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Navient Reports First-Quarter 2016 Financial Results

Apr 19, 2016 (GLOBE NEWSWIRE via COMTEX) --

Acquired over $1.5 Billion of FFELP Loans
Completed Two FFELP ABS Transactions through April 14
Extended $7.5 Billion FFELP ABCP Facility to 2018
Private Education Loan Charge-Offs down 24 Percent from Year-Ago Quarter

WILMINGTON, Del., April 19, 2016 (GLOBE NEWSWIRE) -- Navient NAVI, +1.25% today released its first-quarter 2016 financial results that include $1.5 billion of education loan purchases, two asset-backed securities (ABS) transactions and an extension of its $7.5 billion FFELP asset-backed commercial paper (ABCP) facility to 2018. Private education loan charge-offs were down 24 percent from the year-ago quarter.

"This quarter's results benefited from the continued improvement in credit. Our private education loans continue to demonstrate positive trends with lower delinquency rates and defaults. We have also seen an improving delinquency rate for the federal loans we service," said Jack Remondi, Navient president and CEO. "This quarter we returned to the FFELP asset-backed market even as the rating agency reviews remain open. This demonstrates the strength of the collateral and structure of our deals as well as the attractiveness of the bonds to investors. We continue on track to meet our plan targets across our business lines."

For the first-quarter 2016, GAAP net income was $181 million ($0.53 diluted earnings per share), compared with $292 million ($0.72 diluted earnings per share) for the year-ago quarter.

Core earnings for the quarter were $147 million ($0.43 diluted earnings per share), compared with $194 million ($0.48 diluted earnings per share) for the year-ago quarter. The decrease is primarily the result of a $73 million reduction in net interest income. Excluding expenses associated with regulatory-related costs, first-quarter 2016 and 2015 diluted core earnings per share were $0.44 and $0.48, respectively. First-quarter 2016 operating expenses included $4 million ($0.01 diluted earnings per share) of regulatory-related costs. There were no regulatory-related costs in the first quarter of 2015.

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 below, as well as changes in net income attributable to (1) restructuring and reorganization expense incurred in connection with the spin-off of Navient from SLM Corporation on April 30, 2014, (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 results but have not been included in core earnings results. First-quarter 2016 GAAP results included gains of $54 million from derivative accounting treatment that are excluded from core earnings results, compared with gains of $166 million in the year-ago period. See "Differences between Core Earnings and GAAP" on page 14 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 $66 million in first-quarter 2016, compared with the year-ago quarter's $85 million. This decrease was primarily the result of a $33 million decrease in net interest income due to declines in the balance of the portfolio and the net interest margin. This was partially offset by a decline in expenses.

The company acquired $1.5 billion of FFELP loans in the first-quarter 2016. At March 31, 2016, Navient held $95.0 billion of FFELP loans, compared with $102.4 billion of FFELP loans held at March 31, 2015.

Private Education Loans

In its private education loans segment, Navient acquires, finances and services private education loans.

Core earnings for the segment were $61 million in first-quarter 2016, compared with the year-ago quarter's $77 million. This decrease is primarily the result of a $43 million decrease in net interest income due to declines in the balance of the portfolio and the net interest margin, partially offset by a $16 million decline in the provision for loan losses.

Core earnings first-quarter 2016 private education loan portfolio results vs. first-quarter 2015 are as follows:

  • Delinquencies of 90 days or more of 3.2 percent of loans in repayment, down from 3.6 percent.
  • Total delinquencies of 6.2 percent of loans in repayment, down from 6.9 percent.
  • Annualized charge-off rate of 2.4 percent of average loans in repayment, down from 2.9 percent.
  • Net interest margin of 3.56 percent, down from 3.74 percent.
  • Provision for private education loan losses of $104 million, down from $120 million.

At March 31, 2016, Navient held $25.5 billion of private education loans, compared with $29.0 billion of private education loans held at March 31, 2015.

Business Services

Navient's business services segment includes revenue primarily from its servicing, asset recovery and business processing activities.

Business services core earnings were $75 million in first-quarter 2016, compared with $86 million in the year-ago quarter. This decrease was primarily the result of lower education loan-related asset recovery revenue primarily in connection with a legislated reduction in certain fees as well as lower volumes.

The company services education loans for more than 12 million customers, including 6.3 million customers on behalf of the U.S. Department of Education (ED).

Operating Expenses

The company recognized core earnings regulatory-related costs of $4 million in the first quarter of 2016. There were no regulatory-related costs in the first quarter of 2015. Excluding these regulatory-related costs, first-quarter 2016 core earnings operating expenses were $243 million, compared with $230 million in the year-ago quarter. The increase over the year-ago quarter was due to an increase in operating costs related to Gila LLC, acquired in Feb. 2015, and to Xtend Healthcare, acquired in Oct. 2015. Excluding these acquisitions, operating expenses would have decreased 6 percent as a result of a general reduction in costs related to the implementation of various operating cost initiatives, including the successful conversion of loans to our servicing system in the third quarter of 2015 related to $8.5 billion of FFELP loans acquired in the fourth quarter of 2014.

Funding and Liquidity

During the first-quarter 2016, Navient issued $1.1 billion in FFELP ABS and $488 million in private education loan ABS. On April 14, 2016, Navient issued an additional $497 million in FFELP ABS. During the first-quarter 2016, Navient retired or repurchased $1.0 billion of senior unsecured debt.

In the first-quarter 2016, Navient increased and extended its FFELP ABCP facility with seven global financial institutions. The facility's maturity date was extended to March 2018 from March 2017 and its maximum financing amount, which was originally scheduled to step down to $7 billion in March 2016, was increased to $7.5 billion with a step down to $6.75 billion in March 2017. This facility provides liquidity for FFELP loans.

In the first-quarter 2016, Navient extended the legal final maturity dates for Navient-sponsored FFELP securitizations totaling $2.2 billion of bonds. Since quarter end, Navient has extended an additional $1.5 billion of bonds through April 19, 2016. In total, Navient has extended the legal final maturity dates for $4.8 billion of bonds. The amendments were made at the request of investors in these trusts.

On April 15, 2016, the company completed a second private education loan ABS repurchase agreement, resulting in the issuance of $478 million collateralized by residual interests in three previously issued private education loan ABS trusts.

Shareholder Distributions

In the first-quarter 2016, Navient paid a common stock dividend of $0.16 per share.

Navient repurchased 19.2 million shares of common stock for $200 million in the first quarter of 2016. The shares were repurchased under the company's previously disclosed share repurchase programs. As of March 31, 2016, the remaining repurchase authority was $555 million. Navient repurchased 14.7 million shares of common stock for $300 million in the year-ago quarter.

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 attributable to (1) the financial results attributable to the operations of the consumer banking business prior to the spin-off of Navient from SLM Corporation on April 30, 2014, and related restructuring and reorganization expense incurred in connection with the spin-off, including the restructuring initiated in the second quarter of 2015, (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 release can be found in Navient's Annual Report on Form 10-K for the year ended December 31, 2015 (filed with the SEC on February 25, 2016). Certain reclassifications have been made to the balances as of and for the three months ended March 31, 2015, to be consistent with classifications adopted for 2016, and had no effect on net income, total assets or total liabilities.

Navient will host an earnings conference call tomorrow, April 20, at 8 a.m. EDT. Navient executives will be on hand to discuss various highlights of the quarter and to answer questions related to the company's performance. To participate, join a live audio webcast at navient.com/investors or dial 855-838-4156 (USA and Canada) or dial 267-751-3600 (international) and use access code 84069291 starting at 7:45 a.m. EDT.

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.

A replay of the conference call will be available approximately two hours after the call's conclusion through May 4 at navient.com/investors or by dialing 855-859-2056 (USA and Canada) or 404-537-3406 (international) with access code 84069291.

This press release contains "forward-looking statements" and other information that is 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, opinions or expectations and statements that assume or are dependent upon future events, are forward-looking statements and often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "see," "will," "would," or "target." Forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause actual results to be materially different from those reflected in such forward-looking statements. For Navient, these factors include, among others, the risks and uncertainties associated with increases in financing costs or the availability of financing; limits on our liquidity resulting from disruptions in the capital markets or other factors; unanticipated increases in costs associated with compliance with laws and regulations; changes in the marketplaces in which we compete (including changes in demand or changes resulting from new laws and regulations); changes in accounting standards pertaining to loan loss reserves and estimates or other accounting standards that may impact our operations; 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 hedging transactions. The company could also be affected by, among other things: unanticipated deferrals in our FFELP securitization trusts that would delay repayment of the bonds beyond their legal final maturity date; reductions in our credit ratings, the credit ratings of asset-backed securitizations we sponsor or the credit ratings of the United States of America; failures of our operating systems or infrastructure or those of third-party vendors; risks related to cybersecurity including the potential disruption of our systems or potential disclosure of confidential customer information; damage to our reputation resulting from the politicization of student loan servicing; changes in law and regulations with respect to the student lending business and financial institutions generally; delays or errors in converting portfolio acquisitions to our servicing platform; increased competition from banks and other consumer lenders who are not subject to the same level of regulation, the creditworthiness of our customers; changes in the general interest rate environment, including the relationship between the relevant money-market index rate and the rate at which our assets are priced; changes in general economic conditions and the other factors that are described in the "Risk Factors" section of Navient's Annual Report on Form 10-K and in its future reports filed with the Securities and Exchange Commission. 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 and actual results could differ materially. 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 except as required by law.

About Navient

As the nation's leading loan management, servicing and asset recovery company, Navient NAVI, +1.25% helps customers navigate the path to financial success. Servicing more than $300 billion in education loans, the company supports the educational and economic achievements of more than 12 million Americans. A growing number of public and private clients rely on Navient for proven solutions to meet their financial goals. Learn more at navient.com.

Selected Historical Financial Information and Ratios

Quarters Ended
(In millions, except per share data) March 31, 2016 December 31, 2015 March 31, 2015
GAAP Basis
Net income attributable to Navient Corporation $ 181 $ 286 $ 292
Diluted earnings per common share attributable to Navient Corporation $ .53 $ .79 $ .72
Weighted average shares used to compute diluted earnings per share 343 361 405
Net interest margin, FFELP Loans 1.12 % 1.23 % 1.25 %
Net interest margin, Private Education Loans 3.49 % 3.53 % 3.71 %
Return on assets .57 % .87 % .85 %
Ending FFELP Loans, net $ 95,018 $ 96,498 $ 102,424
Ending Private Education Loans, net 25,547 26,394 28,990
Ending total education loans, net $ 120,565 $ 122,892 $ 131,414
Average FFELP Loans $ 95,721 $ 97,472 $ 103,617
Average Private Education Loans 26,577 27,551 30,105
Average total education loans $ 122,298 $ 125,023 $ 133,722
"Core Earnings" Basis(1)
Net income attributable to Navient Corporation $ 147 $ 172 $ 194
Diluted earnings per common share attributable to Navient Corporation $ .43 $ .48 $ .48
Weighted average shares used to compute diluted earnings per share 343 361 405
Net interest margin, FFELP Loans .81 % .84 % .88 %
Net interest margin, Private Education Loans 3.56 % 3.61 % 3.74 %
Return on assets .46 % .52 % .56 %
Ending FFELP Loans, net $ 95,018 $ 96,498 $ 102,424
Ending Private Education Loans, net 25,547 26,394 28,990
Ending total education loans, net $ 120,565 $ 122,892 $ 131,414
Average FFELP Loans $ 95,721 $ 97,472 $ 103,617
Average Private Education Loans 26,577 27,551 30,105
Average total education loans $ 122,298 $ 125,023 $ 133,722

[(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
(Dollars in millions) March 31, 2016 December 31, 2015 March 31, 2015
FFELP Loan spread .89 % .93 % .96 %
Net interest margin .81 % .84 % .88 %
Provision for loan losses $ 7 $ 7 $ 5
Charge-offs $ 15 $ 13 $ 7
Charge-off rate .08 % .07 % .03 %
Total delinquency rate 14.1 % 15.3 % 15.9 %
Greater than 90-day delinquency rate 7.0 % 8.3 % 8.4 %
Forbearance rate 14.4 % 15.2 % 15.5 %

Private Education Loan Segment Performance Metrics -- "Core Earnings"

Quarters Ended
(Dollars in millions) March 31, 2016 December 31, 2015 March 31, 2015
Private Education Loan spread 3.70 % 3.73 % 3.87 %
Net interest margin 3.56 % 3.61 % 3.74 %
Provision for loan losses $ 104 $ 110 $ 120
Charge-offs $ 144 $ 141 $ 190
Charge-off rate 2.4 % 2.3 % 2.9 %
Total delinquency rate 6.2 % 7.2 % 6.9 %
Greater than 90-day delinquency rate 3.2 % 3.4 % 3.6 %
Forbearance rate 3.7 % 3.8 % 3.8 %
Loans in repayment with more than 12 payments made 95.2 % 94.1 % 92.6 %
Cosigner rate 64 % 64 % 64 %

Business Services Segment Performance Metrics -- "Core Earnings"

As of
(Dollars in billions) March 31, 2016 December 31, 2015 March 31, 2015
Number of accounts serviced for ED (in millions) 6.3 6.3 6.2
Total federal loans serviced $ 291 $ 288 $ 282
Contingent collections receivables inventory:
Education loans $ 10.1 $ 10.3 $ 11.0
Other 9.1 9.9 9.2
Total contingent collections receivables inventory $ 19.2 $ 20.2 $ 20.2

Results of Operations

We present the results of operations below first on a consolidated basis in accordance with GAAP. Following our discussion of consolidated earnings results on a GAAP basis, we present our results on a segment basis. We have four business segments: FFELP Loans, Private Education Loans, Business Services and Other. Since these segments operate in distinct business environments and we manage and evaluate the financial performance of these segments using non-GAAP financial measures, these segments are presented on a "Core Earnings" basis (see "'Core Earnings' -- Definition and Limitations").

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GAAP Statements of Income (Unaudited)
March 31, 2016 vs. December 31, 2015 March 31, 2016 vs. March 31, 2015
Quarters Ended Increase (Decrease) Increase (Decrease)
(In millions, except per share data) March 31, 2016 December 31, 2015 March 31, 2015 $ % $ %
Interest income:
FFELP Loans $ 634 $ 631 $ 637 $ 3 -- % $ (3 ) -- %
Private Education Loans 411 421 456 (10 ) (2 ) (45 ) (10 )
Other loans 1 2 2 (1 ) (50 ) (1 ) (50 )
Cash and investments 5 3 2 2 67 3 150
Total interest income 1,051 1,057 1,097 (6 ) (1 ) (46 ) (4 )
Total interest expense 565 521 514 44 8 51 10
Net interest income 486 536 583 (50 ) (9 ) (97 ) (17 )
Less: provisions for loan losses 111 115 125 (4 ) (3 ) (14 ) (11 )
Net interest income after provisions for loan losses 375 421 458 (46 ) (11 ) (83 ) (18 )
Other income (loss):
Servicing revenue 82 82 77 -- -- 5 6
Asset recovery and business processing revenue 90 92 89 (2 ) (2 ) 1 1
Other income (loss) (13 ) 4 7 (17 ) (425 ) (20 ) (286 )
Gains (losses) on sales of loans and investments -- (21 ) 5 21 (100 ) (5 ) (100 )
Gains on debt repurchases -- 21 -- (21 ) (100 ) -- --
Gains (losses) on derivative and hedging activities, net 1 93 71 (92 ) (99 ) (70 ) (99 )
Total other income (loss) 160 271 249 (111 ) (41 ) (89 ) (36 )
Expenses:
Operating expenses 247 235 230 12 5 17 7
Goodwill and acquired intangible asset impairment and amortization expense 4 5 1 (1 ) (20 ) 3 300
Restructuring and other reorganization expenses -- -- 3 -- -- (3 ) (100 )
Total expenses 251 240 234 11 5 17 7
Income from continuing operations before income tax expense 284 452 473 (168 ) (37 ) (189 ) (40 )
Income tax expense 103 166 181 (63 ) (38 ) (78 ) (43 )
Net income from continuing operations 181 286 292 (105 ) (37 ) (111 ) (38 )
Income (loss) from discontinued operations, net of tax expense (benefit) -- -- -- -- -- -- --
Net income 181 286 292 (105 ) (37 ) (111 ) (38 )
Less: net loss attributable to noncontrolling interest -- -- -- -- -- -- --
Net income attributable to Navient Corporation $ 181 $ 286 $ 292 $ (105 ) (37 )% $

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