Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2016

or

 

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

For the transition period from                  to                 

Commission File Number: 001-36228

 

 

Navient Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   46-4054283

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(302) 283-8000

(Registrant’s telephone number, including area code)

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

 

 

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

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

 

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

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

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

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

 

Class    Outstanding at June 30, 2016
Common Stock, $0.01 par value    317,033,006 shares

 

 

 


Table of Contents

NAVIENT CORPORATION

TABLE OF CONTENTS

 

Part I. Financial Information   

Item 1.

  

Financial Statements

     3   

Item 2.

  

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

     46   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     94   

Item 4.

  

Controls and Procedures

     99   
Part II. Other Information   

Item 1.

  

Legal Proceedings

     100   

Item 1A.

  

Risk Factors

     103   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     104   

Item 3.

  

Defaults Upon Senior Securities

     104   

Item 4.

  

Mine Safety Disclosures

     104   

Item 5.

  

Other Information

     104   

Item 6.

  

Exhibits

     105   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

NAVIENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

(Unaudited)

 

     June 30,
2016
    December 31,
2015
 

Assets

    

FFELP Loans (net of allowance for losses of $62 and $78, respectively)

   $ 92,618      $ 96,498   

Private Education Loans (net of allowance for losses of $1,410 and $1,471 respectively)

     24,741        26,394   

Investments

    

Available-for-sale

     4        5   

Other

     541        496   
  

 

 

   

 

 

 

Total investments

     545        501   

Cash and cash equivalents

     1,377        1,594   

Restricted cash and investments

     3,613        3,738   

Goodwill and acquired intangible assets, net

     696        705   

Other assets

     4,782        4,682   
  

 

 

   

 

 

 

Total assets

   $ 128,372      $ 134,112   
  

 

 

   

 

 

 

Liabilities

    

Short-term borrowings

   $ 2,370      $ 2,570   

Long-term borrowings

     119,637        124,833   

Other liabilities

     2,662        2,710   
  

 

 

   

 

 

 

Total liabilities

     124,669        130,113   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity

    

Common stock, par value $0.01 per share, 1.125 billion shares authorized: 434 million and 431 million shares issued, respectively

     4        4   

Additional paid-in capital

     2,985        2,967   

Accumulated other comprehensive loss (net of tax benefit of $100 and $30, respectively)

     (171     (51

Retained earnings

     2,677        2,480   
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity before treasury stock

     5,495        5,400   

Less: Common stock held in treasury at cost: 116 million and 82 million shares, respectively

     (1,816     (1,425
  

 

 

   

 

 

 

Total Navient Corporation stockholders’ equity

     3,679        3,975   

Noncontrolling interest

     24        24   
  

 

 

   

 

 

 

Total equity

     3,703        3,999   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 128,372      $ 134,112   
  

 

 

   

 

 

 

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

 

     June 30,
2016
     December 31,
2015
 

FFELP Loans

   $ 87,613       $ 91,516   

Private Education Loans

     21,747         23,124   

Restricted cash

     3,419         3,553   

Other assets

     432         293   

Short-term borrowings

     361         710   

Long-term borrowings

     102,103         106,510   
  

 

 

    

 

 

 

Net assets of consolidated variable interest entities

   $ 10,747       $ 11,266   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

 

    Three Months Ended
June  30,
    Six Months Ended
June  30,
 
          2016                 2015                 2016                 2015        

Interest income:

       

FFELP Loans

  $ 618      $ 626      $ 1,252      $ 1,262   

Private Education Loans

    402        434        813        891   

Other loans

    2        2        3        4   

Cash and investments

    6        2        12        4   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    1,028        1,064        2,080        2,161   

Total interest expense

    599        515        1,165        1,029   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    429        549        915        1,132   

Less: provisions for loan losses

    110        198        221        323   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provisions for loan losses

    319        351        694        809   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other income (loss):

       

Servicing revenue

    71        106        154        182   

Asset recovery and business processing revenue

    101        99        191        188   

Other income (loss)

    (21     7        (35     15   

Gains on sales of loans and investments

           7               12   

Gains on debt repurchases

                           

Gains (losses) on derivative and hedging activities, net

    (28     (18     (27     53   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

    123        201        283        450   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

Salaries and benefits

    124        115        256        238   

Other operating expenses

    106        110        222        218   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    230        225        478        456   

Goodwill and acquired intangible asset impairment and amortization expense

    6        3        10        4   

Restructuring and other reorganization expenses

           29               32   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    236        257        488        492   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax expense

    206        295        489        767   

Income tax expense

    81        113        184        293   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    125        182        305        474   

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

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    125        182        305        474   

Less: net income (loss) attributable to noncontrolling interest

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Navient Corporation

  $ 125      $ 182      $ 305      $ 474   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share attributable to Navient Corporation:

       

Continuing operations

  $ .39      $ .48      $ .92      $ 1.22   

Discontinued operations

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ .39      $ .48      $ .92      $ 1.22   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares outstanding

    322        381        331        389   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share attributable to Navient Corporation:

       

Continuing operations

  $ .38      $ .47      $ .91      $ 1.20   

Discontinued operations

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ .38      $ .47      $ .91      $ 1.20   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average common and common equivalent shares outstanding

    328        387        335        396   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends per common share attributable to Navient Corporation

  $     .16      $     .16      $     .32      $     .32   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

4


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
          2016                 2015                 2016                 2015        

Net income

  $ 125      $ 182      $ 305      $ 474   

Other comprehensive income (loss):

       

Unrealized gains (losses) on derivatives:

       

Unrealized hedging gains (losses) on derivatives

    (62     15        (191     (55

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

                         (1
 

 

 

   

 

 

   

 

 

   

 

 

 

Total unrealized gains (losses) on derivatives

    (62     15        (191     (56

Income tax (expense) benefit

    23        (5     71        21   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax expense (benefit)

    (39     10        (120     (35
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to Navient Corporation

  $ 86      $ 192      $ 185      $ 439   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

 

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

Balance at March 31, 2015

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

Comprehensive income:

                     

Net income (loss)

                                              182               182               182   

Other comprehensive income (loss), net of tax

                                       10                      10               10   
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                            192               192   

Cash dividends:

                     

Common stock ($.16 per share)

                                              (61            (61            (61

Issuance of common shares

    633,170               633,170               5                             5               5   

Tax benefit related to employee stock-based compensation plans

                                3                             3               3   

Stock-based compensation expense

                                11                             11               11   

Common stock repurchased

           (15,190,685     (15,190,685                                 (300     (300            (300

Shares repurchased related to employee stock-based compensation plans

           (431,168     (431,168                                 (8     (8            (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    429,856,043        (55,823,281     374,032,762      $ 4      $ 2,954      $ (26   $ 2,072      $ (1,075   $ 3,929      $ 4      $ 3,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2016

    433,061,241        (102,547,422     330,513,819      $ 4      $ 2,975      $ (132   $ 2,604      $ (1,636   $ 3,815      $ 24      $ 3,839   

Comprehensive income:

                     

Net income (loss)

                                              125               125               125   

Other comprehensive income (loss), net of tax

                                       (39                   (39            (39
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                            86               86   

Cash dividends:

                     

Common stock ($.16 per share)

                                              (51            (51            (51

Dividend equivalent units related to employee stock-based compensation plans

                                              (1            (1            (1

Issuance of common shares

    467,007               467,007               4                             4               4   

Tax benefit related to employee stock-based compensation plans

                                1                             1               1   

Stock-based compensation expense

                                5                             5               5   

Common stock repurchased

           (13,579,381     (13,579,381                                 (175     (175            (175

Shares repurchased related to employee stock-based compensation plans

           (368,439     (368,439                                 (5     (5            (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

    433,528,248        (116,495,242     317,033,006      $ 4      $ 2,985      $ (171   $ 2,677      $ (1,816   $ 3,679      $ 24      $ 3,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

 

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

Balance at December 31, 2014

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

Comprehensive income:

                     

Net income (loss)

                                              474               474               474   

Other comprehensive income (loss), net of tax

                                       (35                   (35            (35
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                            439               439   

Cash dividends:

                     

Common stock ($.32 per share)

                                              (124            (124            (124

Dividend equivalent units related to employee stock-based compensation plans

                                              (2            (2            (2

Issuance of common shares

    4,218,408               4,218,408               26                             26               26   

Tax benefit related to employee stock-based compensation plans

                                12                             12               12   

Stock-based compensation expense

                                23                             23               23   

Common stock repurchased

           (29,844,520     (29,844,520                                 (600     (600            (600

Shares repurchased related to employee stock-based compensation plans

           (2,075,932     (2,075,932                                 (43     (43            (43

Noncontrolling interests in businesses

                                                                   4        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

    429,856,043        (55,823,281     374,032,762      $ 4      $ 2,954      $ (26   $ 2,072      $ (1,075   $ 3,929      $ 4      $ 3,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

    430,561,656        (82,350,868     348,210,788      $ 4      $ 2,967      $ (51   $ 2,480      $ (1,425   $ 3,975      $ 24      $ 3,999   

Comprehensive income:

                     

Net income (loss)

                                              305               305               305   

Other comprehensive income (loss), net of tax

                                       (120                   (120            (120
                 

 

 

   

 

 

   

 

 

 

Total comprehensive income

                                                            185               185   

Cash dividends:

                     

Common stock ($.32 per share)

                                              (105            (105            (105

Dividend equivalent units related to employee stock-based compensation plans

                                              (3            (3            (3

Issuance of common shares

    2,966,592               2,966,592               8                             8               8   

Tax benefit related to employee stock-based compensation plans

                                (8                          (8            (8

Stock-based compensation expense

                                18                             18               18   

Common stock repurchased

           (32,789,662     (32,789,662                                 (375     (375            (375

Shares repurchased related to employee stock-based compensation plans

           (1,354,712     (1,354,712                                 (16     (16            (16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2016

    433,528,248        (116,495,242     317,033,006      $ 4      $ 2,985      $ (171   $ 2,677      $ (1,816   $ 3,679      $ 24      $ 3,703   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in millions)

(Unaudited)

 

     Six Months Ended June 30,  
           2016                 2015        

Operating activities

    

Net income

   $ 305      $ 474   

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

    

Gains on loans and investments, net

            (12

Goodwill and acquired intangible asset impairment and amortization expense

     10        4   

Stock-based compensation expense

     18        23   

Unrealized gains on derivative and hedging activities

     (150     (362

Provisions for loan losses

     221        323   

Decrease in restricted cash — other

     1        63   

Decrease in accrued interest receivable

     50        102   

Decrease in accrued interest payable

     (125     (7

Decrease in other assets

     417        407   

Increase in other liabilities

     24        40   
  

 

 

   

 

 

 

Total net cash provided by operating activities

     771        1,055   
  

 

 

   

 

 

 

Investing activities

    

Education loans acquired

     (2,183     (1,834

Reduction of education loans:

    

Installment payments, claims and other

     7,458        7,044   

Proceeds from sales of education loans

            386   

Other investing activities, net

     (51     (18

Proceeds from maturities of available-for-sale securities

     1        1   

Purchases of other securities

     (43     (3

Proceeds from maturities of other securities

     41        1   

Decrease (increase) in restricted cash — variable interest entities

     164        (96

Purchase of subsidiary, net of cash acquired

            (181
  

 

 

   

 

 

 

Total net cash provided by investing activities

     5,387        5,300   
  

 

 

   

 

 

 

Financing activities

    

Borrowings collateralized by loans in trust — issued

     3,791        3,424   

Borrowings collateralized by loans in trust — repaid

     (6,603     (6,702

Asset-backed commercial paper conduits, net

     (2,002     (887

Other long-term borrowings issued

            493   

Other long-term borrowings repaid

     (1,228     (1,649

Other financing activities, net

     147        (139

Common stock repurchased

     (375     (600

Common stock dividends paid

     (105     (124
  

 

 

   

 

 

 

Net cash used in financing activities

     (6,375     (6,184
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (217     171   

Cash and cash equivalents at beginning of period

     1,594        1,443   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,377      $ 1,614   
  

 

 

   

 

 

 

Cash disbursements made (refunds received) for:

    

Interest

   $ 1,088      $ 991   
  

 

 

   

 

 

 

Income taxes paid

   $ 87      $ 67   
  

 

 

   

 

 

 

Income taxes received

   $ (2   $   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited)

 

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited, consolidated financial statements of Navient have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The consolidated financial statements include the accounts of Navient and its majority-owned and controlled subsidiaries and those Variable Interest Entities (“VIEs”) for which we are the primary beneficiary, after eliminating the effects of intercompany accounts and transactions. In the opinion of management, all adjustments considered necessary for a fair statement of the results for the interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results for the year ending December 31, 2016 or for any other period. These unaudited financial statements should be read in conjunction with the audited financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”). Definitions for certain capitalized terms used but not otherwise defined in this Quarterly Report on Form 10-Q can be found in our 2015 Form 10-K.

Reclassifications

Certain reclassifications have been made to the balances as of and for the three and six months ended June 30, 2015 to be consistent with classifications adopted for 2016, and had no effect on net income, total assets, or total liabilities.

Recently Issued Accounting Pronouncements

Revenue Recognition

On May 28, 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB agreed to defer the mandatory effective date by one year. Accordingly, the new standard is effective for the Company as of January 1, 2018. Early application is permitted as of January 2017. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements and footnote disclosures, but expect it to be immaterial.

Classification and Measurement

On January 5, 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which reconsiders the classification and measurement of financial instruments. The objective of this project is to significantly improve the usefulness of financial instrument reporting for users of financial statements. It will be effective for public companies in fiscal years beginning after December 15, 2017. We are currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements and footnote disclosures, but expect it to be immaterial.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

1. Significant Accounting Policies (Continued)

 

Leases

On February 25, 2016, the FASB issued ASU No. 2016-02, “Leases,” which requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve-month term, these arrangements must be recognized as assets and liabilities on the balance sheet of the lessee. A right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption must be calculated using the applicable incremental borrowing rate at the date of adoption. The standard requires the use of the modified retrospective transition method, which will require adjustment to all comparative periods presented. It will be effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements and footnote disclosures, but expect it to be immaterial.

Stock Compensation

On March 30, 2016, the FASB issued ASU No. 2016-09, “Compensation — Stock Compensation,” which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The new standard is effective for the Company in fiscal years beginning after December 15, 2016. Early application is permitted. We are currently assessing the impact that adopting this new accounting standard will have on our consolidated financial statements and footnote disclosures, but expect it to be immaterial.

Allowance for Loan Losses

On June 16, 2016, the FASB issued ASU No. 2016-13, “Financial Instruments — Credit Losses,” which requires measurement and recognition of an allowance for loan loss that estimates remaining expected credit losses for financial assets held at the reporting date. Our current allowance for loan loss is an incurred loss model (see “Note 2 — Significant Accounting Policies” in our 2015 Form 10-K for further discussion of our current policy). The standard is to be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard update is effective for the Company on January 1, 2020, and will primarily impact the allowance for loan losses related to our Private Education Loans and FFELP Loans. Early adoption is permitted on January 1, 2019 for the Company. We are currently evaluating the impact of adopting this update on our consolidated financial statements and footnote disclosures.

 

2. Allowance for Loan Losses

Our provisions for loan losses represent the periodic expense of maintaining an allowance sufficient to absorb incurred probable losses, net of expected recoveries, in the held-for-investment loan portfolios. The evaluation of the provisions for loan losses is inherently subjective, as it requires material estimates that may be susceptible to significant changes. We believe that the allowance for loan losses is appropriate to cover probable losses incurred in the loan portfolios.

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

We segregate our Private Education Loan portfolio into two classes of loans — traditional and non-traditional. Non-traditional loans are loans to (i) customers attending for-profit schools with an original Fair Isaac and Company (“FICO”) score of less than 670 and (ii) customers attending not-for-profit schools with an original FICO score of less than 640. The FICO score used in determining whether a loan is non-traditional is the greater of the customer or cosigner FICO score at origination. Traditional loans are defined as all other Private Education Loans that are not classified as non-traditional.

Allowance for Loan Losses Metrics

 

    Three Months Ended June 30, 2016  

(Dollars in millions)

  FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

       

Beginning balance

  $ 70      $ 1,434      $ 15      $ 1,519   

Total provision

    10        100               110   

Charge-offs(1)

    (18     (127            (145

Reclassification of interest reserve(2)

           3               3   
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 62      $ 1,410      $ 15      $ 1,487   
 

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

       

Ending balance: individually evaluated for impairment

  $      $ 1,163      $ 11      $ 1,174   

Ending balance: collectively evaluated for impairment

  $ 62      $ 247      $ 4      $ 313   

Loans:

       

Ending balance: individually evaluated for impairment(3)

  $      $ 11,162      $ 33      $ 11,195   

Ending balance: collectively evaluated for impairment(3)

  $ 91,719      $ 15,478      $ 47      $ 107,244   

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

    .10     2.17     1.32  

Allowance coverage of charge-offs (annualized)

    .9        2.8        13.5     

Allowance as a percentage of the ending total loan balance

    .07     5.29     18.18  

Allowance as a percentage of the ending loans in repayment

    .09     6.06     18.18  

Ending total loans(3)

  $ 91,719      $ 26,640      $ 80     

Average loans in repayment

  $ 72,973      $ 23,561      $ 82     

Ending loans in repayment

  $ 72,058      $ 23,265      $ 80     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

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

 

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

    Three Months Ended June 30, 2015  

(Dollars in millions)

  FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

       

Beginning balance

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

Total provision

    7        191               198   

Net adjustment resulting from the change in the charge-off rate(1)

           (330            (330

Net charge-offs remaining(2)

    (9     (179     (2     (190
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs

    (9     (509     (2     (520

Reclassification of interest reserve(3)

           2               2   
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 89      $ 1,533      $ 21      $ 1,643   
 

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

       

Ending balance: individually evaluated for impairment

  $      $ 1,257      $ 17      $ 1,274   

Ending balance: collectively evaluated for impairment

  $ 89      $ 276      $ 4      $ 369   

Loans:

       

Ending balance: individually evaluated for impairment(4)

  $      $ 10,769      $ 41      $ 10,810   

Ending balance: collectively evaluated for impairment(4)

  $ 99,207      $ 19,435      $ 55      $ 118,697   

Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in the charge-off rate (annualized)(1)

    .05     2.74     8.68  

Net adjustment resulting from the change in the charge-off rate as a percentage of average loans in repayment (annualized)(1)

        5.07      

Allowance coverage of net charge-offs, excluding the net adjustment resulting from the change in the charge-off rate (annualized)(1)

    2.3        2.1        2.4     

Allowance as a percentage of the ending total loan balance

    .09     5.08     21.50  

Allowance as a percentage of the ending loans in repayment

    .12     5.93     21.50  

Ending total loans(4)

  $ 99,207      $ 30,204      $ 96     

Average loans in repayment

  $ 76,325      $ 26,122      $ 101     

Ending loans in repayment

  $ 75,244      $ 25,865      $ 96     

 

  (1) 

In the second quarter of 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

 

  (2) 

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

 

  (3) 

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

 

  (4) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

    Six Months Ended June 30, 2016  

(Dollars in millions)

  FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

       

Beginning balance

  $ 78      $ 1,471      $ 15      $ 1,564   

Total provision

    17        204               221   

Charge-offs(1)

    (33     (271            (304

Reclassification of interest reserve(2)

           6               6   
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 62      $ 1,410      $ 15      $ 1,487   
 

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

       

Ending balance: individually evaluated for impairment

  $      $ 1,163      $ 11      $ 1,174   

Ending balance: collectively evaluated for impairment

  $ 62      $ 247      $ 4      $ 313   

Loans:

       

Ending balance: individually evaluated for impairment(3)

  $      $ 11,162      $ 33      $ 11,195   

Ending balance: collectively evaluated for impairment(3)

  $ 91,719      $ 15,478      $ 47      $ 107,244   

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

    .09     2.28     1.69  

Allowance coverage of charge-offs (annualized)

    1.0        2.6        10.4     

Allowance as a percentage of the ending total loan balance

    .07     5.29     18.18  

Allowance as a percentage of the ending loans in repayment

    .09     6.06     18.18  

Ending total loans(3)

  $ 91,719      $ 26,640      $ 80     

Average loans in repayment

  $ 73,331      $ 23,871      $ 83     

Ending loans in repayment

  $ 72,058      $ 23,265      $ 80     

 

  (1) 

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

 

  (2) 

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

 

  (3) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

    Six Months Ended June 30, 2015  

(Dollars in millions)

  FFELP Loans     Private Education
Loans
    Other
Loans
    Total  

Allowance for Loan Losses

       

Beginning balance

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

Total provision

    12        311               323   

Net adjustment resulting from the change in the charge-off rate(1)

           (330            (330

Net charge-offs remaining(2)

    (16     (369     (3     (388
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs

    (16     (699     (3     (718

Reclassification of interest reserve(3)

           5               5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 89      $ 1,533      $ 21      $ 1,643   
 

 

 

   

 

 

   

 

 

   

 

 

 

Allowance:

       

Ending balance: individually evaluated for impairment

  $      $ 1,257      $ 17      $ 1,274   

Ending balance: collectively evaluated for impairment

  $ 89      $ 276      $ 4      $ 369   

Loans:

       

Ending balance: individually evaluated for impairment(4)

  $      $ 10,769      $ 41      $ 10,810   

Ending balance: collectively evaluated for impairment(4)

  $ 99,207      $ 19,435      $ 55      $ 118,697   

Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in the charge-off rate (annualized)(1)

    .04     2.82     6.01  

Net adjustment resulting from the change in the charge-off rate as a percentage of average loans in repayment (annualized)(1)

        2.53      

Allowance coverage of net charge-offs, excluding the net adjustment resulting from the change in the charge-off rate (annualized)(1)

    2.8        2.1        3.3     

Allowance as a percentage of the ending total loan balance

    .09     5.08     21.50  

Allowance as a percentage of the ending loans in repayment

    .12     5.93     21.50  

Ending total loans(4)

  $ 99,207      $ 30,204      $ 96     

Average loans in repayment

  $ 76,896      $ 26,382      $ 103     

Ending loans in repayment

  $ 75,244      $ 25,865      $ 96     

 

  (1) 

In the second quarter of 2015, the portion of the loan amount charged off at default on Private Education Loans increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans.

 

  (2) 

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

 

  (3) 

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

 

  (4) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

Key Credit Quality Indicators

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

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

 

     Private Education Loans
Credit Quality Indicators
 
     June 30, 2016     December 31, 2015  

(Dollars in millions)

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

Credit Quality Indicators

          

School Type/FICO Scores:

          

Traditional

   $ 23,697         92   $ 25,280         92

Non-Traditional(1)

     2,096         8        2,235         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 25,793         100   $ 27,515         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Cosigners:

          

With cosigner

   $ 16,621         64   $ 17,738         64

Without cosigner

     9,172         36        9,777         36   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 25,793         100   $ 27,515         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Seasoning(2):

          

1-12 payments

   $ 1,448         6   $ 1,776         7

13-24 payments

     1,596         6        1,977         7   

25-36 payments

     2,486         10        2,982         11   

37-48 payments

     3,431         13        3,787         14   

More than 48 payments

     15,196         59        14,953         54   

Not yet in repayment

     1,636         6        2,040         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 25,793         100   $ 27,515         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

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

 

(2) 

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

 

(3) 

Balance represents gross Private Education Loans.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

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

 

     FFELP Loan Delinquencies  
     June 30,
2016
    December 31,
2015
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 7,149        $ 8,257     

Loans in forbearance(2)

     12,512          13,298     

Loans in repayment and percentage of each status:

        

Loans current

     62,581        86.8     62,651        84.7

Loans delinquent 31-60 days(3)

     2,668        3.7        3,285        4.5   

Loans delinquent 61-90 days(3)

     1,605        2.3        1,856        2.5   

Loans delinquent greater than 90 days(3)

     5,204        7.2        6,142        8.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans in repayment

     72,058        100     73,934        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total FFELP Loans, gross

     91,719          95,489     

FFELP Loan unamortized premium

     961          1,087     
  

 

 

     

 

 

   

Total FFELP Loans

     92,680          96,576     

FFELP Loan allowance for losses

     (62       (78  
  

 

 

     

 

 

   

FFELP Loans, net

   $ 92,618        $ 96,498     
  

 

 

     

 

 

   

Percentage of FFELP Loans in repayment

       78.6       77.4
    

 

 

     

 

 

 

Delinquencies as a percentage of FFELP Loans in repayment

       13.2       15.3
    

 

 

     

 

 

 

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

       14.8       15.2
    

 

 

     

 

 

 

 

(1) 

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

 

(2) 

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

 

(3) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

     Traditional Private Education Loan
Delinquencies
 
     June 30,
2016
    December 31,
2015
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 1,489        $ 1,859     

Loans in forbearance(2)

     792          863     

Loans in repayment and percentage of each status:

        

Loans current

     20,225        94.4     21,085        93.5

Loans delinquent 31-60 days(3)

     401        1.9        491        2.2   

Loans delinquent 61-90 days(3)

     242        1.1        292        1.3   

Loans delinquent greater than 90 days(3)

     548        2.6        690        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans in repayment

     21,416        100     22,558        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total traditional loans, gross

     23,697          25,280     

Traditional loans unamortized discount

     (431       (470  
  

 

 

     

 

 

   

Total traditional loans

     23,266          24,810     

Traditional loans receivable for partially charged-off loans

     541          560     

Traditional loans allowance for losses

     (1,186       (1,236  
  

 

 

     

 

 

   

Traditional loans, net

   $ 22,621        $ 24,134     
  

 

 

     

 

 

   

Percentage of traditional loans in repayment

       90.4       89.2
    

 

 

     

 

 

 

Delinquencies as a percentage of traditional loans in repayment

       5.6       6.5
    

 

 

     

 

 

 

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

       3.6       3.7
    

 

 

     

 

 

 

 

(1) 

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

 

(2) 

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

 

(3) 

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

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

     Non-Traditional Private Education
Loan Delinquencies
 
     June 30,
2016
    December 31,
2015
 

(Dollars in millions)

   Balance     %     Balance     %  

Loans in-school/grace/deferment(1)

   $ 147        $ 181     

Loans in forbearance(2)

     100          110     

Loans in repayment and percentage of each status:

        

Loans current

     1,618        87.5     1,646        84.7

Loans delinquent 31-60 days(3)

     66        3.6        86        4.4   

Loans delinquent 61-90 days(3)

     45        2.4        56        2.9   

Loans delinquent greater than 90 days(3)

     120        6.5        156        8.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans in repayment

     1,849        100     1,944        100
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-traditional loans, gross

     2,096          2,235     

Non-traditional loans unamortized discount

     (58       (61  
  

 

 

     

 

 

   

Total non-traditional loans

     2,038          2,174     

Non-traditional loans receivable for partially charged-off loans

     306          321     

Non-traditional loans allowance for losses

     (224       (235  
  

 

 

     

 

 

   

Non-traditional loans, net

   $ 2,120        $ 2,260     
  

 

 

     

 

 

   

Percentage of non-traditional loans in repayment

       88.2       87.0
    

 

 

     

 

 

 

Delinquencies as a percentage of non-traditional loans in repayment

       12.5       15.3
    

 

 

     

 

 

 

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

       5.1       5.4
    

 

 

     

 

 

 

 

(1) 

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

 

(2) 

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

 

(3) 

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

Receivable for Partially Charged-Off Private Education Loans

At the end of each month, for loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance. Actual recoveries are applied against the remaining loan balance that was not charged off. We refer to this remaining loan balance as the “receivable for partially charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately charged off through the allowance for Private Education Loan losses with an offsetting reduction in the receivable for partially charged-off Private Education Loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The financial crisis, which began in 2007, impacted our collections on defaulted loans and as a result, Private Education Loans which defaulted from 2007 through March 31, 2015, experienced collection performance below our pre-financial crisis experience. For that reason, until we gained enough data and experience to determine the long-term, post-default recovery rate of 21 percent in second-quarter 2015, we established a reserve for potential shortfalls in recoveries. In the second quarter of 2015, the

 

18


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

portion of the loan amount charged off at default increased from 73 percent to 79 percent. This did not impact the provision for loan losses as previously this had been reserved through the allowance for loan losses. This change resulted in a $330 million reduction to the balance of the receivable for partially charged-off loans. We no longer expect to have significant periodic recovery shortfalls as a result of this change; however, it is possible we may continue to experience such shortfalls.

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

 

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

(Dollars in millions)

      2016             2015             2016             2015      

Receivable at beginning of period

  $ 867      $ 1,236      $ 881      $ 1,245   

Expected future recoveries of current period defaults(1)

    32        46        68        108   

Recoveries(2)

    (52     (50     (102     (102

Net adjustment resulting from the change in the charge-off rate(3)

           (330            (330

Net charge-offs remaining

                         (19
 

 

 

   

 

 

   

 

 

   

 

 

 

Total net charge-offs

           (330            (349
 

 

 

   

 

 

   

 

 

   

 

 

 

Receivable at end of period

  $ 847      $ 902      $ 847      $ 902   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1) 

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

 

  (2) 

Current period cash collections.

 

  (3) 

Prior to second-quarter 2015, charge-offs represent the current period recovery shortfall — the difference between what was expected to be collected and what was actually collected. In the second quarter of 2015, 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. These amounts are included in total charge-offs as reported in the “Allowance for Private Education Loan Losses” table.

Troubled Debt Restructurings (“TDRs”)

We sometimes modify the terms of loans for certain customers when we believe such modifications may increase the ability and willingness of a customer to make payments and thus increase the ultimate overall amount collected on a loan. These modifications generally take the form of a forbearance, a temporary interest rate reduction or an extended repayment plan. For customers experiencing financial difficulty, certain Private Education Loans for which we have granted either a forbearance of greater than three months, an interest rate reduction or an extended repayment plan are classified as TDRs. Approximately 58 percent and 56 percent of the loans granted forbearance have qualified as a TDR loan at June 30, 2016 and December 31, 2015, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction plan as of June 30, 2016 and December 31, 2015 was $2.8 billion and $2.5 billion, respectively.

 

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Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

At June 30, 2016 and December 31, 2015, all of our TDR loans had a related allowance recorded. The following table provides the recorded investment, unpaid principal balance and related allowance for our TDR loans.

 

    TDR Loans  

(Dollars in millions)

  Recorded
Investment(1)
    Unpaid
Principal
Balance
    Related
Allowance
 

June 30, 2016

     

Private Education Loans — Traditional

  $ 9,351      $ 9,404      $ 964   

Private Education Loans — Non-Traditional

    1,409        1,415        199   
 

 

 

   

 

 

   

 

 

 

Total

  $ 10,760      $ 10,819      $ 1,163   
 

 

 

   

 

 

   

 

 

 

December 31, 2015

     

Private Education Loans — Traditional

  $ 9,134      $ 9,200      $ 995   

Private Education Loans — Non-Traditional

    1,441        1,442        214   
 

 

 

   

 

 

   

 

 

 

Total

  $ 10,575      $ 10,642      $ 1,209   
 

 

 

   

 

 

   

 

 

 

 

  (1) 

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

The following tables provide the average recorded investment and interest income recognized for our TDR loans.

 

     Three Months Ended June 30,  
     2016      2015  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 9,320       $ 138       $ 8,943       $ 135   

Private Education Loans — Non-Traditional

     1,418         27         1,466         29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,738       $ 165       $ 10,409       $ 164   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     2016      2015  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 9,271       $ 276       $ 8,900       $ 267   

Private Education Loans — Non-Traditional

     1,425         54         1,471         58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,696       $ 330       $ 10,371       $ 325   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

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

 

     TDR Loan Delinquencies  
     June 30, 2016     December 31, 2015  

(Dollars in millions)

   Balance      %     Balance      %  

Loans in deferment(1)

   $ 609         $ 706      

Loans in forbearance(2)

     648           695      

Loans in repayment and percentage of each status:

          

Loans current

     8,424         88.1     7,885         85.3

Loans delinquent 31-60 days(3)

     356         3.7        414         4.5   

Loans delinquent 61-90 days(3)

     228         2.4        263         2.8   

Loans delinquent greater than 90 days(3)

     554         5.8        679         7.4   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans in repayment

     9,562         100     9,241         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Total TDR loans, gross

   $ 10,819         $ 10,642      
  

 

 

      

 

 

    

 

 

(1) 

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

 

(2) 

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

 

(3) 

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

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

 

     Three Months Ended June 30,  
     2016      2015  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 286       $ 74       $ 56       $ 339       $ 101       $ 83   

Private Education Loans — Non-Traditional

     25         20         10         36         30         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 311       $ 94       $ 66       $ 375       $ 131       $ 97   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30,  
     2016      2015  

(Dollars in millions)

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

Private Education Loans — Traditional

   $ 628       $ 154       $ 118       $ 768       $ 192       $ 183   

Private Education Loans — Non-Traditional

     52         42         21         79         58         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 680       $ 196       $ 139       $ 847       $ 250       $ 215   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

(2) 

Represents loans that charged off that were classified as TDRs.

 

21


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

2. Allowance for Loan Losses (Continued)

 

Accrued Interest Receivable

The following table provides information regarding accrued interest receivable on our Private Education Loans.

 

(Dollars in millions)

   Accrued
Interest
Receivable
     Allowance for
Uncollectible
Interest
 

June 30, 2016

     

Private Education Loans — Traditional

   $ 385       $ 25   

Private Education Loans — Non-Traditional

     49         8   
  

 

 

    

 

 

 

Total

   $ 434       $ 33   
  

 

 

    

 

 

 

December 31, 2015

     

Private Education Loans — Traditional

   $ 433       $ 26   

Private Education Loans — Non-Traditional

     57         9   
  

 

 

    

 

 

 

Total

   $ 490       $ 35   
  

 

 

    

 

 

 

 

3. Borrowings

The following table summarizes our borrowings.

 

    June 30, 2016     December 31, 2015  

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Short
Term
    Long
Term
    Total  

Unsecured borrowings:

           

Senior unsecured debt

  $ 1,077      $ 12,801      $ 13,878      $ 1,120      $ 13,976      $ 15,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total unsecured borrowings

    1,077        12,801        13,878        1,120        13,976        15,096   

Secured borrowings:

           

FFELP Loan securitizations

           75,698        75,698               77,764        77,764   

Private Education Loan securitizations(1)

           16,168        16,168               16,900        16,900   

FFELP Loan — other facilities

           14,609        14,609               16,276        16,276   

Private Education Loan — other facilities

    361               361        710               710   

Other(2)

    955               955        760               760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total secured borrowings

    1,316        106,475        107,791        1,470        110,940        112,410   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    2,393        119,276        121,669        2,590        124,916        127,506   

Hedge accounting adjustments

    (23     361        338        (20     (83     (103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,370      $ 119,637      $ 122,007      $ 2,570      $ 124,833      $ 127,403   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $1.0 billion and $546 million of long-term debt related to the Private Education Loan asset-backed securitization repurchase facility (“Repurchase Facility”) as of June 30, 2016 and December 31, 2015, respectively.

 

(2) 

“Other” includes the obligation to return cash collateral held related to derivative exposures.

 

22


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

3. Borrowings (Continued)

 

Variable Interest Entities

We consolidated the following financing VIEs as of June 30, 2016 and December 31, 2015, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

 

    June 30, 2016  
    Debt Outstanding     Carrying Amount of Assets Securing
Debt Outstanding
 

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other
Assets
    Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 75,698      $ 75,698      $ 76,330      $ 2,649      $ 754      $ 79,733   

Private Education Loan securitizations(1)

           16,168        16,168        21,213        477        284        21,974   

FFELP Loan — other facilities

           11,009        11,009        11,283        285        171        11,739   

Private Education Loan — other facilities

    361               361        534        8        16        558   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    361        102,875        103,236        109,360        3,419        1,225        114,004   

Hedge accounting adjustments

           (772     (772                   (793     (793
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 361      $ 102,103      $ 102,464      $ 109,360      $ 3,419      $ 432      $ 113,211   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Dollars in millions)

  Short
Term
    Long
Term
    Total     Loans     Cash     Other
Assets
    Total  

Secured Borrowings — VIEs:

             

FFELP Loan securitizations

  $      $ 77,764      $ 77,764      $ 78,358      $ 2,760      $ 682      $ 81,800   

Private Education Loan securitizations(1)

           16,900        16,900        22,014        452        323        22,789   

FFELP Loan — other facilities

           12,676        12,676        13,158        324        168        13,650   

Private Education Loan — other facilities

    710               710        1,110        17        31        1,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total before hedge accounting adjustments

    710        107,340        108,050        114,640        3,553        1,204        119,397   

Hedge accounting adjustments

           (830     (830                   (911     (911
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 710      $ 106,510      $ 107,220      $ 114,640      $ 3,553      $ 293      $ 118,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes $1.0 billion and $546 million of long-term debt related to the Repurchase Facility as of June 30, 2016 and December 31, 2015, respectively. Includes $69 million and $41 million of restricted cash related to the Repurchase Facility as of June 30, 2016 and December 31, 2015, respectively.

 

23


Table of Contents

NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at June 30, 2016 and for the three and six months ended

June 30, 2016 and 2015 is unaudited) (Continued)

 

4. Derivative Financial Instruments

Our risk management strategy and use of and accounting for derivatives have not materially changed from that discussed in our 2015 Form 10-K. Please refer to “Note 7 — Derivative Financial Instruments” in our 2015 Form 10-K for a full discussion.

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments at June 30, 2016 and December 31, 2015, and their impact on other comprehensive income and earnings for the three and six months ended June 30, 2016 and 2015.

Impact of Derivatives on Consolidated Balance Sheet

 

    

 

  Cash Flow     Fair Value     Trading     Total  

(Dollars in millions)

   Hedged Risk
Exposure
  June 30,
2016
    Dec. 31,
2015
    June 30,
2016
    Dec. 31,
2015
    June 30,
2016
    Dec. 31,
2015
    June 30,
2016
    Dec. 31,
2015
 

Fair Values(1)

                  

Derivative Assets:

                  

Interest rate swaps

   Interest rate   $      $      $ 1,006      $ 694      $ 92      $ 32      $ 1,098      $ 726   

Cross-currency interest rate swaps

   Foreign currency
& interest rate
                  10        2                      10        2   

Other(2)

   Interest rate                                 1               1          
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets(3)

                     1,016        696        93        32        1,109        728   

Derivative Liabilities:

                  

Interest rate swaps

   Interest rate     (280     (89            (3     (65     (68     (345     (160

Floor Income Contracts

   Interest rate                                 (406     (365     (406     (365

Cross-currency interest rate swaps

   Foreign currency
& interest rate
                  (835     (926     (17     (62     (852