NAVI 10-Q Quarter ended March 31, 2021

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

or

For the transition period from                  to

Commission File Number: 001-36228

Navient Corporation

(Exact name of registrant as specified in its charter)

(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 ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Sec u r iti e s r e g i s te r ed p u r s u a n t to Secti o n 12(b ) o f t h e A c t.

As of March 31, 2021, there were 179,513,282 shares of common stock outstanding.

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TABLE OF CONTENTS

Organization of Our Form 10-Q

The order and presentation of content in our Form 10-Q di f fers from the traditional Securities and Exchange Commission (SEC) Form 10-Q format. Our format is designed to improve readability and to better present how we organize and manage our business. See Appendix A, "Form 10-Q Cross-Reference Index" for a cross-reference index to the traditional SEC Form 10-Q format.

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FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking” statements and other information that is based on management’s current expectations as of the date of this report. Statements that are not historical facts, including statements about our beliefs, opinions, or expectations and statements that assume or are dependent upon future events, are forward-looking statements and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “may,” “could,” “should,” “goals,” or “target.” Such statements are based on management's expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties are discussed more fully under the section titled “Risk Factors” in our 2020 Annual Report on Form 10-K (the 2020 Form 10-K) and include, but are not limited to the following:

Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the SEC that disclose risks and uncertainties that may affect our business.

The preparation of our consolidated financial statements also requires management to make certain estimates and assumptions including estimates and assumptions about future events. These estimates or assumptions may prove to be incorrect and actual results could differ materially. All forward-looking statements contained in this report are qualified by these cautionary statements and are made only as of the date of this report. We do not undertake any obligation to update or revise these forward-looking statements except as required by law.

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

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USE OF NON-GAAP FINANCIAL MEASURES

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings, which is a non-GAAP financial measure. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings disclosures in the notes to our consolidated financial statements for our business segments.

In addition to Core Earnings, we present the following non-GAAP financial measures: Tangible Equity, Adjusted Tangible Equity Ratio, Pro forma Adjusted Tangible Equity Ratio, and Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA) (for the Business Processing segment). See “Management’s Discussion and Analysis – Non-GAAP Financial Measures” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.

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Overview and Fundamentals of Our Business

Navient is a leading provider of education loan management and business processing solutions for education, healthcare, and government clients at the federal, state, and local levels. We help our clients and millions of Americans achieve success through technology-enabled financing, services and support.

With a focus on data-driven insights, service, compliance and innovative support, Navient’s business consists of:

We own a portfolio of $56.9 billion of federally guaranteed Federal Family Education Loan Program (FFELP) Loans. We service and provide asset recovery services on this portfolio and for third parties, deploying data-driven approaches to support the success of our customers.

We service federal education loans for approximately 5.6 million customers on behalf of the U.S. Department of Education (ED). Our flexible and scalable infrastructure manages large volumes of complex transactions with continued customer experience and efficiency improvements.

We own, service and originate Private Education Loans that enable students to pursue higher education and economic opportunities. Our $19.7 billion private loan portfolio demonstrates high customer success rates. Our loan origination business assists borrowers in refinancing their education loan debt and supports students and families in financing their higher education. In first-quarter 2021, we originated $1.7 billion in Private Education Loans.

We provide business processing solutions to a variety of public sector and health care organizations. We support over 500 clients – and their millions of clients, patients, and citizens – through a suite of solutions that leverages our scale, technology and customer experience expertise. Our data driven solutions enable our clients to focus on their missions and optimize their cash flow, and they enable individuals to successfully navigate complex programs, transactions, and decisions.

Superior Operational Performance with a Strong Customer Service and Compliance Commitment

We help our customers — both individuals and institutions — navigate the path to financial success through proactive service and innovative solutions.

For example, in our education loan segments, we support approximately 10 million borrowers to navigate their path to successful repayment. We leverage our multichannel communication platform, predictive analytics, and decades of insight to stay in touch with borrowers and address challenges that may arise. As the COVID-19 pandemic hit, we quickly implemented payment relief options for millions of borrowers.

In our Business Processing segment, using cloud-based solutions, we rapidly staffed, trained, and activated several call centers of thousands of remote staff for states needing urgent support during the COVID-19 pandemic.

Across all our businesses, we use real-time dashboards and data visualization tools to monitor performance metrics and identify, track, and address trends and opportunities.

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For example, our staff and systems strive to streamline and simplify the student loan repayment process, so borrowers can more easily understand their available choices and make informed decisions for their situation. We simplified the government’s process for enrolling in federal income-driven repayment plans by creating an agent-assisted e-sign enrollment process, greatly increasing completion.

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Federal loans serviced by Navient achieved a Cohort Default Rate (CDR) 26% better than our peers as calculated from the most recent CDR released by ED in September 2020. During the COVID-19 pandemic, we quickly and accurately delivered assistance to student loan borrowers. We are consistently a top performer in our asset recovery business and deliver superior service to our public and private sector clients. We regularly leverage data-driven insights, scale, technology and customer service to deliver value to our clients.

Our Business Processing segment regularly outperforms our clients’ expectations and the results delivered by our competition. For example:

Strong Financial Performance Resulting in a Strong Capital Return

Our first-quarter 2021 results continue to build upon our previous year’s results  demonstrating the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments. Adjusted Core Earnings ^{( 1 )} per share grew 235% over the year-ago quarter.

Our significant earnings generate significant capital which results in a strong capital return to our investors. Navient expects to continue to return excess capital to shareholders through dividends and share repurchases in accordance with our capital allocation policy.

By optimizing capital adequacy and allocating capital to highly accretive opportunities, including organic growth and acquisitions, we remain well positioned to pay dividends and repurchase stock, while maintaining appropriate leverage that supports our credit ratings and ensures ongoing access to capital markets.

At March 31, 2021, $500 million remained in share repurchase authorization.

To inform our capital allocation decisions, we use the Adjusted Tangible Equity Ratio, in addition to other metrics. As anticipated, the implementation of ASU No. 2016-13, “Financial Instruments – Credit Losses” (CECL), on January 1, 2020, reduced our capital ratios, which we have been rebuilding throughout 2020 and 2021. In addition, our GAAP equity was reduced in 2020 as a result of the net mark-to-market losses related to derivative accounting primarily due to the significant decline in interest rates. Our Pro forma Adjusted Tangible Equity Ratio ⁽¹⁾ at March 31, 2021, which excludes the cumulative net mark-to-market losses related to derivative accounting that will reverse to zero as the contracts mature, was 8.1%.

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How We Organize Our Business

We operate our business in three primary segments: Federal Education Loans, Consumer Lending and Business Processing.

Federal Education Loans Segment

In this segment, Navient owns FFELP Loans and performs servicing and asset recovery services on this portfolio. We also service and perform asset recovery services on federal education loans owned by ED and other institutions. Our servicing quality, data-driven strategies, and multichannel education about federal repayment options translate into positive results for the millions of borrowers we serve.

Consumer Lending Segment

In this segment, Navient owns, originates, acquires and services high-quality private education loans. We believe our more than 45 years of experience, product design, digital marketing strategies, and origination and servicing platform provide a unique competitive advantage. We see meaningful growth opportunities in originating Private Education Loans to financially responsible consumers, generating attractive long-term risk adjusted returns. We generate revenue primarily through net interest income on our Private Education Loan portfolio.

Business Processing Segment

In this segment, Navient performs business processing services for over 500 government and healthcare clients.

Other Segment

Our Other segment consists of our corporate liquidity portfolio, gains and losses incurred on the repurchase of debt, unallocated expenses of shared services and restructuring/other reorganization expenses.

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

Selected Historical Financial Information and Ratios

⁽¹⁾ Item is a non-GAAP financial measure. For a description and reconciliation, see the section titled “Non-GAAP Financial Measures – Core Earnings.”

⁽²⁾ Balances are the same for GAAP and Core Earnings basis.

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T he Quarter i n Review

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also include this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide certain Core Earnings disclosures in the notes to our consolidated financial statements for our business segments. See “Non-GAAP Financial Measures — Core Earnings” for a further discussion and a complete reconciliation between GAAP net income and Core Earnings.

First-quarter 2021 GAAP net income was $370 million ($2.00 diluted earnings per share), compared with a net loss of $106 million ($0.53 diluted loss per share) for the year-ago quarter. See “Results of Operations – Comparison of First-Quarter 2021 Results with First-Quarter 2020” for a discussion of the primary contributors to the change in GAAP earnings between periods.

First-quarter 2021 Core Earnings net income was $305 million ($1.65 diluted Core Earnings per share), compared with $93 million ($0.46 diluted Core Earnings per share) for the year-ago quarter. First-quarter 2021 and 2020 adjusted diluted Core Earnings ⁽¹⁾ per share were $1.71 and $0.51, respectively. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods.

Financial highlights of first-quarter 2021 versus first-quarter 2020 include:

Federal Education Loans segment:

Consumer Lending segment:

Business Processing segment:

Capital, funding and liquidity:

Expenses:

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Navient’s Response to COVID-19

The World Health Organization first declared the COVID-19 outbreak a pandemic on March 13, 2020 by which time the economic impact of the crisis was beginning to take hold, impacting the global economy and our results of operations. The COVID-19 pandemic was subsequently declared a national emergency. In response to the COVID-19 pandemic, many state, local, and foreign governments have put in place quarantines, executive orders, shelter-in-place orders, and restrictions in order to control the spread of the disease. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays, work-from-home policies, travel restrictions, and cancellation or postponement of events. They have also led to a general decline in economic activity and consumer confidence and increases in job losses and unemployment. While certain COVID-19 vaccines have been approved and have become widely available for use in the United States, we are unable to predict how widely utilized the vaccines will be or how effective they will be in preventing the spread of COVID-19. As a result, although the economy has improved since the pandemic began, it is still uncertain when or if normal pre-pandemic economic activity and business operations will resume. In this section, we will highlight our response to the global pandemic and its continuing impact on our business and operations. We suggest that the information below should be read in conjunction with our risk factors included in “Risk Factors — The Impact of COVID-19 and Related Risk” in our 2020 Form 10-K.

Our Team Members

As this crisis evolved, we took early action to protect the health and safety of our employees. We expanded our work-from-home capabilities and implemented best practices in our facilities with regard to safety and hygiene to protect those who were unable to work remotely. We were able to quickly and successfully enable 90% of our team to work from home. As of March 31, 2021, approximately 85% of our team remains on work-from-home status. As a result of these steps, the pandemic has not adversely affected our ability to maintain our operations or service our customers and borrowers. We currently anticipate that some of our team members will begin returning to the office later this year. As we plan for the return to office process, it is likely to take place in stages and we anticipate that the environment may require a continuation of various safety protocols.

Customers and Education Loan Performance

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. In compliance with the CARES Act and through subsequent legislative and executive actions, we have been instructed to place all loans owned by ED into forbearance and suspend payments and interest accrual until September 30, 2021. While the CARES Act applies only to loans owned by ED, our FFELP and Private Education Loan portfolios have also been impacted by the pandemic and we have offered COVID-19 relief options such as the use of forbearance to those borrowers. Private Education Loans in forbearance decreased to $797 million or 3.9% of the portfolio at March 31, 2021, after peaking at $3.4 billion or 14.7% during the second quarter of 2020 due to the COVID-19 forbearance granted to borrowers. This compared to $604 million or 2.7% of the portfolio at December 31, 2019, prior to the impact of COVID-19. Despite the COVID-19 crisis, we have seen most borrowers continue to make payments according to their payment plans. And while forbearance rates are slightly higher today than they were pre-pandemic, the balance of loans delinquent has declined – our Private Education Loan delinquency rate declined from 4.6% at December 31, 2019 to 2.6% as of December 31, 2020 and further to 2.3% as of March 31, 2021. Our Private Education Loan charge-offs declined 49% to $184 million for the full year of 2020 compared with $364 million in full year 2019. This decline was due to the strength of the economy heading into March 2020 as well as a result of the COVID-19 forbearance granted to borrowers. We see this continued decline with charge offs of $35 million in first-quarter 2021 compared to $68 million in the year-ago quarter. We do expect defaults to begin to increase in 2021 and 2022 given the default timing impact of the use of forbearance which our allowance for loan losses captures. Our total reserves were $1.73 billion (excluding the expected future recoveries on charged-off loans) at March 31, 2021, which represent reserves equal to 7.0% of our Private Education Loans and 0.5% of our FFELP Loan portfolio. While we are paying close attention to the needs of our customers, it is too early to know the full impact of this crisis or the path and timing of the recovery.

In the first quarter of 2020, our Private Education Refinance Loan originations of $1.9 billion represented a 92% increase over the year-ago quarter. With the onset of the crisis in March 2020, we reduced our marketing efforts and tightened credit until we had greater visibility into the uncertainty and volatility in the capital markets and the overall economic outlook. This resulted in second-quarter 2020 originations of $238 million. With improved visibility in both credit and funding costs, we restarted marketing efforts in the third quarter of 2020 and increased third-quarter and fourth-quarter originations to $1.3 billion and $1.1 billion, respectively. Total originations were $4.6 billion in 2020 compared to $4.9 billion in 2019. First-quarter 2021 originations were $1.7 billion. We expect 2021 originations to be higher than 2020 if the economy continues to improve.

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Clients and Business Processing Segment Performance

In our Business Processing Segment (BPS), EBITDA ⁽¹⁾ increased to $36 million from $4 million in the year-ago quarter. This increase is a result of being able to transition hundreds of our experienced BPS colleagues and adapt our technology enabled solutions to support state clients working to help residents access unemployment benefits implemented in the CARES Act, as well as to perform contact tracing and vaccine administration services. These new services have generated revenue in 2020 and the first quarter of 2021 that more than offset the negative revenue impact BPS is experiencing as a result of COVID-19 which includes lower transaction-related placements in both government services and health care revenue cycle management. In 2021, we expect the revenue from the unemployment contracts related to the CARES Act and contact tracing and vaccine administration contracts to decline as the economy recovers and the need decreases. We also expect revenue from the core parts of the business to continue to improve to pre-COVID-19 levels if the economy continues to improve.

Liquidity, Financings and Capital

The impact of the COVID-19 crisis on the capital markets was significant during the early part of the crisis, decreasing the number of transactions brought to market and increasing the pricing of those that were successfully marketed. However, in the second half of 2020 the capital markets began to improve with ready access to the markets, albeit at a higher cost than pre-COVID-19 levels. In first-quarter 2021, we issued $500 million of unsecured debt and $2.8 billion of ABS below pre-COVID-19 cost of funds levels. Throughout the crisis we have maintained a strong liquidity position. As of March 31, 2021, we had $2.7 billion of primary sources of liquidity, $1.5 billion of which was cash. We also had, as of March 31, 2021, additional capacity in our funding facilities of $2.8 billion for Private Education Loans and $826 million for FFELP Loans. In addition, cash flow from our loan portfolio and services contracts remains strong as our very seasoned loan portfolio experiences lower levels of stress.

We ended the quarter with an Adjusted Tangible Equity Ratio ⁽¹⁾ of 6.2% compared to 5.0% as of December 31,2020. In 2020, our GAAP equity was reduced due to the implementation of CECL on January 1, 2020 as well as a result of the net mark-to-market losses related to derivative accounting as a result of the significant decrease in interest rates.  These mark-to-market losses recognized under GAAP cumulatively totaled $499 million (after tax) as of March 31, 2021. This decrease will reverse over time as these derivatives mature. The resulting Pro forma Adjusted Tangible Equity Ratio ⁽¹⁾ , which excludes these cumulative mark-to-market losses, was 8.1% at March 31, 2021. We expect our capital levels to continue to rebuild over the course of 2021.

Other Matters

From an accounting, reporting and disclosure perspective, COVID-19 and the related work-from-home policies did not negatively impact our ability to close our books, manage our financial systems, or maintain our internal control over financial reporting and our disclosure controls and procedures. See “Critical Accounting Policies and Estimates” in our 2020 Form 10-K for a discussion of how COVID-19 impacted our allowance for loan loss and our conclusion of goodwill not being impaired.

We have successfully implemented our business continuity plans in response to COVID-19. We do not foresee requiring material expenditures to continue to operate in a work-from-home environment nor do we expect material expenditures to return to work in the office. We do not anticipate a material adverse impact of COVID-19 on our supply chain and we do not expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues. We have not been adversely impacted by travel restrictions and border closures nor do we anticipate that our operations will be materially impacted by any constraints on our human capital resources and productivity.

⁽¹⁾ Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Results of Operations

GAAP Income Statements (Unaudited)

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Comparison of First-Quarter 2021 Results with First-Quarter 2020

For the three months ended March 31, 2020, net income was $370 million, or $2.00 diluted earnings per common share, compared with a net loss of $106 million, or $0.53 diluted loss per common share, for the year-ago period.

The primary contributors to the change in net income are as follows:

There was not a significant change in the credit quality of the loan portfolio or in the current and forecasted economic conditions since December 31, 2020. The negative provision of $(87) million in the first quarter of 2021 was primarily related to the reversal of $102 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans discussed below. This was partially offset by provision related to loan originations. The provision in the year-ago quarter primarily related to an increase in expected losses due to COVID-19’s negative impact on the current and forecasted economic conditions that occurred subsequent to the adoption of CECL on January 1, 2020

We repurchased 8.2 million and 23.0 million shares of our common stock during the first quarters of 2021 and 2020, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 15 million common shares (or 8%) from the year-ago period.

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Segment Results

Federal Education Loans Segment

The following table presents Core Earnings results for our Federal Education Loans segment.

Comparison of First-Quarter 2021 Results with First-Quarter 2020

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Key performance metrics are as follows:

Net Interest Margin

The following table details the net interest margin.

⁽¹⁾ The average balances of the interest-earning assets for the respective periods are:

As of March 31, 2021, our FFELP Loan portfolio totaled $56.9 billion, comprised of $19.2 billion of FFELP Stafford Loans and $37.7 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of March 31, 2021 was 6 years and 7 years, respectively, assuming a Constant Prepayment Rate (CPR) of 9% and 5%, respectively.

Floor Income

The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn Floor Income after March 31, 2021 and 2020, based on interest rates as of those dates.

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The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period April 1, 2021 to December 31, 2025.

Provision for Loan Losses

The provision for FFELP Loan Losses was $0 in first-quarter 2021, down $6 million from the year-ago quarter.

Servicing Revenue

The Company services loans for approximately 5.6 million and 5.6 million customer accounts under its ED servicing contract as of March 31, 2021 and 2020, respectively. Third-party loan servicing fees in the three months ended March 31, 2021 and 2020 included $34 million and $36 million, respectively, of servicing revenue related to the ED servicing contract.

Asset Recovery and Business Processing Revenue

Asset recovery and business processing revenue decreased $39 million primarily as a result of the wind-down of the ED asset recovery contract as well as the impact of COVID-19 on certain collection and processing activities (temporary stoppage or other restrictions on certain activities).

Other Revenue

Other revenue decreased $4 million primarily as a result of the wind-down of certain transition services provided.

Operating Expenses

Expenses were $20 million lower primarily as a result of the decrease in asset recovery revenue discussed above as well as improvements in operating efficiencies.

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Consumer Lending Segment

The following table presents Core Earnings results for our Consumer Lending segment.

Comparison of First-Quarter 2021 Results with First-Quarter 2020

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Key performance metrics are as follows:

Net Interest Margin

The following table details the net interest margin.

As of March 31, 2021, our Private Education Loan portfolio totaled $19.7 billion. The weighted-average life of this portfolio as of March 31, 2021 was 5 years assuming a CPR of 11%.

Provision for Loan Losses

The provision for loan losses decreased from $89 million to $(87) million. There was not a significant change in the credit quality of the education loan portfolio or in the current and forecasted economic conditions since December 31, 2020. The negative provision of $(87) million in the first quarter of 2021 was primarily related to the reversal of $102 million of allowance for loan losses in connection with the sale of approximately $1.6 billion of Private Education Loans discussed below. This was partially offset by provision related to loan originations. The provision in the year-ago quarter primarily related to an increase in expected losses due to COVID-19’s negative impact on the current and forecasted economic conditions that occurred subsequent to the adoption of CECL on January 1, 2020.

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Gains on Sales of Loans

Gains on sales of education loans were $89 million in connection with the sale of approximately $1.6 billion of Private Education Loans in first-quarter 2021. There were no such sales in the year-ago quarter. The sales of Private Education Loans were comprised of two separate transactions:

^○ Approximately $560 million of non-Refinance Loans, resulting in a $46 million gain on sale; and

^○ Approximately $1.03 billion of Refinance Loans, resulting in a $43 million gain on sale.

Operating Expenses

Operating expenses were $2 million higher Primarily related to increased marketing spend.

Business Processing Segment

The following table presents Core Earnings results for our Business Processing segment.

Comparison of First-Quarter 2021 Results with First-Quarter 2020

Key performance metrics are as follows:

⁽¹⁾ Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.”

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Other Segment

The following table presents Core Earnings results for our Other segment.

Net Interest Loss after Provision for Loan Losses

Net interest loss after provision for loan losses is due to the negative carrying cost of our corporate liquidity portfolio. The decrease in the net interest loss is primarily a result of a decrease in the cost of funds of the debt funding the corporate liquidity portfolio.

Unallocated Shared Services Expenses

Unallocated shared services expenses are comprised of costs primarily related to information technology costs related to infrastructure and operations, stock-based compensation expense, accounting, finance, legal, compliance and risk management, regulatory-related expenses, human resources, certain executive management and the board of directors. Regulatory-related expenses include actual settlement amounts as well as third-party professional fees we incur in connection with such regulatory matters and are presented net of any insurance reimbursements for covered costs related to such matters. On an adjusted basis, expenses decreased $12 million from the year-ago quarter. Adjusted expenses exclude $8 million and $7 million, respectively, of regulatory-related expenses in the first quarters of 2021 and 2020.

See “Note 9 – Commitments, Contingencies and Guarantees” for a discussion of legal and regulatory matters where it is reasonably possible that a loss contingency exists. The Company is unable to anticipate the timing of a resolution or the impact that these matters may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.

Restructuring/Other Reorganization Expenses

During the first quarters of 2021 and 2020, the Company incurred $6 million and $5 million, respectively, of restructuring/other reorganization expenses in connection with an effort to reduce costs and improve operating efficiency. The charges were due primarily to facility lease terminations and severance-related costs.

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Financial Condition

This section provides information regarding the balances, activity and credit performance metrics of our education loan portfolio.

Summary of Our Education Loan Portfolio

Ending Education Loan Balances, net

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Education Loan Activity

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FFELP Loan Portfolio Performance

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Private Education Loan Portfolio Performance

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Allowance for Loan Losses

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Liquidity and Capital Resources

Funding and Liquidity Risk Management

The following “Liquidity and Capital Resources” discussion concentrates primarily on our Federal Education Loans and Consumer Lending segments. Our Business Processing and Other segments require minimal liquidity and funding. See “Navient’s Response to COVID-19” for a discussion of COVID-19’s impact on liquidity and capital resources.

We define liquidity as cash and high-quality liquid assets that we can use to meet our cash requirements. Our two primary liquidity needs are: (1) servicing our debt and (2) our ongoing ability to meet our cash needs for running the operations of our businesses (including derivative collateral requirements) throughout market cycles, including during periods of financial stress. Secondary liquidity needs, which can be adjusted as needed, include the origination of Private Education Loans, acquisitions of Private Education Loan and FFELP Loan portfolios, acquisitions of companies, the payment of common stock dividends and the repurchase of our common stock. To achieve these objectives, we analyze and monitor our liquidity needs and maintain excess liquidity and access to diverse funding sources including the issuance of unsecured debt and the issuance of secured debt primarily through asset-backed securitizations and/or other financing facilities.

We define our liquidity risk as the potential inability to meet our obligations when they become due without incurring unacceptable losses or to invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risk relates to our ability to service our debt, meet our other business obligations and to continue to grow our business. The ability to access the capital markets is impacted by general market and economic conditions, our credit ratings, as well as the overall availability of funding sources in the marketplace. In addition, credit ratings may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions, including over-the-counter derivatives.

Credit ratings and outlooks are opinions subject to ongoing review by the ratings agencies and may change, from time to time, based on our financial performance, industry and market dynamics and other factors. Other factors that influence our credit ratings include the ratings agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, reputation, liquidity position, the level and volatility of earnings, corporate governance and risk management policies, capital position and capital management practices. A negative change in our credit rating could have a negative effect on our liquidity because it might raise the cost and availability of funding and potentially require additional cash collateral or restrict cash currently held as collateral on existing borrowings or derivative collateral arrangements. It is our objective to improve our credit ratings so that we can continue to efficiently access the capital markets even in difficult economic and market conditions. We have unsecured debt totaling $8.8 billion at March 31, 2021. Three credit rating agencies currently rate our long-term unsecured debt at below investment grade.

We expect to fund our ongoing liquidity needs, including the repayment of $1.4 billion of senior unsecured notes that mature in the short term (i.e., over the next 12 months, of which $627 million was retired in April 2021) and the remaining $7.4 billion of senior unsecured notes that mature in the long term (from 2022 to 2043 with 85% maturing by 2029), primarily through our current cash, investments and unencumbered FFELP Loan and Private Education Refinance Loan portfolios (see “Sources of Liquidity” below), the predictable operating cash flows provided by operating activities ($179 million in the three months ended March 31, 2021), the repayment of principal on unencumbered education loan assets, and the distribution of overcollateralization from our securitization trusts. We may also, depending on market conditions and availability, draw down on our secured FFELP Loan and Private Education Loan facilities, issue term ABS, enter into additional Private Education Loan ABS repurchase facilities, or issue additional unsecured debt.

We originate Private Education Loans. We also have purchased and may purchase, in future periods, Private Education Loan and FFELP Loan portfolios from third parties. Those originations and purchases are part of our ongoing liquidity needs. We purchased 8.2 million shares of common stock for $100 million in first-quarter 2021. We had $500 million of remaining share repurchase authority as of March 31, 2021.

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Sources of Primary Liquidity

Sources of Additional Liquidity

Liquidity may also be available under our secured credit facilities. Maximum borrowing capacity under the FFELP Loan and Private Education Loan asset-backed commercial paper (ABCP) facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered loans. The following tables detail additional borrowing capacity of these facilities with maturity dates ranging from June 2021 to April 2023.

At March 31, 2021, we had a total of $6.1 billion of unencumbered tangible assets inclusive of those listed in the table above as sources of primary liquidity. Total unencumbered education loans comprised $3.0 billion principal of our unencumbered tangible assets of which $2.8 billion and $0.3 billion related to Private Education Loans and FFELP Loans, respectively. In addition, as of March 31, 2021, we had $5.8 billion of encumbered net assets (i.e., overcollateralization) in our various financing facilities (consolidated variable interest entities). Since the fourth quarter of 2015, we have closed on $4.3 billion of Private Education Loan ABS Repurchase Facilities with $0.8 billion outstanding as of March 31, 2021. These repurchase facilities are collateralized by Residual Interests in previously issued Private Education Loan ABS trusts. These repurchase facilities are collateralized by Residual Interests in previously issued Private Education Loan ABS trusts. These are examples of how we can effectively finance previously encumbered assets to generate additional liquidity in addition to the unencumbered assets we traditionally have encumbered in the past. Additionally, these repurchase facilities had a cost of funds lower than that of a new unsecured debt issuance.

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The following table reconciles encumbered and unencumbered assets and their net impact on total Tangible Equity.

Borrowings

Ending Balances

Average Balances

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Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). A discussion of our critical accounting policies, which includes the allowance for loan losses, goodwill, and premium and discount amortization, can be found in our 2020 Form 10-K. There were no significant changes to these critical accounting policies during the three months ended March 31, 2021.

Non-GAAP Financial Measures

In addition to financial results reported on a GAAP basis, Navient also provides certain performance measures which are non-GAAP financial measures.  We present the following non-GAAP financial measures: (1) Core Earnings, (2) Adjusted Tangible Equity Ratio and (3) EBITDA for the Business Processing segment.

1.   Core Earnings

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide certain Core Earnings disclosures in the notes to our consolidated financial statements for our business segments.

Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed below, that can create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the two items we remove to result in our Core Earnings presentations are:

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.

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The following tables show Core Earnings for each reportable segment and our business as a whole along with the adjustments made to the income/expense items to reconcile the amounts to our reported GAAP results as required by GAAP and reported in “Note 12 — Segment Reporting.”

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The following discussion summarizes the differences between Core Earnings and GAAP net income and details each specific adjustment required to reconcile our Core Earnings segment presentation to our GAAP earnings.

(1) Derivative Accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP, as well as the periodic mark-to-market gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. Under GAAP, for our derivatives that are held to maturity, the mark-to-market gain or loss over the life of the contract will equal $0 except for Floor Income Contracts, where the mark-to-market gain will equal the amount for which we originally sold the contract. In our Core Earnings presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. The gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” and interest expense (for qualifying fair value hedges) are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts, basis swaps and at times, certain other LIBOR swaps do not qualify for hedge accounting treatment and the stand-alone derivative is adjusted to fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item.

Our Floor Income Contracts are written options that must meet more stringent requirements than other hedging relationships to achieve hedge effectiveness. Specifically, our Floor Income Contracts do not qualify for hedge accounting treatment because the pay down of principal of the education loans underlying the Floor Income embedded in those education loans does not exactly match the change in the notional amount of our written Floor Income Contracts. Additionally, the term, the interest rate index, and the interest rate index reset frequency of the Floor Income Contract can be different than that of the education loans. Under derivative accounting treatment, the upfront contractual payment is deemed a liability and changes in fair value are recorded through income throughout the life of the contract. The change in the fair value of Floor Income Contracts is primarily caused by changing interest rates that cause the amount of Floor Income paid to the counterparties to vary. This is economically offset by the change in the amount of Floor Income earned on the underlying education loans but that offsetting change in fair value is not recognized. We believe the Floor Income Contracts are economic hedges because they effectively fix the amount of Floor Income earned over the contract period, thus eliminating the timing and uncertainty that changes in interest rates can have on Floor Income for that period. Therefore, for purposes of Core Earnings, we have removed the mark-to-market gains and losses related to these contracts and added back the amortization of the net contractual premiums received on the Floor Income Contracts. The amortization of the net contractual premiums received on the Floor Income Contracts for Core Earnings is reflected in education loan interest income. Under GAAP accounting, the premiums received on the Floor Income Contracts are recorded as revenue in the “gains (losses) on derivative and hedging activities, net” line item by the end of the contracts’ lives.

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Basis swaps are used to convert floating rate debt from one floating interest rate index to another to better match the interest rate characteristics of the assets financed by that debt. We primarily use basis swaps to hedge our education loan assets that are primarily indexed to LIBOR or Prime. The accounting for derivatives requires that when using basis swaps, the change in the cash flows of the hedge effectively offset both the change in the cash flows of the asset and the change in the cash flows of the liability. Our basis swaps hedge variable interest rate risk; however, they generally do not meet this effectiveness test because the index of the swap does not exactly match the index of the hedged assets as required for hedge accounting treatment. Additionally, some of our FFELP Loans can earn at either a variable or a fixed interest rate depending on market interest rates and therefore swaps economically hedging these FFELP Loans do not meet the criteria for hedge accounting treatment. As a result, under GAAP, these swaps are recorded at fair value with changes in fair value reflected currently in the income statement.

The table below quantifies the adjustments for derivative accounting between GAAP and Core Earnings net income.

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Cumulative Impact of Derivative Accounting under GAAP compared to Core Earnings

As of March 31, 2021, derivative accounting has decreased GAAP equity by approximately $499 million as a result of cumulative net mark-to-market losses (after tax) recognized under GAAP, but not in Core Earnings. The following table rolls forward the cumulative impact to GAAP equity due to these after-tax mark-to-market net gains and losses related to derivative accounting.

⁽²⁾ See “Core Earnings derivative adjustments” table above.

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Hedging Embedded Floor Income

Net Floor premiums received on Floor Income Contracts that have not been amortized into Core Earnings as of the respective period-ends are presented in the table below. These net premiums will be recognized in Core Earnings in future periods. As of March 31, 2021, the remaining term of the Floor Income Contracts was approximately 2 years. Historically, we have sold Floor Income Contracts on a periodic basis and depending upon market conditions and pricing, we may enter into additional Floor Income Contracts in the future. The balance of unamortized Floor Income Contracts will increase as we sell new contracts and decline due to the amortization of existing contracts.

In addition to using Floor Income Contracts, we also use pay-fixed interest rate swaps to hedge the embedded Floor Income within FFELP Loans. These interest rate swaps qualify as GAAP hedges and are accounted for as cash flow hedges of variable rate debt. For GAAP, gains and losses on these hedges are recorded in accumulated other comprehensive income. Hedged Floor Income from these cash flow hedges that has not been recognized into Core Earnings and GAAP as of the respective period-ends is presented in the table below. This hedged Floor Income will be recognized in Core Earnings and GAAP in future periods and is presented net of tax. As of March 31, 2021, the remaining term of these pay-fixed interest rate swaps was approximately 6 years. Historically, we have used pay-fixed interest rate swaps on a periodic basis to hedge embedded Floor Income and depending upon market conditions and pricing, we may enter into swaps in the future. The balance of unrecognized hedged Floor Income will increase as we enter into new swaps and decline as revenue is recognized

(2) Goodwill and Acquired Intangible Assets: Our Core Earnings exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments.

Adjusted Core Earnings

Adjusted Core Earnings net income and adjusted Core Earnings operating expenses exclude restructuring and regulatory-related expenses. Management excludes these expenses as it is one of the measures we review internally when making management decisions regarding our performance and how we allocate resources, as this presentation is a useful basis for management and investors to further analyze Core Earnings. We also refer to this information in our presentations with credit rating agencies, lenders and investors.

The following table summarizes these expenses which are excluded:

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2.   Adjusted Tangible Equity Ratio

Adjusted Tangible Equity Ratio measures the ratio of Navient’s Tangible Equity to its tangible assets. We adjust this ratio to exclude the assets and equity associated with our FFELP portfolio because FFELP Loans are no longer originated and the FFELP portfolio bears a 3% maximum loss exposure under the terms of the federal guaranty. Management believes that excluding this portfolio from the ratio enhances its usefulness to investors. Management uses this ratio, in addition to other metrics, for analysis and decision making related to capital allocation decisions. The Adjusted Tangible Equity Ratio is calculated as:

3.   Earnings before Interest, Taxes, Depreciation and Amortization Expense (EBITDA)

This measures the operating performance of the Business Processing segment and is used by management and equity investors to monitor operating performance and determine the value of those businesses.  EBITDA for the Business Processing segment is calculated as:

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Legal Proceedings

For a discussion of legal matters as of March 31, 2021, please refer to “Note 9 – Commitments and Contingencies” to our consolidated financial statements included in this report, which is incorporated into this item by reference.

Risk Factors

The risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “Form 10-K”) should be considered together with information included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2021. These are not the only risks to which we are exposed. The following information amends and restates in its entirety the previously disclosed risk factor in our Form 10-K relating to the transition away from the LIBOR reference rate. Except for such additional information, we believe there have been no material changes from the risk factors previously disclosed in our Form 10-K.

The transition away from the LIBOR reference rate to an alternative reference rate may create uncertainty in the capital markets and may negatively impact the value of existing LIBOR based financial instruments.

The London Interbank Offered Rate, or LIBOR, has historically served as a global benchmark for determining interest rates on commercial and consumer loans, bonds, derivatives and numerous other financial instruments. LIBOR is the reference rate for most of our student loans, bonds, asset-backed securities (ABS), other financing facilities, and derivatives (financial instruments). On July 27, 2017, the Chief Executive Officer of the United Kingdom Financial Conduct Authority (FCA) announced that by the end of 2021, LIBOR would no longer be sustained through the FCA’s efforts to compel banks’ participation in setting the benchmark. The FCA’s original intention was that after 2021, it will no longer be necessary for the FCA to ask, or to require, banks to submit contributions to LIBOR. On March 5, 2021, the ICE Benchmark Administration Limited (the “IBA”), which took over administration of LIBOR on February 1, 2014, published the results of a consultation confirming its intention to cease the publication of (i) EUR, CHF, JPY and GBP LIBOR for all tenors and one-week and two-month U.S. Dollar LIBOR immediately following the publication of such rates on December 31, 2021, and (ii) the remaining U.S. Dollar LIBOR rates, including one-month and three-month LIBOR, immediately following the publication of such rates on June 30, 2023. Also on March 5, 2021, FCA announced that it does not intend to sustain LIBOR by requiring panel banks to continue providing quotations of LIBOR beyond the dates for which they have notified their departure from IBA’s LIBOR quotation scheme, or to require IBA to publish LIBOR beyond such dates. As a result, immediately after December 31, 2021 and June 30, 2023, respectively, LIBOR will no longer be representative of the underlying market and economic reality that the rates are intended to measure. As of December 31, 2021, we had approximately $200 billion notional of financial instruments indexed to LIBOR. Most of these financial instruments do not include provisions clearly specifying a method for transitioning from LIBOR to an alternative benchmark rate, and it is not yet known how courts or regulators will view the transition away from LIBOR to an alternative benchmark rate. As a result, it is difficult to predict the impact that a cessation of LIBOR would have on the value and performance of our existing financial instruments. These uncertainties regarding the possible cessation of LIBOR or their resolution could have a material adverse impact on our funding costs, net interest margin, loan and other asset values, asset-liability management strategies, and other aspects of our business and financial results.

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Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity Analysis

Our interest rate risk management seeks to limit the impact of short-term movements in interest rates on our results of operations and financial position. The following tables summarize the potential effect on earnings over the next 12 months and the potential effect on fair values of balance sheet assets and liabilities at March 31, 2021 and 2020, based upon a sensitivity analysis performed by management assuming a hypothetical increase and decrease in market interest rates of 100 basis points. The earnings sensitivities assume an immediate increase and decrease in market interest rates of 100 basis points and are applied only to financial assets and liabilities, including hedging instruments, that existed at the balance sheet date and do not take into account any new assets, liabilities or hedging instruments that may arise over the next 12 months. There is the possibility that the Federal Reserve may use negative interest rates if economic conditions warrant which could potentially affect the success of our asset and liability management activities and negatively affect our financial condition and results of operations.

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A primary objective in our funding is to minimize our sensitivity to changing interest rates by generally funding our floating rate education loan portfolio with floating rate debt and our fixed rate education loan portfolio with fixed rate debt although we can have a mismatch at times. In addition, we can have a mismatch in the index (including the frequency of reset) of floating rate debt versus floating rate assets. In addition, due to the ability of some FFELP Loans to earn Floor Income, we can have a fixed versus floating mismatch in funding if the education loan earns at the fixed borrower rate and the funding remains floating. During 2021 and 2020, certain FFELP Loans were earning Floor Income and we locked in a portion of that Floor Income through the use of derivative contracts. The result of these hedging transactions was to fix the relative spread between the education loan asset rate and the variable rate liability.

In the preceding tables, under the scenario where interest rates increase or decrease by 100 basis points, the change in pre-tax net income before the mark-to-market gains (losses) on derivative and hedging activities is primarily due to the impact of (i) our unhedged FFELP Loans being in a fixed-rate mode due to Floor Income, while being funded with variable rate debt in low interest rate environments; and (ii) a portion of our variable rate assets being funded with fixed rate liabilities. Item (i) will generally cause income to decrease when interest rates increase and income to increase when interest rates decrease. Item (ii) has the opposite effect. The increase and decrease in income in both periods when interest rates increase and decrease 100 basis points is due primarily to item (i) above. The relative changes in the impacts between 2021 and 2020 related to a decrease in interest rates are primarily a result of interest rates being significantly lower in 2021 compared to 2020.

In the preceding tables, under the scenario where interest rates increase or decrease by 100 basis points, the change in mark-to-market gains (losses) on derivative and hedging activities in 2021 and 2020 is primarily due to (i) the notional amount and remaining term of our derivative portfolio and related hedged debt and (ii) the interest rate environment. In 2021 and 2020 the mark to market gains (losses) are primarily related to derivatives that don’t qualify for hedge accounting that are used to economically hedge Floor Income as well as the origination of fixed rate Private Education Refinance loans. As a result of not qualifying for hedge accounting there is not an offsetting mark to market of the hedged item in this analysis. The mark to market gains (losses) where interest rates increase and decrease

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100 basis points are lower in 2021 than 2020 primarily as a result of a decline in the notional amount of derivatives outstanding in connection with the decrease in the education loan portfolio over that time period.

In addition to interest rate risk addressed in the preceding tables, we are also exposed to risks related to foreign currency exchange rates. Foreign currency exchange risk is primarily the result of foreign currency denominated debt issued by us. When we issue foreign denominated corporate unsecured and securitization debt, our policy is to use cross currency interest rate swaps to swap all foreign currency denominated debt payments (fixed and floating) to U.S. dollar LIBOR using a fixed exchange rate. In the tables above, there would be an immaterial impact on earnings if exchange rates were to decrease or increase, due to the terms of the hedging instrument and hedged items matching. The balance sheet interest bearing liabilities would be affected by a change in exchange rates; however, the change would be materially offset by the cross-currency interest rate swaps in other assets or other liabilities. In certain economic environments, volatility in the spread between spot and forward foreign exchange rates has resulted in mark-to-market impacts to current-period earnings which have not been factored into the above analysis. The earnings impact is noncash, and at maturity of the instruments the cumulative mark-to-market impact will be zero. Navient has not issued foreign currency denominated debt since 2008.

Asset and Liability Funding Gap

The tables below present our assets and liabilities (funding) arranged by underlying indices as of March 31, 2021. In the following GAAP presentation, the funding gap only includes derivatives that qualify as effective hedges (those derivatives which are reflected in net interest margin, as opposed to those reflected in the “gains (losses) on derivatives and hedging activities, net” line on the consolidated statements of income). The difference between the asset and the funding is the funding gap for the specified index. This represents our exposure to interest rate risk in the form of basis risk and repricing risk, which is the risk that the different indices may reset at different frequencies or may not move in the same direction or at the same magnitude.

Management analyzes interest rate risk and in doing so includes all derivatives that are economically hedging our debt whether they qualify as effective hedges or not (Core Earnings basis). Accordingly, we are also presenting the asset and liability funding gap on a Core Earnings basis in the table that follows the GAAP presentation.

GAAP Basis:

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Core Earnings Basis:

We use interest rate swaps and other derivatives to achieve our risk management objectives. Our asset liability management strategy is to match assets with debt (in combination with derivatives) that have the same underlying index and reset frequency or, when economical, have interest rate characteristics that we believe are highly correlated. Interest earned on our FFELP Loans is primarily indexed to daily one-month LIBOR and our cost of funds is primarily indexed to rates other than daily one-month LIBOR. A source of variability in FFELP net interest income could also be Floor Income we earn on certain FFELP Loans. Pursuant to the terms of the FFELP, certain FFELP Loans can earn interest at the stated fixed rate of interest as underlying debt interest rate expense remains variable. We refer to this additional spread income as “Floor Income.” Floor Income can be volatile since it is dependent on interest rate levels. We frequently hedge this volatility with derivatives which lock in the value of the Floor Income over the term of the contract. Interest earned on our Private Education Refinance Loans is generally fixed rate with the related cost of funds generally fixed rate as well. Interest earned on the remaining Private Education Loans is generally indexed to either one-month Prime or LIBOR rates and our cost of funds is primarily indexed to one-month or three-month LIBOR. The use of funding with index types and reset frequencies that are different from our assets exposes us to interest rate risk in the form of basis and repricing risk. This could result in our cost of funds not moving in the same direction or with the same magnitude as the yield on our assets. While we believe this risk is low, as all of these indices are short-term with rate movements that are highly correlated over a long period of time, market disruptions (which have occurred in prior years) can lead to a temporary divergence between indices resulting in a negative impact to our earnings.

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Unregistered Sales of Equity Securities and Use of Proceeds

Share Repurchases

The following table provides information relating to our purchases of shares of our common stock in the three months ended March 31, 2021.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive and Principal Financial Officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2021. Based on this evaluation, our Principal Executive and Principal Financial Officers concluded that, as of March 31, 2021, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) accumulated and communicated to our management, including our Principal Executive and Principal Financial Officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Exhibits

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Financial Statements

NAVIENT CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)

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

See accompanying notes to consolidated financial statements.

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NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

See accompanying notes to consolidated financial statements.

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NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share amounts)

(Unaudited)

See accompanying notes to consolidated financial statements.

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NAVIENT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

See accompanying notes to consolidated financial statements.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 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 months ended March 31, 2021 are not necessarily indicative of the results for the year ending December 31, 2020 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, 2020 (the 2020 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 2020 Form 10-K.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses

Allowance for Loan Losses Metrics

		Three Months Ended March 31, 2021
(Dollars in millions)		FFELP Loans				Private Education Loans				Total
Allowance at beginning of period		$	288			$	1,089			$	1,377
Provision:
Reversal of allowance related to loan sales (1)			—				( 102	)			( 102	)
Remaining provision			—				15				15
Total provision			—				( 87	)			( 87	)
Charge-offs (2)			( 6	)			( 35	)			( 41	)
Decrease in expected future recoveries on charged-off loans (3)			—				25				25
Allowance at end of period			282				992				1,274
Plus: expected future recoveries on charged-off loans (3)			—				454				454
Allowance at end of period excluding expected future recoveries on charged-off loans (4)		$	282			$	1,446			$	1,728
Charge-offs as a percentage of average loans in repayment (annualized)			.06	%			.68	%
Allowance coverage of charge-offs (annualized) (4)			10.7				10.2
Allowance as a percentage of the ending total loan balance (4)			.5	%			7.0	%
Allowance as a percentage of ending loans in repayment (4)			.6	%			7.4	%
Ending total loans		$	57,155			$	20,734
Average loans in repayment		$	47,044			$	20,883
Ending loans in repayment		$	45,922			$	19,480

(1)	In connection with the sale of approximately $ 1.6 billion of Private Education Loans.

( 2 )

Charge-offs are reported net of expected recoveries. For Private Education Loans, at the time of charge-off, the expected recovery amount is transferred from the education loan balance to the allowance for loan loss and is referred to as the expected future recoveries on charged-off loans. For FFELP Loans, the recovery is received at the time of charge-off.

( 3 )

At the end of each month, for Private Education 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 as the “expected future recoveries on 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 expected future recoveries for charged-off 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 following table summarizes the activity in the expected future recoveries on charged-off loans:

		Three Months Ended March 31,
(Dollars in millions)		2021
Beginning of period expected recoveries		$	479
Expected future recoveries of current period defaults			5
Recoveries			( 25	)
Charge-offs			( 5	)
End of period expected recoveries		$	454
Change in balance during period		$	( 25	)

( 4 )

The allowance used for these metrics excludes the expected future recoveries on charged-off loans to better reflect the current expected credit losses remaining in the portfolio.

50

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

		Three Months Ended March 31, 2020
(Dollars in millions)		FFELP Loans				Private Education Loans				Other Loans
Allowance as of December 31, 2019		$	64			$	1,048			$	1,112
Transition adjustment made under CECL on January 1, 2020 (1)			260				( 3	)			257
Allowance as of January 1, 2020 after transition adjustment to CECL			324				1,045				1,369
Total provision			6				89				95
Charge-offs (2)			( 19	)			( 68	)			( 87	)
Decrease in expected future recoveries on charged-off loans (3)			—				17				17
Allowance at end of period			311				1,083				1,394
Plus: expected future recoveries on charged-off loans (3)			—				571				571
Allowance at end of period excluding expected future recoveries on charged-off loans (4)		$	311			$	1,654			$	1,965
Charge-offs as a percentage of average loans in repayment (annualized)			.15	%			1.27	%
Allowance coverage of charge-offs (annualized) (4)			4.1				6.0
Allowance as a percentage of the ending total loan balance (4)			.5	%			7.1	%
Allowance as a percentage of ending loans in repayment (4)			.6	%			7.8	%
Ending total loans		$	62,803			$	23,421
Average loans in repayment		$	52,460			$	21,601
Ending loans in repayment		$	50,514			$	21,235

(1)	For a further discussion of our adoption of CECL, see “Note 2 – Significant Accounting Policies” in our 2020 Annual Report on Form 10-K.

( 2 )

Charge-offs are reported net of expected recoveries. For Private Education Loans, at the time of charge-off, the expected recovery amount is transferred from the education loan balance to the allowance for loan loss and is referred to as the expected future recoveries on charged-off loans. For FFELP Loans, the recovery is received at the time of charge-off.

( 3 )

At the end of each month, for Private Education 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 as the “expected future recoveries on 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 expected future recoveries for charged-off 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 following table summarizes the activity in the expected future recoveries on charged-off loans:

		Three Months Ended March 31,
(Dollars in millions)		2020
Beginning of period expected recoveries		$	588
Expected future recoveries of current period defaults			13
Recoveries			( 28	)
Charge-offs			( 2	)
End of period expected recoveries		$	571
Change in balance during period		$	( 17	)

( 4 )

The allowance used for these metrics excludes the expected future recoveries on charged-off loans to better reflect the current expected credit losses remaining in the portfolio.

51

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

Troubled Debt Restructurings (“TDRs”)

We sometimes modify the terms of loans 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 73 % and 72 % of the loans granted forbearance have qualified as a TDR loan at March 31, 2021 and December 31, 2020, respectively. The unpaid principal balance of TDR loans that were in an interest rate reduction program as of March 31, 2021 and December 31, 2020 was $ 831 million and $ 948 million, respectively.

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.

		Three Months Ended March 31,
(Dollars in millions)		2021				2020
Modified loans		$	40			$	95
Charge-offs		$	26			$	58
Payment default		$	5			$	21

52

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

Key Credit Quality Indicators

We assess and determine the collectability of our education loan portfolios by evaluating certain risk characteristics we refer to as key credit quality indicators. Key credit quality indicators are incorporated into the allowance for loan losses calculation.

FFELP Loans

FFELP Loans are substantially insured and guaranteed as to their principal and accrued interest in the event of default. The key credit quality indicators are loan status and loan type.

		FFELP Loan Delinquencies
		March 31, 2021								December 31, 2020								March 31, 2020
(Dollars in millions)		Balance				%				Balance				%				Balance				%
Loans in-school/grace/deferment (1)		$	2,781							$	2,791							$	3,291
Loans in forbearance (2)			8,452								7,725								8,998
Loans in repayment and percentage of each status:
Loans current			42,127				91.7	%			43,623				90.8	%			45,216				89.5	%
Loans delinquent 31-60 days (3)			1,377				3.0				1,374				2.9				1,631				3.2
Loans delinquent 61-90 days (3)			813				1.8				836				1.7				969				1.9
Loans delinquent greater than 90 days (3)			1,605				3.5				2,223				4.6				2,698				5.4
Total FFELP Loans in repayment			45,922				100	%			48,056				100	%			50,514				100	%
Total FFELP Loans			57,155								58,572								62,803
FFELP Loan allowance for losses			( 282	)							( 288	)							( 311	)
FFELP Loans, net		$	56,873							$	58,284							$	62,492
Percentage of FFELP Loans in repayment							80.3	%							82.0	%							80.4	%
Delinquencies as a percentage of FFELP Loans in repayment							8.3	%							9.2	%							10.5	%
FFELP Loans in forbearance as a percentage of loans in repayment and forbearance							15.5	%							13.8	%							15.1	%

(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 such as disaster relief, including COVID-19 relief programs, 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.

Loan type :

(Dollars in millions)		March 31, 2021				March 31, 2020				Change
Stafford Loans		$	17,327			$	18,829			$	( 1,502	)
Consolidation Loans			34,961				38,796				( 3,835	)
Rehab Loans			4,867				5,178				( 311	)
Total		$	57,155			$	62,803			$	( 5,648	)

53

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

Private Education Loans

The key credit quality indicators are credit scores (FICO scores), loan status, loan seasoning, whether a loan is a TDR, the existence of a cosigner and school type. The FICO score is the higher of the borrower or co-borrower score and is updated at least every six months while school type is assessed at origination. The other Private Education Loan key quality indicators are updated quarterly.

		Private Education Loan Credit Quality Indicators by Origination Year
		March 31, 2021
(Dollars in millions)		March 31, 2021				2020				2019				2018				2017				Prior				Total				% of Total
Credit Quality Indicators
FICO Scores:
640 and above		$	1,485			$	2,835			$	2,553			$	929			$	291			$	10,736			$	18,829				91	%
Below 640			10				12				35				24				9				1,815				1,905				9
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
Loan Status:
In-school/grace/ deferment/forbearance		$	6			$	29			$	45			$	23			$	8			$	1,143			$	1,254				6	%
Current/90 days or less delinquent			1,489				2,817				2,541				929				291				11,232				19,299				93
Greater than 90 days delinquent			—				1				2				1				1				176				181				1
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
Seasoning (1) :
1-12 payments		$	1,491			$	2,517			$	131			$	6			$	1			$	159			$	4,305				21	%
13-24 payments			—				314				2,330				54				5				198				2,901			14
25-36 payments			—				—				105				823				28				327				1,283				6
37-48 payments			—				—				—				58				251				512				821			4
More than 48 payments			—				—				—				—				12				10,955				10,967				53
Loans in-school/ grace/deferment			4				16				22				12				3				400				457			2
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
TDR Status:
TDR		$	—			$	2			$	18			$	25			$	31			$	7,742			$	7,818				38	%
Non-TDR			1,495				2,845				2,570				928				269				4,809				12,916				62
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
Cosigners:
With cosigner (2)		$	3			$	32			$	13			$	1			$	43			$	8,249			$	8,341				40	%
Without cosigner			1,492				2,815				2,575				952				257				4,302				12,393				60
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
School Type:
Not-for-profit		$	1,408			$	2,718			$	2,416			$	879			$	287			$	10,417			$	18,125				87	%
For-profit			87				129				172				74				13				2,134				2,609				13
Total		$	1,495			$	2,847			$	2,588			$	953			$	300			$	12,551			$	20,734				100	%
Allowance for loan losses																											( 992	)
Total loans, net																										$	19,742

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

(2)	Excluding Private Education Refinance Loans, which do not have a cosigner, the cosigner rate was 65 % for total loans at March 31, 2021.

54

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

		Private Education Loan Credit Quality Indicators by Origination Year
		March 31, 2020
(Dollars in millions)		March 31, 2020				2019				2018				2017				2016				Prior				Total				% of Total
Credit Quality Indicators
FICO Scores:
640 and above		$	1,852			$	4,108			$	1,506			$	497			$	102			$	12,574			$	20,639				88	%
Below 640			13				33				25				11				3				2,697			$	2,782				12
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
Loan Status:
In-school/grace/ deferment/forbearance		$	45			$	209			$	86			$	32			$	6			$	1,808			$	2,186				9	%
Current/90 days or less delinquent			1,820				3,930				1,443				475				99				13,121				20,888				89
Greater than 90 days delinquent			—				2				2				1				—				342				347				2
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
Seasoning (1) :
1-12 payments		$	1,862			$	3,935			$	23			$	2			$	—			$	224			$	6,046				26	%
13-24 payments			—				189				1,380				20				2				299				1,890			8
25-36 payments			—				—				116				458				9				509				1,092				5
37-48 payments			—				—				—				24				92				747				863			4
More than 48 payments			—				—				—				—				—				12,927				12,927				55
Loans in-school/ grace/deferment			3				17				12				4				2				565				603			2
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
TDR Status:
TDR		$	—			$	2			$	21			$	30			$	12			$	8,826			$	8,891				38	%
Non-TDR			1,865				4,139				1,510				478				93				6,445				14,530				62
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
Cosigners:
With cosigner (2)		$	2			$	15			$	1			$	61			$	27			$	10,015			$	10,121				43	%
Without cosigner			1,863				4,126				1,530				447				78				5,256				13,300				57
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
School Type:
Not-for-profit		$	1,764			$	3,873			$	1,419			$	486			$	104			$	12,618			$	20,264				87	%
For-profit			101				268				112				22				1				2,653				3,157				13
Total		$	1,865			$	4,141			$	1,531			$	508			$	105			$	15,271			$	23,421				100	%
Allowance for loan losses																											( 1,083	)
Total loans, net																										$	22,338

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

(2)	Excluding Private Education Refinance Loans, which do not have a cosigner, the cosigner rate was 65 % for total loans at March 31, 2020.

55

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

		Private Education Loan Delinquencies
		TDRs
		March 31, 2021								December 31, 2020								March 31, 2020
(Dollars in millions)		Balance				%				Balance				%				Balance				%
Loans in-school/grace/deferment (1)		$	255							$	280							$	345
Loans in forbearance (2)			668								703								1,057
Loans in repayment and percentage of each status:
Loans current			6,477				94.0	%			6,952				93.4	%			6,808				90.9	%
Loans delinquent 31-60 days (3)			160				2.3				185				2.5				227				3.0
Loans delinquent 61-90 days (3)			92				1.3				114				1.5				139				1.9
Loans delinquent greater than 90 days (3)			166				2.4				197				2.6				315				4.2
Total TDR loans in repayment			6,895				100	%			7,448				100	%			7,489				100	%
Total TDR loans			7,818								8,431								8,891
TDR loans allowance for losses			( 857	)							( 929	)							( 951	)
TDR loans, net		$	6,961							$	7,502							$	7,940
Percentage of TDR loans in repayment							88.2	%							88.3	%							84.2	%
Delinquencies as a percentage of TDR loans in repayment							6.0	%							6.6	%							9.1	%
Loans in forbearance as a percentage of TDR loans in repayment and forbearance							8.8	%							8.6	%							12.4	%

(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 such as disaster relief, including COVID-19 relief programs, 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.

56

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

2.   Allowance for Loan Losses (Continued)

		Private Education Loan Delinquencies
		Non-TDRs
		March 31, 2021								December 31, 2020								March 31, 2020
(Dollars in millions)		Balance				%				Balance				%				Balance				%
Loans in-school/grace/deferment (1)		$	202							$	203							$	258
Loans in forbearance (2)			129								141								526
Loans in repayment and percentage of each status:
Loans current			12,543				99.7	%			13,335				99.6	%			13,658				99.4	%
Loans delinquent 31-60 days (3)			19				.1				26				.2				38				.3
Loans delinquent 61-90 days (3)			8				.1				12				.1				18				.1
Loans delinquent greater than 90 days (3)			15				.1				20				.1				32				.2
Total non-TDR loans in repayment			12,585				100	%			13,393				100	%			13,746				100	%
Total non-TDR loans			12,916								13,737								14,530
Non-TDR loans allowance for losses			( 135	)							( 160	)							( 132	)
Non-TDR loans, net		$	12,781							$	13,577							$	14,398
Percentage of non-TDR loans in repayment							97.4	%							97.5	%							94.6	%
Delinquencies as a percentage of non-TDR loans in repayment							.3	%							.4	%							.6	%
Loans in forbearance as a percentage of non- TDR loans in repayment and forbearance							1.0	%							1.0	%							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 such as disaster relief, including COVID-19 relief programs, 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.

57

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

3.   Borrowings

The following table summarizes our borrowings.

		March 31, 2021												December 31, 2020
(Dollars in millions)		Short Term				Long Term				Total				Short Term				Long Term				Total
Unsecured borrowings:
Senior unsecured debt (1)		$	1,375			$	7,436			$	8,811			$	677			$	7,714			$	8,391
Total unsecured borrowings			1,375				7,436				8,811				677				7,714				8,391
Secured borrowings:
FFELP Loan securitizations (2)			—				54,469				54,469				—				54,697				54,697
Private Education Loan securitizations (3)			848				13,235				14,083				960				13,891				14,851
FFELP Loan ABCP facilities			1,323				169				1,492				2,053				479				2,532
Private Education Loan ABCP facilities			1,889				—				1,889				2,582				—				2,582
Other (4)			232				—				232				337				—				337
Total secured borrowings			4,292				67,873				72,165				5,932				69,067				74,999
Total before hedge accounting adjustments			5,667				75,309				80,976				6,609				76,781				83,390
Hedge accounting adjustments			17				365				382				4				551				555
Total		$	5,684			$	75,674			$	81,358			$	6,613			$	77,332			$	83,945

(1)	Includes principal amount of $ 1.4 billion and $ 678 million of short-term debt as of March 31, 2021 and December 31, 2020, respectively. Includes principal amount of $ 7.5 billion and $ 7.8 billion of long-term debt as of March 31, 2021 and December 31, 2020, respectively.

(2)	Includes $ 156 million and $ 157 million of long-term debt related to the FFELP Loan asset-backed securitization repurchase facilities (“FFELP Loan Repurchase Facilities”) as of March 31, 2021 and December 31, 2020, respectively.

(3)

Includes $ 848 million and $ 960 million of short-term debt related to the Private Education Loan asset-backed securitization repurchase facilities (“Private Education Loan Repurchase Facilities”) as of March 31, 2021 and December 31, 2020, respectively. Includes $ 0 and $ 260 million of long-term debt related to the Private Education Loan Repurchase Facilities as of March 31, 2021 and December 31, 2020, respectively.

(4)	“Other” primarily includes the obligation to return cash collateral held related to derivative exposures.

58

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

3.   Borrowings (Continued)

Variable Interest Entities

We consolidated the following financing VIEs as of March 31, 2021 and December 31, 2020, as we are the primary beneficiary. As a result, these VIEs are accounted for as secured borrowings.

		March 31, 2021
		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		$	—			$	54,469			$	54,469			$	55,130			$	1,762			$	1,462			$	58,354
Private Education Loan securitizations			848				13,235				14,083				14,890				680				184				15,754
FFELP Loan ABCP facilities			1,323				169				1,492				1,475				30				46				1,551
Private Education Loan ABCP facilities			1,889				—				1,889				2,072				95				26				2,193
Total before hedge accounting adjustments			4,060				67,873				71,933				73,567				2,567				1,718				77,852
Hedge accounting adjustments			—				( 127	)			( 127	)			—				—				( 235	)			( 235	)
Total		$	4,060			$	67,746			$	71,806			$	73,567			$	2,567			$	1,483			$	77,617

		December 31, 2020
		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		$	—			$	54,697			$	54,697			$	55,535			$	1,606			$	1,438			$	58,579
Private Education Loan securitizations			960				13,891				14,851				15,823				606				187				16,616
FFELP Loan ABCP facilities			2,053				479				2,532				2,533				36				76				2,645
Private Education Loan ABCP facilities			2,582				—				2,582				2,835				74				27				2,936
Total before hedge accounting adjustments			5,595				69,067				74,662				76,726				2,322				1,728				80,776
Hedge accounting adjustments			—				( 167	)			( 167	)			—				—				( 308	)			( 308	)
Total		$	5,595			$	68,900			$	74,495			$	76,726			$	2,322			$	1,420			$	80,468

59

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

4.   Derivative Financial Instruments

Summary of Derivative Financial Statement Impact

The following tables summarize the fair values and notional amounts of all derivative instruments and their impact on net income and other comprehensive income

Impact of Derivatives on Balance Sheet

				Cash Flow								Fair Value (4)								Trading								Total
(Dollars in millions)		Hedged Risk Exposure		Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020
Fair Values (1)
Derivative Assets:
Interest rate swaps		Interest rate		$	—			$	—			$	240			$	323			$	4			$	6			$	244			$	329
Cross-currency interest rate swaps		Foreign currency and interest rate			—				—				11				28				—				—				11				28
Total derivative assets (2)					—				—				251				351				4				6				255				357
Derivative Liabilities:
Interest rate swaps		Interest rate			—				—				—				—				( 11	)			( 14	)			( 11	)			( 14	)
Floor Income Contracts		Interest rate			—				—				—				—				( 160	)			( 197	)			( 160	)			( 197	)
Cross-currency interest rate swaps		Foreign currency and interest rate			—				—				( 236	)			( 322	)			—				—				( 236	)			( 322	)
Other (3)		Interest rate			—				—				—				—				—				—				—				—
Total derivative liabilities (2)					—				—				( 236	)			( 322	)			( 171	)			( 211	)			( 407	)			( 533	)
Net total derivatives				$	—			$	—			$	15			$	29			$	( 167	)		$	( 205	)		$	( 152	)		$	( 176	)

(1)

Fair values reported are exclusive of collateral held and pledged and accrued interest. Assets and liabilities are presented without consideration of master netting agreements. Derivatives are carried on the balance sheet based on net position by counterparty under master netting agreements and classified in other assets or other liabilities depending on whether in a net positive or negative position.

(2)	The following table reconciles gross positions without the impact of master netting agreements to the balance sheet classification:

		Other Assets								Other Liabilities
(Dollar in millions)		March 31, 2021				December 31, 2020				March 31, 2021				December 31, 2020
Gross position		$	255			$	357			$	( 407	)		$	( 533	)
Impact of master netting agreements			( 41	)			( 50	)			41				50
Derivative values with impact of master netting agreements (as carried on balance sheet)			214				307				( 366	)			( 483	)
Cash collateral (held) pledged			( 231	)			( 336	)			199				234
Net position		$	( 17	)		$	( 29	)		$	( 167	)		$	( 249	)

(3)	“Other” includes derivatives related to our Total Return Swap Facility.

(4)	The following table shows the carrying value of liabilities in fair value hedges and the related fair value hedging adjustments to these liabilities:

		As of March 31, 2021								As of December 31, 2020
(Dollar in millions)		Carrying Value				Hedge Basis Adjustments				Carrying Value				Hedge Basis Adjustments
Short-term borrowings		$	1,392			$	17			$	631			$	4
Long-term borrowings		$	9,662			$	356			$	11,017			$	541

60

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

4.   Derivative Financial Instruments (Continued)

The above fair values include adjustments when necessary for counterparty credit risk for both when we are exposed to the counterparty, net of collateral postings, and when the counterparty is exposed to us, net of collateral postings. The net adjustments decreased the asset position at March 31, 2021 and December 31, 2020 by $ 7 million and $ 8 million, respectively. In addition, the above fair values reflect adjustments for illiquid derivatives as indicated by a wide bid/ask spread in the interest rate indices to which the derivatives are indexed. These adjustments decreased the overall net asset positions at March 31, 2021 and December 31, 2020 by $ 4 million and $ 5 million, respectively.

		Cash Flow								Fair Value								Trading								Total
(Dollars in billions)		Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020				Mar 31, 2021				Dec 31, 2020
Notional Values:
Interest rate swaps		$	16.4			$	16.7			$	8.0			$	7.5			$	30.3			$	26.8			$	54.7			$	51.0
Floor Income Contracts			—				—				—				—				12.5				17.0				12.5				17.0
Cross-currency interest rate swaps			—				—				2.7				3.7				—				—				2.7				3.7
Total derivatives		$	16.4			$	16.7			$	10.7			$	11.2			$	42.8			$	43.8			$	69.9			$	71.7

Mark-to-Market Impact of Derivatives on Statements of Income

		Total Gains (Losses)
		Three Months Ended March 31,
(Dollars in millions)		2021				2020
Fair Value Hedges:
Interest Rate Swaps
Gains (losses) recognized in net income on derivatives		$	( 197	)		$	410
Gains (losses) recognized in net income on hedged items			212				( 429	)
Net fair value hedge ineffectiveness gains (losses)			15				( 19	)
Cross currency interest rate swaps
Gains (losses) recognized in net income on derivatives			70				( 91	)
Gains (losses) recognized in net income on hedged items			( 40	)			101
Net fair value hedge ineffectiveness gains (losses)			30				10
Total fair value hedges (1)(2)			45				( 9	)
Cash Flow Hedges:
Total cash flow hedges (2)			—				—
Trading:
Interest rate swaps			22				( 41	)
Floor income contracts			14				( 182	)
Cross currency interest rate swaps			—				—
Other			—				—
Total trading derivatives (3)			36				( 223	)
Mark-to-market gains (losses) recognized		$	81			$	( 232	)

(1)	Recorded in interest expense in the consolidated statements of income.

(2)	The accrued interest income (expense) on fair value hedges and cash flow hedges is recorded in interest expense and is excluded from this table.

(3)	Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

4.   Derivative Financial Instruments (Continued)

Impact of Derivatives on Other Comprehensive Income (Equity)

		Three Months Ended March 31,
(Dollars in millions)		2021				2020
Total gains (losses) on cash flow hedges		$	27			$	( 209	)
Reclassification adjustments for derivative (gains) losses included in net income (interest expense) (1)			21				—
Net changes in cash flow hedges, net of tax		$	48			$	( 209	)

(1)

Includes net settlement income/expense.

Collateral

The following table details collateral held and pledged related to derivative exposure between us and our derivative counterparties:

(Dollars in millions)		March 31, 2021				December 31, 2020
Collateral held:
Cash (obligation to return cash collateral is recorded in short-term borrowings)		$	231			$	336
Securities at fair value — corporate derivatives (not recorded in financial statements) (1)			—				—
Securities at fair value — on-balance sheet securitization derivatives (not recorded in financial statements) (2)			55				78
Total collateral held		$	286			$	414
Derivative asset at fair value including accrued interest		$	226			$	351
Collateral pledged to others:
Cash (right to receive return of cash collateral is recorded in investments)		$	199			$	234
Total collateral pledged		$	199			$	234
Derivative liability at fair value including accrued interest and premium receivable		$	381			$	504

(1)	The Company has the ability to sell or re-pledge securities it holds as collateral.

(2)	The trusts do not have the ability to sell or re-pledge securities they hold as collateral.

Our corporate derivatives contain credit contingent features. At our current unsecured credit rating, we have fully collateralized our corporate derivative liability position (including accrued interest and net of premiums receivable) of $ 132 million with our counterparties. Downgrades in our unsecured credit rating would not result in any additional collateral requirements. Trust related derivatives do not contain credit contingent features related to our or the trusts’ credit ratings. At March 31, 2021 and December 31, 2020, we had a net positive exposure (derivative gain positions to us less collateral which has been posted by counterparties to us) related to Navient Corporation derivatives of $ 16 million and $ 13 million, respectively. The trusts are not required to post collateral to the counterparties. At March 31, 2021 and December 31, 2020, the net positive exposure on swaps in securitization trusts was $ 11 million and $ 28 million, respectively.

The table below highlights credit exposure related to our derivative counterparties at March 31, 2021.

(Dollars in millions)		Corporate Contracts				Securitization Trust Contracts
Exposure, net of collateral		$	16			$	11
Percent of exposure to counterparties with credit ratings below S&P AA- or Moody’s Aa3			100	%			—	%
Percent of exposure to counterparties with credit ratings below S&P A- or Moody’s A3			—	%			—	%

62

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

5.   Other Assets

The following table provides the detail of our other assets.

(Dollars in millions)		March 31, 2021				December 31, 2020
Accrued interest receivable		$	1,843			$	1,933
Benefit and insurance-related investments			467				469
Income tax asset, net			325				454
Derivatives at fair value			214				307
Accounts receivable			147				118
Fixed assets, net			113				116
Other			97				95
Total		$	3,206			$	3,492

6.   Stockholders’ Equity

The following table summarizes common share repurchases, issuances and dividends paid.

		Three Months Ended March 31,
(Dollars and shares in millions, except per share amounts)		2021				2020
Common stock repurchased (1)			8.2				23.0
Common stock repurchased (in dollars) (1)		$	100			$	335
Average purchase price per share (1)		$	12.23			$	14.61
Remaining common stock repurchase authority (1)		$	500			$	665
Shares repurchased related to employee stock- based compensation plans (2)			2.2				.9
Average purchase price per share (2)		$	11.91			$	13.69
Common shares issued (3)			3.6				2.3
Dividends paid		$	29			$	31
Dividends per share		$	.16			$	.16

(1)	Common shares purchased under our share repurchase program. Our board of directors authorized a $ 1 billion multi-year share repurchase program in October 2019.

(2)	Comprises shares withheld from stock option exercises and vesting of restricted stock for employees’ tax withholding obligations and shares tendered by employees to satisfy option exercise costs.

(3)	Common shares issued under our various compensation and benefit plans.

The closing price of our common stock on March 31, 2021 was $ 14.31 .

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

7.   Earnings (Loss) per Common Share

Basic earnings (loss) per common share (EPS) are calculated using the weighted average number of shares of common stock outstanding during each period. A reconciliation of the numerators and denominators of the basic and diluted EPS calculations on a GAAP basis follows.

		Three Months Ended March 31,
(In millions, except per share data)		2021				2020
Numerator:
Net income (loss)		$	370			$	( 106	)
Denominator:
Weighted average shares used to compute basic EPS			183				200
Effect of dilutive securities:
Dilutive effect of stock options, restricted stock, restricted stock units, performance stock units, and Employee Stock Purchase Plan (ESPP) (1)			2				—
Dilutive potential common shares (2)			2				—
Weighted average shares used to compute diluted EPS			185				200
Basic earnings (loss) per common share		$	2.02			$	( .53	)
Diluted earnings (loss) per common share		$	2.00			$	( .53	)

(1)

Includes the potential dilutive effect of additional common shares that are issuable upon exercise of outstanding stock options, restricted stock, restricted stock units, performance stock units and the outstanding commitment to issue shares under applicable ESPPs, determined by the treasury stock method.

(2)	For the three months ended March 31, 2021 and 2020, securities covering approximately 2 million and 7 million shares, respectively, were outstanding but not included in the computation of diluted earnings per share because they were anti-dilutive.

8.   Fair Value Measurements

We use estimates of fair value in applying various accounting standards in our financial statements. We categorize our fair value estimates based on a hierarchical framework associated with three levels of price transparency utilized in measuring financial instruments at fair value. See “Note 11 – Fair Value Measurements” in our 2020 Form 10-K for a full discussion.

During the three months ended March 31, 2021, there were no significant transfers of financial instruments between levels, or changes in our methodology used to value our financial instruments.

64

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

8. Fair Value Measurements (Continued)

The following table summarizes the valuation of our financial instruments that are marked-to-market on a recurring basis. During first quarter 2021 and 2020, there were no significant transfers of financial instruments between levels.

		Fair Value Measurements on a Recurring Basis
		March 31, 2021																December 31, 2020
(Dollars in millions)		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Assets
Derivative instruments: (1)
Interest rate swaps		$	—			$	240			$	4			$	244			$	—			$	323			$	6			$	329
Cross-currency interest rate swaps			—				—				11				11				—				—				28				28
Total derivative assets (2)			—				240				15				255				—				323				34				357
Total		$	—			$	240			$	15			$	255			$	—			$	323			$	34			$	357
Liabilities (3)
Derivative instruments (1)
Interest rate swaps		$	—			$	—			$	( 11	)		$	( 11	)		$	—			$	—			$	( 14	)		$	( 14	)
Floor Income Contracts			—				( 160	)			—				( 160	)			—				( 197	)			—				( 197	)
Cross-currency interest rate swaps			—				—				( 236	)			( 236	)			—				—				( 322	)			( 322	)
Other			—				—				—				—				—				—				—				—
Total derivative liabilities (2)			—				( 160	)			( 247	)			( 407	)			—				( 197	)			( 336	)			( 533	)
Total		$	—			$	( 160	)		$	( 247	)		$	( 407	)		$	—			$	( 197	)		$	( 336	)		$	( 533	)

(1)	Fair value of derivative instruments excludes accrued interest and the value of collateral.

(2)	See "Note 4 – Derivative Financial Instruments" for a reconciliation of gross positions without the impact of master netting agreements to the balance sheet classification.

(3)	Borrowings which are the hedged item in a fair value hedge relationship and which are adjusted for changes in value due to benchmark interest rates only are not carried at full fair value and not reflected in this table.

65

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

8.   Fair Value Measurements (Continued)

The following tables summarize the change in balance sheet carrying value associated with level 3 financial instruments carried at fair value on a recurring basis.

		Three Months Ended March 31,
		2021																2020
		Derivative instruments																Derivative instruments
(Dollars in millions)		Interest Rate Swaps				Cross Currency Interest Rate Swaps				Other				Total Derivative Instruments				Interest Rate Swaps				Cross Currency Interest Rate Swaps				Other				Total Derivative Instruments
Balance, beginning of period		$	( 8	)		$	( 294	)		$	—			$	( 302	)		$	( 17	)		$	( 575	)		$	( 1	)		$	( 593	)
Total gains/(losses):
Included in earnings (1)			1				62				—				63				4				( 112	)			1				( 107	)
Included in other comprehensive income			—				—				—				—				—				—				—				—
Settlements			—				7				—				7				1				21				—				22
Transfers in and/or out of level 3			—				—				—				—				—				—				—				—
Balance, end of period		$	( 7	)		$	( 225	)		$	—			$	( 232	)		$	( 12	)		$	( 666	)		$	—			$	( 678	)
Change in mark-to-market gains/(losses) relating to instruments still held at the reporting date (2)		$	1			$	( 91	)		$	—			$	( 90	)		$	2			$	( 91	)		$	1			$	( 88	)

(1)	“Included in earnings” is comprised of the following amounts recorded in the specified line item in the consolidated statements of income:

		Three Months Ended March 31,
(Dollars in millions)		2021				2020
Gains (losses) on derivative and hedging activities, net		$	1			$	5
Interest expense			62				( 112	)
Total		$	63			$	( 107	)

(2)	Recorded in “gains (losses) on derivative and hedging activities, net” in the consolidated statements of income.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

8.   Fair Value Measurements (Continued)

The following table presents the significant inputs that are unobservable or from inactive markets used in the recurring valuations of the level 3 financial instruments detailed above.

(Dollars in millions)		Fair Value at March 31, 2021				Valuation Technique		Input		Range and Weighted Average
Derivatives
Prime/LIBOR basis swaps		$	( 7	)		Discounted cash flow		Constant Prepayment Rate		9 %
								Bid/ask adjustment to discount rate		.08 %
Cross-currency interest rate swaps			( 225	)		Discounted cash flow		Constant Prepayment Rate		5 %
Other			—
Total		$	( 232	)

The following table summarizes the fair values of our financial assets and liabilities, including derivative financial instruments.

		March 31, 2021												December 31, 2020
(Dollars in millions)		Fair Value				Carrying Value				Difference				Fair Value				Carrying Value				Difference
Earning assets
FFELP Loans		$	58,299			$	56,873			$	1,426			$	59,117			$	58,284			$	833
Private Education Loans			21,106				19,742				1,364				22,462				21,079				1,383
Cash and investments			4,405				4,405				—				3,822				3,822				—
Total earning assets			83,810				81,020				2,790				85,401				83,185				2,216
Interest-bearing liabilities
Short-term borrowings			5,707				5,684				( 23	)			6,626				6,613				( 13	)
Long-term borrowings			75,593				75,674				81				76,719				77,332				613
Total interest-bearing liabilities			81,300				81,358				58				83,345				83,945				600
Derivative financial instruments
Floor Income Contracts			( 160	)			( 160	)			—				( 197	)			( 197	)			—
Interest rate swaps			233				233				—				315				315				—
Cross-currency interest rate swaps			( 225	)			( 225	)			—				( 294	)			( 294	)			—
Other			—				—				—				—				—				—
Excess of net asset fair value over carrying value										$	2,848											$	2,816

67

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

9.   Commitments and Contingencies

Legal Proceedings

We and our subsidiaries and affiliates are subject to various claims, lawsuits and other actions that arise in the normal course of business. We believe that these claims, lawsuits and other actions will not, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations, except as otherwise disclosed. Most of these matters are claims including individual and class action lawsuits against our servicing or business processing subsidiaries alleging the violation of state or federal laws in connection with servicing or collection activities on their education loans and other debts.

In the ordinary course of our business, the Company and our subsidiaries and affiliates receive information and document requests and investigative demands from various entities including State Attorneys General, U.S. Attorneys, legislative committees, individual members of Congress and administrative agencies. These requests may be informational, regulatory or enforcement in nature and may relate to our business practices, the industries in which we operate, or companies with whom we conduct business. Generally, our practice has been and continues to be to cooperate with these bodies and to be responsive to any such requests.

The number of these inquiries and the volume of related information demands continue to increase and therefore continue to increase the time, costs and resources we must dedicate to timely respond to these requests and may, depending on their outcome, result in payments of restitution, fines and penalties.

Certain Cases

During the first quarter of 2016, Navient Corporation, certain Navient officers and directors, and the underwriters of certain Navient securities offerings were sued in three putative securities class action lawsuits filed on behalf of certain investors in Navient stock or Navient unsecured debt. These three cases, which were filed in the U.S. District Court for the District of Delaware, were consolidated by the District Court, with Lord Abbett Funds appointed as Lead Plaintiff. The caption of the consolidated case is Lord Abbett Affiliated Fund, Inc., et al. v. Navient Corporation, et al. The plaintiffs filed their amended and consolidated complaint in September 2016. In September 2017, the Court granted the Navient defendants’ motion and dismissed the complaint in its entirety with leave to amend. The plaintiffs filed a second amended complaint with the court in November 2017 and the Navient defendants filed a motion to dismiss the second amended complaint in January 2018. In January 2019, the Court granted-in-part and denied-in-part the Navient defendants’ motion to dismiss. The Navient defendants deny the allegations and intend to vigorously defend against the allegation in this lawsuit. Discovery is on-going. Additionally, two putative class actions have been filed in the U.S. District Court for the District of New Jersey captioned Eli Pope v. Navient Corporation, John F. Remondi, Somsak Chivavibul and Christian Lown, and Melvin Gross v. Navient Corporation, John F. Remondi, Somsak Chivavibul and Christian M. Lown, both of which allege violations of the federal securities laws under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. After the cases were consolidated by the Court in February 2018 under the caption In Re Navient Corporation Securities Litigation , the plaintiffs filed a consolidated amended complaint in April 2018 and the Company filed a motion to dismiss in June 2018. In December 2019, the Court denied the Company’s motion to dismiss and discovery is on-going. The Company continues to deny the allegations and intends to vigorously defend itself.

In addition, the Company has been named as defendant in a number of putative class action cases alleging violations of various state and federal consumer protection laws including the Telephone Consumer Protection Act (TCPA), the Consumer Financial Protection Act of 2010 (CFPA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA) and various other state consumer protection laws.

At this point in time, the Company is unable to anticipate the timing of a resolution or the impact that these legal proceedings discussed above may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

9. Commitments and Cont ingencies (Continued)

In January 2017, the Consumer Financial Protection Bureau (the CFPB) and Attorneys General for the State of Illinois and the State of Washington initiated civil actions naming Navient Corporation and several of its subsidiaries as defendants alleging violations of certain Federal and State consumer protection statutes, including the CFPA, FCRA, FDCPA and various state consumer protection laws. In October 2017, the Attorney General for the Commonwealth of Pennsylvania initiated a civil action against Navient Corporation and Navient Solutions, LLC (Solutions), containing similar alleged violations of the CFPA and the Pennsylvania Unfair Trade Practices and Consumer Protection Law. The Attorneys General for the States of California, Mississippi and, in October 2020, New Jersey have also initiated actions against the Company and certain subsidiaries alleging violations of various state and federal consumer protection laws based upon similar alleged acts or failures to act. We refer to the Illinois, Pennsylvania, Washington, California, Mississippi and New Jersey Attorneys General collectively as the “State Attorneys General.” In addition to these matters, a number of lawsuits have been filed by nongovernmental parties or, in the future, may be filed by additional governmental or nongovernmental parties seeking damages or other remedies related to similar issues raised by the CFPB and the State Attorneys General. As the Company has previously stated, we believe the suits improperly seek to impose penalties on Navient based on new, previously unannounced servicing standards applied retroactively against only one servicer, and that the allegations are false. We therefore have denied these allegations and are vigorously defending against the allegations in each of these cases. At this point in time, it is reasonably possible that a loss contingency exists; however, the Company is unable to anticipate the timing of a resolution or the impact that these legal proceedings may have on the Company’s consolidated financial position, liquidity, results of operation or cash flows. As a result, it is not possible at this time to estimate a range of potential exposure, if any, for amounts that may be payable in connection with these matters and reserves have not been established. It is possible that an adverse ruling or rulings may have a material adverse impact on the Company.

Regulatory Matters

In addition, Navient and its subsidiaries are subject to examination or regulation by various federal regulatory, state licensing or other regulatory agencies as part of its ordinary course of business including the SEC, CFPB, FFIEC and ED. Items or matters similar to or different from those described above may arise during the course of those examinations. We also routinely receive inquiries or requests from various regulatory entities or bodies or government agencies concerning our business or our assets. Generally, the Company endeavors to cooperate with each such inquiry or request. The Company subsequently received separate  CIDs or subpoenas from the Attorneys General for the District of Columbia, Kansas, Oregon, Colorado, New Jersey, New York and Indiana that are similar to the CIDs or subpoenas that preceded the lawsuits referenced above. We have and, in the future, may receive additional CIDs or subpoenas and other inquiries from these or other Attorneys General with respect to similar or different matters.

Under the terms of the Separation and Distribution Agreement between the Company and SLM BankCo, Navient agreed to indemnify SLM BankCo for claims, actions, damages, losses or expenses that may arise from the conduct of activities of pre-Spin-Off SLM BankCo occurring prior to the Spin-Off other than those specifically excluded in that agreement. Also, as part of the Separation and Distribution Agreement, SLM BankCo agreed to indemnify Navient for certain claims, actions, damages, losses or expenses subject to the terms, conditions and limitations set forth in that agreement. As a result, subject to the terms, conditions and limitations set forth in that agreement, Navient agreed to indemnify and hold harmless Sallie Mae and its subsidiaries, including Sallie Mae Bank from liabilities arising out of the regulatory matters and CFPB and State Attorneys General lawsuits mentioned above. In addition, we asserted various claims for indemnification against Sallie Mae and Sallie Mae Bank for such specifically excluded items arising out of the CFPB and the State Attorneys General lawsuits if and to the extent any indemnified liabilities exist now or in the future. We expect these various indemnification claims to be resolved at a future date as the cases move toward conclusion. Navient has no reserves related to indemnification matters with SLM BankCo as of March 31, 2021.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

9. Commitments and Contingencies (Continued)

OIG Audit

The Office of the Inspector General (the OIG) of ED commenced an audit regarding Special Allowance Payments (SAP) on September 10, 2007. In September 2013, we received the final audit determination of Federal Student Aid (the Final Audit Determination) on the final audit report issued by the OIG in August 2009 related to this audit. The Final Audit Determination concurred with the final audit report issued by the OIG and instructed us to make adjustment to our government billing to reflect the policy determination. In August 2016, we filed our notice of appeal to the Administrative Actions and Appeals Service Group of ED, and a hearing was held in April 2017. In March 2019, the administrative law judge hearing the appeal affirmed the audit’s findings, holding the then-existing Dear Colleague letter relied upon by the Company and other industry participants was inconsistent with the statutory framework creating the SAP rules applicable to loans funded by certain types of debt obligations at issue. We appealed the administrative law judge’s decision to the Secretary of Education given Navient’s adherence to ED-issued guidance and the potential impact on participants in any ED program student loan servicers if such guidance is deemed unreliable and may not be relied upon. In January 2021, the Acting Secretary of Education upheld the decision of the administrative law judge. In March 2021, we filed a complaint for declaratory judgment in federal court seeking to set aside the Acting Secretary’s decision. We continue to believe that our SAP billing practices were proper, considering then-existing ED guidance and lack of applicable regulations. The Company first established a reserve for this matter in 2014 and increased the reserve in 2020 in response to the recent decision by the Acting Secretary. We do not believe, at this time, that an adverse ruling will have a material effect on the Company as a whole.

Contingencies

In the ordinary course of business, we and our subsidiaries are defendants in or parties to pending and threatened legal actions and proceedings including actions brought on behalf of various classes of claimants. These actions and proceedings may be based on alleged violations of consumer protection, securities, employment and other laws. In certain of these actions and proceedings, claims for substantial monetary damage are asserted against us and our subsidiaries. We and our subsidiaries are also subject to potential unasserted claims by third parties.

In the ordinary course of business, we and our subsidiaries are subject to regulatory examinations, information gathering requests, inquiries and investigations. In connection with formal and informal inquiries in these cases, we and our subsidiaries receive requests, subpoenas and orders for documents, testimony and information in connection with various aspects of our regulated activities.

We are required to establish reserves for litigation and regulatory matters where those matters present loss contingencies that are both probable and estimable. When loss contingencies are not both probable and estimable, we do not establish reserves.

In view of the inherent difficulty of predicting the outcome of litigation and regulatory matters, we may not be able to predict what the eventual outcome of the pending matters will be, what the timing or the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties, if any, related to each pending matter may be.

Based on current knowledge, reserves have been established for certain litigation, regulatory matters, and unasserted contract claims where the loss is both probable and estimable. Based on current knowledge, management does not believe that loss contingencies, if any, arising from pending investigations, litigation or regulatory matters will have a material adverse effect on our consolidated financial position, liquidity, results of operations or cash flows, except as otherwise disclosed.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

10.   Revenue from Contracts with Customers Accounted for in Accordance with ASC 606

The following tables illustrate the disaggregation of revenue from contracts accounted for under ASC 606 with customers according to service type and client type by reportable operating segment.

Revenue by Service Type

		Three Months Ended March 31,
		2021												2020
(Dollars in millions)		Federal Education Loans				Business Processing				Total Revenue				Federal Education Loans				Business Processing				Total Revenue
Federal Education Loan asset recovery services		$	5			$	—			$	5			$	31			$	—			$	31
Government services			—				63				63				—				33				33
Healthcare services			—				62				62				—				24				24
Total		$	5			$	125			$	130			$	31			$	57			$	88

Revenue by Client Type

		Three Months Ended March 31,
		2021												2020
(Dollars in millions)		Federal Education Loans				Business Processing				Total Revenue				Federal Education Loans				Business Processing				Total Revenue
Federal government		$	1			$	8			$	9			$	18			$	5			$	23
Guarantor agencies			4				—				4				13				—				13
Other institutions			—				—				—				—				—				—
State and local government			—				42				42				—				16				16
Tolling authorities			—				13				13				—				12				12
Hospitals and other healthcare providers			—				62				62				—				24				24
Total		$	5			$	125			$	130			$	31			$	57			$	88

As of March 31, 2021 and March 31, 2020, there was $ 113 million and $ 67 million, respectively, of net accounts receivable related to these contracts. Navient had no material contract assets or contract liabilities.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting

We monitor and assess our ongoing operations and results based on the following four reportable operating segments: Federal Education Loans, Consumer Lending, Business Processing and Other.

These segments meet the quantitative thresholds for reportable operating segments.  Accordingly, the results of operations of these reportable operating segments are presented separately. The underlying operating segments are used by the Company’s chief operating decision maker to manage the business, review operating performance and allocate resources, and qualify to be aggregated as part of the primary reportable operating segments. As discussed further below, we measure the profitability of our operating segments based on Core Earnings net income. Accordingly, information regarding our reportable operating segments net income is provided on a Core Earnings basis.

Federal Education Loans Segment

In this segment, Navient owns FFELP Loans and performs servicing and asset recovery services on this portfolio. We also service and perform asset recovery services on federal education loans owned by ED and other institutions. Our servicing quality, data-driven strategies, and multichannel education about federal repayment options translates into positive results for the millions of borrowers we serve.

We generate revenue primarily through net interest income on the FFELP Loan portfolio as well as servicing and asset recovery services revenue. This segment is expected to generate significant earnings and cash flow over the remaining life of the portfolio.

The following table includes asset information for our Federal Education Loans segment.

(Dollars in millions)		March 31, 2021				December 31, 2020
FFELP Loans, net		$	56,873			$	58,284
Cash and investments (1)			1,836				1,685
Other			2,126				2,241
Total assets		$	60,835			$	62,210

(1)

Includes restricted cash and investments.

Consumer Lending Segment

In this segment, Navient owns, originates, acquires and services high-quality private education loans. We believe our more than 45 years of experience, product design, digital marketing strategies, and origination and servicing platform provide a unique competitive advantage. We see meaningful opportunities in originating Private Education Loans to financially responsible consumers, generating attractive long-term risk adjusted returns. We generate revenue primarily through net interest income on our Private Education Loan portfolio.

The following table includes asset information for our Consumer Lending segment.

(Dollars in millions)		March 31, 2021				December 31, 2020
Private Education Loans, net		$	19,742			$	21,079
Cash and investments (1)			1,017				828
Other			834				964
Total assets		$	21,593			$	22,871

(1)

Includes restricted cash and investments.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting (Continued)

Business Processing Segment

In this segment, Navient performs business processing services for over 500 government and healthcare clients.

•

Government services : We provide state governments, agencies, court systems, municipalities, and parking and tolling authorities with expert service, leveraging  our scale, integrated technology solutions and data-driven approach. Our support enables our clients to better serve their constituents, meet rapidly changing needs, reduce their operating expenses, manage risk and maximize revenue opportunities.

•

Healthcare services : We perform revenue cycle outsourcing, accounts receivable management, extended business office support, consulting engagements and public health programs. We offer customizable solutions for our clients that include hospitals, hospital systems, medical centers, large physician groups, other healthcare providers and departments of public health.

At March 31, 2021 and December 31, 2020, the Business Processing segment had total assets of $ 436 million and $ 425 million, respectively.

Other Segment

This segment primarily consists of our corporate liquidity portfolio, gains and losses incurred on the repurchase of debt, unallocated expenses of shared services and restructuring/other reorganization expenses.

Unallocated shared services expenses are comprised of costs primarily related to information technology costs related to infrastructure and operations, stock-based compensation expense, accounting, finance, legal, compliance and risk management, regulatory-related expenses, human resources, certain executive management and the board of directors. Regulatory-related expenses include actual settlement amounts as well as third-party professional fees we incur in connection with such regulatory matters and are presented net of any insurance reimbursements for covered costs related to such matters.

At March 31, 2021 and December 31, 2020, the Other segment had total assets of $ 2.1 billion and $ 1.9 billion, respectively.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting (Continued)

Measure of Profitability

We prepare financial statements and present financial results in accordance with GAAP. However, we also evaluate our business segments and present financial results on a basis that differs from GAAP. We refer to this different basis of presentation as Core Earnings. We provide this Core Earnings basis of presentation on a consolidated basis and for each business segment because this is what we review internally when making management decisions regarding our performance and how we allocate resources. We also refer to this information in our presentations with credit rating agencies, lenders and investors. Because our Core Earnings basis of presentation corresponds to our segment financial presentations, we are required by GAAP to provide Core Earnings disclosure in the notes to our consolidated financial statements for our business segments.

Core Earnings are not a substitute for reported results under GAAP. We use Core Earnings to manage our business segments because Core Earnings reflect adjustments to GAAP financial results for two items, discussed below, that can create significant volatility mostly due to timing factors generally beyond the control of management. Accordingly, we believe that Core Earnings provide management with a useful basis from which to better evaluate results from ongoing operations against the business plan or against results from prior periods. Consequently, we disclose this information because we believe it provides investors with additional information regarding the operational and performance indicators that are most closely assessed by management. When compared to GAAP results, the two items we remove to result in our Core Earnings presentations are:

1.

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

2.

The accounting for goodwill and acquired intangible assets.

While GAAP provides a uniform, comprehensive basis of accounting, for the reasons described above, our Core Earnings basis of presentation does not. Core Earnings are subject to certain general and specific limitations that investors should carefully consider. For example, there is no comprehensive, authoritative guidance for management reporting. Our Core Earnings are not defined terms within GAAP and may not be comparable to similarly titled measures reported by other companies. Accordingly, our Core Earnings presentation does not represent a comprehensive basis of accounting. Investors, therefore, may not be able to compare our performance with that of other financial services companies based upon Core Earnings. Core Earnings results are only meant to supplement GAAP results by providing additional information regarding the operational and performance indicators that are most closely used by management, our board of directors, credit rating agencies, lenders and investors to assess performance.

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting (Continued)

Segment Results and Reconciliations to GAAP

		Three Months Ended March 31, 2021
																						Adjustments
(Dollars in millions)		Federal Education Loans				Consumer Lending				Business Processing				Other				Total Core Earnings				Reclassi- fications				Additions/ (Subtractions)				Total Adjustments (1)				Total GAAP
Interest income:
Education loans		$	359			$	319			$	—			$	—			$	678			$	23			$	( 9	)		$	14			$	692
Cash and investments			—				—				—				—				—				—				—				—				—
Total interest income			359				319				—				—				678				23				( 9	)			14				692
Total interest expense			215				150				—				18				383				( 1	)			( 53	)			( 54	)			329
Net interest income (loss)			144				169				—				( 18	)			295				24				44				68				363
Less: provisions for loan losses			—				( 87	)			—				—				( 87	)			—				—				—				( 87	)
Net interest income (loss) after provisions for loan losses			144				256				—				( 18	)			382				24				44				68				450
Other income (loss):
Servicing revenue			52				1				—				—				53				—				—				—				53
Asset recovery and business processing revenue			14				—				125				—				139				—				—				—				139
Other income (loss)			—				—				—				—				—				( 11	)			47				36				36
Gains on sales of loans			—				89				—				—				89				( 13	)			—				( 13	)			76
Total other income (loss)			66				90				125				—				281				( 24	)			47				23				304
Expenses:
Direct operating expenses			63				41				91				—				195				—				—				—				195
Unallocated shared services expenses			—				—				—				64				64				—				—				—				64
Operating expenses			63				41				91				64				259				—				—				—				259
Goodwill and acquired intangible asset impairment and amortization			—				—				—				—				—				—				5				5				5
Restructuring/other reorganization expenses			—				—				—				6				6				—				—				—				6
Total expenses			63				41				91				70				265				—				5				5				270
Income (loss) before income tax expense (benefit)			147				305				34				( 88	)			398				—				86				86				484
Income tax expense (benefit) (2)			35				71				8				( 21	)			93				—				21				21				114
Net income (loss)		$	112			$	234			$	26			$	( 67	)		$	305			$	—			$	65			$	65			$	370

(1)	Core Earnings adjustments to GAAP:

		Three Months Ended March 31, 2021
(Dollars in millions)		Net Impact of Derivative Accounting				Net Impact of Acquired Intangibles				Total
Net interest income (loss) after provisions for loan losses		$	68			$	—			$	68
Total other income (loss)			23				—				23
Goodwill and acquired intangible asset impairment and amortization			—				5				5
Total Core Earnings adjustments to GAAP		$	91			$	( 5	)			86
Income tax expense (benefit)											21
Net income (loss)										$	65

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

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting (Continued)

		Three Months Ended March 31, 2020
																						Adjustments
(Dollars in millions)		Federal Education Loans				Consumer Lending				Business Processing				Other				Total Core Earnings				Reclassi- fications				Additions/ (Subtractions)				Total Adjustments (1)				Total GAAP
Interest income:
Education loans		$	582			$	404			$	—			$	—			$	986			$	3			$	( 14	)		$	( 11	)		$	975
Cash and investments			6				2				—				4				12				—				—				—				12
Total interest income			588				406				—				4				998				3				( 14	)			( 11	)			987
Total interest expense			456				210				—				35				701				7				6				13				714
Net interest income (loss)			132				196				—				( 31	)			297				( 4	)			( 20	)			( 24	)			273
Less: provisions for loan losses			6				89				—				—				95				—				—				—				95
Net interest income (loss) after provisions for loan losses			126				107				—				( 31	)			202				( 4	)			( 20	)			( 24	)			178
Other income (loss):
Servicing revenue			56				2				—				—				58				—				—				—				58
Asset recovery and business processing revenue			53				—				57				—				110				—				—				—				110
Other income (loss)			4				—				—				3				7				4				( 227	)			( 223	)			( 216	)
Total other income (loss)			113				2				57				3				175				4				( 227	)			( 223	)			( 48	)
Expenses:
Direct operating expenses			83				39				54				—				176				—				—				—				176
Unallocated shared services expenses			—				—				—				75				75				—				—				—				75
Operating expenses			83				39				54				75				251				—				—				—				251
Goodwill and acquired intangible asset impairment and amortization			—				—				—				—				—				—				5				5				5
Restructuring/other reorganization expenses			—				—				—				5				5				—				—				—				5
Total expenses			83				39				54				80				256				—				5				5				261
Income (loss) before income tax expense (benefit)			156				70				3				( 108	)			121				—				( 252	)			( 252	)			( 131	)
Income tax expense (benefit) (2)			37				16				1				( 26	)			28				—				( 53	)			( 53	)			( 25	)
Net income (loss)		$	119			$	54			$	2			$	( 82	)		$	93			$	—			$	( 199	)		$	( 199	)		$	( 106	)

(1)	Core Earnings adjustments to GAAP:

		Three Months Ended March 31, 2020
(Dollars in millions)		Net Impact of Derivative Accounting				Net Impact of Acquired Intangibles				Total
Net interest income (loss) after provisions for loan losses		$	( 24	)		$	—			$	( 24	)
Total other income (loss)			( 223	)			—				( 223	)
Goodwill and acquired intangible asset impairment and amortization			—				5				5
Total Core Earnings adjustments to GAAP		$	( 247	)		$	( 5	)			( 252	)
Income tax expense (benefit)											( 53	)
Net income (loss)										$	( 199	)

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

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NAVIENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information at March 31, 2021 and for the three months ended

March 31, 2021 and 2020 is unaudited)

11.   Segment Reporting (Continued)

Summary of Core Earnings Adjustments to GAAP

		Three Months Ended March 31,
(Dollars in millions)		2021				2020
Core Earnings net income		$	305			$	93
Core Earnings adjustments to GAAP:
Net impact of derivative accounting (1)			91				( 247	)
Net impact of goodwill and acquired intangible assets (2)			( 5	)			( 5	)
Net tax effect (3)			( 21	)			53
Total Core Earnings adjustments to GAAP			65				( 199	)
GAAP net income (loss)		$	370			$	( 106	)

(1)

Derivative accounting: Core Earnings exclude periodic gains and losses that are caused by the mark-to-market valuations on derivatives that do not qualify for hedge accounting treatment under GAAP as well as the periodic mark-to-market gains and losses that are a result of ineffectiveness recognized related to effective hedges under GAAP. Under GAAP, for our derivatives that are held to maturity, the mark-to-market gain or loss over the life of the contract will equal $ 0 except for Floor Income Contracts where the mark-to-market gain will equal the amount for which we sold the contract. In our Core Earnings presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life.

(2)

Goodwill and acquired intangible assets: Our Core Earnings exclude goodwill and intangible asset impairment and amortization of acquired intangible assets.

(3)

Net tax effect: Such tax effect is based upon our Core Earnings effective tax rate for the year.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: April 28, 2021

78

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APPENDIX A

form 10-Q cross-reference index

79