# NAVIENT CORP (NAVI) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from NAVIENT CORP's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1593538/000095017024020149/navi-20231231.htm Accession: 0000950170-24-020149 Filing date: 2024-02-26 Report date: 2023-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Confidence: high Company profile: /company/NAVI/ All MD&A years: /company/NAVI/mda/ Previous year: /company/NAVI/mda/fy2022/ (FY 2022) Next year: /company/NAVI/mda/fy2024/ (FY 2024) Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Form 10-K. This discussion and analysis also contains forward-looking statements and should be read in conjunction with the disclosures and information contained in “Forward-Looking and Cautionary Statements” and “Risk Factors” in this Form 10-K. The objective of this discussion and analysis is to allow investors to view the Company from management’s perspective. Accordingly, we provide the reader with 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. The discussion that follows is primarily focused on 2023 versus 2022 results. Discussion and analysis of 2022 results compared to 2021 is included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K for the year ended December 31, 2022 as filed with the SEC on February 24, 2023. Selected Historical Financial Information and Ratios [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(In millions, except per share data)","","2023","","","2022","","","2021"],["GAAP Basis"],["Net income","","$","228","","","$","645","","","$","717"],["Diluted earnings per common share","","$","1.85","","","$","4.49","","","$","4.18"],["Weighted average shares used to compute diluted earnings per share","","","123","","","","144","","","","172"],["Return on assets","","",".36","%","","",".87","%","","",".88","%"],["Dividends per common share","","$",".64","","","$",".64","","","$",".64"],["Return on common stockholders' equity","","","8","%","","","22","%","","","27","%"],["Dividend payout ratio","","","35","%","","","14","%","","","15","%"],["Average equity/average assets","","","4.43","%","","","3.78","%","","","3.20","%"],["Total assets","","$","61,375","","","$","70,795","","","$","80,605"],["Total borrowings","","$","57,628","","","$","66,896","","","$","76,978"],["Total Navient Corporation stockholders' equity","","$","2,760","","","$","2,977","","","$","2,597"],["Book value per common share","","$","24.32","","","$","22.86","","","$","16.89"],["Core Earnings Basis(1)"],["Net income(1)","","$","303","","","$","458","","","$","551"],["Diluted earnings per common share(1)","","$","2.45","","","$","3.19","","","$","3.21"],["Weighted average shares used to compute diluted earnings per share","","","123","","","","144","","","","172"],["Net interest margin, Federal Education Loans segment","","","1.12","%","","","1.01","%","","",".99","%"],["Net interest margin, Consumer Lending segment","","","3.04","%","","","2.81","%","","","2.92","%"],["Return on assets","","",".48","%","","",".62","%","","",".68","%"],["Education Loan Portfolios"],["Ending FFELP Loans, net","","$","37,925","","","$","43,525","","","$","52,641"],["Ending Private Education Loans, net","","","16,902","","","","18,725","","","","20,171"],["Ending total education loans, net","","$","54,827","","","$","62,250","","","$","72,812"],["Average FFELP Loans","","$","41,191","","","$","49,183","","","$","56,018"],["Average Private Education Loans","","","18,463","","","","20,524","","","","21,225"],["Average total education loans","","$","59,654","","","$","69,707","","","$","77,243"]] [[/GREPCENT_TABLE]] (1) Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures — Core Earnings.” 11 The Year in 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. 2023 GAAP net income was $228 million ($1.85 diluted earnings per share), compared with $645 million ($4.49 diluted earnings per share) in the prior year. See “Results of Operations — GAAP Comparison of 2023 Results with 2022” for a discussion of the primary contributors to the change in GAAP earnings between periods. 2023 Core Earnings net income was $303 million ($2.45 diluted Core Earnings per share), compared with $458 million ($3.19 diluted Core Earnings per share) for 2022. See “Segment Results” for a discussion of the primary contributors to the change in Core Earnings between periods. Financial highlights of 2023 include: Federal Education Loans segment: • Net income of $319 million. • Net interest margin of 1.12%. Consumer Lending segment: • Net income of $287 million. • Net interest margin of 3.04%. • Originated $971 million of Private Education Loans. Business Processing segment: • Revenue of $321 million. • Net income of $28 million and EBITDA(1) of $39 million. Capital, funding and liquidity: • GAAP equity-to-asset ratio of 4.5% and adjusted tangible equity ratio(1) of 8.2%. • Repurchased $310 million of common shares. $290 million common share repurchase authority remains outstanding. • Paid $78 million in common stock dividends. • Retired $850 million of unsecured debt, resulting in a pre-tax loss of $8 million. • Issued $1.0 billion of unsecured debt and $1.2 billion of asset-backed securities. Operating Expenses: • Operating expenses of $720 million, excluding $80 million of regulatory-related expenses. (1) Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 12 Results of Operations GAAP Income Statements [[GREPCENT_TABLE]] [["","","","","","","","","","","","Increase (Decrease)"],["","","Years Ended December 31,","","","2023 vs. 2022","","","2022 vs. 2021"],["(Dollars in millions, except per share amounts)","","2023","","","2022","","","2021","","","$","","","%","","","$","","","%"],["Interest income"],["FFELP Loans","","$","2,897","","","$","1,966","","","$","1,464","","","$","931","","","","47","%","","$","502","","","","34","%"],["Private Education Loans","","","1,369","","","","1,195","","","","1,181","","","","174","","","","15","","","","14","","","","1"],["Cash and investments","","","153","","","","62","","","","3","","","","91","","","","147","","","","59","","","","1,967"],["Total interest income","","","4,419","","","","3,223","","","","2,648","","","","1,196","","","","37","","","","575","","","","22"],["Total interest expense","","","3,557","","","","2,102","","","","1,316","","","","1,455","","","","69","","","","786","","","","60"],["Net interest income","","","862","","","","1,121","","","","1,332","","","","(259",")","","","(23",")","","","(211",")","","","(16",")"],["Less: provisions for loan losses","","","123","","","","79","","","","(61",")","","","44","","","","56","","","","140","","","","230"],["Net interest income after provisions for loan losses","","","739","","","","1,042","","","","1,393","","","","(303",")","","","(29",")","","","(351",")","","","(25",")"],["Other income (loss):"],["Servicing revenue","","","64","","","","77","","","","168","","","","(13",")","","","(17",")","","","(91",")","","","(54",")"],["Asset recovery and business processing revenue","","","321","","","","336","","","","539","","","","(15",")","","","(4",")","","","(203",")","","","(38",")"],["Other income","","","21","","","","32","","","","30","","","","(11",")","","","(34",")","","","2","","","","7"],["Gains on sales of loans","","","\u2014","","","","\u2014","","","","78","","","","\u2014","","","","\u2014","","","","(78",")","","","(100",")"],["Losses on debt repurchases","","","(8",")","","","\u2014","","","","(73",")","","","(8",")","","","100","","","","73","","","","(100",")"],["Gains (losses) on derivative and hedging activities, net","","","11","","","","171","","","","64","","","","(160",")","","","(94",")","","","107","","","","167"],["Total other income","","","409","","","","616","","","","806","","","","(207",")","","","(34",")","","","(190",")","","","(24",")"],["Expenses:"],["Operating expenses","","","800","","","","776","","","","1,207","","","","24","","","","3","","","","(431",")","","","(36",")"],["Goodwill and acquired intangible assets impairment and amortization expense","","","10","","","","19","","","","30","","","","(9",")","","","(47",")","","","(11",")","","","(37",")"],["Restructuring/other reorganization expenses","","","25","","","","36","","","","26","","","","(11",")","","","(31",")","","","10","","","","38"],["Total expenses","","","835","","","","831","","","","1,263","","","","4","","","","\u2014","","","","(432",")","","","(34",")"],["Income before income tax expense","","","313","","","","827","","","","936","","","","(514",")","","","(62",")","","","(109",")","","","(12",")"],["Income tax expense","","","85","","","","182","","","","219","","","","(97",")","","","(53",")","","","(37",")","","","(17",")"],["Net income","","$","228","","","$","645","","","$","717","","","$","(417",")","","","(65",")%","","$","(72",")","","","(10",")%"],["Basic earnings per common share","","$","1.87","","","$","4.54","","","$","4.23","","","$","(2.67",")","","","(59",")%","","$",".31","","","","7","%"],["Diluted earnings per common share","","$","1.85","","","$","4.49","","","$","4.18","","","$","(2.64",")","","","(59",")%","","$",".31","","","","7","%"],["Dividends per common share","","$",".64","","","$",".64","","","$",".64","","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%"]] [[/GREPCENT_TABLE]] 13 GAAP Comparison of 2023 Results with 2022 For the year ended December 31, 2023, net income was $228 million, or $1.85 diluted earnings per common share, compared with net income of $645 million, or $4.49 diluted earnings per common share, for the year-ago period. The primary contributors to the change in net income are as follows: • Net interest income decreased by $259 million primarily as a result of a $129 million decrease in mark-to-market gains on fair value hedges recorded in interest expense, the paydown of the FFELP and Private Education Loan portfolios and an increase in interest rates. • Provisions for loan losses increased $44 million from $79 million to $123 million: o The provision for FFELP Loan losses increased $56 million from $0 to $56 million. o The provision for Private Education Loan losses decreased $12 million from $79 million to $67 million. The FFELP Loan provision for loan losses of $56 million in the current period was primarily a result of the continued extension of the portfolio and the resulting increase in both the expected future defaults and the premium allocated to all expected future defaults. The Private Education Loan provision for loan losses of $67 million in the current period included $25 million in connection with loan originations, $35 million related to internal policy changes being made to reflect changing regulatory expectations related to school misconduct discharges on certain populations of private loans, $29 million related to changes in the net charge-off rates on defaulted loans, $23 million in connection with the resolution of certain private legacy loans in bankruptcy and $22 million related to a general reserve build, which was partially offset by a $67 million reduction in connection with the adoption of a new accounting standard, Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments – Credit Losses: Troubled Debt Restructurings and Vintage Disclosures.” The provision of $79 million in the year-ago period included $34 million in connection with loan originations, $33 million related to changes in the net charge-off rates on defaulted loans and $12 million related to a general reserve build. We adopted ASU No. 2022-02 on January 1, 2023. This new ASU eliminates the troubled debt restructurings (TDRs) recognition and measurement guidance. Prior to adopting this new guidance, as it relates to interest rate concessions granted as part of our Private Education Loan modification program, a discounted cash flow model was used to calculate the amount of interest forgiven for loans that were in the program and the present value of that interest rate concession was included as a part of the allowance for loan loss. This new guidance no longer allows the measurement and recognition of this element of our allowance for loan loss for new modifications that occur subsequent to January 1, 2023. As of December 31, 2022, the allowance for loan loss included $77 million related to this interest rate concession component of the allowance for loan loss. We elected to adopt this amendment using a prospective transition method which has resulted and will continue to result in the $77 million releasing between 2023 and 2024 as the borrowers exit their current modification programs. $67 million of the $77 million was released in 2023, and we expect that the remaining $10 million will release in 2024. • Asset recovery and business processing revenue decreased $15 million primarily as a result of the expected $83 million reduction in revenue from the wind-down of Business Processing pandemic-related contracts, which was partially offset by a $74 million increase in revenue from services for our traditional Business Processing clients. The remaining $6 million decrease was related to revenue earned in our Federal Education Loans segment and was a result of exiting that business line in fourth-quarter 2022. • Losses on debt repurchases increased $8 million. We repurchased $850 million of debt at an $8 million loss in the current period. There were no debt repurchases in the year-ago period. The benefit of these repurchases is a reduction of interest expense in the future. • Net gains on derivative and hedging activities decreased $160 million. The primary factors affecting the change were interest rate fluctuations. Valuations of derivative instruments fluctuate based upon many factors including changes in interest rates and other market factors. As a result, net gains and losses on derivative and hedging activities may vary significantly in future periods. • Operating expenses increased $24 million primarily related to a $73 million contingency loss accrual (regulatory-related expense) recorded in the second half of 2023 related to recent developments in connection with Consumer Financial Protection Bureau (CFPB) matters. The remaining $49 million decrease in operating expenses was primarily a result of a decline in overall servicing costs as well as exiting the Federal Education Loans segment’s asset recovery business line in the fourth quarter of 2022. 14 • Goodwill and acquired intangible asset impairment and amortization expense decreased $9 million primarily due to $6 million of impairment in 2022 of a Business Processing segment customer relationship asset as a result of exiting a line of business. No acquired intangible assets were impaired in 2023. • Restructuring expenses declined $11 million. In 2023, these expenses relate primarily to severance costs incurred in connection with the CEO transition as well as a facility lease termination and impairment of a facility held for sale in conjunction with the implementation of certain efficiency initiatives. Expense in 2022 primarily relates to costs for severance and facility lease terminations in connection with the Company's decision to exit the FFELP asset recovery business and consolidate certain business lines. • The effective income tax rates for the current and year-ago periods were 27% and 22%, respectively. The movement in the effective income tax rate was primarily driven by the reduction of tax and interest on state uncertain tax positions in the year-ago period and changes in the valuation allowance attributable to the deferred tax asset for state disallowed interest expense carryovers in the current period. We repurchased 18.0 million and 24.8 million shares of our common stock during 2023 and 2022, respectively. As a result of repurchases, our average outstanding diluted shares decreased by 21 million common shares (or 15%) from the year-ago period. 15 Segment Results Federal Education Loans Segment The following table presents Core Earnings results for our Federal Education Loans segment. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","% Increase (Decrease)"],["(Dollars in millions)","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Interest income:"],["FFELP Loans","","$","2,901","","","$","1,955","","","$","1,405","","","","48","%","","","39","%"],["Cash and investments","","","76","","","","32","","","","\u2014","","","","138","","","","100"],["Total interest income","","","2,977","","","","1,987","","","","1,405","","","","50","","","","41"],["Total interest expense","","","2,497","","","","1,468","","","","830","","","","70","","","","77"],["Net interest income","","","480","","","","519","","","","575","","","","(8",")","","","(10",")"],["Less: provision for loan losses","","","56","","","","\u2014","","","","\u2014","","","","100","","","","\u2014"],["Net interest income after provision for loan losses","","","424","","","","519","","","","575","","","","(18",")","","","(10",")"],["Other income (loss):"],["Servicing revenue","","","52","","","","65","","","","162","","","","(20",")","","","(60",")"],["Asset recovery and business processing revenue","","","\u2014","","","","6","","","","51","","","","(100",")","","","(88",")"],["Other revenue","","","14","","","","31","","","","25","","","","(55",")","","","24"],["Total other income","","","66","","","","102","","","","238","","","","(35",")","","","(57",")"],["Direct operating expenses","","","72","","","","106","","","","223","","","","(32",")","","","(52",")"],["Income before income tax expense","","","418","","","","515","","","","590","","","","(19",")","","","(13",")"],["Income tax expense","","","99","","","","108","","","","136","","","","(8",")","","","(21",")"],["Net income","","$","319","","","$","407","","","$","454","","","","(22",")%","","","(10",")%"]] [[/GREPCENT_TABLE]] Highlights of 2023 vs. 2022 • Net income was $319 million compared to $407 million. • Net interest income decreased $39 million primarily due to the impact of increasing interest rates on the different index resets for the segment's assets and debt, as well as reducing floor income earned on the FFELP Loans. The paydown of the loan portfolio also reduced net interest income. These decreases were partially offset by a $48 million benefit in 2023 related to the decrease in the speed of loan premium amortization in connection with the continued extension of the FFELP loan portfolio. • Provision for loan losses increased $56 million. The $56 million of provision for loan losses in 2023 was primarily a result of the continued extension of the portfolio and the resulting increase in both the expected future defaults and the premium allocated to all expected future defaults. o Net charge-offs were $63 million compared to $40 million. o Delinquencies greater than 90 days were $2.3 billion compared to $3.3 billion. o Forbearances were $6.1 billion compared to $7.6 billion. • Other income decreased $36 million primarily due to the discontinuation in 2022 of contract-exit transition services provided to third parties, as well as the paydown of the portfolio on which servicing fees are earned. • Expenses were $34 million lower as a result of the paydown of the loan portfolio, lower contract-exit transition services referenced above, as well as exiting the asset recovery business line in the fourth quarter of 2022. 16 Key performance metrics are as follows: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Segment net interest margin","","","1.12","%","","","1.01","%","","",".99","%"],["FFELP Loans:"],["FFELP Loan spread","","","1.23","%","","","1.11","%","","","1.06","%"],["Provision for loan losses","","$","56","","","$","\u2014","","","$","\u2014"],["Net charge-offs","","$","63","","","$","40","","","$","26"],["Net charge-off rate","","",".19","%","","",".10","%","","",".06","%"],["Greater than 30-days delinquency rate","","","13.9","%","","","15.6","%","","","10.6","%"],["Greater than 90-days delinquency rate","","","7.5","%","","","9.6","%","","","4.8","%"],["Forbearance rate","","","16.8","%","","","18.1","%","","","12.4","%"],["Average FFELP Loans","","$","41,191","","","$","49,183","","","$","56,018"],["Ending FFELP Loans, net","","$","37,925","","","$","43,525","","","$","52,641"],["(Dollars in billions)"],["Total federal loans serviced","","$","44","","","$","51","","","$","61"]] [[/GREPCENT_TABLE]] Net Interest Margin The following table details the net interest margin. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2023","","","2022","","","2021"],["FFELP Loan yield","","","6.59","%","","","3.55","%","","","1.91","%"],["Floor Income","","",".45","","","",".42","","","",".60"],["FFELP Loan net yield","","","7.04","","","","3.97","","","","2.51"],["FFELP Loan cost of funds","","","(5.81",")","","","(2.86",")","","","(1.45",")"],["FFELP Loan spread","","","1.23","","","","1.11","","","","1.06"],["Other interest-earning asset spread impact","","","(.11",")","","","(.10",")","","","(.07",")"],["Net interest margin(1)","","","1.12","%","","","1.01","%","","",".99","%"]] [[/GREPCENT_TABLE]] (1) The average balances of the interest-earning assets for the respective periods are: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["FFELP Loans","","$","41,191","","","$","49,183","","","$","56,018"],["Other interest-earning assets","","","1,673","","","","2,110","","","","1,816"],["Total FFELP Loan interest-earning assets","","$","42,864","","","$","51,293","","","$","57,834"]] [[/GREPCENT_TABLE]] As of December 31, 2023, our FFELP Loan portfolio totaled $37.9 billion, comprised of $13.6 billion of FFELP Stafford Loans and $24.3 billion of FFELP Consolidation Loans. The weighted-average life of these portfolios as of December 31, 2023 was 7 years and 8 years, respectively, assuming a Constant Prepayment Rate (CPR) of 7% and 5%, respectively. Floor Income The following table analyzes on a Core Earnings basis the ability of the FFELP Loans in our portfolio to earn Floor Income after December 31, 2023 and 2022, based on interest rates as of those dates. [[GREPCENT_TABLE]] [["(Dollars in billions)","","December 31, 2023","","","December 31, 2022"],["Education loans eligible to earn Floor Income","","$","37.7","","","$","43.2"],["Less: post-March 31, 2006 disbursed loans required to rebate Floor Income","","","(17.9",")","","","(20.5",")"],["Less: economically hedged Floor Income","","","(3.2",")","","","(12.3",")"],["Education loans eligible to earn Floor Income after rebates and economically hedged","","$","16.6","","","$","10.4"],["Education loans earning Floor Income","","$","1.1","","","$","\u2014"]] [[/GREPCENT_TABLE]] The following table presents a projection of the average balance of FFELP Consolidation Loans for which Fixed Rate Floor Income has been economically hedged with derivatives for the period January 1, 2024 to December 31, 2028. [[GREPCENT_TABLE]] [["(Dollars in billions)","","2024","","","2025","","","2026","","","2027","","","2028"],["Average balance of FFELP Consolidation Loans whose Floor Income is economically hedged","","$","1.8","","","$",".9","","","$",".7","","","$",".3","","","$",".3"]] [[/GREPCENT_TABLE]] 17 Servicing Revenue Servicing revenue decreased $13 million primarily as a result of the paydown of the FFELP Loan portfolio serviced. Asset Recovery and Business Processing Revenue Asset recovery and business processing revenue decreased $6 million as a result of exiting the asset recovery business in the fourth quarter of 2022. Other Revenue Other revenue decreased $17 million primarily due to the discontinuation in 2022 of contract-exit transition services provided to third parties. Operating Expenses Operating expenses for the Federal Education Loans segment primarily include costs incurred to perform servicing on our FFELP Loan portfolio and federal education loans held by other institutions. Expenses were $34 million lower as a result of the paydown of the loan portfolio, lower contract-exit transition services referenced above, as well as exiting the asset recovery business line in the fourth quarter of 2022. Various Federal Loan Forgiveness Plans On August 24, 2022, the Biden-Harris Administration announced its Student Debt Relief (SDR) Plan. The SDR Plan would have provided up to $20,000 in one-time debt relief to income-qualified recipients with ED held student loans and a repayment pause on ED held loans. Privately held FFELP Loans, like ours, were not eligible for debt forgiveness. A number of states and private organizations initiated legal challenges to the SDR Plan in various courts throughout the country. On June 30, 2023, the Supreme Court ruled that ED was prohibited from implementing the SDR Plan, and student loan payments on ED held loans resumed in October 2023. After the invalidation of the SDR Plan, ED announced that it had begun a new rulemaking process to consider other ways to provide debt relief to borrowers, which could include borrowers with privately held FFELP Loans. ED held several public meeting sessions with a negotiated rulemaking committee in the fourth quarter of 2023 and in the first quarter of 2024. ED is expected to publish proposed regulations for public comment in May 2024. In addition, on July 10, 2023, ED issued final regulations on income-driven repayment plans for Direct loans, which are student loans held by ED. Eligible FFELP borrowers can access the new changes by consolidating their loans into the Direct Loan Program. The new regulations are effective July 1, 2024; however, ED has elected early implementation for some features starting July 30, 2023. The regulations provide a lower monthly loan payment on a Direct loan by decreasing discretionary income (i.e., taxable income over 225% of the federal poverty guideline), decreasing the percentage of discretionary income that must be paid toward a Direct loan to 5% (for undergraduates), and providing the option for married borrowers to exclude their spouse’s income from being factored by filing a separate tax return. Other changes provide for the elimination of accrued interest that is not covered by the monthly payment amount, provide credit towards loan forgiveness that counts certain periods of deferment and forbearance, a shorter loan forgiveness period (10-years) for borrowers with an original principal balance less than or equal to $12,000, and credit toward loan forgiveness for eligible payments on a Direct or FFELP loan that is repaid by a Direct Consolidation loan. This new income-driven repayment plan may increase consolidation activity in the future as FFELP borrowers consolidate their loans into the Direct Loan Program in order to be eligible for the new income-driven repayment plan. This could have a material impact on the Company’s results in future periods. 18 Consumer Lending Segment The following table presents Core Earnings results for our Consumer Lending segment. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","% Increase (Decrease)"],["(Dollars in millions)","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Interest income:"],["Private Education Loans","","$","1,369","","","$","1,195","","","$","1,181","","","","15","%","","","1","%"],["Cash and investments","","","27","","","","10","","","","2","","","","170","","","","400"],["Interest income","","","1,396","","","","1,205","","","","1,183","","","","16","","","","2"],["Interest expense","","","816","","","","611","","","","541","","","","34","","","","13"],["Net interest income","","","580","","","","594","","","","642","","","","(2",")","","","(7",")"],["Less: provision for loan losses","","","67","","","","79","","","","(61",")","","","(15",")","","","230"],["Net interest income after provision for loan losses","","","513","","","","515","","","","703","","","","\u2014","","","","(27",")"],["Other income (loss):"],["Servicing revenue","","","12","","","","12","","","","6","","","","\u2014","","","","100"],["Other revenue","","","2","","","","1","","","","\u2014","","","","100","","","","100"],["Gains on sales of loans","","","\u2014","","","","\u2014","","","","91","","","","\u2014","","","","(100",")"],["Total other income","","","14","","","","13","","","","97","","","","8","","","","(87",")"],["Direct operating expenses","","","151","","","","148","","","","162","","","","2","","","","(9",")"],["Income before income tax expense","","","376","","","","380","","","","638","","","","(1",")","","","(40",")"],["Income tax expense","","","89","","","","80","","","","146","","","","11","","","","(45",")"],["Net income","","$","287","","","$","300","","","$","492","","","","(4",")%","","","(39",")%"]] [[/GREPCENT_TABLE]] Highlights of 2023 vs. 2022 • Originated $971 million of Private Education Loans compared to $2.0 billion. o Refinance Loan originations were $647 million compared to $1.7 billion. The decrease in originations is primarily the result of borrowers with fixed interest rate loans having less of an incentive to refinance in light of the significant increase in interest rates that occurred during 2022 and 2023 which was primarily the result of historically high inflation. o In-school loan originations were $324 million compared to $322 million. • Net income was $287 million compared to $300 million. • Net interest income decreased $14 million primarily due to the paydown of the loan portfolio, offset by an increase in the net interest margin primarily due to improved funding spreads. • Provision for loan losses decreased $12 million. The provision for loan losses of $67 million in 2023 included $25 million in connection with loan originations, $35 million related to internal policy changes being made to reflect changing regulatory expectations related to school misconduct discharges on certain populations of private loans, $29 million related to changes in the net charge-off rates on defaulted loans, $23 million in connection with the resolution of certain private legacy loans in bankruptcy and $22 million related to a general reserve build, which was partially offset by a $67 million reduction in connection with the adoption of a new accounting standard (see "Results of Operations — GAAP Comparison of 2023 Results with 2022" for further details). The provision of $79 million in the year-ago period included $34 million in connection with loan originations, $33 million related to changes in the net charge-off rates on defaulted loans and $12 million related to a general reserve build. o Excluding the $25 million and $30 million, respectively, related to the change in the net charge-off rate on defaulted loans, net charge-offs were $273 million compared with $313 million. o Private Education Loan delinquencies greater than 90 days: $380 million, down $31 million from $411 million. o Private Education Loan forbearances: $363 million, down $38 million from $401 million. • Expenses increased $3 million. 19 Key performance metrics are as follows: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Segment net interest margin","","","3.04","%","","","2.81","%","","","2.92","%"],["Private Education Loans (including Refinance Loans):"],["Private Education Loan spread","","","3.18","%","","","2.95","%","","","3.12","%"],["Provision for loan losses","","$","67","","","$","79","","","$","(61",")"],["Net charge-offs(1)","","$","273","","","$","313","","","$","153"],["Net charge-off rate(1)","","","1.54","%","","","1.59","%","","",".76","%"],["Greater than 30-days delinquency rate","","","5.1","%","","","5.0","%","","","3.2","%"],["Greater than 90-days delinquency rate","","","2.3","%","","","2.2","%","","","1.5","%"],["Forbearance rate","","","2.1","%","","","2.1","%","","","2.6","%"],["Average Private Education Loans","","$","18,463","","","$","20,524","","","$","21,225"],["Ending Private Education Loans, net","","$","16,902","","","$","18,725","","","$","20,171"],["Private Education Refinance Loans:"],["Net charge-offs","","$","32","","","$","20","","","$","11"],["Greater than 90-day delinquency rate","","",".4","%","","",".2","%","","",".1","%"],["Average balance of Private Education Refinance Loans","","$","9,206","","","$","9,984","","","$","8,876"],["Ending balance of Private Education Refinance Loans","","$","8,752","","","$","9,516","","","$","9,791"],["Private Education Refinance Loan originations","","$","647","","","$","1,680","","","$","5,811"]] [[/GREPCENT_TABLE]] (1) Excludes $25 million, $30 million and $16 million of charge-offs on the expected future recoveries of previously fully charged-off loans in 2023, 2022 and 2021, respectively, as a result of increasing the net charge-off rate on defaulted loans. Net Interest Margin The following table details the net interest margin. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2023","","","2022","","","2021"],["Private Education Loan yield","","","7.42","%","","","5.82","%","","","5.57","%"],["Private Education Loan cost of funds","","","(4.24",")","","","(2.87",")","","","(2.45",")"],["Private Education Loan spread","","","3.18","","","","2.95","","","","3.12"],["Other interest-earning asset spread impact","","","(.14",")","","","(.14",")","","","(.20",")"],["Net interest margin(1)","","","3.04","%","","","2.81","%","","","2.92","%"]] [[/GREPCENT_TABLE]] (1) The average balances of the interest-earning assets for the respective periods are: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Private Education Loans","","$","18,463","","","$","20,524","","","$","21,225"],["Other interest-earning assets","","","593","","","","644","","","","787"],["Total Private Education Loan interest-earning assets","","$","19,056","","","$","21,168","","","$","22,012"]] [[/GREPCENT_TABLE]] The increase in the net interest margin from the prior years is primarily a result of improved funding spreads which was primarily the result of a portion of the variable rate education loans being funded by fixed rate debt in an increasing interest rate environment. As of December 31, 2023, our Private Education Loan portfolio totaled $16.9 billion, comprised of $8.8 billion of refinance loans and $8.1 billion of non-refinance loans. The weighted-average life of this portfolio as of December 31, 2023 was 5 years and 5 years, respectively, assuming a Constant Prepayment Rate (CPR) of 10% and 10%, respectively. Provision for Loan Losses The provision for Private Education Loan losses decreased $12 million. The provision for loan losses of $67 million in 2023 included $25 million in connection with loan originations, $35 million related to internal policy changes being made to reflect changing regulatory expectations related to school misconduct discharges on certain populations of private loans, $29 million related to changes in the net charge-off rates on defaulted loans, $23 million in connection with the resolution of certain private legacy loans in bankruptcy and $22 million related to a general reserve build. This was partially offset by a $67 million reduction in connection with the adoption of a new accounting standard (see "Results of Operations — GAAP Comparison of 2023 Results with 2022" for further details). The provision of $79 million in the year-ago period included $34 million in connection with loan originations, $33 million related to changes in the net charge-off rates on defaulted loans and $12 million related to a general reserve build. 20 Operating Expenses Operating expenses for our consumer lending segment include costs to originate, acquire, service and collect on our consumer loan portfolio. Operating expenses increased $3 million. Business Processing Segment The following table presents Core Earnings results for our Business Processing segment. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","% Increase (Decrease)"],["(Dollars in millions)","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Business processing revenue","","$","321","","","$","330","","","$","488","","","","(3",")%","","","(32",")%"],["Direct operating expenses","","","285","","","","280","","","","360","","","","2","","","","(22",")"],["Income before income tax expense","","","36","","","","50","","","","128","","","","(28",")","","","(61",")"],["Income tax expense","","","8","","","","10","","","","29","","","","(20",")","","","(66",")"],["Net income","","$","28","","","$","40","","","$","99","","","","(30",")%","","","(60",")%"]] [[/GREPCENT_TABLE]] Highlights of 2023 vs. 2022 • Revenue was $321 million, $9 million lower due to a $74 million increase in revenue from services for our traditional Business Processing clients, which was more than offset by the expected $83 million reduction in revenue from the wind-down of pandemic-related contracts. • Net income was $28 million compared to $40 million. • EBITDA(1) was $39 million, down $14 million, primarily the result of the revenue decrease discussed above. Key performance metrics are as follows: [[GREPCENT_TABLE]] [["","","As of December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Revenue from government services","","$","200","","","$","187","","","$","258"],["Revenue from healthcare services","","","121","","","","143","","","","230"],["Total fee revenue","","$","321","","","$","330","","","$","488"],["EBITDA(1)","","$","39","","","$","53","","","$","136"],["EBITDA margin(1)","","","12","%","","","16","%","","","28","%"]] [[/GREPCENT_TABLE]] (1) Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 21 Other Segment The following table presents Core Earnings results for our Other segment. [[GREPCENT_TABLE]] [["","","Years Ended December 31,","","","% Increase (Decrease)"],["(Dollars in millions)","","2023","","","2022","","","2021","","","2023 vs. 2022","","","2022 vs. 2021"],["Net interest loss after provision for loan losses","","$","(114",")","","$","(87",")","","$","(69",")","","","31","%","","","26","%"],["Other income (loss):"],["Other revenue","","","5","","","","\u2014","","","","5","","","","100","","","","(100",")"],["Losses on debt repurchases","","","(8",")","","","\u2014","","","","(73",")","","","100","","","","(100",")"],["Total other income (loss)","","","(3",")","","","\u2014","","","","(68",")","","","(100",")","","","(100",")"],["Expenses:"],["Unallocated shared services operating expenses:"],["Unallocated information technology costs","","","80","","","","85","","","","65","","","","(6",")","","","31"],["Unallocated corporate costs","","","212","","","","157","","","","397","","","","35","","","","(60",")"],["Total unallocated shared services operating expenses","","","292","","","","242","","","","462","","","","21","","","","(48",")"],["Restructuring/other reorganization expenses","","","25","","","","36","","","","26","","","","(31",")","","","38"],["Total expenses","","","317","","","","278","","","","488","","","","14","","","","(43",")"],["Loss before income tax benefit","","","(434",")","","","(365",")","","","(625",")","","","19","","","","(42",")"],["Income tax benefit","","","(103",")","","","(76",")","","","(131",")","","","36","","","","(42",")"],["Net loss","","$","(331",")","","$","(289",")","","$","(494",")","","","15","%","","","(41",")%"]] [[/GREPCENT_TABLE]] 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 amount of the net interest loss is primarily a result of the size of the liquidity portfolio as well as the cost of funds of the debt funding the corporate liquidity portfolio. Unallocated Shared Services Expenses Unallocated shared services operating expenses are 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. Expenses increased $50 million from the prior year primarily as a result of a $73 million increase in regulatory-related expenses. Regulatory-related expenses were $80 million and $7 million in 2023 and 2022, respectively, with 2023 including a $73 million contingency loss accrual related to recent developments in connection to CFPB matters. The remaining $23 million decrease in expenses was primarily the result of ongoing initiatives to reduce costs and improve operating efficiency. See “Note 12 — 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 certain 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 certain 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 These expenses declined $11 million. In 2023, these expenses relate primarily to severance costs incurred in connection with the CEO transition as well as a facility lease termination and impairment of a facility held for sale in conjunction with the implementation of certain efficiency initiatives. Expense in 2022 primarily related to costs for severance and facility lease terminations in connection with the Company's decision to exit the FFELP asset recovery business and consolidate certain business lines. 22 Financial Condition This section provides information regarding the balances, activity and credit performance metrics of our education loan portfolio. Summary of our Education Loan Portfolio Ending Education Loan Balances, net [[GREPCENT_TABLE]] [["","","December 31, 2023"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Total education loan portfolio:"],["In-school(1)","","$","12","","","$","\u2014","","","$","12","","","$","70","","","$","82"],["Grace, repayment and other(2)","","","13,708","","","","24,420","","","","38,128","","","","17,449","","","","55,577"],["Total","","","13,720","","","","24,420","","","","38,140","","","","17,519","","","","55,659"],["Allowance for loan losses","","","(156",")","","","(59",")","","","(215",")","","","(617",")","","","(832",")"],["Total education loan portfolio","","$","13,564","","","$","24,361","","","$","37,925","","","$","16,902","","","$","54,827"],["% of total FFELP","","","36","%","","","64","%","","","100","%"],["% of total","","","25","%","","","44","%","","","69","%","","","31","%","","","100","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","December 31, 2022"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Total education loan portfolio:"],["In-school(1)","","$","16","","","$","\u2014","","","$","16","","","$","54","","","$","70"],["Grace, repayment and other(2)","","","15,834","","","","27,897","","","","43,731","","","","19,471","","","","63,202"],["Total","","","15,850","","","","27,897","","","","43,747","","","","19,525","","","","63,272"],["Allowance for loan losses","","","(159",")","","","(63",")","","","(222",")","","","(800",")","","","(1,022",")"],["Total education loan portfolio","","$","15,691","","","$","27,834","","","$","43,525","","","$","18,725","","","$","62,250"],["% of total FFELP","","","36","%","","","64","%","","","100","%"],["% of total","","","25","%","","","45","%","","","70","%","","","30","%","","","100","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","December 31, 2021"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Total education loan portfolio:"],["In-school(1)","","$","20","","","$","\u2014","","","$","20","","","$","19","","","$","39"],["Grace, repayment and other(2)","","","18,379","","","","34,504","","","","52,883","","","","21,161","","","","74,044"],["Total","","","18,399","","","","34,504","","","","52,903","","","","21,180","","","","74,083"],["Allowance for loan losses","","","(180",")","","","(82",")","","","(262",")","","","(1,009",")","","","(1,271",")"],["Total education loan portfolio","","$","18,219","","","$","34,422","","","$","52,641","","","$","20,171","","","$","72,812"],["% of total FFELP","","","35","%","","","65","%","","","100","%"],["% of total","","","25","%","","","47","%","","","72","%","","","28","%","","","100","%"]] [[/GREPCENT_TABLE]] (1) Loans for customers still attending school and are not yet required to make payments on the loan. (2) Includes loans in deferment or forbearance. 23 Education Loan Activity [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Beginning balance","","$","15,691","","","$","27,834","","","$","43,525","","","$","18,725","","","$","62,250"],["Acquisitions (originations and purchases)(1)","","","\u2014","","","","\u2014","","","","\u2014","","","","970","","","","970"],["Capitalized interest and premium/discount amortization","","","577","","","","616","","","","1,193","","","","184","","","","1,377"],["Refinancings and consolidations to third parties","","","(859",")","","","(1,811",")","","","(2,670",")","","","(239",")","","","(2,909",")"],["Repayments and other","","","(1,845",")","","","(2,278",")","","","(4,123",")","","","(2,738",")","","","(6,861",")"],["Ending balance","","$","13,564","","","$","24,361","","","$","37,925","","","$","16,902","","","$","54,827"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Beginning balance","","$","18,219","","","$","34,422","","","$","52,641","","","$","20,171","","","$","72,812"],["Acquisitions (originations and purchases)(1)","","","1","","","","1","","","","2","","","","2,049","","","","2,051"],["Capitalized interest and premium/discount amortization","","","641","","","","731","","","","1,372","","","","208","","","","1,580"],["Refinancings and consolidations to third parties","","","(1,851",")","","","(4,709",")","","","(6,560",")","","","(452",")","","","(7,012",")"],["Repayments and other","","","(1,319",")","","","(2,611",")","","","(3,930",")","","","(3,251",")","","","(7,181",")"],["Ending balance","","$","15,691","","","$","27,834","","","$","43,525","","","$","18,725","","","$","62,250"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["(Dollars in millions)","","FFELP Stafford and Other","","","FFELP Consolidation Loans","","","Total FFELP Loans","","","Private Education Loans","","","Total Portfolio"],["Beginning balance","","$","19,607","","","$","38,677","","","$","58,284","","","$","21,079","","","$","79,363"],["Acquisitions (originations and purchases)(1)","","","70","","","","41","","","","111","","","","5,993","","","","6,104"],["Capitalized interest and premium/discount amortization","","","666","","","","762","","","","1,428","","","","186","","","","1,614"],["Refinancings and consolidations to third parties","","","(906",")","","","(1,819",")","","","(2,725",")","","","(529",")","","","(3,254",")"],["Loan sales","","","\u2014","","","","\u2014","","","","\u2014","","","","(1,613",")","","","(1,613",")"],["Repayments and other","","","(1,218",")","","","(3,239",")","","","(4,457",")","","","(4,945",")","","","(9,402",")"],["Ending balance","","$","18,219","","","$","34,422","","","$","52,641","","","$","20,171","","","$","72,812"]] [[/GREPCENT_TABLE]] (1) Includes the origination of $176 million, $390 million and $1.7 billion of Private Education Refinance Loans in 2023, 2022 and 2021, respectively, that refinanced FFELP and Private Education Loans that were on our balance sheet. 24 FFELP Loan Portfolio Performance [[GREPCENT_TABLE]] [["","","December 31,"],["","","2023","","","2022","","","2021"],["(Dollars in millions)","","Balance","","","%","","","Balance","","","%","","","Balance","","","%"],["Loans in-school/grace/deferment(1)","","$","1,557","","","","","","$","1,772","","","","","","$","2,220"],["Loans in forbearance(2)","","","6,147","","","","","","","7,603","","","","","","","6,292"],["Loans in repayment and percentage of each status:"],["Loans current","","","26,204","","","","86.1","%","","","29,004","","","","84.4","%","","","39,679","","","","89.4","%"],["Loans delinquent 31-60 days(3)","","","1,193","","","","3.9","","","","1,247","","","","3.6","","","","1,696","","","","3.8"],["Loans delinquent 61-90 days(3)","","","746","","","","2.5","","","","833","","","","2.4","","","","904","","","","2.0"],["Loans delinquent greater than 90 days(3)","","","2,293","","","","7.5","","","","3,288","","","","9.6","","","","2,112","","","","4.8"],["Total FFELP Loans in repayment","","","30,436","","","","100","%","","","34,372","","","","100","%","","","44,391","","","","100","%"],["Total FFELP Loans","","","38,140","","","","","","","43,747","","","","","","","52,903"],["FFELP Loan allowance for losses","","","(215",")","","","","","","(222",")","","","","","","(262",")"],["FFELP Loans, net","","$","37,925","","","","","","$","43,525","","","","","","$","52,641"],["Percentage of FFELP Loans in repayment","","","","","","79.8","%","","","","","","78.6","%","","","","","","83.9","%"],["Delinquencies as a percentage of FFELP Loans in repayment","","","","","","13.9","%","","","","","","15.6","%","","","","","","10.6","%"],["FFELP Loans in forbearance as a percentage of loans in repayment and forbearance","","","","","","16.8","%","","","","","","18.1","%","","","","","","12.4","%"]] [[/GREPCENT_TABLE]] (1) Loans for customers who may still be attending school or engaging in other permitted educational activities and are not yet required to make payments on their loans, e.g., residency periods for medical students or a grace period for bar exam preparation, as well as loans for customers who have requested and qualify for other permitted program deferments such as military, unemployment, or economic hardships. (2) Loans for customers who have used their allowable deferment time or do not qualify for deferment, that need additional time to obtain employment or who have temporarily ceased making payments due to hardship or other factors such as disaster relief, including COVID-19 relief programs. (3) The period of delinquency is based on the number of days scheduled payments are contractually past due. Private Education Loan Portfolio Performance [[GREPCENT_TABLE]] [["","","December 31,"],["","","2023","","","2022","","","2021"],["(Dollars in millions)","","Balance","","","%","","","Balance","","","%","","","Balance","","","%"],["Loans in-school/grace/deferment(1)","","$","360","","","","","","$","354","","","","","","$","361"],["Loans in forbearance(2)","","","363","","","","","","","401","","","","","","","535"],["Loans in repayment and percentage of each status:"],["Loans current","","","15,935","","","","94.9","%","","","17,838","","","","95.0","%","","","19,634","","","","96.8","%"],["Loans delinquent 31-60 days(3)","","","308","","","","1.8","","","","335","","","","1.8","","","","222","","","","1.1"],["Loans delinquent 61-90 days(3)","","","173","","","","1.0","","","","186","","","","1.0","","","","131","","","",".6"],["Loans delinquent greater than 90 days(3)","","","380","","","","2.3","","","","411","","","","2.2","","","","297","","","","1.5"],["Total Private Education Loans in repayment","","","16,796","","","","100","%","","","18,770","","","","100","%","","","20,284","","","","100","%"],["Total Private Education Loans","","","17,519","","","","","","","19,525","","","","","","","21,180"],["Private Education Loan allowance for losses","","","(617",")","","","","","","(800",")","","","","","","(1,009",")"],["Private Education Loans, net","","$","16,902","","","","","","$","18,725","","","","","","$","20,171"],["Percentage of Private Education Loans in repayment","","","","","","95.9","%","","","","","","96.1","%","","","","","","95.8","%"],["Delinquencies as a percentage of Private Education Loans in repayment","","","","","","5.1","%","","","","","","5.0","%","","","","","","3.2","%"],["Loans in forbearance as a percentage of loans in repayment and forbearance","","","","","","2.1","%","","","","","","2.1","%","","","","","","2.6","%"],["Percentage of Private Education Loans with a cosigner(4)","","","","","","33","%","","","","","","33","%","","","","","","35","%"]] [[/GREPCENT_TABLE]] (1) Loans for customers who are attending school or are in other permitted educational activities and are not yet required to make payments on their loans, e.g., internship periods, as well as loans for customers who have requested and qualify for other permitted program deferments such as various military eligible deferments. (2) Loans for customers who have requested extension of grace period generally during employment transition or who have temporarily ceased making full payments due to hardship or other factors such as disaster relief, including COVID-19 relief programs, consistent with established loan program servicing policies and procedures. (3) The period of delinquency is based on the number of days scheduled payments are contractually past due. (4) Excluding Private Education Refinance Loans, which do not have a cosigner, the cosigner rate was 65% for all periods presented. 25 Allowance for Loan Losses [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023"],["(Dollars in millions)","","FFELP Loans","","","Private Education Loans","","","Total"],["Allowance at beginning of period","","$","222","","","$","800","","","$","1,022"],["Total provision","","","56","","","","67","","","","123"],["Charge-offs:"],["Gross charge-offs","","","(63",")","","","(320",")","","","(383",")"],["Expected future recoveries on current period gross charge-offs","","","\u2014","","","","47","","","","47"],["Total(1)","","","(63",")","","","(273",")","","","(336",")"],["Adjustment resulting from the change in charge-off rate(2)","","","\u2014","","","","(25",")","","","(25",")"],["Net charge-offs","","","(63",")","","","(298",")","","","(361",")"],["Decrease in expected future recoveries on previously fully charged-off loans(3)","","","\u2014","","","","48","","","","48"],["Allowance at end of period (GAAP)","","","215","","","","617","","","","832"],["Plus: expected future recoveries on previously fully charged-off loans(3)","","","\u2014","","","","226","","","","226"],["Allowance at end of period excluding expected future recoveries on previously fully charged-off loans (Non-GAAP Financial Measure)(4)","","$","215","","","$","843","","","$","1,058"],["Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in charge-off rate(2)","","",".19","%","","","1.54","%"],["Net adjustment resulting from the change in charge -off rate as a percentage of average loans in repayment(2)","","","\u2014","%","","",".14","%"],["Net charge-offs as a percentage of average loans in repayment","","",".19","%","","","1.68","%"],["Allowance coverage of charge-offs(4)","","","3.4","","","","2.8","","","(Non-GAAP)"],["Allowance as a percentage of the ending total loan balance(4)","","",".6","%","","","4.8","%","","(Non-GAAP)"],["Allowance as a percentage of the ending loans in repayment(4)","","",".7","%","","","5.0","%","","(Non-GAAP)"],["Ending total loans","","$","38,140","","","$","17,519"],["Average loans in repayment","","$","33,047","","","$","17,749"],["Ending loans in repayment","","$","30,436","","","$","16,796"]] [[/GREPCENT_TABLE]] (1) Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off. (2) An increase in the net charge-off rate on defaulted Private Education Loans in 2023 resulted in a $25 million reduction in the balance of expected future recoveries on previously fully charged-off loans. (3) At the end of each month, for Private Education Loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as "expected future recoveries on previously fully charged-off loans." If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in millions)","","2023"],["Beginning of period expected future recoveries on previously fully charged-off loans","","$","274"],["Expected future recoveries of current period defaults","","","47"],["Recoveries (cash collected)","","","(46",")"],["Charge-offs (as a result of lower recovery expectations)","","","(49",")"],["End of period expected future recoveries on previously fully charged-off loans","","$","226"],["Change in balance during period","","$","(48",")"]] [[/GREPCENT_TABLE]] (4) For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 26 [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["(Dollars in millions)","","FFELP Loans","","","Private Education Loans","","","Total"],["Allowance at beginning of period","","$","262","","","$","1,009","","","$","1,271"],["Total provision","","","\u2014","","","","79","","","","79"],["Charge-offs:"],["Gross charge-offs","","","(40",")","","","(370",")","","","(410",")"],["Expected future recoveries on current period gross charge-offs","","","\u2014","","","","57","","","","57"],["Total(1)","","","(40",")","","","(313",")","","","(353",")"],["Adjustment resulting from the change in charge-off rate(2)","","","\u2014","","","","(30",")","","","(30",")"],["Net charge-offs","","","(40",")","","","(343",")","","","(383",")"],["Decrease in expected future recoveries on previously fully charged-off loans(3)","","","\u2014","","","","55","","","","55"],["Allowance at end of period (GAAP)","","","222","","","","800","","","","1,022"],["Plus: expected future recoveries on previously fully charged-off loans(3)","","","\u2014","","","","274","","","","274"],["Allowance at end of period excluding expected future recoveries on previously fully charged -off loans (Non-GAAP Financial Measure)(4)","","$","222","","","$","1,074","","","$","1,296"],["Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in charge-off rate(2)","","",".10","%","","","1.59","%"],["Net adjustment resulting from the change in charge-off rate as a percentage of average loans in repayment(2)","","","\u2014","%","","",".15","%"],["Net charge-offs as a percentage of average loans in repayment","","",".10","%","","","1.74","%"],["Allowance coverage of charge-offs(4)","","","5.5","","","","3.1","","","(Non-GAAP)"],["Allowance as a percentage of the ending total loan balance(4)","","",".5","%","","","5.5","%","","(Non-GAAP)"],["Allowance as a percentage of the ending loans in repayment(4)","","",".6","%","","","5.7","%","","(Non-GAAP)"],["Ending total loans","","$","43,747","","","$","19,525"],["Average loans in repayment","","$","40,332","","","$","19,796"],["Ending loans in repayment","","$","34,372","","","$","18,770"]] [[/GREPCENT_TABLE]] (1) Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off. (2) An increase in the net charge-off rate on defaulted Private Education Loans in 2022 resulted in a $30 million reduction in the balance of expected future recoveries on previously fully charged-off loans. (3) At the end of each month, for Private Education Loans that are 212 or more days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as "expected future recoveries on previously fully charged-off loans." If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in millions)","","2022"],["Beginning of period expected future recoveries on previously fully charged-off loans","","$","329"],["Expected future recoveries of current period defaults","","","57"],["Recoveries (cash collected)","","","(56",")"],["Charge-offs (as a result of lower recovery expectations)","","","(56",")"],["End of period expected future recoveries on previously fully charged-off loans","","$","274"],["Change in balance during period","","$","(55",")"]] [[/GREPCENT_TABLE]] (4) For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 27 [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["(Dollars in millions)","","FFELP Loans","","","Private Education Loans","","","Total"],["Allowance at beginning of period","","$","288","","","$","1,089","","","$","1,377"],["Provision:"],["Reversal of allowance related to loan sales(1)","","","\u2014","","","","(107",")","","","(107",")"],["Remaining provision","","","\u2014","","","","46","","","","46"],["Total provision","","","\u2014","","","","(61",")","","","(61",")"],["Charge-offs:"],["Gross charge-offs","","","(26",")","","","(175",")","","","(201",")"],["Expected future recoveries on current period gross charge-offs","","","\u2014","","","","22","","","","22"],["Total(2)","","","(26",")","","","(153",")","","","(179",")"],["Adjustment resulting from the change in charge-off rate(3)","","","\u2014","","","","(16",")","","","(16",")"],["Net charge-offs","","","(26",")","","","(169",")","","","(195",")"],["Decrease in expected future recoveries on previously fully charged-off loans(4)","","","\u2014","","","","150","","","","150"],["Allowance at end of period (GAAP)","","","262","","","","1,009","","","","1,271"],["Plus: expected future recoveries on previously fully charged-off loans(4)","","","\u2014","","","","329","","","","329"],["Allowance at end of period excluding expected future recoveries on previously fully charged -off loans (Non-GAAP Financial Measure)(5)","","$","262","","","$","1,338","","","$","1,600"],["Net charge-offs as a percentage of average loans in repayment, excluding the net adjustment resulting from the change in charge-off rate(3)","","",".06","%","","",".76","%"],["Net adjustment resulting from the change in charge-off rate as a percentage of average loans in repayment(3)","","","\u2014","%","","",".08","%"],["Net charge-offs as a percentage of average loans in repayment","","",".06","%","","",".84","%"],["Allowance coverage of charge-offs(5)","","","10.0","","","","7.9","","","(Non-GAAP)"],["Allowance as a percentage of the ending total loan balance(5)","","",".5","%","","","6.3","%","","(Non-GAAP)"],["Allowance as a percentage of the ending loans in repayment(5)","","",".6","%","","","6.6","%","","(Non-GAAP)"],["Ending total loans","","$","52,903","","","$","21,180"],["Average loans in repayment","","$","45,781","","","$","20,150"],["Ending loans in repayment","","$","44,390","","","$","20,284"]] [[/GREPCENT_TABLE]] (1) In connection with the sale of approximately $1.6 billion of Private Education Loans in 2021. (2) Charge-offs are reported net of expected recoveries. For Private Education Loans, we charge off the estimated loss of a defaulted loan balance by charging off the entire defaulted loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” For FFELP Loans, the recovery is received at the time of charge-off. (3) An increase in the net charge-off rate on defaulted Private Education Loans in 2021 resulted in a $16 million reduction in the balance of expected future recoveries on previously fully charged-off loans. (4) At the end of each month, for Private Education Loans that are 212 days past due, we charge off the estimated loss of a defaulted loan balance by charging off the entire loan balance and estimating recoveries on a pool basis. These estimated recoveries are referred to as “expected future recoveries on previously fully charged-off loans.” If actual periodic recoveries are less than expected, the difference is immediately reflected as a reduction to expected future recoveries on previously fully charged-off loans. If actual periodic recoveries are greater than expected, they will be reflected as a recovery through the allowance for Private Education Loan losses once the cumulative recovery amount exceeds the cumulative amount originally expected to be recovered. The following table summarizes the activity in the expected future recoveries on previously fully charged-off loans: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Dollars in millions)","","2021"],["Beginning of period expected future recoveries on previously fully charged-off loans","","$","479"],["Expected future recoveries of current period defaults","","","22"],["Recoveries (cash collected)","","","(87",")"],["Charge-offs (as a result of lower recovery expectations)","","","(35",")"],["Reduction in expected recoveries related to regulatory settlement(6)","","","(50",")"],["End of period expected future recoveries on previously fully charged-off loans","","$","329"],["Change in balance during period","","$","(150",")"]] [[/GREPCENT_TABLE]] (5) For Private Education Loans, the item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 28 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 segment requires minimal liquidity and funding. 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 rating 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 rating 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 $5.9 billion at December 31, 2023. 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 $0.5 billion of senior unsecured notes that mature in the short term (i.e., over the next 12 months) and the remaining $5.4 billion of senior unsecured notes that mature in the long term (from 2025 to 2043 with 60% maturing by 2029), through a number of sources. These sources include our cash on hand, unencumbered FFELP Loan and Private Education Refinance Loan portfolios (see “Sources of Primary Liquidity” below), the predictable operating cash flows provided by operating activities, 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 asset-backed commercial paper (ABCP) facilities, issue term asset-backed securities (ABS), enter into additional Private Education Loan and FFELP Loan repurchase facilities, or issue additional unsecured debt. We originate Private Education Loans (a portion of which is obtained through a forward purchase agreement). We also have purchased and may purchase, in future periods, Private Education Loan and FFELP Loan portfolios from third parties. Loan originations and purchases are part of our ongoing liquidity needs. We repurchased 18.0 million shares of common stock for $310 million in 2023 and have $290 million of unused share repurchase authority as of December 31, 2023. 29 Sources of Primary Liquidity [[GREPCENT_TABLE]] [["","","Ending Balances","","","Average Balances"],["","","December 31,","","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2023","","","2022","","","2021"],["Unrestricted cash and liquid investments","","$","839","","","$","1,535","","","$","1,024","","","$","1,157","","","$","1,209"],["Unencumbered FFELP Loans","","","92","","","","68","","","","89","","","","167","","","","220"],["Unencumbered Private Education Refinance Loans","","","236","","","","55","","","","105","","","","235","","","","642"],["Total","","$","1,167","","","$","1,658","","","$","1,218","","","$","1,559","","","$","2,071"]] [[/GREPCENT_TABLE]] Sources of Additional Liquidity Liquidity may also be available under our secured credit facilities. Maximum borrowing capacity under the FFELP Loan and Private Education Loan ABCP facilities will vary and be subject to each agreement’s borrowing conditions, including, among others, facility size, current usage and availability of qualifying collateral from unencumbered loans. The following tables detail the additional borrowing capacity of these facilities with maturity dates ranging from June 2024 to June 2025. [[GREPCENT_TABLE]] [["","","Maximum Additional Capacity"],["","","December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Ending Balances:"],["FFELP Loan ABCP facilities","","$","408","","","$","101","","","$","546"],["Private Education Loan ABCP facilities","","","1,719","","","","1,248","","","","2,235"],["Total","","$","2,127","","","$","1,349","","","$","2,781"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","","Average Maximum Additional Capacity"],["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Average Balances:"],["FFELP Loan ABCP facilities","","$","103","","","$","275","","","$","514"],["Private Education Loan ABCP facilities","","","1,756","","","","1,998","","","","2,351"],["Total","","$","1,859","","","$","2,273","","","$","2,865"]] [[/GREPCENT_TABLE]] At December 31, 2023, we had a total of $3.0 billion of unencumbered tangible assets inclusive of those listed in the table above as sources of primary liquidity. Total unencumbered education loans comprised $1.2 billion principal of our unencumbered tangible assets of which $1.1 billion and $92 million related to Private Education Loans and FFELP Loans, respectively. In addition, as of December 31, 2023, we had $5.5 billion of encumbered net assets (i.e., overcollateralization) in our various financing facilities (consolidated variable interest entities). We enter into repurchase facilities at times to borrow against the encumbered net assets of these financing vehicles. As of December 31, 2023, $0.6 billion of repurchase facility borrowings were outstanding. The following table reconciles encumbered and unencumbered assets and their net impact on total Tangible Equity. [[GREPCENT_TABLE]] [["(Dollars in billions)","","December 31, 2023","","","December 31, 2022"],["Net assets of consolidated variable interest entities (encumbered assets) \u2014 FFELP Loans","","$","3.4","","","$","3.7"],["Net assets of consolidated variable interest entities (encumbered assets) \u2014 Private Education Loans","","","2.1","","","","1.5"],["Tangible unencumbered assets(1)","","","3.0","","","","4.1"],["Senior unsecured debt","","","(5.9",")","","","(7.0",")"],["Mark-to-market on unsecured hedged debt(2)","","",".2","","","",".3"],["Other liabilities, net","","","(.7",")","","","(.3",")"],["Total Tangible Equity(3)","","$","2.1","","","$","2.3"]] [[/GREPCENT_TABLE]] (1) Excludes goodwill and acquired intangible assets of $695 million and $705 million at December 31, 2023 and 2022, respectively. (2) At December 31, 2023 and 2022, there were $(181) million and $(285) million, respectively, of net gains (losses) on derivatives hedging this debt in unencumbered assets, which partially offset these gains (losses). (3) Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” 30 Borrowings Ending Balances [[GREPCENT_TABLE]] [["","","December 31, 2023","","","December 31, 2022","","","December 31, 2021"],["(Dollars in millions)","","Short Term","","","Long Term","","","Total","","","Short Term","","","Long Term","","","Total","","","Short Term","","","Long Term","","","Total"],["Unsecured borrowings:"],["Senior unsecured debt","","$","506","","","$","5,351","","","$","5,857","","","$","1,301","","","$","5,711","","","$","7,012","","","$","\u2014","","","$","7,014","","","$","7,014"],["Total unsecured borrowings","","","506","","","","5,351","","","","5,857","","","","1,301","","","","5,711","","","","7,012","","","","\u2014","","","","7,014","","","","7,014"],["Secured borrowings:"],["FFELP Loan securitizations","","","59","","","","35,626","","","","35,685","","","","76","","","","42,675","","","","42,751","","","","\u2014","","","","51,841","","","","51,841"],["Private Education Loan securitizations","","","435","","","","11,754","","","","12,189","","","","725","","","","12,744","","","","13,469","","","","543","","","","14,074","","","","14,617"],["FFELP Loan ABCP facilities","","","1,854","","","","89","","","","1,943","","","","923","","","","386","","","","1,309","","","","282","","","","150","","","","432"],["Private Education Loan ABCP facilities","","","1,286","","","","821","","","","2,107","","","","2,734","","","","\u2014","","","","2,734","","","","1,363","","","","1,152","","","","2,515"],["Other","","","95","","","","39","","","","134","","","","121","","","","\u2014","","","","121","","","","302","","","","\u2014","","","","302"],["Total secured borrowings","","","3,729","","","","48,329","","","","52,058","","","","4,579","","","","55,805","","","","60,384","","","","2,490","","","","67,217","","","","69,707"],["Core Earnings basis borrowings(1)","","","4,235","","","","53,680","","","","57,915","","","","5,880","","","","61,516","","","","67,396","","","","2,490","","","","74,231","","","","76,721"],["Adjustment for GAAP accounting treatment","","","(9",")","","","(278",")","","","(287",")","","","(10",")","","","(490",")","","","(500",")","","","\u2014","","","","257","","","","257"],["GAAP basis borrowings","","$","4,226","","","$","53,402","","","$","57,628","","","$","5,870","","","$","61,026","","","$","66,896","","","$","2,490","","","$","74,488","","","$","76,978"]] [[/GREPCENT_TABLE]] Average Balances [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["","","2023","","","2022","","","2021"],["(Dollars in millions)","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate","","","Average Balance","","","Average Rate"],["Unsecured borrowings:"],["Senior unsecured debt","","$","6,363","","","","8.74","%","","$","7,010","","","","5.66","%","","$","7,978","","","","4.43","%"],["Total unsecured borrowings","","","6,363","","","","8.74","","","","7,010","","","","5.66","","","","7,978","","","","4.43"],["Secured borrowings:"],["FFELP Loan securitizations","","","38,652","","","","5.68","","","","47,528","","","","2.72","","","","53,661","","","","1.27"],["Private Education Loan securitizations","","","12,800","","","","3.45","","","","14,252","","","","2.63","","","","14,273","","","","2.40"],["FFELP Loan ABCP facilities","","","1,773","","","","6.40","","","","988","","","","3.27","","","","1,012","","","","1.55"],["Private Education Loan ABCP facilities","","","2,448","","","","6.87","","","","2,519","","","","3.39","","","","2,429","","","","1.86"],["Other","","","106","","","","1.91","","","","171","","","","1.68","","","","303","","","",".34"],["Total secured borrowings","","","55,779","","","","5.24","","","","65,458","","","","2.73","","","","71,678","","","","1.52"],["Core Earnings basis borrowings(1)","","","62,142","","","","5.60","","","","72,468","","","","3.02","","","","79,656","","","","1.81"],["Adjustment for GAAP accounting treatment","","","\u2014","","","",".12","","","","\u2014","","","","(.12",")","","","\u2014","","","","(.16",")"],["GAAP basis borrowings","","$","62,142","","","","5.72","%","","$","72,468","","","","2.90","%","","$","79,656","","","","1.65","%"]] [[/GREPCENT_TABLE]] (1) Item is a non-GAAP financial measure. For a description and reconciliation, see “Non-GAAP Financial Measures.” The differences in derivative accounting give rise to the difference above. 31 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). “Note 2 — Significant Accounting Policies” includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. Actual results may differ from these estimates under varying assumptions or conditions. On a quarterly basis, management evaluates its estimates, particularly those that include the most difficult, subjective or complex judgments and are often about matters that are inherently uncertain. Critical accounting estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of our operations. Our critical accounting policies and estimates are the allowance for loan losses, goodwill impairment assessment, and loan premium and discount amortization. Allowance for Loan Losses We measure and recognize an allowance for loan losses that estimates the remaining current expected credit losses (CECL) for financial assets measured at amortized cost held at the reporting date. We have determined that, for modeling current expected credit losses, in general, we can reasonably estimate expected losses that incorporate current and forecasted economic conditions over a “reasonable and supportable” period. For Private Education Loans, we incorporate a reasonable and supportable forecast of various macro-economic variables over the remaining life of the loans. The development of the reasonable and supportable forecast incorporates an assumption that each macro-economic variable will revert to a long-term expectation starting in years 2-4 of the forecast and largely completing within the first five years of the forecast. For FFELP Loans, after a three-year reasonable and supportable period, there is an immediate reversion to a long-term expectation. The models used to project losses utilize key credit quality indicators of the loan portfolios and predict how those attributes are expected to perform in connection with the forecasted economic conditions. In connection with this methodology, our modeling of current expected credit losses utilizes historical loan repayment experience since 2008 identifying loan variables (key credit quality indicators) that are significantly predictive of loans that will default and predicts how loans will perform in connection with the forecasted economic conditions. The key credit quality indicators used by the model for Private Education Loans are credit scores (FICO scores), loan status, loan seasoning, certain types of loan modifications, the existence of a cosigner and school type: • Credit scores are an indicator of the credit risk of a customer and generally the higher the credit score the more likely it is the customer will be able to make all of their contractual payments. • Loan status affects the credit risk because generally a past due loan is more likely to default than an up-to-date loan. Additionally, loans in a deferred payment status have different credit risk profiles compared with those in current payment status. • Of the portfolio in repayment, loan seasoning affects credit risk because a loan with a history of making payments generally has a lower incidence of default than a loan with a history of making infrequent or no payments. • Certain types of loan modifications are those that represent the historical definition of a TDR prior to the implementation of ASU No. 2022-02 on January 1, 2023. Any loan that meets the historical definition of a TDR retains that classification, as a key credit quality indicator used for calculating the allowance for loan losses, for the life of the loan (including loans that met that definition in 2023). A TDR is where an economic concession (interest rate modifications, term extensions or forbearance greater than 3 months in the prior 24-month period) has been given to a borrower experiencing financial difficulties. This classification is not intended to reconcile in any way to the new modification disclosures required under ASU No. 2022-02. • The existence of a cosigner generally lowers the likelihood of default, thus lowering the credit risk. • The type of school customers attended can have an impact on their graduation rate and job prospects after graduation and therefore can affect their ability to make payments, which impacts the credit risk. For FFELP Loans, the key credit quality indicators are loan status and loan type (Stafford, Consolidation and Rehab loans). We project losses over the contractual term of our loans, including any extension options within the control of the borrower. Further, we make estimates regarding prepayments when determining our expected credit losses which are derived in the same manner discussed above. 32 The forecasted economic conditions used in our modeling of expected losses are provided by a third party. The primary economic metrics we use in the economic forecast are unemployment, GDP, interest rates, consumer loan delinquency rates and consumer income. Several forecast scenarios are provided which represent the baseline economic expectations as well as favorable and adverse scenarios. We analyze and evaluate the alternative scenarios for reasonableness and determine the appropriate weighting of these alternative scenarios based upon the current economic conditions and our view of the likelihood and risks of the alternative scenarios. We use historical customer payment experience to estimate the amount of future recoveries (and the resulting net charge-off rate) on defaulted Private Education Loans. We use judgment in determining whether historical performance is representative of what we expect to collect in the future. The amount of expected future recoveries on defaulted FFELP Loans is based on the contractual government guarantee (which generally limits the maximum loss to 3% of the loan balance). Once our loss model calculations are performed, we determine if qualitative adjustments are needed for factors not reflected in the quantitative model. These adjustments may include, but are not limited to, changes in lending, servicing and collection policies and practices as well as the effect of other external factors such as the economy and changes in legal or regulatory requirements that impact the amount of future credit losses. The Private Education Loan provision for loan losses of $67 million in 2023 included $25 million in connection with loan originations, $35 million related to internal policy changes being made to reflect changing regulatory expectations related to school misconduct discharges on certain populations of private loans, $29 million related to changes in the net charge-off rates on defaulted loans, $23 million in connection with the resolution of certain private legacy loans in bankruptcy and $22 million related to a general reserve build, which was partially offset by a $67 million reduction in connection with the adoption of a new accounting standard (ASU No. 2022-02) (see "Results of Operations — GAAP Comparison of 2023 Results with 2022" for further details). The FFELP Loan provision for loan losses of $56 million was primarily a result of the continued extension of the portfolio and the resulting increase in both the expected future defaults and the premium allocated to all expected future defaults. The extension of the portfolio is primarily the result of the continued increase in the usage of Income Dependent Repayment (IDR) plans by borrowers in this portfolio. This has the effect of extending the expected maturity date on the loans in which borrowers use IDR. With respect to the $35 million of Private Education Loan provision for loan losses related to changing regulatory expectations related to school misconduct, we estimated the amount of loans that will apply and be approved for loan discharge which is inherently judgmental. With respect to the $23 million provision for loan losses discussed above, relating to the resolution of certain private legacy loans in bankruptcy, we considered the expected amount of discharges related to expected litigation settlements. See "Note 12 — Commitments, Contingencies and Guarantees" for further discussion of this matter. We evaluated and considered several forecasted economic scenarios when determining our allowance for loan losses and provision. We also considered the characteristics of our loan portfolio and its expected behavior in the forecasted economic scenarios. There has been a decline in the forecasted economic conditions since December 31, 2022 which has been incorporated into our allowance for loan loss as of December 31, 2023. This decline in economic conditions is seen in an increase in forecasted unemployment rates and consumer loan delinquency rates and a decrease in nominal GDP growth. There is uncertainty as to the ultimate impact to the economy from historically high inflation over the prior two years and the significant increase in interest rates that occurred in 2022 and 2023. There is also uncertainty related to the potential negative impact on the portfolio from the end of various payment relief and stimulus benefits that previously occurred. These conclusions and adjustments were based on an evaluation of current and forecasted economic conditions. If future economic conditions are significantly worse than what was assumed as a part of this assessment, it could result in additional provision for loan loss being recorded in future periods. The evaluation of the allowance for loan losses is inherently subjective, as it requires material estimates and assumptions that are used to project losses over the remaining life of the portfolio (in excess of 15 years). These assumptions and estimates are susceptible to significant changes. If actual future performance in delinquency, charge-offs and recoveries are significantly different than estimated, or management’s assumptions or practices were to change, this could materially affect our estimate of the allowance for loan losses and the related provision for loan losses on our income statement. Goodwill Impairment Assessment In determining annually (or more frequently if required) whether goodwill is impaired, we complete a goodwill impairment analysis which may be a qualitative or a quantitative analysis depending on the facts and circumstances associated with the reporting unit. Qualitative factors considered in conjunction with a qualitative analysis include: (1) the amount of cushion that existed the last time a quantitative test was completed which requires performing a valuation of the reporting unit, the resulting value of which is compared to the carrying value of the reporting unit, (2) macroeconomic factors (economy), (3) industry specific factors (growth or deterioration of the market; regulatory/political developments), (4) cost factors (margins), (5) financial performance of the reporting unit itself, (6) other specific items (litigation, change in management or key personnel) and (7) whether a sustained decrease in our 33 share price is indicative of a decline in value of the specific reporting unit. There can be significant judgment involved in assessing these qualitative factors. If, based on a qualitative analysis, we determine it is “more-likely-than-not” that the fair value of a reporting unit is less than its carrying amount, we also complete a quantitative impairment analysis. In lieu of performing a qualitative assessment, we may proceed directly to a quantitative impairment analysis. A quantitative goodwill impairment analysis requires a comparison of the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds the reporting unit’s fair value (the amount we believe a third party would pay for such reporting unit), the goodwill associated with the reporting unit will be impaired in an amount equal to the difference between the reporting unit’s fair value and its carrying value, not to exceed the carrying value of goodwill attributed to the reporting unit. There are significant judgments involved in determining the fair value of a reporting unit, including determining the appropriate valuation approach or approaches to utilize and the assumptions to apply including estimates of projected future cash flows which incorporate estimated future revenues, expenses, net income and capital expenditures from and related to existing and new business activities and appropriate market multiples, discount rates and growth rates. An appropriate resulting control premium is also considered. The reporting units with goodwill for which we estimate fair value are not publicly traded and for some reporting units directly comparable market data may not be available to aid in its valuation. Navient tests goodwill as of October 1 each year or at interim dates if an event occurs or circumstances exist such that it is determined that it is "more-likely-than-not" that the fair value of the reporting unit is less than its carrying value (the qualitative test). Such an event or circumstance is a triggering event. If it is concluded that a triggering event has occurred at an interim date, a quantitative impairment test must be performed. Despite certain negative macroeconomic conditions during 2023, primarily the high interest rate environment, the financial results of each of our reporting units with goodwill were strong in 2023, and Navient’s stock price improved during 2023 achieving a share price of $18.62 per share at December 31, 2023 compared to $16.45 per share at December 31, 2022. In addition, these reporting units have substantial cushion (as discussed further below), which provides a strong indication that the goodwill associated with these reporting units is not impaired. As a result, at March 31, June 30, and September 30, 2023, we concluded that no triggering events occurred with respect to these reporting units to warrant performing an interim quantitative impairment test. We performed annual impairment testing as of October 1, 2023. For each of our reporting units with goodwill including our FFELP Loans, Private Education Legacy In-School Loans, Private Education Refinance Loans, Private Education Recent In-School Loans and Federal Education Loan Servicing reporting units (collectively, the Loan reporting units) and our Government Services and Healthcare Services reporting units (collectively, the Business Processing reporting units), we assessed relevant qualitative factors to determine whether it is “more-likely-than-not” that the fair value of an individual reporting unit is less than its carrying value. We considered the amount of excess fair values over the carrying values (the cushion) of each of the Loan reporting units, as of October 1, 2022 when we last performed a quantitative goodwill impairment test by engaging an independent appraiser to estimate the fair values of these reporting units since the fair values of these reporting units were substantially in excess of their carrying amounts. The current outlook and cash flows for the FFELP Loans, Federal Education Loan Servicing and Private Education Legacy In-School Loans reporting units have not changed significantly since our 2022 assessment. The cash flows for these reporting units continue to decline consistent with our expectations as the underlying portfolios amortize. For the Private Education Recent In-School Loans reporting unit, we considered the increase in brand awareness in 2023 of Earnest, a wholly owned subsidiary of Navient, through development and rollout of new programs and product offerings and Navient’s continued success utilizing its Going Merry platform to enable students to match to and apply for scholarships, institutional aid and government grants. Strong in-school origination growth is expected in 2024 with sustained growth expected in the future. No goodwill was deemed impaired for these reporting units as of October 1, 2023 after assessing these relevant qualitative factors. For the FFELP Loans reporting unit, due to the runoff nature of the portfolio and the passage of time, our current projections of future cash flows would result in goodwill being partially impaired in 2025. This is based on estimated cash flows and, as a result, this future impairment date may change. We also considered the amount of excess fair value over the carrying values of the Business Processing reporting units (the cushion) as of October 1, 2022, when we last performed a quantitative goodwill impairment test by engaging an independent appraiser to estimate the fair values of these reporting units since the fair values of these reporting units were substantially in excess of their carrying values. The outlook and long-term cash flow projections for these reporting units remain favorable and have not changed significantly since our 2022 quantitative impairment assessment despite the expected wind down of significant contracts acquired in 2020 and 2021 to implement and administer programs under the CARES act and perform contact tracing and vaccine administration services during the COVID-19 pandemic. In 2023 there was a $9 million aggregate decrease in Business Processing reporting unit revenue from 2022, as expected and forecasted. This decline was the result of an $83 million aggregate reduction in revenue from the wind-down of the pandemic-related contracts; however, this reduction was largely offset by a $74 million aggregate increase in revenue from services for our traditional clients. The cash flows from traditional service offerings increased significantly, returning to and in some instances exceeding pre-pandemic levels despite inflationary pressures in certain sectors. These reporting units also acquired new contracts in 2023, which are expected to yield significant benefit in future periods. No goodwill was deemed impaired for these reporting units after assessing these relevant qualitative factors. 34 For each of our reporting units, we also considered the current regulatory and legislative environment, the current economic environment, our 2023 earnings, 2024 expected earnings, market expectations regarding our stock price, and our market capitalization in relation to book equity and concluded that no goodwill associated with our reporting units was impaired. Although our market capitalization was less than our book equity at October 1 and December 31, 2023, we have concluded that our market capitalization in relation to our book equity does not indicate impairment of our reporting units’ respective goodwill at October 1 and December 31, 2023. Our market capitalization is not indicative of the value of our reporting units with goodwill on a standalone basis. Additionally, the implied control premium at October 1 and December 31, 2023 is a reasonable control premium above the then current stock price. If the regulatory environment changes such that it negatively impacts our reporting units or future economic conditions are significantly worse than what was assumed as a part of our annual impairment testing for each of our reporting units, goodwill attributed to our reporting units could be impaired in future periods. Loan Premium and Discount Amortization The Company had a net unamortized premium balance of $180 million, or 0.32%, in connection with its $56 billion education loan portfolio as of December 31, 2023. The most judgmental estimate for premium and discount amortization on education loans is the Constant Prepayment Rate (CPR), which measures the rate at which loans in the portfolio pay down principal compared to their stated terms. In determining the CPR we only consider payments made in excess of contractually required payments. This would include loans that are refinanced or consolidated and other early payoff activity. These activities are generally affected by changes in our business strategy, changes in our competitors’ business strategies, legislative changes including the ability to consolidate, interest rates and changes to the current economic and credit environment. When we determine the CPR, we begin with historical prepayment rates. We make judgments about which historical period to start with and then make further judgments about whether that historical experience is representative of future expectations and whether additional adjustment may be needed to those historical prepayment rates. As a result of the passage of the Health Care and Education Reconciliation Act of 2010 (HCERA), there is no longer the ability to consolidate loans under the FFELP although there are other consolidation options with ED and private refinancing options with Navient and other lenders. At this time, we expect CPRs related to our FFELP Loans to remain relatively stable over time, unless there is a regulatory change by ED or legislative change by Congress to either (1) forgive loan balances (which would result in Navient receiving cash for the amounts forgiven resulting in a prepayment of principal) or (2) encourage or force consolidation. Some education loan companies, including Navient, offer Private Education Loans to refinance a borrower’s loan (both FFELP and Private Education Loans). These products and the related expectation of use are built into the CPR assumption we use for FFELP and Private Education Loans. However, it is difficult to accurately project the timing and level at which this activity will continue, and our assumption may need to be updated by a material amount in the future based on changes in the economy, marketplace and legislation. In 2023, there was a net $58 million increase in net interest income due to cumulative adjustments related to changes in prepayment speed and related remaining term assumptions used to amortize loan premiums and discounts. This primarily related to the following two items: • $48 million increase related to the continued extension of the remaining term to maturity of the FFELP Loan portfolio. This is primarily the result of the continued increase in the usage of Income Dependent Repayment (IDR) plans by borrowers in this portfolio. This has the effect of extending the expected maturity date on the loans in which borrowers use IDR. This results in the slowing down of the amortization of the premium on these loans which has the effect of increasing interest income in the period of the assumption change. • $10 million increase related to the Private Education Refinance Loan CPR decreasing from 15% to 10%. This CPR assumption decrease was primarily a result of borrowers with fixed interest rates having less of an incentive to refinance in light of the significant increase in interest rates that occurred in 2022 and 2023. The decrease in the CPR has the effect of slowing down the amortization of the premium on these loans which has the effect of increasing interest income in the period of the assumption change. Impact of various federal loan forgiveness plans on accounting policies and estimates On August 24, 2022, the Biden-Harris Administration announced its Student Debt Relief (SDR) Plan. The SDR Plan would have provided up to $20,000 in one-time debt relief to income-qualified recipients with ED held student loans and a repayment pause on ED held loans. Privately held FFELP Loans, like ours, were not eligible for debt forgiveness. A number of states and private organizations initiated legal challenges to the SDR Plan in various courts throughout the country. On June 30, 2023, the Supreme Court ruled that ED was prohibited from implementing the SDR Plan, and student loan payments on ED held loans resumed in October 2023. After the invalidation of the SDR Plan, ED announced that it had begun a new rulemaking process to consider other ways to provide debt relief to borrowers, which could include borrowers with privately held FFELP Loans. ED held several public meeting sessions with a 35 negotiated rulemaking committee in the fourth quarter of 2023 and in the first quarter of 2024. ED is expected to publish proposed regulations for public comment in May 2024. In addition, on July 10, 2023, ED issued final regulations on income-driven repayment plans for Direct loans, which are student loans held by ED. Eligible FFELP borrowers can access the new changes by consolidating their loans into the Direct Loan Program. The new regulations are effective July 1, 2024; however, ED has elected early implementation for some features starting July 30, 2023. The regulations provide a lower monthly loan payment on a Direct loan by decreasing discretionary income (i.e., taxable income over 225% of the federal poverty guideline), decreasing the percentage of discretionary income that must be paid toward a Direct loan to 5% (for undergraduates), and providing the option for married borrowers to exclude their spouse’s income from being factored by filing a separate tax return. Other changes provide for the elimination of accrued interest that is not covered by the monthly payment amount, provide credit towards loan forgiveness that counts certain periods of deferment and forbearance, a shorter loan forgiveness period (10-years) for borrowers with an original principal balance less than or equal to $12,000, and credit toward loan forgiveness for eligible payments on a Direct or FFELP loan that is repaid by a Direct Consolidation loan. This new income-driven repayment plan may increase consolidation activity in the future as FFELP borrowers consolidate their loans into the Direct Loan Program in order to be eligible for the new income-driven repayment plan. This could have a material impact on the Company’s results in future periods. 36 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) Tangible Equity (as well as the Adjusted Tangible Equity Ratio), (3) EBITDA for the Business Processing segment, and (4) Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans. Definitions for the non-GAAP financial measures and reconciliations are provided below, except that reconciliations of forward-looking non-GAAP financial measures are not provided because the Company is unable to provide such reconciliations without unreasonable effort due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of certain items, including, but not limited to, the impact of any mark-to-market gains/losses resulting from our use of derivative instruments to hedge our economic risks. 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: (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. 37 The following tables show our consolidated GAAP results, Core Earnings results (including for each reportable segment) along with the adjustments made to the income/expense items to reconcile the consolidated GAAP results to the Core Earnings results as required by GAAP and reported in “Note 15 — Segment Reporting.” [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023"],["","","","","","Adjustments","","","","","","Reportable Segments"],["(Dollars in millions)","","Total GAAP","","","Reclassi- fications","","","Additions/ (Subtractions)","","","Total Adjustments (1)","","","Total Core Earnings","","","Federal Education Loans","","","Consumer Lending","","","Business Processing","","","Other"],["Interest income:"],["Education loans","","$","4,266","","","","","","","","","","","","","","","$","2,901","","","$","1,369","","","$","\u2014","","","$","\u2014"],["Cash and investments","","","153","","","","","","","","","","","","","","","","76","","","","27","","","","\u2014","","","","50"],["Total interest income","","","4,419","","","","","","","","","","","","","","","","2,977","","","","1,396","","","","\u2014","","","","50"],["Total interest expense","","","3,557","","","","","","","","","","","","","","","","2,497","","","","816","","","","\u2014","","","","164"],["Net interest income (loss)","","","862","","","$","32","","","$","52","","","$","84","","","$","946","","","","480","","","","580","","","","\u2014","","","","(114",")"],["Less: provisions for loan losses","","","123","","","","","","","","","","","","","123","","","","56","","","","67","","","","\u2014","","","","\u2014"],["Net interest income (loss) after provisions for loan losses","","","739","","","","","","","","","","","","","","","","424","","","","513","","","","\u2014","","","","(114",")"],["Other income (loss):"],["Servicing revenue","","","64","","","","","","","","","","","","","","","","52","","","","12","","","","\u2014","","","","\u2014"],["Asset recovery and business processing revenue","","","321","","","","","","","","","","","","","","","","\u2014","","","","\u2014","","","","321","","","","\u2014"],["Other revenue","","","32","","","","","","","","","","","","","","","","14","","","","2","","","","\u2014","","","","5"],["Losses on debt repurchases","","","(8",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","(8",")"],["Total other income (loss)","","","409","","","","(32",")","","","21","","","","(11",")","","","398","","","","66","","","","14","","","","321","","","","(3",")"],["Expenses:"],["Direct operating expenses","","","508","","","","","","","","","","","","","","","","72","","","","151","","","","285","","","","\u2014"],["Unallocated shared services expenses","","","292","","","","","","","","","","","","","","","","\u2014","","","","\u2014","","","","\u2014","","","","292"],["Operating expenses","","","800","","","","\u2014","","","","\u2014","","","","\u2014","","","","800","","","","72","","","","151","","","","285","","","","292"],["Goodwill and acquired intangible asset impairment and amortization","","","10","","","","\u2014","","","","(10",")","","","(10",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Restructuring/other reorganization expenses","","","25","","","","\u2014","","","","\u2014","","","","\u2014","","","","25","","","","\u2014","","","","\u2014","","","","\u2014","","","","25"],["Total expenses","","","835","","","","\u2014","","","","(10",")","","","(10",")","","","825","","","","72","","","","151","","","","285","","","","317"],["Income (loss) before income tax expense (benefit)","","","313","","","","\u2014","","","","83","","","","83","","","","396","","","","418","","","","376","","","","36","","","","(434",")"],["Income tax expense (benefit)(2)","","","85","","","","\u2014","","","","8","","","","8","","","","93","","","","99","","","","89","","","","8","","","","(103",")"],["Net income (loss)","","$","228","","","$","\u2014","","","$","75","","","$","75","","","$","303","","","$","319","","","$","287","","","$","28","","","$","(331",")"]] [[/GREPCENT_TABLE]] (1) Core Earnings adjustments to GAAP: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2023"],["(Dollars in millions)","","Net Impact of Derivative Accounting","","","Net Impact of Acquired Intangibles","","","Total"],["Net interest income (loss) after provisions for loan losses","","$","84","","","$","\u2014","","","$","84"],["Total other income (loss)","","","(11",")","","","\u2014","","","","(11",")"],["Goodwill and acquired intangible asset impairment and amortization","","","\u2014","","","","(10",")","","","(10",")"],["Total Core Earnings adjustments to GAAP","","$","73","","","$","10","","","","83"],["Income tax expense (benefit)","","","","","","","","","8"],["Net income (loss)","","","","","","","","$","75"]] [[/GREPCENT_TABLE]] (2) Income taxes are based on a percentage of net income before tax for the individual reportable segment. 38 [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["","","","","","Adjustments","","","","","","Reportable Segments"],["(Dollars in millions)","","Total GAAP","","","Reclassi- fications","","","Additions/ (Subtractions)","","","Total Adjustments (1)","","","Total Core Earnings","","","Federal Education Loans","","","Consumer Lending","","","Business Processing","","","Other"],["Interest income:"],["Education loans","","$","3,161","","","","","","","","","","","","","","","$","1,955","","","$","1,195","","","$","\u2014","","","$","\u2014"],["Cash and investments","","","62","","","","","","","","","","","","","","","","32","","","","10","","","","\u2014","","","","20"],["Total interest income","","","3,223","","","","","","","","","","","","","","","","1,987","","","","1,205","","","","\u2014","","","","20"],["Total interest expense","","","2,102","","","","","","","","","","","","","","","","1,468","","","","611","","","","\u2014","","","","107"],["Net interest income (loss)","","","1,121","","","$","(15",")","","$","(80",")","","$","(95",")","","$","1,026","","","","519","","","","594","","","","\u2014","","","","(87",")"],["Less: provisions for loan losses","","","79","","","","","","","","","","","","","79","","","","\u2014","","","","79","","","","\u2014","","","","\u2014"],["Net interest income (loss) after provisions for loan losses","","","1,042","","","","","","","","","","","","","","","","519","","","","515","","","","\u2014","","","","(87",")"],["Other income (loss):"],["Servicing revenue","","","77","","","","","","","","","","","","","","","","65","","","","12","","","","\u2014","","","","\u2014"],["Asset recovery and business processing revenue","","","336","","","","","","","","","","","","","","","","6","","","","\u2014","","","","330","","","","\u2014"],["Other revenue","","","203","","","","","","","","","","","","","","","","31","","","","1","","","","\u2014","","","","\u2014"],["Total other income (loss)","","","616","","","","15","","","","(186",")","","","(171",")","","","445","","","","102","","","","13","","","","330","","","","\u2014"],["Expenses:"],["Direct operating expenses","","","534","","","","","","","","","","","","","","","","106","","","","148","","","","280","","","","\u2014"],["Unallocated shared services expenses","","","242","","","","","","","","","","","","","","","","\u2014","","","","\u2014","","","","\u2014","","","","242"],["Operating expenses","","","776","","","","\u2014","","","","\u2014","","","","\u2014","","","","776","","","","106","","","","148","","","","280","","","","242"],["Goodwill and acquired intangible asset impairment and amortization","","","19","","","","\u2014","","","","(19",")","","","(19",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Restructuring/other reorganization expenses","","","36","","","","\u2014","","","","\u2014","","","","\u2014","","","","36","","","","\u2014","","","","\u2014","","","","\u2014","","","","36"],["Total expenses","","","831","","","","\u2014","","","","(19",")","","","(19",")","","","812","","","","106","","","","148","","","","280","","","","278"],["Income (loss) before income tax expense (benefit)","","","827","","","","\u2014","","","","(247",")","","","(247",")","","","580","","","","515","","","","380","","","","50","","","","(365",")"],["Income tax expense (benefit)(2)","","","182","","","","\u2014","","","","(60",")","","","(60",")","","","122","","","","108","","","","80","","","","10","","","","(76",")"],["Net income (loss)","","$","645","","","$","\u2014","","","$","(187",")","","$","(187",")","","$","458","","","$","407","","","$","300","","","$","40","","","$","(289",")"]] [[/GREPCENT_TABLE]] (1) Core Earnings adjustments to GAAP: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2022"],["(Dollars in millions)","","Net Impact of Derivative Accounting","","","Net Impact of Acquired Intangibles","","","Total"],["Net interest income (loss) after provisions for loan losses","","$","(95",")","","$","\u2014","","","$","(95",")"],["Total other income (loss)","","","(171",")","","","\u2014","","","","(171",")"],["Goodwill and acquired intangible asset impairment and amortization","","","\u2014","","","","(19",")","","","(19",")"],["Total Core Earnings adjustments to GAAP","","$","(266",")","","$","19","","","","(247",")"],["Income tax expense (benefit)","","","","","","","","","(60",")"],["Net income (loss)","","","","","","","","$","(187",")"]] [[/GREPCENT_TABLE]] (2) Income taxes are based on a percentage of net income before tax for the individual reportable segment. 39 [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["","","","","","Adjustments","","","","","","Reportable Segments"],["(Dollars in millions)","","Total GAAP","","","Reclassi- fications","","","Additions/ (Subtractions)","","","Total Adjustments (1)","","","Total Core Earnings","","","Federal Education Loans","","","Consumer Lending","","","Business Processing","","","Other"],["Interest income:"],["Education loans","","$","2,645","","","","","","","","","","","","","","","$","1,405","","","$","1,181","","","$","\u2014","","","$","\u2014"],["Cash and investments","","","3","","","","","","","","","","","","","","","","\u2014","","","","2","","","","\u2014","","","","1"],["Total interest income","","","2,648","","","","","","","","","","","","","","","","1,405","","","","1,183","","","","\u2014","","","","1"],["Total interest expense","","","1,316","","","","","","","","","","","","","","","","830","","","","541","","","","\u2014","","","","70"],["Net interest income (loss)","","","1,332","","","$","(106",")","","$","(78",")","","$","(184",")","","$","1,148","","","","575","","","","642","","","","\u2014","","","","(69",")"],["Less: provisions for loan losses","","","(61",")","","","","","","","","","","","","(61",")","","","\u2014","","","","(61",")","","","\u2014","","","","\u2014"],["Net interest income (loss) after provisions for loan losses","","","1,393","","","","","","","","","","","","","","","","575","","","","703","","","","\u2014","","","","(69",")"],["Other income (loss):"],["Servicing revenue","","","168","","","","","","","","","","","","","","","","162","","","","6","","","","\u2014","","","","\u2014"],["Asset recovery and business processing revenue","","","539","","","","","","","","","","","","","","","","51","","","","\u2014","","","","488","","","","\u2014"],["Other revenue","","","94","","","","","","","","","","","","","","","","25","","","","\u2014","","","","\u2014","","","","5"],["Gains on sales of loans","","","78","","","","","","","","","","","","","","","","\u2014","","","","91","","","","\u2014","","","","\u2014"],["Losses on debt repurchases","","","(73",")","","","","","","","","","","","","","","","\u2014","","","","\u2014","","","","\u2014","","","","(73",")"],["Total other income (loss)","","","806","","","","106","","","","(157",")","","","(51",")","","","755","","","","238","","","","97","","","","488","","","","(68",")"],["Expenses:"],["Direct operating expenses","","","745","","","","","","","","","","","","","","","","223","","","","162","","","","360","","","","\u2014"],["Unallocated shared services expenses","","","462","","","","","","","","","","","","","","","","\u2014","","","","\u2014","","","","\u2014","","","","462"],["Operating expenses","","","1,207","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,207","","","","223","","","","162","","","","360","","","","462"],["Goodwill and acquired intangible asset impairment and amortization","","","30","","","","\u2014","","","","(30",")","","","(30",")","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Restructuring/other reorganization expenses","","","26","","","","\u2014","","","","\u2014","","","","\u2014","","","","26","","","","\u2014","","","","\u2014","","","","\u2014","","","","26"],["Total expenses","","","1,263","","","","\u2014","","","","(30",")","","","(30",")","","","1,233","","","","223","","","","162","","","","360","","","","488"],["Income (loss) before income tax expense (benefit)","","","936","","","","\u2014","","","","(205",")","","","(205",")","","","731","","","","590","","","","638","","","","128","","","","(625",")"],["Income tax expense (benefit)(2)","","","219","","","","\u2014","","","","(39",")","","","(39",")","","","180","","","","136","","","","146","","","","29","","","","(131",")"],["Net income (loss)","","$","717","","","$","\u2014","","","$","(166",")","","$","(166",")","","$","551","","","$","454","","","$","492","","","$","99","","","$","(494",")"]] [[/GREPCENT_TABLE]] (1) Core Earnings adjustments to GAAP: [[GREPCENT_TABLE]] [["","","Year Ended December 31, 2021"],["(Dollars in millions)","","Net Impact of Derivative Accounting","","","Net Impact of Acquired Intangibles","","","Total"],["Net interest income (loss) after provisions for loan losses","","$","(184",")","","$","\u2014","","","$","(184",")"],["Total other income (loss)","","","(51",")","","","\u2014","","","","(51",")"],["Goodwill and acquired intangible asset impairment and amortization","","","\u2014","","","","(30",")","","","(30",")"],["Total Core Earnings adjustments to GAAP","","$","(235",")","","$","30","","","","(205",")"],["Income tax expense (benefit)","","","","","","","","","(39",")"],["Net income (loss)","","","","","","","","$","(166",")"]] [[/GREPCENT_TABLE]] (2) Income taxes are based on a percentage of net income before tax for the individual reportable segment. 40 The following discussion summarizes the differences between Core Earnings and GAAP net income and details each specific adjustment required to reconcile our Core Earnings segment presentation to our GAAP earnings. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["GAAP net income","","$","228","","","$","645","","","$","717"],["Core Earnings adjustments to GAAP:"],["Net impact of derivative accounting","","","73","","","","(266",")","","","(235",")"],["Net impact of goodwill and acquired intangible assets","","","10","","","","19","","","","30"],["Net income tax effect","","","(8",")","","","60","","","","39"],["Total Core Earnings adjustments to GAAP","","","75","","","","(187",")","","","(166",")"],["Core Earnings net income","","$","303","","","$","458","","","$","551"]] [[/GREPCENT_TABLE]] (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 $0 except for Floor Income Contracts, where the mark-to-market gain will equal the amount for which we originally sold the contract. In our Core Earnings presentation, we recognize the economic effect of these hedges, which generally results in any net settlement cash paid or received being recognized ratably as an interest expense or revenue over the hedged item’s life. The accounting for derivatives requires that changes in the fair value of derivative instruments be recognized currently in earnings, with no fair value adjustment of the hedged item, unless specific hedge accounting criteria are met. The gains and losses recorded in “Gains (losses) on derivative and hedging activities, net” and interest expense (for qualifying fair value hedges) are primarily caused by interest rate and foreign currency exchange rate volatility and changing credit spreads during the period as well as the volume and term of derivatives not receiving hedge accounting treatment. We believe that our derivatives are effective economic hedges, and as such, are a critical element of our interest rate and foreign currency risk management strategy. However, some of our derivatives, primarily Floor Income Contracts, basis swaps and at times, certain other interest rate swaps do not qualify for hedge accounting treatment and the stand-alone derivative is adjusted to fair value in the income statement with no consideration for the corresponding change in fair value of the hedged item. 41 The table below quantifies the adjustments for derivative accounting between GAAP and Core Earnings net income. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Core Earnings derivative adjustments:"],["(Gains) losses on derivative and hedging activities, net, included in other income","","$","(11",")","","$","(171",")","","$","(64",")"],["Plus: (Gains) losses on fair value hedging activity included in interest expense","","","46","","","","(83",")","","","(88",")"],["Total (gains) losses in GAAP net income","","","35","","","","(254",")","","","(152",")"],["Plus: Reclassification of settlement income (expense) on derivative and hedging activities, net(1)","","","32","","","","(15",")","","","(93",")"],["Mark-to-market (gains) losses on derivative and hedging activities, net(2)","","","67","","","","(269",")","","","(245",")"],["Amortization of net premiums on Floor Income Contracts in net interest income for Core Earnings","","","4","","","","12","","","","39"],["Other derivative accounting adjustments(3)","","","2","","","","(9",")","","","(29",")"],["Total net impact of derivative accounting","","$","73","","","$","(266",")","","$","(235",")"]] [[/GREPCENT_TABLE]] (1) Derivative accounting requires net settlement income/expense on derivatives that do not qualify as hedges to be recorded in a separate income statement line item below net interest income. Under our Core Earnings presentation, these settlements are reclassified to the income statement line item of the economically hedged item. For our Core Earnings net interest income, this would primarily include (a) reclassifying the net settlement amounts related to our Floor Income Contracts to education loan interest income and (b) reclassifying the net settlement amounts related to certain of our interest rate swaps to debt interest expense. The table below summarizes these net settlements on derivative and hedging activities and the associated reclassification on a Core Earnings basis. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Reclassification of settlements on derivative and hedging activities:"],["Net settlement expense on Floor Income Contracts reclassified to net interest income","","$","\u2014","","","$","(23",")","","$","(98",")"],["Net settlement income (expense) on interest rate swaps reclassified to net interest income","","","32","","","","8","","","","(8",")"],["Net realized gains (losses) on terminated derivative contracts reclassified to other income","","","\u2014","","","","\u2014","","","","13"],["Total reclassifications of settlement income (expense) on derivative and hedging activities","","$","32","","","$","(15",")","","$","(93",")"]] [[/GREPCENT_TABLE]] (2) “Mark-to-market (gains) losses on derivative and hedging activities, net” is comprised of the following: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Fair value hedges","","$","24","","","$","(50",")","","$","(39",")"],["Foreign currency hedges","","","22","","","","(33",")","","","(49",")"],["Floor Income Contracts","","","\u2014","","","","(65",")","","","(133",")"],["Basis swaps","","","(1",")","","","(1",")","","","(8",")"],["Other","","","22","","","","(120",")","","","(16",")"],["Total mark-to-market (gains) losses on derivative and hedging activities, net","","$","67","","","$","(269",")","","$","(245",")"]] [[/GREPCENT_TABLE]] (3) Other derivative accounting adjustments consist of adjustments related to certain terminated derivatives that did not receive hedge accounting treatment under GAAP but were economic hedges under Core Earnings and, as a result, such gains or losses are amortized into Core Earnings over the life of the hedged item. 42 Cumulative Impact of Derivative Accounting under GAAP compared to Core Earnings As of December 31, 2023, derivative accounting has decreased GAAP equity by approximately $1 million as a result of cumulative net mark-to-market losses (after tax) recognized under GAAP, but not in Core Earnings. The following table rolls forward the cumulative impact to GAAP equity due to these after-tax mark-to-market net gains and losses related to derivative accounting. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Beginning impact of derivative accounting on GAAP equity","","$","122","","","$","(299",")","","$","(616",")"],["Net impact of net mark-to-market gains (losses) under derivative accounting(1)","","","(123",")","","","421","","","","317"],["Ending impact of derivative accounting on GAAP equity","","$","(1",")","","$","122","","","$","(299",")"]] [[/GREPCENT_TABLE]] (1) Net impact of net mark-to-market gains (losses) under derivative accounting is composed of the following: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Total pre-tax net impact of derivative accounting recognized in net income(2)","","$","(73",")","","$","266","","","$","235"],["Tax and other impacts of derivative accounting adjustments","","","18","","","","(65",")","","","(59",")"],["Change in mark-to-market gains (losses) on derivatives, net of tax recognized in other comprehensive income","","","(68",")","","","220","","","","141"],["Net impact of net mark-to-market gains (losses) under derivative accounting","","$","(123",")","","$","421","","","$","317"]] [[/GREPCENT_TABLE]] (2) See “Core Earnings derivative adjustments” table above. Hedging Embedded Floor Income We use Floor Income Contracts, pay-fixed swaps and fixed rate debt to economically hedge embedded Floor Income in our FFELP Loans. Historically, we have used these instruments on a periodic basis and depending upon market conditions and pricing, we may enter into additional hedges in the future. Under GAAP, the Floor Income Contracts do not qualify for hedge accounting and the pay-fixed swaps are accounted for as cash flow hedges. The table below shows the amount of hedged Floor Income that will be recognized in Core Earnings in future periods based on these hedge strategies. [[GREPCENT_TABLE]] [["","","December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Total hedged Floor Income, net of tax(1)(2)","","$","90","","","$","200","","","$","325"]] [[/GREPCENT_TABLE]] (1) $118 million, $254 million and $422 million on a pre-tax basis as of December 31, 2023, 2022 and 2021, respectively. (2) Of the $90 million as of December 31, 2023, approximately $37 million, $20 million, $16 million and $10 million will be recognized as part of Core Earnings in 2024, 2025, 2026 and 2027, respectively. (2) Goodwill and Acquired Intangible Assets: Our Core Earnings exclude goodwill and intangible asset impairment and the amortization of acquired intangible assets. The following table summarizes the goodwill and acquired intangible asset adjustments. [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Core Earnings goodwill and acquired intangible asset adjustments","","$","10","","","$","19","","","$","30"]] [[/GREPCENT_TABLE]] 43 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 Loan portfolio because FFELP Loans are no longer originated and the FFELP Loan 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: [[GREPCENT_TABLE]] [["(Dollars in billions)","","December 31, 2023","","","December 31, 2022"],["Navient Corporation's stockholders' equity","","$","2,760","","","$","2,977"],["Less: Goodwill and acquired intangible assets","","","695","","","","705"],["Tangible Equity","","","2,065","","","","2,272"],["Less: Equity held for FFELP Loans","","","190","","","","218"],["Adjusted Tangible Equity","","$","1,875","","","$","2,054"],["Divided by:"],["Total assets","","$","61,375","","","$","70,795"],["Less:"],["Goodwill and acquired intangible assets","","","695","","","","705"],["FFELP Loans","","","37,925","","","","43,525"],["Adjusted tangible assets","","$","22,755","","","$","26,565"],["Adjusted Tangible Equity Ratio","","","8.2","%","","","7.7","%"]] [[/GREPCENT_TABLE]] 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: [[GREPCENT_TABLE]] [["","","Years Ended December 31,"],["(Dollars in millions)","","2023","","","2022","","","2021"],["Pre-tax income","","$","36","","","$","50","","","$","128"],["Plus:"],["Depreciation and amortization expense(1)","","","3","","","","3","","","","8"],["EBITDA","","$","39","","","$","53","","","$","136"],["Divided by:"],["Total revenue","","$","321","","","$","330","","","$","488"],["EBITDA margin","","","12","%","","","16","%","","","28","%"]] [[/GREPCENT_TABLE]] (1) There is no interest expense in this segment. 44 4. Allowance for Loan Losses Excluding Expected Future Recoveries on Previously Fully Charged-off Loans The allowance for loan losses on the Private Education Loan portfolio used for the three credit metrics below excludes the expected future recoveries on previously fully charged-off loans to better reflect the current expected credit losses remaining in connection with the loans on balance sheet that have not charged off. That is, as of December 31, 2023, the $843 million Private Education Loan allowance for loan losses excluding expected future recoveries on previously fully charged-off loans represents the current expected credit losses that remain in connection with the $17,519 million Private Education Loan portfolio. The $226 million of expected future recoveries on previously fully charged-off loans, which is collected over an average 15-year period, mechanically is a reduction to the overall allowance for loan losses. However, it is not related to the $17,519 million Private Education Loan portfolio on our balance sheet and, as a result, management excludes this impact to the allowance to better evaluate and assess our overall credit loss coverage on the Private Education Loan portfolio. We believe this provides a more meaningful and holistic view of the available credit loss coverage on our non-charged-off Private Education Loan portfolio. We believe this information is useful to our investors, lenders and rating agencies. Allowance for Loan Losses Metrics – Private Education Loans [[GREPCENT_TABLE]] [["","","For the Year Ended December 31,"],["","","2023","","","2022","","","2021"],["(Dollars in millions)"],["Allowance at end of period (GAAP)","","$","617","","","$","800","","","$","1,009"],["Plus: expected future recoveries on previously fully charged-off loans","","","226","","","","274","","","","329"],["Allowance at end of period excluding expected future recoveries on previously fully charged-off loans (Non-GAAP Financial Measure)","","$","843","","","$","1,074","","","$","1,338"],["Ending total loans","","$","17,519","","","$","19,525","","","$","21,180"],["Ending loans in repayment","","$","16,796","","","$","18,770","","","$","20,284"],["Net charge-offs","","$","298","","","$","343","","","$","169"],["Allowance coverage of charge-offs (annualized):"],["GAAP","","","2.1","","","","2.3","","","","6.0"],["Adjustment(1)","","",".7","","","",".8","","","","1.9"],["Non-GAAP Financial Measure(1)","","","2.8","","","","3.1","","","","7.9"],["Allowance as a percentage of the ending total loan balance:"],["GAAP","","","3.5","%","","","4.1","%","","","4.8","%"],["Adjustment(1)","","","1.3","","","","1.4","","","","1.5"],["Non-GAAP Financial Measure(1)","","","4.8","%","","","5.5","%","","","6.3","%"],["Allowance as a percentage of the ending loans in repayment:"],["GAAP","","","3.7","%","","","4.2","%","","","5.0","%"],["Adjustment(1)","","","1.3","","","","1.5","","","","1.6"],["Non-GAAP Financial Measure(1)","","","5.0","%","","","5.7","%","","","6.6","%"]] [[/GREPCENT_TABLE]] (1) The allowance used for these credit metrics excludes the expected future recoveries on previously fully charged-off loans. See discussion above. 45 Risk Management Our Approach Navient’s identification, understanding and effective management of the risks inherent in our business are critical to our continued success. We assign risk oversight, management and assessment responsibilities at various levels within our organization and continuously coordinate these activities. We maintain comprehensive risk management practices to identify, measure, monitor, evaluate, control and report on our significant risks and we routinely evaluate these practices to determine whether they are functioning properly and can be improved. Risk Management Philosophy Navient’s risk management philosophy is to ensure all significant risks inherent in our business are identified, measured, monitored, evaluated, controlled and reported. In furtherance of these goals, Navient • maintains a comprehensive and uniform risk management framework; • follows a “Three Lines Model” structure based upon: (1) accountability and ownership at the business area level for risks inherent in their activities (first line of defense); (2) supporting areas, such as Human Resources, Legal, Compliance, Finance and Accounting, Information Technology and Information Security, monitor, guide and advise the business areas in their respective areas of expertise (second line of defense); and (3) Internal Audit independently reviews business and support areas to ensure compliance with applicable laws, regulations and internal policies and procedures (third line of defense); • provides appropriate reporting to management and our Board of Directors and their respective committees; and • trains our employees on our risk management processes and philosophy. Risk Oversight, Roles and Responsibilities Responsibility for risk management is assigned at several different levels of our organization, including our Board of Directors and its committees. Each business area within our organization is primarily responsible for managing its specific risks. In addition, our second line of defense support areas are responsible for providing our business areas with the training, systems and specialized expertise necessary to properly perform their risk management responsibilities. Board of Directors. The Navient Board of Directors and its standing committees oversee our strategic direction, including setting our risk management philosophy, tolerance and parameters; and assessing the risks our businesses face as well as our risk management practices. It approves our annual business plan, periodically reviews our strategic approach and priorities and spends significant time considering our capital requirements and our dividend and share repurchase levels and activities. We escalate to our Board of Directors any significant departures from established tolerances and parameters and review new and emerging risks with them. Standing committees of our Board of Directors include Executive, Audit, Compensation and Human Resources, Nominations and Governance, and Risk. Charters for each committee providing their specific responsibilities and areas of risk oversight are published on our website together with the names of the directors serving on these committees. Chief Executive Officer. Our Chief Executive Officer is responsible for establishing our risk management culture and ensuring business areas operate within risk parameters and in accordance with our annual business plan. Chief Risk and Compliance Officer. Our Chief Risk and Compliance Officer is responsible for ensuring proper oversight, management and reporting to our Board of Directors and management regarding our risk management practices. Enterprise Risk and Compliance Committee. Our Enterprise Risk and Compliance Committee is an executive management-level committee where senior management reviews our significant risks, receives reports on adherence to established risk parameters, provides direction on mitigation of our risks and closure of issues and supervises our enterprise risk management program. This committee also oversees regulatory compliance risk management activities including regulatory compliance training, regulatory compliance change management, compliance risk assessment, transactional testing and monitoring, customer complaint monitoring, policies and procedures, privacy and information sharing practices, compliance with the Sarbanes-Oxley Act of 2002, and our Code of Business Conduct. This committee also evaluates risks associated with new or modified business and makes recommendations regarding proposed business initiatives based on their inherent risks and controls. Credit and Loan Loss Committee. Our Credit and Loan Loss Committee is an executive management-level committee that oversees our credit and portfolio management monitoring and strategies, the sufficiency of our loan loss reserves, and current or emerging issues affecting delinquency and default trends which may result in adjustments in our allowances for loan losses. 46 Disclosure Committee. Our Disclosure Committee reviews our periodic SEC reporting documents, earnings releases and related disclosure policies and procedures, and evaluates whether modified or additional disclosures are required. Asset and Liability Committee. Our Asset and Liability Committee oversees our investment portfolio and strategy and our compliance with our investment policy. Other Management-Level Committees. We have other management-level committees that oversee various other Navient business activities including critical accounting assumptions, human resources management, and incentive compensation governance. Internal Audit Risk Assessment Navient’s Internal Audit function monitors Navient’s various risk management and compliance efforts, identifies areas that may require increased focus and resources, and reports its findings and recommendations to executive management and the Audit Committee of our Board of Directors. Internal Audit performs an annual risk assessment evaluating the risk of all significant components of our company and uses the results to develop an annual risk-based internal audit plan as well as a multi-year rotational audit schedule. Risk Appetite Framework Navient’s Risk Appetite Framework establishes the level of risk we are willing to accept within each risk category in pursuit of our business strategy. The Risk Committee of our Board of Directors reviews our Risk Appetite Framework annually, helping to ensure consistency in our business decisions, monitoring and reporting. Our management-level Enterprise Risk and Compliance Committee monitors approved risk limits and thresholds to ensure our businesses are operating within approved risk limits. Through ongoing monitoring of risk exposures, management identifies potential risks and develops appropriate responses and mitigation strategies. Risk Categories Our Risk Appetite Framework segments Navient’s risks across nine domains: (1) credit; (2) market; (3) funding and liquidity; (4) operational; (5) compliance; (6) legal; (7) governance; (8) reputational/political; and (9) strategic. Credit Risk. Credit risk is the risk to earnings or capital resulting from an obligor’s failure to meet the terms of any contract with us or otherwise fail to perform as agreed. Navient has credit or counterparty risk exposure with borrowers and cosigners of our Private Education Loans and Private Education Refinance Loans, counterparties with whom we have entered derivative or other similar contracts and entities with whom we make investments. Credit and counterparty risks are overseen by our Chief Risk and Compliance Officer and our management-level Credit and Loan Loss Committee. The credit risk related to our Private Education Loans and Private Education Refinance Loans is managed within a credit risk infrastructure which includes: (i) a well-defined underwriting, asset quality and collection policy framework; (ii) an ongoing monitoring and review process of portfolio concentration and trends; (iii) assignment and management of credit and loss forecasting authorities and responsibilities; and (iv) establishment of an allowance for loan losses. Credit risk related to derivative contracts is managed by reviewing counterparties for credit strength on an ongoing basis and through our credit policies, which place limits on our exposure with any single counterparty and, in most cases, require collateral to secure the position. Our Chief Risk and Compliance Officer reports regularly to both the Risk and Audit Committees of our Board of Directors on credit risk management. Market Risk. Market risk is the risk to earnings or capital resulting from changes in market conditions, such as interest rates, index mismatches, credit spreads, commodity prices or volatilities. Navient is exposed to various types of market risk, including mismatches between the maturity/duration of assets and liabilities, interest rate risk and other risks that arise through the management of our investment, debt and education loan portfolios. Market risk exposure is overseen by our Chief Financial Officer and our management-level Asset and Liability Committee, which are responsible for managing market risks associated with our assets and liabilities and recommending limits to be included in our risk appetite and investment structure. These activities are closely tied to those related to the management of our funding and liquidity risks. The Risk Committee of our Board of Directors periodically reviews and approves the investment, asset and liability management policies, establishes and monitors various tolerances or other risk measurements, as well as contingency funding plans developed and administered by our Asset and Liability Committee. The Risk Committee and our Chief Financial Officer report to the full Board of Directors on matters of market risk management. Funding and Liquidity Risk. Funding and liquidity risk is the risk to earnings, capital or the conduct of our business arising from the inability to meet our obligations when they become due without incurring unacceptable losses, such as the ability to fund liability maturities or invest in future asset growth and business operations at reasonable market rates. Our primary liquidity risks are any mismatch between the maturity of our assets and liabilities and the servicing of our indebtedness. Navient’s Chief Financial Officer oversees our funding and liquidity management activities and is responsible for planning and executing our funding activities and strategies, analyzing and monitoring our liquidity risk, maintaining excess liquidity and accessing diverse funding sources depending on current market conditions. Funding and liquidity risks are overseen and recommendations approved primarily through our management-level 47 Asset and Liability Committee. The Risk Committee of our Board of Directors periodically reviews and approves our funding and liquidity positions and the contingency funding plan developed and administered by our Asset and Liability Committee. The Risk Committee also receives regular reports on our performance against funding and liquidity plans at each of its meetings. Operational Risk. Operational risk is the risk to earnings or the conduct of our business resulting from inadequate or failed internal processes, people or systems or from external events. Operational risk is pervasive, existing in all business areas, functional units, legal entities and geographic locations, and it includes information technology risk, cybersecurity risk, physical security risk on tangible assets, third-party vendor risk, legal risk, compliance risk and reputational risk. Operational risk exposures are managed by business area management and our second and third lines of defense, with oversight by our management-level committees. The Board of Directors or the Risk Committee of our Board receives operations reports at each regularly scheduled meeting. The Board of Directors or the Risk Committee of our Board also receives business development updates regarding our various business initiatives, receives periodic information security and cybersecurity updates and reviews operational and systems-related matters to ensure their implementation produces no significant internal control issues. Compliance, Legal and Governance Risk. Compliance, legal and governance risks are subsets of operational risk but are recognized as a separate and complementary risk category given their importance in our business. Compliance risk is the risk to earnings, capital or reputation arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. Legal risk is the risk to earnings, capital or reputation manifested by claims made through the legal system and may arise from a product or service, a transaction, a business relationship, property (real, personal or intellectual), conduct of an employee or change in law or regulation. Governance risk is the risk of not establishing and maintaining a control environment that aligns with stakeholder and regulatory expectations, including tone at the top and board performance. These risks are inherent in all of our businesses. The Audit Committee of our Board of Directors oversees our monitoring and control of legal and compliance risks. The Audit Committee annually reviews our Compliance Plan and significant breaches of our Code of Business Conduct and receives regular reports from executive management responsible for the regulatory and compliance risk management functions. The Board of Directors and the Audit Committee receive reports on significant litigation and regulatory matters at each regularly scheduled meeting. Reputational/Political Risk. Reputational risk is the risk to earnings or capital arising from damage to our reputation in the view of, or loss of the trust of, customers and the general public. Political risk is the closely related risk to earnings or capital arising from damage to our relationships with governmental entities, regulators and political leaders and candidates. These risks can arise due to both our own acts and omissions (both real and perceived), and the acts and omissions of other industry participants or other third parties, and they are inherent in all of our businesses. Reputational risk and political risk are managed through a combination of business area management and our second and third lines of defense. The Nominations and Governance Committee of our Board of Directors oversees our reputational and political risk and regularly receives reports on these matters. Strategic Risk. Strategic risk is the risk to earnings or capital arising from our potential inability to successfully carry out our strategy. This risk can arise due to both our own acts or omissions, and the acts or omissions of other industry participants or other third parties, and it is inherent in all of our businesses. Strategic risk is managed through a combination of business area management and our second and third lines of defense. 48 Supervision and Regulation Regulatory Oversight We operate in a highly regulated industry where many aspects of our businesses are subject to federal and state regulation and administrative oversight. The following is a summary of the material statutes and regulations currently applicable to us and our subsidiaries. We may become subject to additional laws, rules or regulations in the future. This summary is not a comprehensive analysis of all applicable laws and is qualified by reference to the full text of the statutes and regulations referenced below. The Dodd-Frank Act was adopted to reform and strengthen regulation and supervision of the U.S. financial services industry. It contains comprehensive provisions that govern the practices and oversight of financial institutions and other participants in the financial markets. It imposes additional regulations, requirements and oversight on almost every aspect of the U.S. financial services industry, including increased capital and liquidity requirements, limits on leverage and enhanced supervisory authority. Some of these provisions apply to Navient and its various businesses and securitization vehicles. The CFPB has authority to write regulations under federal consumer financial protection laws and to directly or indirectly enforce those laws and examine financial institutions for compliance. The CFPB is authorized to impose fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. It also has authority to prevent unfair, deceptive or abusive practices. In January 2017, the CFPB filed a lawsuit against Navient alleging several unfair, deceptive or abusive practices, and other violations of consumer protection statutes. Additional information on the CFPB lawsuit is included in “Note 12 – Commitments, Contingencies and Guarantees” in this Form 10-K. The Dodd-Frank Act also authorizes state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptive and abusive practices. The Attorneys General of the State of Illinois, the State of Washington, the Commonwealth of Pennsylvania, the State of California, the State of Mississippi and the State of New Jersey also filed lawsuits against Navient and some of its subsidiaries containing similar alleged violations of consumer protection laws as those alleged in the CFPB lawsuit as well as several additional areas. These cases were settled by mutual agreement between the Company and various State Attorneys General. Additional information on these lawsuits is included in “Note 12 – Commitments, Contingencies and Guarantees” in this Form 10-K. Higher Education Act (HEA). The HEA is the primary law that authorizes and regulates federal student aid programs for higher education. Navient is subject to the HEA and its education loan operations are periodically reviewed by ED and Guarantors or entities acting on their behalf. As a servicer of federal education loans, Navient is subject to ED regulations regarding financial responsibility and administrative capability that govern all third-party servicers of insured education loans. In connection with its servicing operations on behalf of Guarantor clients, Navient must comply with ED regulations that govern Guarantor activities as well as agreements for reimbursement between ED and our Guarantor clients. While the HEA is required to be reviewed and "reauthorized" by Congress every five years, Congress has not reauthorized the HEA since 2008, choosing to temporarily extend the Act each year since 2013. During the COVID-19 pandemic, the Biden-Harris Administration and ED have relied upon The CARES Act and The HEROs Act to provide the legislative authority necessary to delay or cancel direct student loan payments. We cannot predict whether or when legislation will be passed or how it would impact us. Federal Financial Institutions Examination Council. As a service provider to financial institutions, Navient is subject to periodic examination by the Federal Financial Institutions Examination Council (FFIEC). FFIEC is a formal interagency body of the U.S. government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Federal Reserve Banks (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, the Office of the Comptroller of the Currency and the CFPB and to make recommendations to promote uniformity in the supervision of financial institutions. 49 Consumer Protection and Privacy. Navient’s Consumer Lending and Federal Education Loan segments are subject to federal and state consumer protection, privacy and related laws and regulations and are subject to supervision and examination by the CFPB and various state agencies. Some of the more significant federal laws and regulations include: • various laws governing unfair, deceptive or abusive acts or practices; • the Truth-In-Lending Act and Regulation Z, which govern disclosures of credit terms to consumer borrowers; • the Fair Credit Reporting Act and Regulation V, which govern the use and provision of information to consumer reporting agencies; • the Equal Credit Opportunity Act and Regulation B, which prohibit discrimination on the basis of race, creed or other prohibited factors in extending credit; • the Servicemembers Civil Relief Act (SCRA), which applies to all debts incurred prior to commencement of active military service (including education loans) and limits the amount of interest, including certain fees or charges that are related to the obligation or liability; and • the Telephone Consumer Protection Act (TCPA), which governs communication methods that may be used to contact customers. Navient’s Business Processing segment is subject to federal and state consumer protection, privacy and related laws and regulations, as well as certain activities, supervision and examination by the CFPB and various state agencies. Some of the more significant federal statutes are the Fair Debt Collection Practices Act and additional provisions of the acts listed above, as well as the HEA and the various laws and regulations that pertain to government contractors. These activities are also subject to state laws and regulations similar to the federal laws and regulations listed above. Regulatory Outlook In 2024, we expect the regulatory environment for the business in which we operate will continue to be challenging. We anticipate that regulators will be more focused on conducting regulatory audits and initiating enforcement actions. We anticipate a number of prominent themes will emerge: • The number and configuration of regulators, particularly the CFPB, State Attorneys General and various state legislators, is likely to change which may add to the complexity, cost and unpredictability of timing for resolution of particular regulatory issues. • The regulatory, compliance and risk control structures of financial institutions subject to enforcement actions by state and federal regulators are frequently cited, regardless of whether past practices have been changed, and enforcement orders have often included detailed demands for increased compliance, audit and board supervision, as well as the use of third-party consultants or monitors to recommend further changes or monitor remediation efforts. • Issues first identified with respect to one consumer product class or distribution channel are sometimes applied to other product classes or channels. For a discussion of potential upcoming ED regulations after the invalidation of the Student Debt Relief Plan, see "Segment Results — Federal Education Loans Segments — Various Federal Loan Forgiveness Plans." We expect that consumer protection regulations, standards, supervision, examination and enforcement practices will continue to evolve in both detail and scope as well as being more unpredictable than in previous periods. This evolution has added and may continue to significantly add to Navient’s compliance, servicing and operating costs. We have invested in compliance through multiple steps including realignment of Navient’s compliance management system to a lending, servicing, collections and business services business model; dedicated compliance resources for certain topics to focus on consumer expectations; formation of business support operations to enhance risk, control and compliance functions in each business area; additional regulatory training for front-line employees to ensure obligations are understood and followed during interactions with customers, as well as additional regulatory training for our Board of Directors to enhance their ability to oversee the Company’s risk framework and compliance as it and the regulatory environment changes; and expanded oversight and analysis of complaint trends to identify and remediate, if necessary, areas of potential consumer harm. Despite these increased activities, our current operations and compliance processes may not satisfy evolving regulatory standards. Past practices or products may continue to be the focus of examinations, inquiries or lawsuits. As a result of our recent strategic announcements, we anticipate the need to further restructure and realign our compliance efforts and focus with our evolving footprint and businesses. As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Risk Management,” Navient has implemented a coordinated, formal enterprise risk management system aimed at reducing business and regulatory risks. 50 Listed below are some of the most significant recent and pending regulatory changes that have the potential to affect Navient. Education Loan Servicing and Consumer Lending. The CFPB has been active in the education loan industry and undertook a number of initiatives in recent years relative to the private education loan market and education loan servicing. In addition, several states have enacted various state servicing and licensing requirements. It is possible that more states will propose or pass similar or different requirements on either holders of education loans or their servicers. Depending on the nature of these laws or rules, they may impose additional or different requirements than Navient faces at the federal level. Debt Collection Supervision. The CFPB also maintains supervisory authority over larger consumer debt collectors and in late 2021 implemented changes to Regulation F governing the collection of third-party consumer debt. The CFPB’s rules do not preempt the various and varied levels of state consumer and collection regulations to which the activities of Navient’s subsidiaries are currently subject. Navient also utilizes third-party debt collectors to collect defaulted and charged-off education loans and will continue to be responsible for oversight of their procedures and controls. Oversight of Derivatives. The Dodd-Frank Act created a comprehensive new regulatory framework for derivatives transactions under the Commodity Futures Trading Commission (CFTC), other prudential regulators and the SEC. This framework, among other things, subjects certain swap participants to new capital and margin requirements, recordkeeping and business conduct standards and imposes registration and regulation of swap dealers and major swap participants. Even where Navient or a securitization trust sponsored by Navient qualifies for an exemption, many of its derivatives counterparties are subject to capital, margin and business conduct requirements and therefore Navient’s business may be impacted. Where Navient or the securitization trusts it sponsors do not qualify for an exemption, Navient or an existing or future securitization trust sponsored by Navient may be unable to enter into new swaps to hedge interest rate or currency risk or the costs associated with such swaps may increase. With respect to existing securitization trusts, an inability to amend, novate or otherwise materially modify existing swap contracts could result in a downgrade of its outstanding asset-backed securities. As a result, Navient’s business, ability to access the capital markets for financing and costs may be impacted by these regulations. Legal Proceedings For a discussion of legal matters as of December 31, 2023, please refer to “Note 12 – Commitments, Contingencies and Guarantees” to our consolidated financial statements included in this report, which is incorporated into this item by reference. 51