, financial condition and results of operations.

RISKS ASSOCIATED WITH OUR SPIN-OFF

Navient’s historical and pro forma financial information is not necessarily representative of the results that it would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results.

Due to the relative significance of Navient to SLM Corporation, among other factors, Navient is the “accounting successor” to SLM Corporation for financial reporting purposes, notwithstanding the legal form of the Spin-Off described in this Form 10-K. Hence, Navient’s historical consolidated financial statements included in this Form 10-K are the consolidated financial statements of SLM Corporation. Other significant changes have occurred in Navient’s cost structure, management, financing and business operations due to the Company operating as a company separate from the combined businesses of SLM Corporation. Accordingly, the historical financial information for Navient included in this Form 10-K does not necessarily reflect the financial condition, results of operations or cash flows that Navient would have achieved as a separate, publicly traded company during the periods presented or those that Navient will achieve in the future.

Navient’s ability to engage in stockholder distributions and other strategic corporate transactions in the near term could be limited.

To preserve the tax-free treatment to SLM BankCo of the Spin-Off, Navient and SLM BankCo entered into a tax sharing agreement that restricts Navient from engaging in certain transactions. These restrictions are intended to prevent the distribution and related transactions from becoming taxable to SLM BankCo and its stockholders for U.S. federal income tax purposes. Under the tax sharing agreement, for up to a two-year period following the distribution (the “Restricted Period”), Navient is prohibited from, among other things:

 

   

issuing shares of Navient stock equal to or exceeding 25 percent of the shares of Navient stock issued and outstanding immediately following the distribution date, including issuances intended to raise capital or as acquisition currency in furtherance of strategic transactions, such as for the purchase of additional portfolios of education loans;

 

   

selling 50 percent or more of the assets of the loan management, servicing and asset recovery business or engaging in mergers or other strategic transactions that may result in a change of control of Navient (as determined under U.S. federal income tax law);

 

   

repurchasing outstanding shares of its common stock, other than in open market repurchases constituting less than 20 percent of such stock outstanding immediately following the distribution date; and

 

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ceasing to actively conduct its business or liquidating.

The foregoing prohibitions are in some cases more restrictive than those required under the Internal Revenue Code of 1986, as amended (the “Code”) due to the potential significant liability to SLM BankCo and its stockholders were the Spin-Off and the distribution determined to be a taxable transaction. Under the tax sharing agreement, Navient has the ability to engage in certain otherwise prohibited transactions, such as additional stock issuances or stock repurchases during the Restricted Period, provided it first delivers to SLM BankCo a tax opinion reasonably satisfactory to SLM BankCo or an IRS ruling that doing so will not adversely affect the tax-free treatment of the Spin-Off and the distribution. Navient has in fact complied with these exceptions to obtain relief from several of these prohibitions.

The foregoing prohibitions could limit Navient’s ability to pursue strategic transactions or other transactions during the Restricted Period that it may believe to be in the best interests of its stockholders or that might increase the value of its business. In addition, under the tax sharing agreement, Navient is required to indemnify SLM BankCo against any tax liabilities incurred as a result of the violation of any of the foregoing restrictions, as well as any transaction (or series of transactions) that results in the distribution being considered part of a plan by Navient that includes a later change in control of Navient during the Restricted Period (as determined under U.S. federal income tax law).

Navient will owe obligations, including service and indemnification obligations, to SLM BankCo under various transaction agreements that have been executed as part of the Spin-Off. These obligations could be materially disruptive to Navient’s business or subject it to substantial liabilities, including contingent liabilities and liabilities that are presently unknown.

In connection with the Spin-Off, Navient, SLM Corporation and SLM BankCo entered into various agreements, including, among others, a transition services agreement, a tax sharing agreement, an employee matters agreement, a loan servicing and administration agreement, a joint marketing agreement, a key systems agreement, a data sharing agreement and a sublease agreement. Under the transition services agreement, a subsidiary of Navient hosts and provides SLM BankCo with access to Navient’s information technology systems and services, and Navient assists SLM BankCo in migrating its customer data and service functions to a separate environment. The performance by Navient of its obligations to SLM BankCo under these agreements may require the diversion of a significant amount of Navient management’s time from Navient’s operations and could be disruptive to its business operations.

The separation and distribution agreement between Navient, SLM Corporation and SLM BankCo provides for, among other things, indemnification obligations designed to make Navient financially responsible for substantially all liabilities that may exist whether incurred prior to or after the Spin-Off, relating to the business activities, of SLM Corporation prior to the Spin-Off, other than those arising out of the consumer banking business and expressly assumed by SLM BankCo pursuant to the Spin-Off and distribution agreement. This includes Navient being financially responsible for all servicing and collections activities that it performed or directed on behalf of Sallie Mae Bank. If Navient is required to indemnify SLM BankCo under the circumstances set forth in the separation and distribution agreement, Navient may be subject to substantial liabilities including liabilities that are accrued, contingent or otherwise and regardless of whether the liabilities were known or unknown at the time of the Spin-Off. SLM BankCo is party to various claims, litigation and legal, regulatory and other proceedings resulting from ordinary business activities relating to its current and former operations. Previous business activities of SLM BankCo, including originations and acquisitions of various classes of consumer loans outside of Sallie Mae Bank, may also result in liability due to future laws, rules, interpretations or court decisions which purport to have retroactive effect, and such liability could be significant. SLM BankCo may also be subject to liabilities related to past activities of acquired businesses. It is inherently difficult, and in some cases impossible, to estimate the probable losses associated with contingent and unknown liabilities of this nature, but future losses may be substantial and will be borne by Navient in accordance with the terms of the separation and distribution agreement.

 

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There could be significant liability to Navient if the Spin-Off is determined to be a taxable transaction.

The Spin-Off of Navient from SLM BankCo was intended to qualify as a reorganization under various provisions of the Code and as such to not be a taxable transaction. The Spin-Off was therefore conditioned on the receipt by SLM Corporation of a private letter ruling from the IRS to the effect that, among other things, (i) the merger of SLM Corporation with and into a limited liability company wholly owned by SLM BankCo (the “SLM Merger”) (together with the conversion of the shares of SLM Corporation common and preferred stock into shares of SLM BankCo common and preferred stock pursuant to the SLM Merger) will qualify as a “reorganization” within the meaning of Section 368(a)(1)(F) of the Code and will not be integrated with the rest of the Spin-Off , and (ii) the Spin-Off will qualify as a “reorganization” for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. In addition, the Spin-Off was conditioned on SLM BankCo’s receipt of an opinion from outside tax counsel to the effect that, with respect to certain requirements for tax-free treatment under Section 355 of the Code on which the IRS will not rule, such requirements will be satisfied. Both of these conditions were satisfied or waived prior to the Spin-Off. Navient received the private letter ruling from the IRS after the Spin-Off.

The ruling and the opinion rely on facts, assumptions, representations and undertakings from SLM Corporation, SLM BankCo and Navient regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings is incorrect, SLM BankCo and its stockholders may not be able to rely on the ruling or the opinion of tax counsel and could be subject to significant tax liabilities. In addition, notwithstanding receipt of the private letter ruling from the IRS and opinion of tax counsel, the IRS could determine on audit that the SLM Merger and/or Spin-Off was taxable if it determines that any of these facts, assumptions, representations or undertakings were not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling, or for other reasons, including as a result of significant changes in the share ownership of SLM BankCo or Navient after the Spin-Off. If the SLM Merger and/or Spin-Off is determined to be taxable for U.S. federal income tax purposes, SLM BankCo and its stockholders that are subject to U.S. federal income tax could incur significant U.S. federal income tax liabilities and Navient could incur significant liabilities related thereto.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

The following table lists the principal facilities owned by us as of December 31, 2015:

 

Location

 

Function

 

Business Segment(s)

  Approximate
Square Feet
 

Fishers, IN

  Loan Servicing and Data Center   FFELP Loans; Private Education Loans; Business Services     450,000   

Wilkes-Barre, PA

  Loan Servicing Center   FFELP Loans; Private Education Loans; Business Services     133,000   

Big Flats, NY

  GRC and Pioneer Credit Recovery — Collections Center   Business Services     60,000   

Indianapolis, IN

  Loan Servicing Center   Business Services     50,000   

Arcade, NY

  Pioneer Credit Recovery — Collections Center   Business Services     46,000   

Perry, NY

  Pioneer Credit Recovery — Collections Center   Business Services     45,000   

Lake City, FL

  Gila MSB — Collections Center   Business Services     8,000   

The following table lists the principal facilities leased by us as of December 31, 2015:

 

Location

 

Function

 

Business Segment(s)

  Approximate
Square Feet
 

Newark, DE

  Operations Center and Administrative Offices   FFELP Loans; Private Education Loans; Business Services; Other     106,000   

Reston, VA(1)

  Administrative Offices   FFELP Loans; Private Education Loans; Business Services; Other     90,000   

Muncie, IN

  Collections Center   Private Education Loans; Business Services     75,400   

Mason, OH

  GRC Headquarters and Collections Center   Business Services     54,000   

Wilmington, DE

  Headquarters   FFELP Loans; Private Education Loans; Business Services; Other     46,000   

Moorestown, NJ

  Pioneer Credit Recovery — Collections Center   Business Services; Other     30,000   

Austin, TX

  Gila MSB — Collections Center   Business Services; Other     55,000   

Hendersonville, TN(2)

  Xtend Healthcare — Revenue Cycle Management   Business Services; Other     90,000   

Nashville, TN

  Xtend Healthcare — Revenue Cycle Management   Business Services; Other     28,000   

 

  (1) 

Includes 18,000 square feet sublet to SLM Corporation.

 

  (2) 

Includes 34,000 square feet at 500 West Main Street, 34,000 square feet at 90 Volunteer Drive, and 22,000 square feet at 237 East Main Street.

None of the facilities that we own is encumbered by a mortgage. We believe that our headquarters, loan servicing centers, data center, back-up facility and data management and collections centers are generally adequate to meet our long-term customer needs and business goals. Our headquarters is currently in leased space at 123 Justison Street, Wilmington, Delaware, 19801.

 

Item 3. 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 including individual and class action lawsuits against our servicing and collection subsidiaries by borrowers and debtors alleging the violation of state or federal laws in connection with servicing or collection activities on their education loans and other debts.

In the ordinary course of our business, the Company, our subsidiaries and affiliates may receive information and document requests and investigative demands from state attorneys general, U.S. Attorneys, legislative committees and administrative agencies. These requests may be informational or regulatory in nature and may relate to our business practices, the industries in which we operate, or other companies with whom we conduct business. Our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

 

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These increases in the number of inquiries and the volume of related information demands are increasing the costs and resources we must dedicate to timely respond to these requests and may, depending on their outcome, result in payments of additional amounts of restitution, fines and penalties in addition to those described below.

On March 18, 2011, an education loan borrower filed a putative class action complaint against SLM Corporation as it existed prior to the Spin-Off (“Old SLM”) in the U.S. District Court for the Northern District of California. The complaint was captioned Tina M. Ubaldi v. SLM Corporation et. al. The plaintiff brought the complaint on behalf of a class consisting of other similarly situated California borrowers. The complaint alleged, among other things, that Old SLM’s practice of charging late fees proportional to the amount of missed payments constituted liquidated damages in violation of California law; and Old SLM engaged in unfair business practices by charging daily interest on private educational loans. Following additional amendments to the complaint, which added usury claims under California state law and two additional defendants (Sallie Mae, Inc., now known as Navient Solutions, Inc. (“NSI”), and SLM PC Student Loan Trust 2004-A), a Modified Third Amended Complaint was filed on December 2, 2013. In that complaint, plaintiffs sought restitution of late charges and interest paid by members of the class, injunctive relief, cancellation of all future interest payments, treble damages as permitted by law, as well as costs and attorneys’ fees, among other relief. Prior to the formation of Sallie Mae Bank in 2005, Old SLM followed prevalent capital market practices of acquiring and securitizing private education loans purchased in secondary transactions from banks who originated these loans. Plaintiffs alleged that the services provided by the then SLM Corporation 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. Named defendants are subsidiaries of Navient and as such any liability arising from the Ubaldi litigation will remain the sole responsibility of Navient Corporation. On June 23, 2014, Plaintiffs filed a Renewed Motion for Class Certification. On December 19, 2014, the court granted plaintiffs’ Renewed Motion for Class Certification regarding the claims concerning late fees, but denied the motion as to the usury claims. On January 30, 2015, Plaintiffs filed a motion seeking leave to file another amended complaint. On March 24, 2015, the Court denied Plaintiffs’ motion, denying their request to amend the complaint again. The case is still pending. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection therewith.

On November 26, 2014, Marlene Blyden filed a putative class action suit in the U.S. District Court for the Central District of California against Navient Corporation, Navient, LLC, Navient Solutions, Inc., Navient Credit Finance Corporation, Navient Investment Corporation, SLM Corporation, The Bank of New York, and The Bank of New York Mellon Trust Company, N.A. (“BNY Mellon”). The complaint was captioned Marlene Blyden v. Navient Corporation et. al. On December 2, 2014, plaintiff filed a First Amended Complaint. The plaintiff purports to bring the First Amended Complaint on behalf of a class consisting of other similarly situated California borrowers. The First Amended Complaint alleged that plaintiff and members of the asserted class were charged and/or paid interest at a rate above that permitted under California law. On February 4, 2015, Plaintiff filed her Second Amended Complaint, which dropped SLM Corporation as a defendant, added various securitization trusts as defendants, and added claims for conversion and for money received. On July 23, 2015, the Court granted Defendants’ Motions to Dismiss Plaintiff’s Second Amended Complaint but permitted Plaintiff to make certain amendments. On August 4, 2015, Plaintiff filed a Third Amended Complaint. The Third Amended Complaint removed all of the Defendants except the SLM PC Student Loan 2003-B Trust, BNY Mellon (in its capacity as a trustee), and Navient Solutions, Inc. The other trust defendants and Navient Credit Finance Corporation are no longer defendants in the matter. The court granted Defendants’ Motion to Dismiss the Third Amended Complaint on February 16, 2016. The court allowed Plaintiff to file a further amended complaint. Allegations similar to those asserted in the Ubaldi and Blyden cases are also raised in a putative class action complaint captioned Jamie Beechum, et al. v. Navient Solutions, Inc. filed on October 21, 2015, and deemed served as February 16, 2016. It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with either the Blyden or Beechum lawsuits.

 

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Regulatory Matters

On May 2, 2014, Navient Solutions, Inc. (“NSI”), a wholly-owned subsidiary of Navient, and Sallie Mae Bank entered into consent orders, without admitting any wrongdoing, with the Federal Deposit Insurance Corporation (the “FDIC”) (respectively, the “NSI Order” and the “Bank Order”; collectively, the “FDIC Orders”) to settle 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 (the “SCRA”). The FDIC Orders, which became effective upon the signing of the consent order with the United States Department of Justice (the “DOJ”) by NSI and SLM BankCo on May 13, 2014, required NSI to pay $3.3 million in civil monetary penalties. NSI paid its civil monetary penalties. In addition, the FDIC Orders required the establishment of a restitution reserve account totaling $30 million to provide restitution with respect to loans owned or originated by Sallie Mae Bank, from November 28, 2005 until the effective date of the FDIC Orders. Pursuant to the Separation and Distribution Agreement among SLM Corporation, SLM BankCo and Navient dated as of April 28, 2014 (the “Separation Agreement”), Navient funded the restitution reserve account in May 2014.

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

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

The total reserves established by the Company in 2013 and 2014 to cover these costs were $177 million, and as of December 31, 2015, substantially all of this amount had been paid or credited or refunded to customer accounts. The final cost of these proceedings will remain uncertain until all of the work under the various consent orders has been completed and the consent orders are lifted.

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

 

   

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

 

   

In April 2014, NSI received a CID from the Consumer Financial Protection Bureau (the “CFPB”) as part of the CFPB’s separate investigation regarding allegations relating to Navient’s disclosures and assessment of late fees and other matters. Navient has received a series of supplemental CIDs on these matters. On August 19, 2015, NSI received a letter from the CFPB notifying NSI that, in accordance with the CFPB’s discretionary Notice and Opportunity to Respond and Advise (“NORA”) process, the CFPB’s Office of Enforcement is considering recommending that the CFPB take legal action against NSI. The NORA letter relates to a previously disclosed investigation into NSI’s disclosures and assessment of late

 

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fees and other matters and states that, in connection with any action, the CFPB may seek restitution, civil monetary penalties and corrective action against NSI. The Company responded to the NORA letter on September 10, 2015.

 

   

In November 2014, Navient’s subsidiary, Pioneer Credit Recovery, Inc. (“Pioneer”), received a CID from the CFPB as part of the CFPB’s investigation regarding Pioneer’s activities relating to rehabilitation loans and collection of defaulted student debt.

 

   

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

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

In addition, Navient and its subsidiaries are subject to examination by the CFPB, FDIC, ED and various state agencies as part of its ordinary course of business. Items or matters similar to or different from those described above may arise during the course of those examinations. We also routinely receive inquiries or requests from various regulatory entities or bodies or government agencies concerning our business or our assets. The Company endeavors to cooperate with each such inquiry or request.

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

OIG Audit

The Office of the Inspector General (the “OIG”) of ED commenced an audit regarding Special Allowance Payments (“SAP”) on September 10, 2007. On September 25, 2013, we received the final audit determination of Federal Student Aid (the “Final Audit Determination”) on the final audit report issued by the OIG on August 3, 2009 related to this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make adjustment to our government billing to reflect the policy determination. Navient remains in active discussions with ED on this matter and we also have the right to appeal the Final Audit Determination to the Administrative Actions and Appeals Service Group of ED. The period to file an appeal in this matter has not expired. We continue to believe that our SAP billing practices were proper, considering then-existing ED guidance and lack of applicable regulations. The Company established a reserve for this matter in 2014 as part of the total reserve for pending regulatory matters discussed previously.

Recent Developments

On February 11, 2016, Navient Corporation, along with our President and Chief Executive Officer and our Chief Financial Officer, was sued in a putative securities class action in the United States District Court for the District of Delaware. The complaint is captioned George A. Menold v. Navient Corporation et al. The complaint alleges that the Company, our CEO and our CFO violated federal securities laws by making materially false and misleading statements to the public regarding the Company’s loan servicing practices and whether those practices are in compliance with applicable federal regulations.

 

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On February 16, 2016, Navient Corporation, along with our President and Chief Executive Officer and our Chief Financial Officer, was sued in a putative securities class action in the United States District Court for the District of Delaware. The complaint is captioned Tore Heinz Markus Jagrelius v. Navient Corporation. The complaint alleges that the Company, our CEO and our CFO violated federal securities laws by making materially false and misleading statements to the public regarding, among other things, the Company’s financial results, its loan servicing practices and its liquidity facilities.

It is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these cases. We intend to vigorously defend against these allegations.

 

Item 4. Mine Safety Disclosures

N/A

 

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PART II.

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed and traded on the NASDAQ under the symbol NAVI. As of January 31, 2016, there were 342,817,020 shares of our common stock outstanding and 398 holders of record.

The following table presents the high and low sales prices for Navient’s common stock for each post-Spin-Off quarter within the two most recent fiscal years.

 

     Sales Price  
     High      Low  

2015

     

1st Quarter (January 1 — Mar 31, 2015)

   $ 22.41       $ 17.16   

2nd Quarter (May 1 — Jun 30, 2015)

     20.95         18.09   

3rd Quarter (Jul 1 — Sep 30, 2015)

     19.00         10.95   

4th Quarter (Oct 1 — Dec 31, 2015)

     13.93         10.62   

2014

     

2nd Quarter (May 1 — Jun 30, 2014)

   $ 17.98       $ 15.50   

3rd Quarter (Jul 1 — Sep 30, 2014)

     18.28         16.76   

4th Quarter (Oct 1 — Dec 31, 2014)

     22.71         16.98   

We paid quarterly cash dividends on our common stock of $0.15 per share for each quarter of 2014 and $0.16 per share for each quarter of 2015.

Issuer Purchases of Equity Securities

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

 

    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)
 

(In millions, except per share data)

                       

Period:

       

Oct 1 – Oct 31, 2015

    5.9      $ 12.06        5.8      $ 155   

Nov 1 – Nov 30, 2015

                         155   

Dec 1 – Dec 31, 2015

    8.3        12.05        8.3        755   
 

 

 

   

 

 

   

 

 

   

Total fourth quarter

    14.2      $ 12.06        14.1     
 

 

 

   

 

 

   

 

 

   

 

  (1) 

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

 

  (2) 

In December 2015, our board of directors authorized an additional $700 million to be added to the Company’s previously announced $1 billion common share repurchase program announced by the Company in December 2014.

 

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Stock Performance

The following performance graph compares the monthly dollar change in our cumulative total shareholder return on our common stock to that of the S&P 500 Financials Index and the S&P 500 following the Spin-Off on April 30, 2014. The graph assumes a base investment of $100 at May 1, 2014 and reinvestment of dividends through December 31, 2015.

Cumulative Total Stockholder Return since Spin-Off

 

 

LOGO

 

Company/Index

   5/01/14      6/30/14      9/30/14      12/31/14      3/31/15      6/30/15      9/30/15      12/31/15  

Navient Corporation

   $ 100.0       $ 105.2       $ 106.1       $ 130.4       $ 123.6       $ 111.6       $ 69.8       $ 72.1   

S&P 500 Financials Index

     100.0         103.8         106.3         113.9         111.6         113.5         105.9         112.1   

S&P 500

     100.0         104.5         105.7         110.9         111.9         112.2         105.0         112.4   

 

Source: Bloomberg Total Return Analysis

 

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Item 6. Selected Financial Data.

Selected Financial Data 2011-2015

(Dollars in millions, except per share amounts)

The following table sets forth our selected financial and other operating information prepared in accordance with GAAP. The selected financial data in the table is derived from our consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     2015     2014     2013     2012     2011  

Operating Data:

          

Net interest income

   $ 2,221      $ 2,667      $ 3,167      $ 3,208      $ 3,529   

Net income (loss) attributable to Navient Corporation:

          

Continuing operations, net of tax

   $ 996      $ 1,149      $ 1,312      $ 941      $ 598   

Discontinued operations, net of tax

     1               106        (2     35   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

   $ 997      $ 1,149      $ 1,418      $ 939      $ 633   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Continuing operations

   $ 2.66      $ 2.74      $ 2.94      $ 1.93      $ 1.12   

Discontinued operations

                   .24               .07   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.66      $ 2.74      $ 3.18      $ 1.93      $ 1.19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Continuing operations

   $ 2.61      $ 2.69      $ 2.89      $ 1.90      $ 1.11   

Discontinued operations

                   .23               .07   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.61      $ 2.69      $ 3.12      $ 1.90      $ 1.18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to Navient Corporation common shareholders

   $ .64      $ .60      $ .60      $ .50      $ .30   

Return on common stockholders’ equity

     25     26     29     21     14

Net interest margin

     1.64        1.89        1.98        1.78        1.85   

Return on assets

     .74        .81        .89        .52        .33   

Dividend payout ratio

     25        22        19        26        25   

Average equity/average assets

     2.86        3.15        3.28        2.69        2.54   

Balance Sheet Data:

          

Education loans, net

   $ 122,892      $ 134,317      $ 142,100      $ 162,546      $ 174,420   

Total assets

     134,112        146,352        159,543        181,260        193,345   

Total borrowings

     127,403        139,529        150,443        172,257        183,966   

Total Navient Corporation stockholders’ equity

     3,975        4,198        5,637        5,060        5,243   

Book value per common share

     11.41        10.45        11.82        9.92        9.20   

 

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Item 7. 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 Annual Report on Form 10-K. This discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and Item 1A. “Risk Factors” in this Annual Report on Form 10-K.

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

Selected Historical Financial Information and Ratios

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

 

     Years Ended December 31,  

(In millions, except per share data)

   2015     2014     2013  

GAAP Basis

      

Net income attributable to Navient Corporation

   $ 997      $ 1,149      $ 1,418   

Diluted earnings per common share attributable to Navient Corporation

   $ 2.61      $ 2.69      $ 3.12   

Weighted average shares used to compute diluted earnings per share

     382        425        449   

Net interest margin, FFELP Loans

     1.22     1.30     1.29

Net interest margin, Private Education Loans

     3.61     4.06     4.13

Return on assets

     .74     .81     .89

Ending FFELP Loans, net

   $ 96,498      $ 104,521      $ 104,588   

Ending Private Education Loans, net

     26,394        29,796        37,512   
  

 

 

   

 

 

   

 

 

 

Ending total education loans, net

   $ 122,892      $ 134,317      $ 142,100   
  

 

 

   

 

 

   

 

 

 

Average FFELP Loans

   $ 100,421      $ 100,662      $ 112,152   

Average Private Education Loans

     28,803        33,672        38,292   
  

 

 

   

 

 

   

 

 

 

Average total education loans

   $ 129,224      $ 134,334      $ 150,444   
  

 

 

   

 

 

   

 

 

 

“Core Earnings” Basis(1)

      

Net income attributable to Navient Corporation

   $ 694      $ 818      $ 1,242   

Diluted earnings per common share attributable to Navient Corporation

   $ 1.82      $ 1.93      $ 2.77   

Weighted average shares used to compute diluted earnings per share

     382        425        449   

Net interest margin, FFELP Loans

     .84     .90     .88

Net interest margin, Private Education Loans

     3.67     3.94     3.87

Return on assets

     .51     .59     .82

Ending FFELP Loans, net

   $ 96,498      $ 104,521      $ 103,163   

Ending Private Education Loans, net

     26,394        29,796        31,006   
  

 

 

   

 

 

   

 

 

 

Ending total education loans, net

   $ 122,892      $ 134,317      $ 134,169   
  

 

 

   

 

 

   

 

 

 

Average FFELP Loans

   $ 100,421      $ 100,202      $ 111,008   

Average Private Education Loans

     28,803        31,243        32,296   
  

 

 

   

 

 

   

 

 

 

Average total education loans

   $ 129,224      $ 131,445      $ 143,304   
  

 

 

   

 

 

   

 

 

 

 

(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.

 

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Overview

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

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

FFELP Loans Segment

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

Private Education Loans Segment

In this segment, we acquire, finance and service our Private Education Loans. Even though we no longer originate Private Education Loans, we continue to pursue acquisitions of Private Education Loan portfolios that leverage our servicing scale 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 earnings and cash flow as the portfolio amortizes.

Business Services Segment

Our Business Services segment generates revenue from servicing, asset recovery and business processing activities. Within this segment, we primarily generate revenue from servicing our FFELP Loan portfolio as well as servicing education loans for Guarantors of FFELP Loans and other institutions, including ED. We provide asset recovery services for loans and receivables on behalf of Guarantors of FFELP Loans, higher education institutions and federal, state, court and municipal clients. In addition, we provide business processing services on behalf of municipalities, public authorities and hospitals.

Other

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

Key Financial Measures

Our operating results are primarily driven by net interest income from our education loan portfolios, provisions for loan losses, the revenues and expenses generated by our servicing and asset recovery businesses, and gains and losses on subsidiary sales, loan sales and debt repurchases. We manage and assess the performance of each business segment separately as each is focused on different customers and each derives its revenue from different activities and services. A brief summary of our key financial measures are listed below.

Net Interest Income

The most significant portion of our earnings is generated by the spread earned between the interest income we receive on assets in our education loan portfolios and the interest expense on debt funding these loans. We report these earnings as net interest income. Net interest income in our FFELP Loans and Private Education Loans segments are driven by significantly different factors.

 

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FFELP Loans Segment

Net interest income will be the primary source of net income generated by this segment as this portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life. Interest earned on our FFELP Loans is indexed to one-month LIBOR rates and our cost of funds is primarily indexed to three-month LIBOR, creating the possibility of basis and repricing risk related to these assets. The FFELP Loans segment’s “Core Earnings” net interest margin was 0.84 percent in 2015 compared with 0.90 percent in 2014. At December 31, 2015, 78 percent of our FFELP Loan portfolio was funded to term with non-recourse, long-term securitization debt. As of December 31, 2015, we had $96.5 billion of FFELP Loans outstanding, compared with $104.5 billion outstanding at December 31, 2014 on a “Core Earnings” basis.

A source of variability in net interest income could be Floor Income we earn on certain FFELP Loans. Pursuant to the terms of the FFELP, certain FFELP Loans can earn interest at the stated fixed rate of interest as underlying debt interest rate expense remains variable. We refer to this additional spread income as “Floor Income.” Floor Income can be volatile. We frequently hedge this volatility with derivatives which lock in the value of the Floor Income over the term of the contract.

Private Education Loans Segment

Net interest income will be the primary source of net income generated by this segment as this portfolio will have an amortization period in excess of 20 years and a 7-year remaining weighted average life. Interest earned on our Private Education Loans is generally indexed to Prime and one-month LIBOR rates and our cost of funds is primarily indexed to one-month and three-month LIBOR, creating the possibility of basis and repricing risk related to these assets. The Private Education Loans segment’s “Core Earnings” net interest margin was 3.67 percent in 2015 compared with 3.94 percent in 2014. At December 31, 2015, 62 percent of our Private Education Loan portfolio was funded to term with non-recourse, long-term securitization debt. As of December 31, 2015, we had $26.4 billion of Private Education Loans outstanding, compared with $29.8 billion outstanding at December 31, 2014 on a “Core Earnings” basis.

Provisions for Loan Losses

Management estimates and maintains an allowance for loan losses at a level sufficient to cover charge-offs expected over the next two years, plus an additional allowance to cover life-of-loan expected losses for loans classified as a troubled debt restructuring (“TDR”). The provision for loan losses increases the related allowance for loan losses. Generally, the provision for loan losses rises when future charge-offs are expected to increase and falls when future charge-offs are expected to decline. Our loss exposure and resulting provision for loan losses is small for FFELP Loans because we generally bear a maximum of 3 percent loss exposure on defaults. We bear the full credit exposure on our Private Education Loans. Our “Core Earnings” provision for loan losses in our FFELP Loans segment was $26 million in 2015 compared with $40 million in 2014. Losses in our Private Education Loans segment are determined by risk characteristics, such as school type, loan status (in-school, grace, forbearance, repayment and delinquency), loan seasoning (number of months a payment has been made by a customer), underwriting criteria (e.g., credit scores), existence of a cosigner and the current economic environment. Our “Core Earnings” provision for loan losses in our Private Education Loans segment was $538 million in 2015 compared with $539 million in 2014.

Charge-Offs and Delinquencies

When we conclude a loan is uncollectible, the unrecoverable portion of the loan is charged against the allowance for loan losses in the applicable segment. Charge-off data provides relevant information with respect to the performance of our loan portfolios. Management focuses on delinquencies as well as the progression of loans from early to late stage delinquency. In the second quarter of 2015, we changed our assumptions related to estimated recoveries and as a result, the portion of the Private Education Loan amount charged off at default increased from 73 percent to 79 percent. This change resulted in a $330 million reduction to the balance of the

 

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receivable for partially charged-off loans. Excluding this amount, the Private Education Loans segment’s “Core Earnings” charge-off rate was 2.6 percent of loans in repayment in 2015, unchanged from 2014. Delinquencies are a very important indicator of the potential future credit performance. Private Education Loan delinquencies as a percentage of Private Education Loans in repayment decreased from 8.1 percent at December 31, 2014 to 7.2 percent at December 31, 2015. The FFELP Loans segment’s “Core Earnings” charge-off rate was 0.05 percent of loans in repayment in 2015 compared with 0.08 percent in 2014.

Servicing, Asset Recovery and Business Processing Revenues

We earn servicing revenues from servicing education loans which is primarily driven by the underlying volume of loans we are servicing on behalf of others. We earn asset recovery revenue primarily related to default aversion and post-default collection work we perform on education loans as well as collection work we perform on various receivables on behalf of our federal, state, court and municipal clients. The fees we recognize are primarily driven by our success in collecting or rehabilitating defaulted or delinquent loans and receivables. We also earn business processing revenue related to transaction processing we perform on behalf of our municipal, public authority and hospital clients. The fees we recognize are primarily driven by the number of transactions processed.

Other Income / (Loss)

In managing our loan portfolios and funding sources, we periodically engage in sales of loans and the repurchase of our outstanding debt. In each case, depending on market conditions, we may incur gains or losses from these transactions that affect our results from operations.

Operating Expenses

The operating expenses reported for our Private Education Loans and Business Services segments are those that are directly attributable to the generation of revenues by those segments. The operating expenses for the FFELP Loans segment primarily represent an intercompany servicing charge from the Business Services segment and do not reflect our actual underlying costs incurred to service the loans. We have included unallocated corporate overhead expenses and certain information technology costs (together referred to as “Overhead”) as well as regulatory-related costs in our Other segment rather than allocate those expenses by segment. Overhead expenses include executive management, the board of directors, accounting, finance, legal, human resources, stock-based compensation expense and certain information technology and infrastructure costs. Regulatory-related costs include actual settlement amounts as well as third-party professional fees we incur in connection with regulatory matters.

“Core Earnings”

We report financial results on a GAAP basis and also present certain “Core Earnings” performance measures. Our management, equity investors, credit rating agencies and debt capital providers use these “Core Earnings” measures to monitor our business performance. “Core Earnings” is the basis in which we prepare our segment disclosures as required by GAAP under ASC 280, “Segment Reporting” (see “Note 15 — Segment Reporting”). For a full explanation of the contents and limitations of “Core Earnings,” see the section titled “‘Core Earnings’ — Definition and Limitations” of this Item 7.

2015 Summary of Results

2015 GAAP net income was $997 million ($2.61 diluted earnings per share), versus net income of $1.1 billion ($2.69 diluted earnings per share) in the prior year. 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, including the restructuring expenses related to the restructuring initiative launched in second-quarter 2015 to simplify and streamline the Company’s management structure post-Spin-Off, (2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and acquired intangible asset amortization and impairment. These items are

 

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recognized in GAAP but have not been included in “Core Earnings” results. In 2015, GAAP results included gains of $543 million from derivative accounting treatment that are excluded from “Core Earnings” results, compared with gains of $573 million in the prior year. See “‘Core Earnings’ — Definition and Limitations —Differences between ‘Core Earnings’ and GAAP” for a complete reconciliation between GAAP net income and “Core Earnings.”

“Core Earnings” for the year were $694 million ($1.82 diluted earnings per share), compared with $818 million ($1.93 diluted earnings per share) for 2014. Excluding expenses associated with regulatory-related costs, 2015 and 2014 diluted core earnings per share were $1.85 and $2.10, respectively. Full-year 2015 and 2014 operating expenses included $19 million ($0.03 diluted earnings per share) and $120 million ($0.17 diluted earnings per share) of regulatory-related costs, respectively.

During 2015, we:

 

   

acquired Gila LLC and Xtend Healthcare, both asset recovery and business processing companies;

 

   

acquired $3.7 billion of education loans;

 

   

issued $2.8 billion of FFELP ABS, $1.7 billion of Private Education Loan ABS and $500 million of unsecured debt; closed on a new $550 million Private Education Loan ABS Repurchase Facility;

 

   

repurchased $1.7 billion of senior unsecured debt;

 

   

repurchased 56.0 million common shares for $945 million on the open market;

 

   

authorized $700 million in December 2015 to be utilized in a new share repurchase program; and

 

   

paid $240 million in common dividends.

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 Consolidated Statements of Income

 

           Increase (Decrease)  
     Years Ended December 31,     2015 vs. 2014     2014 vs. 2013  

(Dollars in millions, except per share amounts)

   2015     2014      2013     $     %     $     %  

Interest income

               

FFELP Loans

   $ 2,524      $ 2,556       $ 2,822      $ (32     (1 )%    $ (266     (9 )% 

Private Education Loans

     1,756        2,156         2,527        (400     (19     (371     (15

Other loans

     7        9         11        (2     (22     (2     (18

Cash and investments

     8        9         17        (1     (11     (8     (47
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     4,295        4,730         5,377        (435     (9     (647     (12

Total interest expense

     2,074        2,063         2,210        11        1        (147     (7
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     2,221        2,667         3,167        (446     (17     (500     (16

Less: provisions for loan losses

     561        628         839        (67     (11     (211     (25
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

     1,660        2,039         2,328        (379     (19     (289     (12

Other income (loss):

               

Servicing revenue

     340        298         290        42        14        8        3   

Asset recovery and business processing revenue

     367        388         420        (21     (5     (32     (8

Other income

     17        82         100        (65     (79     (18     (18

Gains (losses) on sales of loans and investments

     (9             302        (9     (100     (302     (100

Gains on debt repurchases

     21                42        21        100        (42     (100

Gains (losses) on derivative and hedging activities, net

     166        139         (268     27        19        407        152   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     902        907         886        (5     (1     21        2   

Expenses:

               

Operating expenses

     918        987         1,042        (69     (7     (55     (5

Goodwill and acquired intangible assets impairment and amortization expense

     12        9         13        3        33        (4     (31

Restructuring and other reorganization expenses

     32        113         72        (81     (72     41        57   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     962        1,109         1,127        (147     (13     (18     (2

Income from continuing operations, before income tax expense

     1,600        1,837         2,087        (237     (13     (250     (12

Income tax expense

     604        688         776        (84     (12     (88     (11
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     996        1,149         1,311        (153     (13     (162     (12

Income from discontinued operations, net of tax expense

     1                106        1        100        (106     (100
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     997        1,149         1,417        (152     (13     (268     (19

Less: net loss attributable to noncontrolling interest

                    (1                   1        (100
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation

     997        1,149         1,418        (152     (13     (269     (19

Preferred stock dividends

            6         20        (6     (100     (14     (70
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation common stock

   $ 997      $ 1,143       $ 1,398      $ (146     (13 )%    $ (255     (18 )% 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to Navient Corporation:

               

Continuing operations

   $ 2.66      $ 2.74       $ 2.94      $ (.08     (3 )%    $ (.20     (7 )% 

Discontinued operations

                    .24                      (.24     (100
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.66      $ 2.74       $ 3.18      $ (.08     (3 )%    $ (.44     (14 )% 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

               

Continuing operations

   $ 2.61      $ 2.69       $ 2.89      $ (.08     (3 )%    $ (.20     (7 )% 

Discontinued operations

                    .23                      (.23     (100
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2.61      $ 2.69       $ 3.12      $ (.08     (3 )%    $ (.43     (14 )% 
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share

   $ .64      $ .60       $ .60      $ .04        7   $       
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Consolidated Earnings Summary — GAAP basis

Year Ended December 31, 2015 Compared with Year Ended December 31, 2014

For the year ended December 31, 2015, net income was $997 million, or $2.61 diluted earnings per common share, compared with net income of $1.1 billion, or $2.69 diluted earnings per common share, for the year ended December 31, 2014. The decrease in net income was primarily due to a $446 million decline in net interest income, a $65 million decrease in other income, and a $21 million decrease in asset recovery and business processing revenue. This was partially offset by an $81 million decrease in restructuring and other reorganization expenses, a $69 million decrease in operating expenses, a $67 million decrease in the provision for loan losses, a $42 million increase in servicing revenue, a $27 million increase in net gains on derivative and hedging activities, and a $21 million increase in gains on debt repurchases.

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

 

   

Net interest income decreased by $446 million, of which $186 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was a reduction in Private Education Loan net interest income due to a decline in the loan balance and net interest margin, as well as a reduction in the net interest margin on the FFELP Loans.

 

   

Provisions for loan losses declined $67 million, of which $49 million related to the deemed distribution of SLM BankCo on April 30, 2014.

 

   

Servicing revenue increased $42 million primarily as a result of increasing our recovery expectation on previously assessed late fees, as well as a general increase in third-party servicing revenue, primarily related to servicing for ED.

 

   

Asset recovery and business processing revenue decreased $21 million primarily as a result of the Bipartisan Budget Act (the “Budget Act”) enacted on December 26, 2013 and effective on July 1, 2014, which reduced the amount paid to Guarantor agencies for defaulted FFELP Loans that are rehabilitated. This legislative reduction in fees represents $79 million of the decrease in asset recovery and business processing revenue. This reduction was partially offset by $69 million of additional revenue from Gila LLC, acquired in February 2015, and Xtend Healthcare, acquired in October 2015.

 

   

Other income decreased $65 million due in part to a reduction 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.

 

   

Losses on sales of loans and investments increased $9 million due to a $21 million loss on the sale of $178 million of Private Education Loans, partially offset by $12 million in gains on the sale of $412 million of FFELP Loans. There were no loan sales in the prior year.

 

   

Gains on debt repurchases increased $21 million. Debt repurchase activity will fluctuate based on market fundamentals and our liability management strategy.

 

   

Net gains on derivative and hedging activities increased $27 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 fluctuate 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.

 

   

In 2015 and 2014, we recorded $19 million and $112 million, respectively, of regulatory-related costs. Excluding these expenses, operating expenses increased $24 million. This increase was primarily due to operating costs related to Gila LLC, which was acquired in February 2015, and to Xtend Healthcare, which was acquired in October 2015, and incremental third-party servicing expenses related to an $8.5

 

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billion loan acquisition in fourth-quarter 2014 (including $11 million of one-time conversion costs to move $4.9 billion of FFELP Loans to our servicing system). This was partially offset by $63 million related to the deemed distribution of SLM BankCo on April 30, 2014.

 

   

Restructuring and other reorganization expenses decreased $81 million, from $113 million to $32 million. The year-ago period’s expenses were primarily related to third-party costs incurred in connection with the Spin-Off. In second-quarter 2015, the Company launched a restructuring initiative to simplify and streamline its management structure post-Spin-Off to improve the operating efficiency and effectiveness of the organization, and as a result recorded $29 million of restructuring expense primarily related to expected severance and other related costs.

We repurchased 56.0 million shares and 30.4 million shares of our common stock during the years ended December 31, 2015 and 2014, respectively, as part of our common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 43 million common shares from the year-ago period.

Year Ended December 31, 2014 Compared with Year Ended December 31, 2013

For the year ended December 31, 2014, net income was $1.1 billion, or $2.69 diluted earnings per common share, compared with net income of $1.4 billion, or $3.12 diluted earnings per common share, for the year ended December 31, 2013. The decrease in net income was primarily due to a $500 million decline in net interest income, a $302 million decrease in gains on sales of loans and investments, a $106 million after-tax decrease in income from discontinued operations, a $42 million decrease in debt repurchase gains, and higher restructuring and other reorganization costs of $41 million. This was partially offset by a $211 million decline in the provisions for loan losses, a $407 million increase in net gains on derivative and hedging activities and a $55 million decrease in operating expenses.

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

 

   

Net interest income decreased by $500 million, of which $259 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was a reduction in FFELP net interest income resulting from an $11 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.

 

   

Provisions for loan losses declined $211 million, of which $20 million related to the deemed distribution of SLM BankCo on April 30, 2014. The remaining $191 million decrease was primarily the 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 $302 million primarily 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 year-end period.

 

   

Gains (losses) on derivative and hedging activities, net, increased $407 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.

 

   

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

 

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In 2014 and 2013, we recognized $112 million and $65 million of expense, respectively, related to the settlement of regulatory matters (for additional information, see Item 3. “Legal Proceedings — Regulatory Matters”). Excluding these expenses, operating expenses decreased $102 million. This decrease was primarily due to $171 million related to the deemed distribution of SLM BankCo on April 30, 2014, partially offset by incremental costs post-Spin-Off resulting from operating as a new separate company, increased third-party servicing and asset recovery activities, increased account resolution efforts on our education loan portfolios, as well as additional external servicing costs related to loan acquisitions during the year.

 

   

Restructuring and other reorganization expenses increased $41 million to $113 million. These expenses were primarily related to costs incurred in connection with the Spin-Off.

 

   

Income from discontinued operations decreased by $106 million primarily as a result of the sale of our Campus Solutions business in the second quarter of 2013 and our 529 college savings plan administration business in the fourth quarter of 2013, which resulted in after-tax gains of $38 million and $65 million, respectively.

We repurchased 30.4 million shares and 27.0 million shares of our common stock during the years ended December 31, 2014 and 2013, respectively, as part of our common share repurchase program. Primarily as a result of ongoing common share repurchases, our average outstanding diluted shares decreased by 24 million common shares from the year-ago period.

“Core Earnings” — Definition and Limitations

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results 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 that create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the three items we remove to result in our “Core Earnings” presentations are:

 

  1. The financial results attributable to the operations of SLM BankCo prior to the Spin-Off and related restructuring and other reorganization expense incurred in connection with the Spin-Off, including the restructuring expenses related to the restructuring initiative launched in second-quarter 2015 to simplify and streamline the Company’s management structure post-Spin-Off. For GAAP purposes, Navient reflected the deemed distribution of SLM BankCo on April 30, 2014. For “Core Earnings,” we exclude the consumer banking business as if it had never been a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014;

 

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

 

  3. The accounting for goodwill and acquired intangible assets.

 

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

 

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The following tables show “Core Earnings” for each business segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 15 — Segment Reporting.”

 

    Year Ended December 31, 2015  

(Dollars in millions)

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

Interest income:

                   

Education loans

  $ 2,112      $ 1,756      $      $      $      $ 3,868      $ 650      $ (238   $ 412      $ 4,280   

Other loans

                         7               7                             7   

Cash and investments

    6                      2               8                             8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    2,118        1,756               9               3,883        650        (238     412        4,295   

Total interest expense

    1,245        680               112               2,037        37               37        2,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    873        1,076               (103            1,846        613        (238     375        2,221   

Less: provisions for loan losses

    26        538               (3            561                             561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    847        538               (100            1,285        613        (238     375        1,660   

Other income (loss):

                   

Servicing revenue

    95        21        651               (427     340                             340   

Asset recovery and business processing revenue

                  367                      367                             367   

Other income

                  4        11               15        (613     781        168        183   

Gains (losses) on sales of loans and investments

    12        (21                          (9                          (9

Gains on debt repurchases

                         21               21                             21   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    107               1,022        32        (427     734        (613     781        168        902   

Expenses:

                   

Direct operating expenses

    443        168        485        30        (427     699                             699   

Overhead expenses

                         219               219                             219   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    443        168        485        249        (427     918                             918   

Goodwill and acquired intangible asset impairment and amortization

                                                     12        12        12   

Restructuring and other reorganization expenses

                                                     32        32        32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    443        168        485        249        (427     918               44        44        962   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    511        370        537        (317            1,101               499        499        1,600   

Income tax expense (benefit)(3)

    190        137        199        (118            408               196        196        604   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    321        233        338        (199            693               303        303        996   

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

                         1               1                             1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 321      $ 233      $ 338      $ (198   $      $ 694      $      $ 303      $ 303      $ 997   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

     Year Ended December 31, 2015  

(Dollars in millions)

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

Net interest income after provisions for loan losses

   $       $ 375       $       $ 375   

Total other income

             168                 168   

Operating expenses

                               

Goodwill and acquired intangible asset impairment and amortization

                     12         12   

Restructuring and other reorganization expenses

     32                         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total “Core Earnings” adjustments to GAAP

   $ (32    $ 543       $ (12      499   
  

 

 

    

 

 

    

 

 

    

Income tax expense

              196   
           

 

 

 

Net income

            $ 303   
           

 

 

 

 

(3) 

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

 

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    Year Ended December 31, 2014  

(Dollars in millions)

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

Interest income:

                   

Education loans

  $ 2,097      $ 1,958      $      $      $      $ 4,055      $ 699      $ (42   $ 657      $ 4,712   

Other loans

                         9               9                             9   

Cash and investments

    4                      4               8               1        1        9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    2,101        1,958               13               4,072        699        (41     658        4,730   

Total interest expense

    1,168        708               114               1,990        42        31        73        2,063   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    933        1,250               (101            2,082        657        (72     585        2,667   

Less: provisions for loan losses

    40        539                             579               49        49        628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    893        711               (101            1,503        657        (121     536        2,039   

Other income (loss):

                   

Servicing revenue

    62        25        668               (456     299               (1     (1     298   

Asset recovery and business processing revenue

                  388                      388                             388   

Other income

                  6        26               32        (657     846        189        221   

Gains (losses) on sales of loans and investments

                                                                     

Gains on debt repurchases

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    62        25        1,062        26        (456     719        (657     845        188        907   

Expenses:

                   

Direct operating expenses

    478        181        389        132        (456     724               36        36        760   

Overhead expenses

                         200               200               27        27        227   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    478        181        389        332        (456     924               63        63        987   

Goodwill and acquired intangible asset impairment and amortization

                                                     9        9        9   

Restructuring and other reorganization expenses

                                                     113        113        113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    478        181        389        332        (456     924               185        185        1,109   

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

    477        555        673        (407            1,298               539        539        1,837   

Income tax expense (benefit)(3)

    178        204        248        (150            480               208        208        688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

  $ 299      $ 351      $ 425      $ (257   $      $ 818      $      $ 331      $ 331      $ 1,149   

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

                                                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 299      $ 351      $ 425      $ (257   $      $ 818      $      $ 331      $ 331      $ 1,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Year Ended December 31, 2014  

(Dollars in millions)

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

Net interest income after provisions for loan losses

  $ 136      $ 400      $      $ 536   

Total other income

    15        173               188   

Operating expenses

    63                      63   

Goodwill and acquired intangible asset impairment and amortization

                  9        9   

Restructuring and other reorganization expenses

    113                      113   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ (25   $ 573      $ (9     539   
 

 

 

   

 

 

   

 

 

   

Income tax expense

          208   
       

 

 

 

Net income

        $ 331   
       

 

 

 

 

(3) 

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

 

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    Year Ended December 31, 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:

                   

Education loans

  $ 2,274      $ 2,037      $      $      $      $ 4,311      $ 816      $ 222      $ 1,038      $ 5,349   

Other loans

                         11               11                             11   

Cash and investments

    5        2               5               12               5        5        17   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    2,279        2,039               16               4,334        816        227        1,043        5,377   

Total interest expense

    1,260        748               59               2,067        55        88        143        2,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss)

    1,019        1,291               (43            2,267        761        139        900        3,167   

Less: provisions for loan losses

    48        722                             770               69        69        839   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provisions for loan losses

    971        569               (43            1,497        761        70        831        2,328   

Other income (loss):

                   

Servicing revenue

    76        33        705        (1     (529     284               6        6        290   

Asset recovery and business processing revenue

                  420                      420                             420   

Other income (loss)

                  5        5               10        (755     577        (178     (168

Gains (losses) on sales of loans and investments

    312                      (10            302                             302   

Gains on debt repurchases

                         48               48        (6            (6     42   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (loss)

    388        33        1,130        42        (529     1,064        (761     583        (178     886   

Expenses:

                   

Direct operating expenses

    555        179        348        68        (529     621               185        185        806   

Overhead expenses

                         167               167               69        69        236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

    555        179        348        235        (529     788               254        254        1,042   

Goodwill and acquired intangible asset impairment and amortization

                                                     13        13        13   

Restructuring and other reorganization expenses

                                                     72        72        72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    555        179        348        235        (529     788               339        339        1,127   

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

    804        423        782        (236            1,773               314        314        2,087   

Income tax expense (benefit)(3)

    291        154        284        (86            643               133        133        776   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    513        269        498        (150            1,130               181        181        1,311   

Income from discontinued operations, net of tax expense

                  111        1               112               (6     (6     106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    513        269        609        (149            1,242               175        175        1,417   

Less: net loss attributable to noncontrolling interest

                                                     (1     (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Navient Corporation

  $ 513      $ 269      $ 609      $ (149   $      $ 1,242      $      $ 176      $ 176      $ 1,418   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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:

 

    Year Ended December 31, 2013  

(Dollars in millions)

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

Net interest income after provisions for loan losses

  $ 376      $ 455      $      $ 831   

Total other income (loss)

    34        (212            (178

Operating expenses

    254                      254   

Goodwill and acquired intangible asset impairment and amortization

                  13        13   

Restructuring and other reorganization expenses

    72                      72   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total “Core Earnings” adjustments to GAAP

  $ 84      $ 243      $ (13     314   
 

 

 

   

 

 

   

 

 

   

Income tax expense

          133   

Income from discontinued operations, net of tax expense

          (6

Net loss attributable to noncontrolling interest

          (1
       

 

 

 

Net income

        $ 176   
       

 

 

 

 

(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.

 

     Years Ended December 31,  

(Dollars in millions)

   2015     2014     2013  

“Core Earnings” net income attributable to Navient Corporation

   $ 694      $