Navient Acquires $13 Billion in Student Loans During the Year
2014 Charge-Off Rates on Private Education Loan Portfolio Improve to Lowest Levels Since 2008
$1 Billion Authorized for Common Share Repurchases, Effective Jan. 1, 2015
NEWARK, Del., Jan. 21, 2015 (GLOBE NEWSWIRE) — Navient (NAVI) today released fourth-quarter 2014 and full-year 2014 financial results that include $13 billion of student loan purchases during 2014 and lower year-over-year charge-off rates on private education loans.
“2014 marked the successful launch of Navient as an industry leader in loan management, servicing and asset recovery,” said Jack Remondi, president and CEO, Navient. “We enable millions of customers to successfully manage their education loan repayment, helping them capture the value of their higher education. Our customized outreach assisted a record 762,000 student loan customers in 2014 to enroll in income-driven or other alternative payment programs. We continued to meet our commitment to create shareholder value as we announced $13 billion in portfolio acquisitions and realized year-over-year improvements in credit quality. I’m proud of our 6,200 dedicated employees, who each and every day deliver results for our customers, clients and shareholders. Looking ahead to 2015 — our first full year as Navient — we are ready to continue our track record of success.”
For the fourth-quarter 2014, GAAP net income was $263 million ($0.64 diluted earnings per share), compared with $270 million ($0.60 diluted earnings per share) for the year-ago quarter. For 2014, GAAP net income was $1.1 billion ($2.69 diluted earnings per share), compared with $1.4 billion ($3.12 diluted earnings per share) for 2013.
Core earnings for the quarter were $217 million ($0.53 diluted earnings per share), compared with $274 million ($0.62 diluted earnings per share) for the year-ago quarter. Excluding expenses associated with regulatory matters, fourth-quarter 2014 and 2013 diluted core earnings per share were $0.54 and $0.70, respectively.
Core earnings for the year were $818 million ($1.93 diluted earnings per share), compared with $1.2 billion ($2.77 diluted earnings per share) for 2013. Excluding expenses associated with regulatory matters, 2014 and 2013 diluted core earnings per share were $2.10 and $2.85, respectively.
The results for 2013 include gains from the sale of residual interests in FFELP securitization trusts, the divestiture of two subsidiaries and debt repurchases. These transactions increased core earnings by $0.14 and $0.75 per diluted share for the fourth-quarter and full-year 2013, respectively. Excluding these transactions and the expenses associated with regulatory matters, fourth-quarter and full-year 2013 diluted core earnings per share were $0.56 and $2.10, respectively. The table below summarizes the impact of the 2013 transactions resulting in gains on core earnings:
Navient reports core earnings because management makes its financial decisions based on such measures. The changes in GAAP net income are impacted by the same core earnings items discussed above, as well as changes in net income attributable to (1) the financial results attributable to the operations of the consumer banking business prior to the spin-off on April 30, 2014, and related restructuring and reorganization expense incurred in connection with the spin-off, (2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and acquired intangible asset amortization and impairment. These items are recognized in GAAP but have not been included in core earnings results. Fourth-quarter 2014 GAAP results included gains of $98 million from derivative accounting treatment that are excluded from core earnings results, compared with gains of $8 million in the year-ago period. See “Differences between Core Earnings and GAAP” for a complete reconciliation between GAAP net income and core earnings.
Federally Guaranteed Student Loans (FFELP)
In its FFELP loans segment, Navient acquires and finances FFELP loans.
Core earnings for the segment were $82 million in fourth-quarter 2014, compared with the year-ago quarter’s $81 million.
Full-year 2014 core earnings for this segment were $296 million compared with $513 million in 2013. This decrease was primarily due to $312 million of gains from the sale of residual interests in FFELP securitization trusts which occurred in 2013.
The company acquired $9.5 billion of FFELP loans in the fourth-quarter 2014 for a total of $11.3 billion of FFELP loans acquired during the full-year 2014. At Dec. 31, 2014, Navient held $104.5 billion of FFELP loans, compared with $103.2 billion of FFELP loans held at Dec. 31, 2013.
Private Education Loans
In its private education loans segment, Navient acquires, finances and services private education loans.
Core earnings for the segment were $92 million in fourth-quarter 2014, compared with the year-ago quarter’s $86 million. This increase is primarily the result of a $24 million decrease in the provision for private education loan losses.
Core earnings fourth-quarter 2014 private education loan portfolio results vs. fourth-quarter 2013 are as follows:
Delinquencies of 90 days or more of 3.8 percent of loans in repayment, down from 4.7 percent.
Total delinquencies of 8.1 percent of loans in repayment, down from 9.3 percent.
Annualized charge-off rate of 2.5 percent of average loans in repayment, down from 3.3 percent.
Student loan spread of 3.99 percent, down from 4.04 percent.
Provision for private education loan losses of $128 million, down from $152 million.
Full-year core earnings for this segment were $351 million, compared with $269 million in 2013. This increase was primarily the result of a $183 million decrease in the provision for loan losses.
The company acquired $11 million of private education loans in the fourth-quarter 2014 for a total of $1.6 billion of private education loans acquired during the full-year 2014. At Dec. 31, 2014, Navient held $29.8 billion of private education loans, compared with $31 billion of private education loans held at Dec. 31, 2013.
Business Services
Navient’s business services segment includes fees primarily from servicing and asset recovery activities.
Business services core earnings were $98 million in fourth-quarter 2014, compared with $187 million in the year-ago quarter. The decrease in core earnings was primarily the result of the $62 million after-tax gain recognized with the sale of a subsidiary in the year-ago quarter, as well as lower asset recovery revenue, primarily related to a legislative reduction in certain fees earned, and a lower balance of FFELP loans serviced.
Full-year core earnings for this segment were $428 million compared with $609 million in 2013. This decrease was primarily the result of $109 million of after-tax gains from the sale of two subsidiaries in 2013, lower asset recovery revenue and a lower balance of FFELP loans serviced.
The company services student loans for over 12 million customers, including 6.2 million customers on behalf of the U.S. Department of Education (ED).
Operating Expenses
The company recognized core earnings operating expenses related to regulatory matters of $9 million and $54 million for fourth-quarter 2014 and 2013, respectively, and $120 million and $54 million for full-year 2014 and 2013, respectively. Excluding these regulatory matters, fourth-quarter 2014 core earnings operating expenses were $206 million, compared with $179 million in the year-ago quarter, and full-year 2014 operating expenses were $804 million, compared with $734 million in 2013. The respective increases over the prior-year periods are primarily due to incremental costs post-spin-off resulting from operating as a new separate company, as well as increased third-party servicing and asset recovery activities.
Funding and Liquidity
During the fourth-quarter 2014, Navient issued $1 billion in FFELP asset-backed securities (ABS), $664 million in private education loan ABS and $1 billion in unsecured debt. In November 2014, Navient closed a $10 billion FFELP loan asset-backed commercial paper facility. The facility, which matures in November 2017, will finance the acquisition of FFELP loans, as well as provide additional liquidity to the company.
During 2014, Navient issued $5 billion in FFELP ABS, $1.8 billion in private education loan ABS and $1.9 billion in unsecured debt.
Shareholder Distributions
In Dec. 2014, Navient paid a common stock dividend of $0.15 per share, resulting in a full-year common stock dividend of $0.60 per share.
Navient repurchased 8.7 million shares of common stock for $168 million in the fourth quarter of 2014, and an aggregate of 30.4 million shares for $600 million in the year ended 2014, fully utilizing the company’s 2014 share repurchase program authorization. In Dec. 2014, the company’s board of directors authorized $1 billion to be utilized in a new common share repurchase program effective Jan. 1, 2015, with no expiration date.
Spin-Off of Navient
On April 30, 2014, the spin-off of Navient from SLM Corporation was completed and Navient is now an independent, publicly traded company. 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 to SLM Corporation, the historical financial statements of SLM Corporation prior to the distribution on April 30, 2014, are the historical financial statements of Navient. As a result, the GAAP financial results reported in this earnings release include the historical financial results of SLM Corporation prior to the spin-off on April 30, 2014 (i.e., such consolidated results include both the loan management, servicing and asset recovery business (Navient) and the consumer banking business (SLM Corporation)) and reflect the deemed distribution of the consumer banking business to SLM Corporation’s stockholders on April 30, 2014. See “Presentation of Information” and “Spin-Off of Navient” for further information.
Navient reports financial results on a GAAP basis and also provides certain core earnings performance measures. The difference between the company’s core earnings and GAAP results for the periods presented were (1) the financial results attributable to the operations of the consumer banking business prior to the spin-off on April 30, 2014, and related restructuring and reorganization expense incurred in connection with the spin-off, (2) unrealized, mark-to-market gains/losses on derivatives and (3) goodwill and acquired intangible asset amortization and impairment. These items are recognized in GAAP but have not been included in core earnings results. Navient provides core earnings measures because this is what management uses when making management decisions regarding the company’s performance and the allocation of corporate resources. In addition, Navient’s equity investors, credit rating agencies and debt capital providers use these core earnings measures to monitor the company’s business performance. See “‘Core Earnings’ — Definition and Limitations” for a further discussion and a complete reconciliation between GAAP net income and core earnings.
Definitions for capitalized terms in this document can be found in Navient’s Form 10 (filed with the SEC on April 10, 2014, and declared effective on April 14, 2014). Certain reclassifications have been made to the balances as of and for the three months and year ended Dec. 31, 2013, to be consistent with classifications adopted for 2014, and had no effect on net income, total assets or total liabilities.
Navient will host earnings conference call tomorrow, Jan. 22, at 8 a.m. EST. Navient executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company’s performance. Individuals interested in participating in the call should dial 855-267-0359 (USA and Canada) or dial 267-751-3600 (international) and use access code 61712056 starting at 7:45 a.m. EST. A live audio webcast of the conference call may be accessed at www.navient.com/investors. A replay of the conference call will be available via Navient’s website approximately two hours after the call’s conclusion. A telephone replay may be accessed approximately two hours after the call’s conclusion through Feb. 5, by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 61712056.
Presentation slides for the conference call, as well as additional information about the company’s loan portfolios, operating segments, and other details, may be accessed at www.navient.com/investors under the webcasts tab.
This press release contains “forward-looking statements” and information based on management’s current expectations as of the date of this release. Statements that are not historical facts, including statements about the company’s beliefs or expectations and statements that assume or are dependent upon future events, are forward-looking statements. Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the risks and uncertainties set forth in Item 1A “Risk Factors” and elsewhere in Navient’s Form 10, as amended, filed with the Securities and Exchange Commission (the “SEC”) on April 10, 2014 and subsequent filings with the SEC; increases in financing costs; limits on liquidity; increases in costs associated with compliance with laws and regulations; changes in accounting standards and the impact of related changes in significant accounting estimates; any adverse outcomes in any significant litigation to which the company is a party; credit risk associated with the company’s exposure to third parties, including counterparties to the company’s derivative transactions; and changes in the terms of student loans and the educational credit marketplace (including changes resulting from new laws and the implementation of existing laws). The company could also be affected by, among other things: changes in its funding costs and availability; reductions to its credit ratings or the credit ratings of the United States of America; failures of its operating systems or infrastructure, or those of third-party vendors; damage to its reputation; failures to successfully implement cost-cutting and adverse effects of such initiatives on its business; failures or delays in the planned conversion to our servicing platform of the recently acquired Wells Fargo FFELP portfolio or any other portfolio acquisitions; risks associated with restructuring initiatives, including the recently completed separation of Navient from SLM Corporation; changes in law and regulations with respect to the student lending business and financial institutions generally; increased competition from other loan servicers; the creditworthiness of its customers; changes in the general interest rate environment, including the rate relationships among relevant money-market instruments and those of its earning assets vs. its funding arrangements; changes in general economic conditions; the company’s ability to successfully effectuate any acquisitions and other strategic initiatives; and changes in the demand for debt management services. The preparation of the company’s consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect. All forward-looking statements contained in this release are qualified by these cautionary statements and are made only as of the date of this release. The company does not undertake any obligation to update or revise these forward-looking statements to conform the statement to actual results or changes in its expectations.
About Navient
As the nation’s leading loan management, servicing and asset recovery company, Navient (NAVI) helps customers navigate the path to financial success. Servicing more than $300 billion in student loans, the company supports the educational and economic achievements of more than 12 million Americans. A growing number of government and higher education clients rely on Navient for proven solutions to meet their financial goals. Learn more at navient.com. Navient began trading on Nasdaq as an independent company on May 1, 2014.
Presentation of Information
Unless the context otherwise requires, references in this earnings release to:
“We,” “our,” “us,” or the “Company” with respect to any period on or prior to the date of the Spin-Off refers to Old SLM and its consolidated subsidiaries as constituted prior to the Spin-Off, and any references to “Navient,” “we,” “our,” “us,” or the “Company” with respect to any period after the date of the Spin-Off refers to Navient and its consolidated subsidiaries.
“Old SLM” refers to SLM Corporation, as it existed prior to the Spin-Off, and its consolidated subsidiaries. As part of an internal corporate reorganization of Old SLM, Old SLM was merged into a limited liability company and became a subsidiary of Navient, changing its name to “Navient, LLC.”
Navient’s historical business and operations refer to Old SLM’s portfolio of FFELP and private education student loans not held by Sallie Mae Bank, together with the servicing and asset recovery businesses that were retained by or transferred to Navient in connection with the internal corporate reorganization.
“SLM BankCo” refers to New BLC Corporation, which became the publicly traded successor to Old SLM on April 29, 2014 by virtue of a merger pursuant to Section 251(g) of the Delaware General Corporation Law (“DGCL”), and its consolidated subsidiaries. Following consummation of the merger, New BLC Corporation changed its name to SLM Corporation. Immediately after the Spin-Off, SLM BankCo’s business consists primarily of the consumer banking business previously operated by Old SLM, which includes Sallie Mae Bank and its portfolio of Private Education Loans, a new Private Education Loan servicing business and the Upromise Rewards business.
“Spin-Off” collectively refers to the internal reorganization of Old SLM and the distribution of Navient.
Spin-Off of Navient
On April 30, 2014, Old SLM completed its planned separation into two entities — Navient, a loan management, servicing and asset recovery business, and SLM BankCo, comprised primarily of Sallie Mae Bank and its Private Education Loan originations business and the Private Education Loans it held. 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 Old SLM common stock.
Due to the relative significance of Navient to Old SLM, among other factors, for financial reporting purposes Navient is treated as the “accounting spinnor” and therefore is the “accounting successor” to Old SLM, notwithstanding the legal form of the Spin-Off. As a result, the historical GAAP financial statements of Old SLM prior to the distribution on April 30, 2014 are the historical financial statements of Navient. For that reason the historical GAAP financial information related to periods on or prior to April 30, 2014 contained in this earnings release is that of Old SLM (which includes the consolidated results of both the loan management, servicing and asset recovery business (Navient) and the consumer banking business (SLM BankCo)).
Since Navient is the “accounting spinnor,” the GAAP financial statements of Navient reflect the deemed distribution of SLM BankCo to SLM BankCo’s stockholders on April 30, 2014, notwithstanding the legal form of the Spin-Off in which Navient stock was distributed to the stockholders of SLM BankCo.
Selected Historical Financial Information and Ratios
Quarters Ended
Years Ended
(In millions, except per share data)
December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
GAAP Basis
Net income attributable to Navient Corporation.
$ 263
$ 359
$ 270
$ 1,149
$ 1,418
Diluted earnings per common share attributable to Navient Corporation
$ .64
$ .85
$ .60
$ 2.69
$ 3.12
Weighted average shares used to compute diluted earnings per share
413
423
443
425
449
Net interest margin, FFELP Loans
1.31%
1.32%
1.34%
1.30%
1.29%
Net interest margin, Private Education Loans
3.85%
3.91%
4.11%
4.06%
4.13%
Return on assets
.76%
1.05%
.70%
.81%
.89%
Ending FFELP Loans, net
$ 104,521
$ 97,707
$ 104,588
$ 104,521
$ 104,588
Ending Private Education Loans, net
29,796
30,476
37,512
29,796
37,512
Ending total student loans, net
$ 134,317
$ 128,183
$ 142,100
$ 134,317
$ 142,100
Average FFELP Loans
$ 99,323
$ 98,736
$ 105,518
$ 100,662
$ 112,152
Average Private Education Loans
30,869
31,179
38,508
33,672
38,292
Average total student loans
$ 130,192
$ 129,915
$ 144,026
$ 134,334
$ 150,444
“Core Earnings” Basis(1)
Net income attributable to Navient Corporation.
$ 217
$ 218
$ 274
$ 818
$ 1,242
Diluted earnings per common share attributable to Navient Corporation
$ .53
$ .52
$ .62
$ 1.93
$ 2.77
Weighted average shares used to compute diluted earnings per share
413
423
443
425
449
Net interest margin, FFELP Loans
.91%
.93%
.90%
.90%
.88%
Net interest margin, Private Education Loans
3.89%
3.96%
3.86%
3.94%
3.87%
Return on assets
.63%
.64%
.76%
.59%
.82%
Ending FFELP Loans, net
$ 104,521
$ 97,707
$ 103,163
$ 104,521
$ 103,163
Ending Private Education Loans, net
29,796
30,476
31,006
29,796
31,006
Ending total student loans, net
$ 134,317
$ 128,183
$ 134,169
$ 134,317
$ 134,169
Average FFELP Loans
$ 99,323
$ 98,736
$ 104,245
$ 100,202
$ 111,008
Average Private Education Loans
30,869
31,179
32,109
31,243
32,296
Average total student loans
$ 130,192
$ 129,915
$ 136,354
$ 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.
FFELP Loan Segment Performance Metrics — “Core Earnings”
Quarters Ended
Years Ended
(Dollars in millions)
December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
FFELP Loan spread
1.00%
1.02%
1.01%
.99%
.98%
Net interest margin
.91%
.93%
.90%
.90%
.88%
Provision for loan losses
$ 10
$ 10
$ 8
$ 40
$ 48
Charge-offs
$ 9
$ 14
$ 20
$ 60
$ 76
Charge-off rate
.05%
.08%
.10%
.08%
.09%
Total delinquency rate
16.6%
15.1%
17.0%
16.6%
17.0%
Greater than 90-day delinquency rate
8.5%
7.6%
9.3%
8.5%
9.3%
Forbearance rate
15.5%
16.8%
14.9%
15.5%
14.9%
Private Education Loan Segment Performance Metrics — “Core Earnings”
Quarters Ended
Years Ended
(Dollars in millions)
December 31,
2014
September 30,
2014
December 31,
2013
December 31,
2014
December 31,
2013
Private Education Loan spread
3.99%
4.06%
4.04%
4.04%
4.09%
Net interest margin
3.89%
3.96%
3.86%
3.94%
3.87%
Provision for loan losses
$ 128
$ 130
$ 152
$ 539 (1)
$ 722
Charge-offs
$ 174
$ 158
$ 230
$ 717
$ 878
Charge-off rate
2.5%
2.3%
3.3%
2.6%
3.1%
Total delinquency rate
8.1%
7.9%
9.3%
8.1%
9.3%
Greater than 90-day delinquency rate
3.8%
3.4%
4.7%
3.8%
4.7%
Forbearance rate
3.8%
4.4%
3.8%
3.8%
3.8%
Loans in repayment with more than 12 payments made
91.5%
90.5%
88.7%
91.5%
88.7%
Cosigner rate
64%
64%
63%
64%
63%
Average FICO
719
718
717
719
717
(1) Prior to the Spin-Off, Sallie Mae Bank sold $666 million of loans to Old SLM in the quarter ended March 31, 2014 for (1) securitization transactions at Old SLM and (2) to enable Old SLM to manage loans either granted forbearance or were 90 days or more past due. In the quarter ended March 31, 2014, $29 million of the allowance for loan loss balance was transferred from Sallie Mae Bank to Old SLM. As a result, Old SLM did not need to provide additional provision for loan losses for these loans in the quarter ended March 31, 2014. Had the allowance not transferred from Sallie Mae Bank to Old SLM, the provision would have been $568 million for the year ended December 31, 2014.
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”).
GAAP Statements of Income (Unaudited)
December 31, 2014
vs.
September 30, 2014
December 31, 2014
vs.
December 31, 2013
Quarters Ended
Increase
(Decrease)
Increase
(Decrease)
(In millions, except per share data)
December 31,
2014
September 30,
2014
December 31,
2013
$
%
$
%
Interest income:
FFELP Loans
$ 640
$ 638
$ 685
$ 2
—%
$ (45)
(7)%
Private Education Loans
483
490
642
(7)
(1)
(159)
(25)
Other loans
2
2
3
—
—
(1)
(33)
Cash and investments
2
2
4
—
—
(2)
(50)
Total interest income
1,127
1,132
1,334
(5)
—
(207)
(16)
Total interest expense
513
508
545
5
1
(32)
(6)
Net interest income
614
624
789
(10)
(2)
(175)
(22)
Less: provisions for loan losses
138
140
190
(2)
(1)
(52)
(27)
Net interest income after provisions for loan losses
476
484
599
(8)
(2)
(123)
(21)
Other income (loss):
Gains (losses) on sales of loans and investments
—
—
(5)
—
—
5
(100)
Gains (losses) on derivative and hedging activities, net
(22)
108
(128)
(130)
(120)
106
(83)
Servicing revenue
82
81
67
1
1
15
22
Asset recovery revenue
80
65
108
15
23
(28)
(26)
Gains on debt repurchases
—
—
—
—
—
—
—
Other income
32
34
33
(2)
(6)
(1)
(3)
Total other income (loss)
172
288
75
(116)
(40)
97
129
Expenses:
Operating expenses
215
195
305
20
10
(90)
(30)
Goodwill and acquired intangible asset impairment and amortization expense
2
2
3
—
—
(1)
(33)
Restructuring and other reorganization expenses
10
14
26
(4)
(29)
(16)
(62)
Total expenses
227
211
334
16
8
(107)
(32)
Income from continuing operations before income tax expense
421
561
340
(140)
(25)
81
24
Income tax expense
159
200
129
(41)
(21)
30
23
Net income from continuing operations
262
361
211
(99)
(27)
51
24
Income (loss) from discontinued operations, net of tax expense (benefit)
1
(2)
59
3
150
(58)
(98)
Net income
263
359
270
(96)
(27)
(7)
(3)
Less: net loss attributable to noncontrolling interest
—
—
—
—
—
—
—
Net income attributable to Navient Corporation
263
359
270
(96)
(27)
(7)
(3)
Preferred stock dividends
—
—
5
—
—
(5)
(100)
Net income attributable to Navient Corporation common stock
$ 263
$ 359
$ 265
$ (96)
(27)
$ (2)
(1)
Basic earnings per common share attributable to Navient Corporation:
Continuing operations
$ .65
$ .87
$ .47
$ (.22)
(25)%
$ .18
38%
Discontinued operations
—
—
.14
—
—
(.14)
(100)
Total
$ .65
$ .87
$ .61
$ (.22)
(25)%
$ .04
7%
Diluted earnings per common share attributable to Navient Corporation:
Continuing operations
$ .64
$ .85
$ .47
$ (.21)
(25)%
$ .17
36%
Discontinued operations
—
—
.13
—
—
(.13)
(100)
Total
$ .64
$ .85
$ .60
$ (.21)
(25)%
$ .04
7%
Dividends per common share attributable to Navient Corporation
$ .15
$ .15
$ .15
$ —
—%
$ —
—%
GAAP Statements of Income (Unaudited)
Years Ended
December 31,
Increase
(Decrease)
(In millions, except per share data)
2014
2013
$
%
Interest income:
FFELP Loans
$ 2,556
$ 2,822
$ (266)
(9)%
Private Education Loans
2,156
2,527
(371)
(15)
Other loans
9
11
(2)
(18)
Cash and investments
9
17
(8)
(47)
Total interest income
4,730
5,377
(647)
(12)
Total interest expense
2,063
2,210
(147)
(7)
Net interest income
2,667
3,167
(500)
(16)
Less: provisions for loan losses
628
839
(211)
(25)
Net interest income after provisions for loan losses
2,039
2,328
(289)
(12)
Other income (loss):
Gains (losses) on sales of loans and investments
—
302
(302)
(100)
Gains (losses) on derivative and hedging activities, net
139
(268 )
407
152
Servicing revenue
298
290
8
3
Asset recovery revenue
388
420
(32)
(8)
Gains on debt repurchases
—
42
(42)
(100)
Other income
82
100
(18)
(18)
Total other income (loss)
907
886
21
2
Expenses:
Operating expenses
987
1,042
(55)
(5)
Goodwill and acquired intangible asset impairment and amortization expense
9
13
(4)
(31)
Restructuring and other reorganization expenses
113
72
41
57
Total expenses
1,109
1,127
(18)
(2)
Income from continuing operations, before income tax expense
1,837
2,087
(250)
(12)
Income tax expense
688
776
(88)
(11)
Net income from continuing operations
1,149
1,311
(162)
(12)
Income (loss) from discontinued operations, net of tax expense (benefit)
—
106
(106)
(100)
Net income
1,149
1,417
(268)
(19)
Less: net loss attributable to noncontrolling interest
—
(1 )
1
(100)
Net income attributable to Navient Corporation
1,149
1,418
(269)
(19)
Preferred stock dividends
6
20
(14)
(70)
Net income attributable to Navient Corporation common stock
$ 1,143
$ 1,398
$ (255)
(18)%
Basic earnings per common share attributable to Navient Corporation:
Continuing operations
$ 2.74
$ 2.94
$ (.20)
(7)%
Discontinued operations
—
.24
(.24)
(100)
Total
$ 2.74
$ 3.18
$ (.44)
(14)%
Diluted earnings per common share attributable to Navient Corporation:
Continuing operations
$ 2.69
$ 2.89
$ (.20)
(7)%
Discontinued operations
—
.23
(.23)
(100)
Total
$ 2.69
$ 3.12
$ (.43)
(14)%
Dividends per common share attributable to Navient Corporation
$ .60
$ .60
$ —
—%
Consolidated Earnings Summary — GAAP basis
Three Months Ended December 31, 2014 Compared with Three Months Ended December 31, 2013
For the three months ended December 31, 2014, net income was $263 million, or $0.64 diluted earnings per common share, compared with net income of $270 million, or $0.60 diluted earnings per common share, for the three months ended December 31, 2013. The decrease in net income was primarily due to a $175 million decline in net interest income, a $28 million decrease in asset recovery revenue and a $58 million after-tax decrease in income from discontinued operations. This was almost entirely offset by a $106 million increase in net gains on derivative and hedging activities, a $52 million decline in the provisions for loan losses, a $90 million decrease in operating expenses and a $16 million decrease in restructuring and other reorganization expenses.
The primary contributors to each of the identified drivers of changes in net income for the current quarter compared with the year-ago quarter are as follows:
Net interest income decreased by $175 million, of which $121 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 a $6 billion decline in average FFELP Loans outstanding.
Provisions for loan losses declined $52 million, of which $29 million related to the deemed distribution of SLM BankCo on April 30, 2014. Also contributing to the decrease was the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.
Gains (losses) on derivative and hedging activities, net, increased $106 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.
Asset recovery revenue decreased $28 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 earned represents $43 million of the $28 million decrease in asset recovery revenue.
In the fourth quarter of 2014 and 2013, we recorded $9 million and $65 million of expense, respectively, related to the settlement of regulatory matters. Excluding these expenses, operating expenses decreased $34 million. This decrease was primarily due to $61 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, as well as increased third-party servicing and asset recovery activities.
Restructuring and other reorganization expenses decreased $16 million to $10 million. These expenses were primarily related to costs incurred in connection with the Spin-Off. We expect the costs associated with the Spin-Off to be minimal after December 31, 2014.
Income from discontinued operations decreased by $58 million primarily as a result of the sale of our 529 college savings plan administration business in the fourth quarter of 2013, which resulted in an after-tax gain of $56 million.
We repurchased 8.7 million and 7.7 million shares of our common stock during the three months 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 30 million common shares from the year-ago quarter.
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.
In full-year 2014 and 2013, we recognized $112 million and $65 million of expense, respectively, related to the settlement of 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. We expect the costs associated with the Spin-Off to be minimal after December 31, 2014.
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 $56 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 in accordance with GAAP. However, we also evaluate our business segments on a basis that differs from GAAP. We refer to this different basis of presentation as “Core Earnings.” We provide this “Core Earnings” basis of presentation on a consolidated basis for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our “Core Earnings” basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide “Core Earnings” disclosure in the notes to our consolidated financial statements for our business segments.
“Core Earnings” are not a substitute for reported results under GAAP. We use “Core Earnings” to manage each business segment because “Core Earnings” reflect adjustments to GAAP financial results for three items, discussed below, that are either related to the Spin-Off or create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that “Core Earnings” provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information as 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:
The financial results attributable to the operations of the consumer banking business (SLM BankCo) prior to the Spin-Off and related restructuring and reorganization expense incurred in connection with the Spin-Off. For GAAP purposes, Navient reflected the deemed distribution of SLM BankCo on April 30, 2014. For “Core Earnings,” we exclude the consumer banking business as if it had never been a part of Navient’s historical results prior to the deemed distribution of SLM BankCo on April 30, 2014;
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
The accounting for goodwill and acquired intangible assets.
While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our “Core Earnings” basis of presentation does not. “Core Earnings” are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our “Core Earnings” are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our “Core Earnings” presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon “Core Earnings.” “Core Earnings” results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, rating agencies, lenders and investors to assess performance.
Old SLM’s definition of “Core Earnings” did not exclude the financial results attributable to the operations of the consumer banking business and related restructuring and reorganization expense incurred in connection with the Spin-Off. In connection with the Spin-Off, Navient included this additional adjustment as a part of “Core Earnings” to allow better comparability of Navient’s results to pre-Spin-Off historical periods. All prior periods in this earnings release have been restated to conform to Navient’s revised definition of “Core Earnings.”
Quarter Ended December 31, 2014
Private
Total
Adjustments
(Dollars in millions)
FFELP
Loans
Education
Loans
Business
Services
Other
Eliminations(1)
“Core
Earnings”
Reclassifications
Additions/
(Subtractions)
Total
Adjustments(2)
Total
GAAP
Interest income:
Student loans
$ 533
$ 483
$ —
$ —
$ —
$ 1,016
$ 167
$ (60)
$ 107
$1,123
Other loans
—
—
—
2
—
2
—
—
—
2
Cash and investments
1
—
—
1
—
2
—
—
—
2
Total interest income
534
483
—
3
—
1,020
167
(60)
107
1,127
Total interest expense
297
176
—
30
—
503
9
1
10
513
Net interest income (loss)
237
307
—
(27)
—
517
158
(61)
97
614
Less: provisions for loan losses
10
128
—
—
—
138
—
—
—
138
Net interest income (loss) after provisions for loan losses
227
179
—
(27)
—
379
158
(61)
97
476
Other income (loss):
Gains (losses) on sales of loans and investments
—
—
—
—
—
—
—
—
—
—
Servicing revenue
20
7
166
—
(111)
82
—
—
—
82
Asset recovery revenue
—
—
80
—
—
80
—
—
—
80
Gains on debt repurchases
—
—
—
—
—
—
—
—
—
—
Other income (loss)
—
—
2
7
—
9
(158)
159
1
10
Total other income (loss)
20
7
248
7
(111)
171
(158)
159
1
172
Expenses:
Direct operating expenses
120
43
98
14
(111)
164
—
—
—
164
Overhead expenses
—
—
—
51
—
51
—
—
—
51
Operating expenses
120
43
98
65
(111)
215
—
—
—
215
Goodwill and acquired intangible asset impairment and amortization
—
—
—
—
—
—
—
2
2
2
Restructuring and other reorganization expenses
—
—
—
—
—
—
—
10
10
10
Total expenses
120
43
98
65
(111)
215
—
12
12
227
Income (loss) from continuing operations, before income tax expense (benefit)
127
143
150
(85)
—
335
—
86
86
421
Income tax expense (benefit)(3)
45
51
53
(30)
—
119
—
40
40
159
Net income (loss) from continuing operations
$ 82
$ 92
$ 97
$ (55)
$ —
$ 216
$ —
$ 46
$ 46
$ 262
Income (loss) from discontinued operations, net of tax expense (benefit)
—
—
1
—
—
1
—
—
—
1
Net income (loss)
$ 82
$ 92
$ 98
$ (55)
$ —
$ 217
$ —
$ 46
$ 46
$ 263
(1) The eliminations in servicing revenue and direct operating expense represent the elimination of intercompany servicing revenue where the Business Services segment performs the loan servicing function for the FFELP Loans segment.
(2) “Core Earnings” adjustments to GAAP:
Quarter Ended September 30, 2014
Private
Total
Adjustments
(Dollars in millions)
FFELP
Loans
Education
Loans
Business
Services
Other
Eliminations(1)
“Core
Earnings”
Reclassifications
Additions/
(Subtractions)
Total
Adjustments(2)
Total
GAAP
Interest income:
Student loans
$ 531
$ 490
$ —
$ —
$ —
$ 1,021
$ 167
$ (60)
$ 107
$1,128
Other loans
—
—
—
2
—
2
—
—
—
2
Cash and investments
1
—
—
1
—
2
—
—
—
2
Total interest income
532
490
—
3
—
1,025
167
(60)
107
1,132
Total interest expense
293
174
—
29
—
496
10
2
12
508
Net interest income (loss)
239
316
—
(26)
—
529
157
(62)
95
624
Less: provisions for loan losses
10
130
—
—
—
140
—
—
—
140
Net interest income (loss) after provisions for loan losses
229
186
—
(26)
—
389
157
(62)
95
484
Other income (loss):
Gains (losses) on sales of loans and investments
—
—
—
—
—
—
—
—
—
—
Servicing revenue
16
10
167
—
(112)
81
—
—
—
81
Asset recovery revenue
—
—
65
—
—
65
—
—
—
65
Gains on debt repurchases
—
—
—
—
—
—
—
—
—
—
Other income (loss)
—
—
3
8
—
11