(NAVI-NASDAQ) SUMMARY. Risk Level *

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1 December 31, 2014 Navient Corporation Current Recommendation Prior Recommendation Neutral Date of Last Change 12/22/2014 Current Price (12/30/14) $21.98 Target Price $24.50 SUMMARY DATA OUTPERFORM (NAVI-NASDAQ) SUMMARY We are initiating our coverage on Navient with an Outperform recommendation. Navient started operating independently as a loan management, servicing and asset recovery company following the separation of SLM Corporation into two distinct publicly-traded entities in Apr The company s third-quarter 2014 earnings outpaced the Zacks Consensus Estimates. Results were aided by lower provisions for loan losses, partially offset by lower asset recovery revenue, reduced net interest income and higher expenses. Though we remain cautious owing to limited growth opportunities and the persistent low interest rate environment, we believe Navient will be able to maintain its leading position in the student lending market through its continued acquisition of federal and private student loans. 52-Week High $ Week Low $15.68 One-Year Return (%) Beta Average Daily Volume (sh) 2,151,073 Shares Outstanding (mil) 410 Market Capitalization ($mil) $9,012 Short Interest Ratio (days) 2.83 Institutional Ownership (%) 95 Insider Ownership (%) Annual Cash Dividend $0.60 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%) using TTM EPS using 2014 Estimate 10.8 using 2015 Estimate 10.0 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Below Avg., Type of Stock Large-Blend Industry Fin-Cons Loans Zacks Industry Rank * 117 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,367 A 1,602 A 1,457 A 1,680 A 6,106 A ,643 A 1,827 A 1,409 A 1,409 A 6,288 A A 736 A 686 A 543 E 2,109 E ,103 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.54 A $0.49 A $0.58 A $0.55 A $2.16 A 2013 $0.61 A $1.01 A $0.60 A $0.61 A $2.83 A 2014 $0.51 A $0.56 A $0.52 A $0.53 E $2.04 E 2015 $2.20 E Projected EPS Growth - Next 5 Years % Note: Revenue and EPS figures till first-quarter 2014 are consolidated figures prior split. So full-year 2014 estimates do not add to the quarterly data Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Following the separation of SLM Corporation into two distinct publicly-traded entities on Apr , Navient Corporation (NAVI) started operating independently as a loan management, servicing and asset recovery company. Navient, which is now an S&P 500 member, started trading independently on NASDAQ from May 1, In Oct 2014, Navient completed the transition of the servicing operations and introduced the Navient brand to its customers. Sallie Mae (SLM), the other post-split public company, focuses on consumer banking. The separation was part of several initiatives undertaken by management in 2013 to enhance shareholder value. Other initiatives included sale of residual interests in several Federally Guaranteed Student Loans (FFELP) securitization trusts, divestiture of two subsidiaries and debt repurchases. Prior to the split, SLM Corporation being a bellwether in education finance in the U.S., provided funding, delivery and servicing support for education loans in the U.S. through its Private Education Loan (PEL) programs and as a servicer and collector of loans for the U.S. Department of Education (ED). In addition, the company was the largest holder, service and collector of loans made under the Federal Family Education Loan Program (FFELP). Post split, Newark, DE-based Navient continues to hold the largest portfolio of education loans insured or guaranteed under the FFELP, as well as the largest portfolio of Private Education Loans. Navient services its own portfolio of education loans and also those which are owned by third parties including banks, credit unions, non-profit education lenders and ED. Navient stands as one of the four large servicers to ED under its Direct Student Loan Program (DSLP). The company is also engaged in providing asset recovery services on its own portfolio (comprising both education loans as well as other asset classes), and for guaranty agencies. These guaranty agencies act as intermediaries between the U.S. federal government and FFELP lenders and are liable for paying claims on defaulted FFELP Loans. Navient also provides asset recovery services to ED and other clients. In 2010, Congress passed legislation that terminated the origination of education loans under the FFELP program. Outstanding FFELP Loans will amortize over the next 20 years, approximately. Navient aims to maximize the cash flow generated by its FFELP Loan portfolio, including the acquisition of additional FFELP Loans from third parties and increasing its related servicing business. Business Segments The company has four reportable business segments: FFELP Loans Segment: FFELP Loans are insured or guaranteed by either state or not-for-profit agencies. These loans are also secured by contractual rights to recovery from the United States in accordance with guaranty agreements among ED and the agencies. In this segment, Navient is engaged in acquiring and financing FFELP Loans. While the company does not originate FFELP Loans, it continues to acquire FFELP Loan portfolios so as to leverage its servicing scale and derive incremental earnings and cash flow. The company mainly earns net interest income on the FFELP Loan portfolio. As the portfolio gradually amortizes, the company expects to derive significant amounts of cash. Private Education Loans Segment: Private Education Loans are education loans offered to students or their families that are non-federal loans and are not insured or guaranteed. The credit risk in private education loans lies fully on the customers and cosigner. These loans are mainly aimed at filing up the gaps between the higher education cost and the amount funded through financial aid, federal loans or customers resources. In this segment, Navient is engaged in Equity Research NAVI Page 2

3 acquiring and financing and servicing private education loans. While the company does not originate private education loans, it continues to acquire private education loans portfolios so as to leverage its servicing scale and derive incremental earnings and cash flow. The company mainly earns net interest income on the Private Education Loan portfolio. As the portfolio gradually amortizes, the company expects to derive significant amounts of cash. Business Services Segment: In this segment Navient derives a significant part of its revenue from servicing FFELP Loan portfolio. The company also offers servicing and asset recovery services for loans on behalf of Guarantors of FFELP Loans and other institutions, including ED. Other Segment: This segment mainly comprises of activities of the holding company, including the debt repurchase, the corporate liquidity portfolio and all overhead. The company also incorporates results from certain smaller wind-down and discontinued operations within this segment. In Jun 2014, Navient obtained extension of its servicing contract to five more years from the U.S. Department of Education. As of Sep 30, 2014, the company serviced around 6.1 million accounts under this contract. As of Sep 30, 2014, Navient had $140.3 billion in total assets, FFELP loans of $97.7 billion and private education loans of $30.5 billion. REASONS TO BUY RISKS Following the strategic separation, Navient continues to be holder of the biggest portfolio of education loans insured or guaranteed under the FFELP, as well as the biggest portfolio of Private Education Loans. Further, Navient is also a leading servicer of education loans, servicing over $300 billion in student loans for more than 12 million customers. The economic recovery and declining unemployment rate should further enhance the prospects of its business. Particularly, the specialized focus post split will be advantageous to Navient. Navient has exhibited better control over default rate and asset recovery business. The overall federal loans (comprising DSLP and FFELP loans) serviced by the company had a 2011 Cohort Default Rate (CDR) of 8.28%, which is nearly 40% lower than the national CDR of 13.7% released by ED in Sep A lower CDR means less number of borrowers defaulting on their student loans. Given its decent cash generating capacities, the company remains committed to increasing shareholders wealth by raising dividend payments and share buybacks. Notably, during the nine months ended Sep 2014, Navient returned $189 million to its shareholders through dividends and repurchased $432 million in common stock. We expect this trend to continue going forward. We remain cautious owing to limited growth opportunities for the new entity. Following the 2010 reform law, DSLP of the ED originates all federal student loans. As a result of this legislation, Navient s interest income on its FFELP loan portfolio and fee-based revenue from servicing that portfolio and third-party FFELP loans will gradually decrease as existing FFELP loans are paid down, refinanced or repaid after default by guarantors. If Navient fails to acquire new loans or expand or develop alternative sources of revenue to replace or enhance its declining revenue from FFELP loan portfolio, its top line will be under pressure. Equity Research NAVI Page 3

4 RECENT NEWS Higher expenses remain another concern for Navient. Operating expenses increased 2.6% year over year during the third quarter of Substantial volatility in the capital markets could negatively impact Navient s financing costs. Further, as per the Separation and Distribution Agreement, Navient Corporation stands liable for payment of all the regulatory orders, except the penalty charges that are directly imposed on Sallie Mae Bank. These legal costs may further enhance the company s expense base. We believe the company will face challenges in driving operational efficiency if it fails to undertake expense management initiatives. The persistent low interest rate environment also poses a threat to company s revenue growth. Interest earned on FFELP loans and private education loans is primarily indexed to 1-month LIBOR rates and either 1-month LIBOR rates or the 1-month Prime rate, respectively, whereas the cost of funds is primarily indexed to 3-month LIBOR rates. This leads to re-pricing risk related to these assets. In a low interest rate environment, this difference in timing may create pressure on net interest margin for FFELP and private education loans. On the other hand, any rise in interest rates in the future will lower Navient s floor income. Navient Q3 Earnings Beat, Acquires $1.4 Billion in Student Loans Oct 15, 2014 Navient Corporation s third-quarter 2014 core earnings came in at $0.52 per share, marginally beating the Zacks Consensus Estimate. However, the figure compared unfavorably with $0.58 per share earned in the year-ago quarter. Core earnings exclude the impact of the financial results of the consumer banking business for periods prior to the spin off as well as the spin-off related restructuring and reorganization expenses. It also excludes the impact of certain other one time items unrealized, mark-to-market gains/losses on derivatives, and goodwill and acquired intangible asset amortization and impairment. Better-than-expected results were aided by lower provisions for loan losses, partially offset by lower asset recovery revenue, reduced net interest income and higher expenses. Private education loans segment exhibited an improvement. Net income came in at $218 million compared with $259 million in the prior-year quarter. GAAP net income for the quarter was $359 million or 85 cents per share, compared with $260 million or 57 cents per share in the year-ago quarter. Quarter in Detail The following figures are on a core-earnings basis. Net interest income declined 8.3% year over year to $529 million. Non-interest income fell 17.8% year over year to $157 million. Operating expenses increased 2.6% year over year to $195 million. On a positive note, provision for credit losses declined 25.1% year over year to $140 million. Also, during the quarter, the company acquired student loans worth $1.4 billion. Equity Research NAVI Page 4

5 Segmental Performance Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $79 million, down from $91 million in the year-ago quarter. The decline mainly reflected reduced net interest income owing to the reduction in outstanding FFELP loans. During the quarter, Navient acquired FFELP loans of $521 million. As of Sep 30, 2014, the company s FFELP loans stood at $97.7 billion. FFELP loan spread declined 1 basis point year over year to 1.02 %. Private Education Loans: The segment reported core earnings of $98 million in the quarter, up from $75 million in the prior-year quarter. Lower provision for private education loan losses drove the increase. Also, the quarter witnessed improvement in delinquencies and charge-offs on a year-over-year basis. Total delinquencies came in at 7.9% of loans in repayment, down 190 basis points (bps) and the annualized charge-off rate declined 60 bps to 2.3% of average loans in repayment. During the quarter, Navient acquired private education loans of $848 million. As of Sep 30, 2014, the company s private education loans stood at $30.5 billion. Student loan spread declined 6 bps year over year to 4.06 %. Business Services: The segment reported core earnings of $85 million, down from $127 million in the year-ago quarter. The decrease was mainly attributable to lower asset recovery revenue and reduced balance of FFELP loans serviced. Currently, Navient services student loans for 12 million customers. This includes 6.1 million customers on behalf of the U.S. Department of Education (ED). Other: The segment reported net loss of $44 million, compared with net loss of $34 million in the prioryear quarter. Source of Funding and Liquidity In order to meet the liquidity needs, Navient expects to utilize various sources including cash and investment portfolio, issuance of additional unsecured debt, the repayment of principal on unencumbered student loan assets and the distributions from securitization trusts (including servicing fees). It may also issue term asset-backed securities ( ABS ). During the quarter, Navient issued FFELP ABS and private education loan ABS of $1.3 billion and $463 million, respectively. Capital Deployment On Aug 14, 2014, Navient declared third quarter common stock dividend of $0.15 per share. The dividend was paid on Sep 26, 2014, to shareholders of record at the close of business on Sep 12, In May 2014, Navient s board of directors authorized a share repurchase program worth $400 million for the company's outstanding common shares. The share repurchase program does not have an expiration date. During the third quarter Navient repurchased 9.5 million shares of common stock for $167 million. As of Sep 30, 2014, $168 million worth of shares remained outstanding under the repurchase authorization. Equity Research NAVI Page 5

6 Navient Receives $10 Billion commercial paper financing facility Nov 17, 2014 Navient announced that it has closed a new $10 billion student loan asset-backed commercial paper financing facility. The facility, which matures in Nov 2017, was supported by Wells Fargo Bank, JPMorgan Chase Bank and Royal Bank of Canada. Navient will utilize the facility for funding the purchase of FFELP loan portfolios, including a part of the $8.5 billion deal announced on Nov 13. Navient to Buy $8.5 Billion FFELP Loans Nov 13, 2014 Navient announced that it has inked a deal with Wells Fargo & Company to purchase $8.5 billion of its FFELP loans. Both the companies did not reveal the terms of the deal. The deal, which has been inked through the Wells Fargo Education Financial Services, is expected to close in a series of transactions by the end of The transaction comprises entire loans originated under the FFELP prior to its ending in Wells Fargo Bank will assist Navient in partly financing the purchase by arranging a new asset-backed commercial paper facility. The deal enhances the business of Navient, as with this the company will service over $310 billion in student loans. Navient Settles FDIC, DOJ Probe May 13, 2014 Navient revealed that it has recently reached a settlement with regulators the FDIC and DOJ. The company is alleged to have adopted unjust and fraudulent methods associated with student loans that amounted to breach of Section 5 of the Federal Trade Commission Act and violated the Servicemembers Civil Relief Act (SCRA). Notably, the settlement is subject to court approval. The Complaint The regulators alleged that Sallie Mae Bank and a wholly-owned subsidiary of Navient Navient Solutions, Inc. (formerly known as Sallie Mae, Inc.) violated federal law with respect to student loans by making insufficient and improper disclosures relating to payment process and late fees. Further, Sallie Mae is alleged to have violated SCRA and Section 5 rules, as members of the U.S. military were treated unfairly and denied the benefit of 6% interest rate and were instead overcharged. Notably the period dates back to The Settlement According to the FDIC orders, the firms would pay civil money penalties of $6.6 million, establish a restitution reserve account of $30 million. Additionally, it requires the firms to take corrective measures to ensure proper disclosures and fair treatment to servicemembers under the SCRA. Navient Solutions has paid its civil monetary penalties of $3.3 million. As per the Separation and Distribution Agreement among SLM Corporation, SLM BankCo and Navient dated as of Apr 28, 2014 Navient stands liable for funding the restitution reserve account. In May 2014, Navient funded the account. The settlement with DOJ required Navient Solutions to fund a $60 million settlement fund for compensating the servicemembers and shell out $55,000 in civil money penalties. The United States Equity Research NAVI Page 6

7 District Court in Delaware approved the DOJ Order on Sep 29, 2014, following which Navient funded the settlement fund and paid the civil money penalties in Oct VALUATION On a price-to-book (P/B) basis, Navient s shares currently trade at 2.1x, which is at a 5.0% premium to the industry average of 2.0x. On a price-to-earnings () basis, shares trade at 10.8x the Zacks Consensus Estimate for 2014, which is at 10.7% discount to the industry average of 12.1x. Hence, the valuation on basis looks attractive. Navient has a trailing 12-month ROE of 17.7%, compared to the industry average of 15.2%. This implies that the company reinvests its earnings more efficiently than its industry peers. Our 6-month target price of $24.50 per share equates to about 12.0x the Zacks Consensus Estimate for Combined with an annual dividend of $0.60 per share, this target price implies an expected return of about 12.8% over that period. This is consistent with our long-term Outperform recommendation on the shares. Currently, Navient carries a Zacks Rank #2 (Buy). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Navient Corporation (NAVI) NA NA NA NA NA Industry Average S&P Discover Financial Services (DFS) Ally Financial Inc. (ALLY) NA NA NA NA Santander Consumer USA Holdings Inc. (SC) NA NA NA NA SLM Corporation (SLM) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Navient Corporation (NAVI) Industry Average S&P NA 1.9 NA Equity Research NAVI Page 7

8 Earnings Surprise and Estimate Revision History Equity Research NAVI Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of NAVI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1141 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11B Kalyan Nandy Priti Dhanuka Anindita Chaudhury Ishani Mukherjee Kalyan Nandy Equity Research NAVI Page 9