Navient Corp (NAVI) 2015 Q3 法說會逐字稿

Good morning. My name is Kim, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Navient third-quarter 2015 earnings conference call.

(Operator Instructions)

Thank you. Mr. Joe Fisher, Vice President of Investor Relations, you may begin your conference, sir.

Good morning, and welcome to Navient's 2015 third-quarter earnings call. With me today are Jack Remondi, our CEO, and Somsak Chivavibul, our CFO. After their prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the Company's Form 10-K and other filings with the SEC.

During this conference call we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the third quarter 2015 supplemental earnings disclosure. This is posted along with the earnings press release on the Investors page at Navient.com. Thank you, and now I'll turn the call over to Jack.

Thanks, Joe. Good morning everyone, and welcome to our third quarter's earnings call. Thank you for listening. I appreciate your interest and your support. Our results this quarter of $0.48 excluding regulatory expenses are holding in line with our expectations. They demonstrate the quality of our loan portfolio, the earnings they generate, and our strong capabilities in delinquency and default prevention. Our provision for private credit loan losses declined to $117 million this quarter, a reduction of 39% from the prior quarter, and 10% from the year-ago period.

For federal education loans we own and service, performance trends continue to improve since the peak of the recession, with Navient delivering results 38% better than our peers. Our results also benefited from our continued expansion into services beyond student loans. Year to date, our non-student-loan-related revenue totaled $75 million, twice the amount earned in the first nine months of 2014. Gila, which we acquired earlier this year as part of our strategy to leverage our asset recovery and business services capabilities, has generated a 38% increase in net income year over year.

In addition to the $8 million in regulatory expense, this quarter's results also included the impact of $11 million in loan servicing conversion expense -- $6 million from the reduction and asset recovery revenue from a change in interpretation of the Department of Education allowed collection fees, and the write-off of $5 million in deferred financing costs as a result of our calling ABS securities.

Today we also completed the acquisition of Xtend Healthcare. This acquisition is consistent with our previously announced intentions. It leverages our core capabilities in the asset recovery and business services area to the attractive health care payment sector.

Xtend works with over 130 hospitals and medical providers to process payments for the large and rapidly growing patient pay market place. This transaction provides a footprint in this attractive sector from which we believe we can drive significant organic growth. This transaction will bring value to our shareholders and our franchise, will be more accretive than share repurchases, even in current market conditions, and after the purchase price is cash-flow positive. We're delighted to welcome the Xtend team to Navient.

Our business units continue to continue to deliver on the operations front. For example, we successfully completed the conversion of nearly $5 billion in FFELP loans from a third-party servicer platform to our own. Our conversion methodology met or exceeded best practices, including robust data mapping and testing multiple communications prior to and after the conversion to the customer; and a dedicated and specially trained call center team. Our team worked hard to deliver a positive experience for customers, and I'm pleased with the rewarding customer feedback.

This past week we launched a new customer online portal designed to simplify the experience for customers and improve operating efficiency. We also continued our conversion to a new collections platform that will create flexibility for on-boarding new clients, as well as drive lower operating costs. We continue to leverage automation tools to support compliance and consistency while delivering operating efficiency.

In addition, we continue to assist our customers in the successful management of their loans. Last month the Department of Education released the 2012 three-year cohort default rates. Once again, Navient-serviced federal loans defaulted at a significantly lower rate than other borrowers. As I stated earlier, 38% lower.

Our efforts to help customers succeed drive these results. We help our customers successfully manage their loans through extensive and targeted outreach efforts to promote affordable payment solutions. For example, nearly one in five borrowers in the third of all dollars serviced are enrolled in income-driven repayment plans. We promote repayment options to our 10 million federal loan customers through over 170 million letters, e-mails, and texts each year. We assisted 345,000 borrowers who paid their loans in full this year.

As you and certainly we as Management and fellow shareholders are well aware, several items including industry-specific issues are weighing heavily on our stock price and credit spreads. These factors have put limits on our access to new sources of liquidity, particularly new issuance of unsecured notes. Ironically, while the price of our unsecured debt makes it very attractive for us to repurchase, it is very difficult to find willing sellers. While these issues have created some uncertainty for investors, I consider the market reaction to be significantly out of proportion. As a result, I will address the main issues of the legal final maturity date in the current regulatory environment directly.

Earlier this year, Moody's and Fitch placed $34 billion of our FFELP ABS on credit watch due to concerns that trust cash flows will not be sufficient to pay all bonds by the legal final maturity date. This concern is based largely on the increased use of income-driven repayment programs and other repayment options. While borrowers are in fact using these important options, particularly income-driven repayment programs, at higher rates, we still expect borrower payments will be sufficient to meet the legal final maturity dates. To provide added assurance, we've added call rights on most trusts that allow us to purchase up to 20% of the original balance of student loans sold to the trust.

To help put this issue in perspective, of the $34 billion in bonds on credit watch, less than $2.2 billion have a maturity date in the next five years. Even at a 0% pre-payment speed, a rate our trusts have never experienced, we expect loan cash flows to be sufficient to meet the maturity dates. Our data show borrower payments did slow with the recovery of the economy in the improvement in the job markets due to a rapidly falling default rates. This is a good thing. Since then borrower pre-payment speeds have returned to historical levels, and remain at levels that are significantly greater than 0%.

Last week we released an in-depth loan payment data package, including an audio explanation of the slides, and earlier this week we filed a very detailed response to Moody's request for comment. We'll continue to work with the rating agencies to produce the appropriate outcome.

As you know, the CAPB and state agencies have been reviewing our servicing and collections operations. The common public narrative is that the majority of borrowers are struggling with excessive student loan debt. Further, if only services inform borrowers of the available repayment options, delinquency and defaults would all but disappear. In reality, the vast majority of all borrowers are successfully meeting their payment obligations, and we have assisted more than half of borrowers that we service, covering nearly 70% of balances to select and enroll in an alternative payment program.

At Navient, we have developed sophisticated data-driven strategies to reach struggling borrowers. When we do connect, more than nine out of ten times we are able to enroll the customer in a program that keeps them out of default. Sadly, over 90% of our borrowers that do reach default do not respond to our hundreds of attempts to contact them. It goes without saying we cannot enroll a borrower in an alternative payment program if we cannot connect with them.

Some also believe that all borrowers should be enrolled in income-driven repayment options. For some borrowers, enrollment in an income driven payment plan is the right choice. Income-driven repayment plans, however, extend the loan term. As a result for many borrowers, this would significantly increase the total amount paid over the life of the loan. For example, a borrower with $30,000 in loans, and a starting salary of $30,000 per year, they would pay 33% more under payee than under the standard repayment term, even though a small portion of the loan would be forgiven after 20 years. For some borrowers, this is just not an attractive alternative.

Finally, there are some concern that regulatory changes will create significant increases in servicing costs. While we expect regulators to issue standard practices for student loan service in a collection, we believe these standards will establish consistency within the industry, and will be beneficial to borrowers and servicers. We would welcome the introduction of standards that are recognized by all of our regulators.

These factors have combined to weigh heavily on our stock price. Many analysts have written that a reasonable discounted value of our stable and predictable cash flows support a stock price north of $20 a share. I agree. Since quarter end, we have purchased 4.7 million shares at an average price of $11.81, bringing our year-to-date purchases to 46.7 million shares at an average price of $17.80. Also since quarter end, we repurchased $43 million of unsecured debt, mainly of the July, 2018, issue.

Our near-term objective is to take advantage of these current market prices. While we have ample liquidity to service our debt for the next few years, we are aggressively pursuing options that would allow us to increase our activities in both debt and share repurchases. We have substantial assets available to do so, and I am confident in our ability to execute here.

For example, we have $5.2 billion in unencumbered student loans, $11.5 billion in net assets in our securitization trusts, and close to $5 billion in servicing cash flows from our securitization trusts. Bottom line, our business is sound and is generating the earnings and cash flows we expect. Our student loan assets represent a rock-solid foundation of value that we are well prepared to capture. These assets and our existing operating capabilities will allow us to continue to create value for our investors.

Somsak will now provide more details on the results of the quarter. Somsak?

Thanks, Jack. Good morning, everyone. During my prepared remarks I'll be referencing the earnings call presentation, beginning with slide 4, which provides a summary of our core earnings. In the third quarter we reported $0.47 of share of core earnings. These results included a $0.01 per share or $8 million impact of regulatory related costs; and a $0.02 per share or $11 million of one-time conversion costs to move nearly $5 billion of FFELP loans to our servicing system.

Our third-quarter operating expenses totaled $228 million, compared to operating expenses of $195 million a year ago. The increase is related to the costs previously mentioned, and additional cost resulting from the recent acquisition of Gila. We expect 2015 core EPS to be approximately $1.85, and operating expenses of less than $900 million. These items do exclude regulatory related costs, as well as the impact of the acquisition of Xtend.

Before I go into our segment results, I'd like to highlight the financing activities that took place in the third quarter on slide 5. In the quarter we issued a $700-million private loan securitization transaction. The collateral for this transaction was made up of well-seasoned, high-quality loans, primarily from our SLM 2010-B trust. This transaction resulted in lower cost of funds overall, and raised over $70 million of cash after paying off the 2010-B transaction.

As Jack mentioned, we submitted our comments addressing the legal final maturity issue to Moody's earlier this week. To help address this issue, during the quarter we funded $852 million of clean-up calls associated with seven FFELP trusts. Year to date, we have funded $1.1 billion of clean-up calls through our FFELP ABCP conduits. Additionally, we amended another 16 trusts to include a 10% optional service or purchase rights. Our unsecured debt declined by $428 million to less than $16 billion outstanding at quarter end. We maintained a tangible net asset ratio of 1.25 times, and have purchased an additional $43 million of unsecured debt in October.

In the quarter, we repurchased 12.1 million shares for $175 million, and have repurchased an additional 4.8 million shares as of October 20. We have remaining authority of $168 million under our current share repurchase plan as of October 20. Although this activity was undertaken while maintaining a strong capital position, we will look for ways to manage the timing of our future cash flows from our student loan portfolio to better match the maturity profile of our unsecured debt.

Let's turn to slide 6 to discuss our FFELP segment results. FFELP core earnings were $70 million for the third quarter of 2015. That's compared with $79 million in the third quarter of 2014. For the quarter, FFELP net interest margin was 81 basis points. Going forward, FFELP NIM may be impacted by future LIBOR rates, which will impact the amount of floor income in our portfolio. We expect the fourth quarter FFELP net interest margin to remain in the low 80%s.

I'm going to move to slide 7 to review our private education loan segment. Core earnings in this segment decreased $21 million from the year-ago quarter to $77 million. Third-quarter net interest margin came in at 3.77%. The private net interest margin was 6 basis points lower than our expectations, primarily due to a decrease in the spread between our prime earning assets that are funded with LIBOR-based debt. For the fourth quarter, we expect the private student loan net interest margin to be approximately 3.65%.

The decrease in our provision for losses of $74 million in the prior quarter is as a result of the additional reserve we booked in a second quarter for a segment of borrowers who exited deferment 2014, and are experiencing unfavorable credit trends compared to those who exited deferment in previous years.

Slide 8 shows our private education loan asset quality trends over the last five years. This is a portfolio that is well seasoned, with 94% of our loans in repayment status having made more than 12 payments. The third-quarter charge-offs were at 2.3%, or $10 million lower than the third quarter of last year. Our total delinquency rate was at 7.4%, and that's compared to 7.9% from the year-ago quarter. Do expect our annualized charge-off rates for the full-year to be approximately 2.6%.

Let's turn to slide 9 to review our business services segment. In this segment, core earnings were $79 million in the quarter, compared with $85 million in the third quarter of 2014. We saw an increase in our asset recovery revenues of $20 million versus the prior year. This increase was primarily related to the full integration of Gila, which expanded our footprint in the asset recovery and business process outsourcing space.

The decline in asset recovery revenues from the prior quarter is mainly related to three items: First, an expected reduction of volume for student loan collections; second, an expected rate change to our flat unit fee structure associated with the Department of Education collections contract which became effective on July 1; third, a change in the interpretation of the Department of Education which impacted allowed collection fees for FFELP loans that Jack mentioned earlier.

During the quarter, we were awarded a state tax amnesty contract that resulted in an increase in our contingency asset recovery receivable inventory of $5.7 billion. The amnesty program will be conducted from September 15 through November 16 of this year. In the past 10 years, we've recovered over $1 billion under similar tax amnesty contracts for states and large municipalities. We expect our asset recovery revenues to be approximately $355 million for 2015.

Finally, turning to GAAP results on slide 10, we recorded third-quarter GAAP net income of $237 million, or $0.63 per share, as compared with net income of $359 million, or $0.85 per share, in the third quarter 2014. Just as a reminder, the primary differences between core earnings and GAAP are the marks related to our derivative positions, expenses related to the restructuring and reorganization, and the income associated with [Essilon Banco]. With that, let's open the call up for questions.

(Operator Instructions)

Mark DeVries, Barclays.

Yes, thank you. First question, Jack, with all of the securities in your capital structure -- you're trading so cheap. I know you've talked about pulling forward cash flows. What's your appetite here for potentially selling residuals, particularly in private student loans, so you can buy back debt and buy back stock here?

Well, we think we have more attractive options available to us to raise liquidity to do both of those things at lower rates and better returns, ultimately, for shareholders. I think selling residuals at this stage in the game is -- it's more attractive, frankly, for us to hold those on our books than it is to sell them, and to do financing transactions off of our unencumbered loan portfolios or our over-collateralization in our trusts, as an example.

Okay. What's your optimism about your ability to do something in the near term in terms of securitizing some of those unencumbered assets?

I'm very optimistic about it. I think both of these asset classes, particularly -- well, the unencumbered side of the equation is a well-worn path here in terms of how to get those deals done, and an investor base that understands the cash flows and the structure of the deals. That's really a function of more the organized time it takes to complete a transaction as you go through this series of mechanisms of rating agency reviews and process, et cetera, and underwriting the deal. On the over-collateralization -- financing against the over- collateralization and the trust, that's not something that's been done before, but it's really akin to financing whole loans and a conduit type of facility, and something that we are very confident of our ability to pull off here.

Okay. Should we expect you're going to be focused more on securitizing your unencumbered private student loans rather than FFELP at this point?

Yes.

Okay. Then how should we think about the use of that cash? Will most of that go to smoothing out your debt maturities, or will there be some room to buy back stock as well from that?

I think a lot of this depends on what you are actually financing. To the extent that you're financing cash flows that you would otherwise expect to be -- that would be financed with our unsecured debt today, clearly those proceeds would go to repurchasing our unsecured debt maturities.

Our goal -- our long-term goal here has been to, and what we've actually accomplished, has been to pay down our unsecured debt for the most part, but smooth it out. We've been steady issuers in the unsecured arena over the last several years to flatten out our maturity profile there to better match our cash flows. At the same time, we've substantially reduced the amount of our unsecured debt outstanding and have continued to do so year to date in 2015. To the extent that we're financing and pulling in future earnings, that's where you would really look to creating the capability of enhancing our stock repurchase program.

Okay, got it. Then finally, just one last question on the private student loan NIM. Could you give us a little better sense of NOI guidance on that is fallen. What are the moving pieces here that are causing NIM to come in below previous expectations?

Sure, Mark. The issue on the private NIM is just really more than anything a timing issue when our assets resets, and when -- or what our liabilities that fund those assets are tied to. There was an expectation there that the prime -- our assets, 2/3 of our private portfolios are tied to the prime rate, which as you know has not increased, and is typically tied to the fed funds rate. Meanwhile, the underlying LIBOR rates have steadily increased. Once there's an -- I'll call it an increase in the prime rate, you will see a recovery in that spread between prime and LIBOR.

Okay, got it. But you're just not willing to call for that in the fourth quarter, so you took the NIM down?

That's correct.

Okay. Fair enough, thank you.

Thanks, Mark.

Sanjay Sakhrani, KBW.

Thank you. I guess following up on the NIM commentary, switching over to FFELP, I would have thought you would see a little bit more benefit from some of the clean-up calls. Could you just talk about how much of that's going to factor into fourth quarter, and what other pressures are factored into the FFELP NIM?

I do think the amount of bonds that we acquire during the cleanup call are a relatively small percentage compared to the total mix. That's a bit of a -- it would be hard to move the entire spread item on that basis. Remember, this quarter we also -- the NIM, the FFELP NIM would have absorbed a $5-million expense resulting from the expensing of the deferred financing costs in the NIM, as well.

That item effectively reduced the NIM by about two basis point, Sanjay.

Okay. Is that -- that's going to be ongoing?

No, that's a one-time item.

Okay.

You think about it, right, the $852 million that we called represents less than 1% of our overall FFELP portfolio.

Okay. Then I guess looking ahead, as far as the timeline of events of important items, how should we think about what's on the horizon? I guess we would hear from the CFPB sometime soon. Then maybe if you could just talk about the relevance of Moody's extending out the comment period talks over -- when do we get a decision from them? Is it a constructive thing that they moved it out to October?

On the first point of the regulatory items, we have responded to the CFPB's list of issues, and we are now waiting to hear back from them. There's not a specific time frame for that process, but certainly we are eager to engage and begin to resolve some of these items. I think it's important to note that several of the items here on this list are items that were previously covered through other regulatory settlements, particularly with the FDIC. Some items are related to Department of Ed policies and regulations.

To my earlier comments, we and borrowers I think would certainly benefit from a common understanding of regulators of what the roles and program terms and conditions should be. Some we just -- we'll continue to work with them -- are items that we have addressed and changed in prior years, just as we continue to work with customers to make the process of managing their loans easier.

On the legal final maturity date issue, this is -- it's obviously a complicated issue and has lots of moving parts, but at the end of the day we believe that borrower payments and cash flows coming off the student loan portfolios, what they did slow during that 2008 and 2013 period for lots of various reasons, that the activities or the performance in those periods really don't form a baseline in which one should extrapolate off of. If you look at historical norms, and that is probably closer to what we are experiencing today, pre-payment speeds for borrowed loads are substantially higher than they were during that time frame. When you run cash flows and expected borrower behavior off of those numbers, you do get very different results.

Having -- we would certainly rather the rating agencies take more time to evaluate the data and get a more comprehensive understanding of potential cash flows here and in borrower behavior than to make a short-term answer or solution. Obviously we would like the issue resolved, but it's certainly better to have it resolved right or appropriately.

The final question, I know you guys talked extensively about how you could sell assets to buy back stock, but you also mentioned that you want to adhere to the tangible net asset ratio of 1.25 times, and it's been hard to repurchase debt. Is there anything that would preclude you from exhausting the share buy-back, or extending it further, if you can't do the debt?

No. Obviously, our philosophy here in practice has been to as we generate excess capital, both through earnings and through the release of capital from the amortization of our loan portfolios, that would be returned to shareholders through share repurchases and dividends. I don't think anything has changed here on that side of the equation.

Clearly, the current stock price would encourage us and makes it far more attractive for us to be more aggressive on that front. But that does require the ability to be able to issue in the unsecured markets to be able to smooth out our debt maturities. That's one of the things we are very eager to do. We believe that as we address some of the items that investors have, that we -- as I said, I would describe them as being out of proportion, that you would see credit spreads continue to tighten as we have over the last couple weeks here, and return to more normalized levels.

Okay, great. Thank you.

Moshe Orenbuch, Credit Suisse.

Just to follow up on that stock buy-back question, it looks like you have been doing in the neighborhood of $60 million a month through the Q3, and a little faster in October because it's not a full month yet. What factors -- which is probably slightly slower, actually, in dollars than you were doing previously -- is there any constraint in terms of the trading volumes of the stock?

No. It's just really completing the allocation that we had of the $1-billion authorization from earlier this year.

Okay. You alluded to this in a previous question, but how should we think about from the issues related to the CFPB -- the fact that perhaps some of the companies that the CFPB has examined and is looking at in this report haven't dealt with some of the regulatory bodies that you have? How do you think that influences the process as it goes forward?

Well, this is really the first time for us through that with the bureau, so I think that's really going to be a wait and see. We feel like we have outstanding controls and practices here to protect borrowers and service their loans appropriately. I think the most important thing we do, and the thing we feel most strongly about is helping customers avoid default and the severe consequences of that -- that means getting them into repayment programs they can afford. As the Department of Ed default statistics illustrate here, we do this better than anybody. To take loans that are basically the same across all servicers and deliver a 38% lower default rate is -- those are the results people are looking for here, right, getting borrowers into programs they can afford.

As I mentioned, some folks do believe that income-driven repayment is the ultimate solution. What we do is we really work with customers to let them understand the range of options that they have available to them, and they get to pick the one that fits their budget best. 70% of our dollar volume is enrolled in an alternative payment program, which would include everything from income-driven repayment solutions to loan consolidation, which extends the loan-term out. These are the solutions that work for our customers and drive the substantially lower default rates. I think that's how we've been working with regulators in this, and if it means changing some of our practices to be -- to improve outcomes, we're all in on that.

I was struck by the fact that the GAO in their report pointed to the federal government for not advertising some of the repayment options, as opposed to the servicers. Maybe you can list those in the process and round that out a little better. Last thing --

Certainly, we would argue here that there's a couple things that need to happen. Certainly, encouraging borrowers to contact their servicers is something that we would like to see more of, because when we do contact a customer and connect with them, more than nine times out of 10 we are able to resolve that delinquency.

The other big issue here, which we've talked about before and I've written about, is simplification of the program. The sheer volume and terms of some of these repayment options can be very overwhelming to people who are not dealing with this day to day. It's hard for them to understand which program produces the best results for them. If we can simplify them, narrow them, shrink them down into fewer but more simple programs to understand, I think everyone benefits from that.

Last thing that I've got is you made a comment that I thought was pretty interesting. You said that the acquisition of Xtend would be better than deploying cash into share repurchase. Could you talk a little bit about what the economics are, and whether there are other opportunities out there that could be comparable in the fee-based area?

We have -- sure on that side. One of the things that we've looked at as we completed the separation is what are our core capabilities, and how are those transferable into different areas or different asset classes. In the asset recovery business services sector, this is an area where we have developed a very strong and successful track record of helping our customers manage their cash flows through either asset recovery or business processes types of things.

For years, our focus here was on education loans almost exclusively, and we began to develop on alternatives, working with state agencies and municipalities. Somsak referenced the state tax amnesty program that we're running as an example. We've had long-standing contracts with a number of cities and states managing their receivables book. We thought that there were a couple places that we could go to expand our footprint and really put us in a place that we can grow rapidly on an organic basis off of that. Gila, the acquisition of Gila earlier this year, was one example of leveraging those skills and capabilities into a broader municipal arena, and geographic areas where we were not strong to begin with.

Xtend does the same thing for us in a new area of health care payments. Our view here was that an acquisition in this space was really necessary for us to bring a resume to bear. But yet the activities that they do are very similar to what we do in other asset classes. Bringing our scale, our data, sophistication, and strategies to that process is something that we think will allow us to grow those businesses rapidly. When you look at the opportunities there relative to share repurchases, that's where we do our math, and understand what we can drive in terms of economics. It's a better deal for shareholders in our view to allocate that capital to that acquisition than it is to do share repurchases.

I want to be clear, however, though that these are relatively small acquisitions that has helped us build a footprint. It is not -- our strategy is not to buy these businesses through a series of acquisitions, but to build a footprint and grow organically.

Thank you.

Lee Cooperman, Omega Advisors.

Appreciate the call, Jack. It's really more observations, philosophical rather than questions, but they are important to me. I think if my numbers are right that since the spin we have spent $1.242 billion buying back 69 million shares at an average price of $18. When you have been quizzed about repurchase program, I think the response from the Company generally has been that you believe the net asset value is in the area of $22 or $23, and repurchasing to make sense. We agree with that, by the way. Our number is $23.

If we still believe that, we would urge you to find ways of being creative to raise additional funds to double down or triple down. I think you're in sympathy with that, but we would just urge you -- there's no better use of shareholder money than buying something back at $0.50 on $1, particularly in this environment where there's very few things selling at $0.50 on the $1. That's an advocacy question -- not a question, but an advocacy statement.

Second, I noticed recently that a company by the name of Winthrop Realty announced an intention to liquidate. When I called the CEO -- I was not a shareholder in the company -- when I called the CEO I knew, I asked him what motivated him. He said he thought that the prospect of hidden gain in stock to sell at the net asset value that he believed the company had was so remote that he felt the best thing to do was to liquidate the company and return the money to shareholders.

A theme out of that book, you deal with many regulators, some of which have conflicting views. We are living with constant criticism and a hostile environment despite the social good you do for the people that borrow money from you. Has the Board considered the advised ability of liquidating the Company by going into run-off and returning the money to shareholders so they can invest in companies that are more appreciated by shareholders or the government? That's a philosophical question.

Third, your comment I thought was very interesting. I have no problem with the Xtend acquisition. Companies cannot repurchase stock to success. You've got to grow the business. But when you said that it's more accretive than stock repurchase, I would probably challenge that, because essentially when you buy back stock you're probably looking at the earnings-per-share impact of what earnings you got versus the cost of money, et cetera. But in the stock repurchase you're retiring a 5% dividend and you're capturing a $9 discount to NAV. Obviously, as you retire more shares at a $9 discount to NAV, that NAV goes up. I'm not sure you're calculating correctly the virtue of Xtend versus a stock repurchase. But that's not a big deal, because I think you try to grow the Company.

Those are just observations. I don't know if you want to comment on them, but I will leave them up to you. But we are very supportive of Management. Not a complaint, just an observation.

Thank you, Lee. We definitely agree with your first point, and we are working hard to find those creative alternatives to allow us to do more -- more both in -- two things are on sale here, both the debt and the share price. We are aggressively working on both of those. One of the unique parts of our business is if we can finance assets through an ABS transaction, we're able to raise funds substantially cheaper than our cost of debt in the unsecured arena. It's an easy arbitrage to take advantage of, and one that we would like to do -- see more of that. Same is true on the share repurchase side.

I do want to spend a little bit of time on your comment about the liquidation issue here. The value, the franchise value of this Company is really anchored in the cash flows coming from the student loan portfolios. I would say the regulatory issues are coming from our service -- the servicing of student loans. In effect, not because we chose this, it was chosen by Congress, we are liquidating our student loan holdings. They're an amortizing portfolio. No new FFELP loans are being created. Those loans will, those portfolios will go to zero over time. Our job is to maximize the earnings of that portfolio. We think we can -- we are doing that. Running the operation on that side of the equation is frankly not a whole lot different in either kind of alternative structure.

On the servicing side of the equation, there's no question that as a business we do a great job in this space, and we deliver value for our customers and taxpayers in the results that we generate. If the regulatory environment is not going to allow that business to work and be profitable, then it's not an attractive business. That is certainly something we would take a look at. We need to work with the regulators today to resolve the open issues with the state AGs and the CAPB and we're going to do that. A big part of our strategy is really about driving and producing the results that all, including the regulators, are looking for here. But that's a to-be-determined opportunity, for sure.

I would be willing to take a higher cost temporarily on issuing unsecured debt to buy an asset back at $0.50 on the $1. The only thing, just to keep your feet to the fire a little bit -- and I like you guys -- but in the second quarter of 2015 we spent $300 million at $19.76. In the first quarter of 2015 we spent $300 million at $20.52. If we spent $300 million at the -- $600 million at the $20 level, we should be spending $1 billion at this level. That's all. It's easy for me to -- hindsight is 20/20. We should just find a way of being more aggressive down here, because we are on sale.

I agree. Thank you.

Eric Beardsley, Goldman Sachs.

Hi, thank you. Just a few follow-up questions on the Xtend Acquisition. One, are you going to complete the $1-billion buy-back? In other words, are we going to see $225 million in the fourth quarter, even with the Xtend acquisition?

Yes, so the $1-billion buy-back is not impacted by this. As I provided, we have continued to buy back shares since quarter end, so 4.7 million shares were acquired since quarter end.

We've got $168 million of remaining authority left, Eric, as of yesterday.

Got it. What level of OpEx should we expect following the acquisition? I know you were originally guiding to somewhere around a $50-million reduction in OpEx next year off the 2Q run rate. That was getting us somewhere around $850 million. How much growth from this deal will we see?

At this -- for the fourth quarter, we are going to be taking on some acquisition costs that will -- up-front acquisition costs and integration costs that we will have to expense in the fourth quarter, but just for that particular transaction. It's early at this stage in the game, but it wouldn't shock me to see additional expenses in the $15 million range.

In the $50 million? Five-oh?

$15 million. One-five.

$15 million, okay. So run rate OpEx annually is only $15 million? I think the presentation mentioned --

We expect -- well, let's be careful. We do expect to -- it's a little early at this point, but to the extent we can grow that business organically, you will see increasing expenses as well as associated revenues going forward.

Okay. If I'm looking at the presentation correctly, you mentioned $70 million of revenue. Is that coming right into the collections line?

It would be part of the asset recovery revenues line

Okay.

Remember the guidance I provided did not include the impact of Xtend, just as a clarification.

Got it, so the $355 million for the year did not include any Xtend revenue?

That's correct.

Okay. If we were to assume maybe you get $10 million, $15 million or so coming in fourth quarter from that?

Yes. The expectation is the impact of Xtend for the fourth quarter is going to be de minimis to the bottom line.

Got it. $70 of revenue, $15 million of OpEx, with some growth from organic, is that all in the right way to think about it?

Well, $70 million -- remember $70 million is an annual amount.

Okay, and the $15 million of OpEx was quarterly, or is that annual, as well?

Quarterly, that's correct.

That's quarterly, okay. So $60 million, got it.

That's right.

Okay. Then I guess where would you need to see the unsecured debt tighten to before you issued?

I think the issue here is more about a more -- a functioning market place. I think investors are looking for some clarity in the process, and there are a couple of tools that we have available to us that we think will tighten spreads here. It's cheaper for us to pursue opportunities to finance off of our assets than it is to finance in the unsecured. Both produce the same net proceed types of things. Once we can demonstrate that and do it, I think the unsecured spreads tighten again. Our goal here, as I said earlier, is to spread those maturities out, so we would -- all else being equal, we plan to be an issuer in the unsecured arena. The sooner those spreads can return to a level that we think is more appropriate, that's when we would be back in the market place.

Got it. I was just curious in terms of what you feel is the more appropriate level, if there's a certain range. You're all in unsecured debt expense with swaps somewhere around 4% today. I think your weighted average coupon's like 6.2% or so. Do you need to see it get back down to that level, or are you comfortable taking on some incremental funding costs here?

We would certainly -- we're not -- to capture the opportunities that are embedded in our debt and stock price does not mean we are looking for perfection on the cost to fund side.

Okay.

I think we've also got to look at where -- what the relative cost of funds of other sources of financing would be, too. That will be part of the equation.

Got it. Your $1.85 guidance, that doesn't include any debt tender cost, does it?

It does not.

Okay. Is there anything else baked in there in terms of non-run rate that we should be aware of?

No, there's no non-run rate numbers in the $1.85, other than the impact of Xtend and any regulatory-related items.

Got it. Lastly, I guess we're still yet to see the final terms of what the re-pay program will look like. Is your expectation that will be open to the FFELP program? If not, would you expect to see any consolidation of loans out of FFELP into the direct loan program for that?

Repay E is an expansion -- is yet another income-driven repayment solution. The primary benefit of this program is going to be to customers who are new to repayment. There are income-driven repayment options available under FFELP. We certainly would see -- expect to see some accounts consolidate into direct lending, to capture that program. But the benefits of it are not -- if you've been paying your loan for five years, you are far better off working through the repayment options available to you in FFELP than you would be to start over again in Repay E.

Got it. Great. Well, thank you.

Sameer Gokhale, Janney Montgomery Scott.

Thank you. It seems apparent to me that you guys don't have a cash flow issue, but it's a timing of cash flow concern, that the unsecured markets seem to have. I don't know if you talked about this earlier, it seems there are several things that have come together all at one time from a headline perspective that I think made perhaps bondholders nervous and also some stockholders nervous, explaining the sell-off. It seems like to a certain extent when the bond spreads have widened out, that's also resulted in a cycle where the stock has sold off as well. Just because people wonder if the bond market is nervous then we should be nervous as well.

I was just curious in terms of trying to figure out the chain of events going forward. Clearly, we find out from Moody's what their thinking is; but you've given analysis showing pretty clearly that you have the cash flows to comfortably meet the legal maturity date, and also cash flows over time to meet your unsecured debt charities, and yet none of that seems to matter.

What I was curious about -- I'll ask the question a little bit differently from what Lee was asking earlier. Rather than going to liquidation, in your discussions with fixed-income investors, there's a concern here in the widening of credit spread for you guys more a function of some concern that you might split the Company up into some sort of servicing and asset management business such that credit spreads -- that would extend the spread widening. Is there a concern that maybe you take the Company private, given all the headline risks that are out there, and is that something you would contemplate? It would be helpful to get your thinking around that, because something here doesn't seem to add up. Just your thoughts would be helpful there? Thank you.

First of all, I think the items that were on the table, both the legal final maturity and the regulatory stuff, create where the outcome is unclear. That uncertainty creates the opportunity for the events that you just described to happen. Some of those were certainly interpreted by some incorrectly. There was a view earlier on that, early in the process, that the legal final maturity date issue would cause us to spend liquidity that would otherwise be used to service our unsecured debt to clean up those asset back-hauls. I think we've clearly explained that is not the case, as an example. As we've responded to some of the theses here and items, I think you've seen both our credit spreads tighten and our stock price improve.

Our goal and objective is of course to produce the outcomes that -- and make sure people understand the outcomes -- that are likely to occur here. That's what we've been working on, on both the legal final maturity and the regulatory cost side of the equation. But we do need those items to resolve before I think you get back to completely normal.

As I mentioned at the beginning of the call, one of the challenges we're facing is even though it's attractive for us to buy back debt, it's difficult for us to get any kind of meaningful volume here. That, I think, tells you a little bit about how -- what the fixed income investors are. They see the same value we do, and therefore are unwilling to sell.

Okay, that's helpful. The rest of my questions have been answered. Thank you.

Mark Hammond, Bank of America.

Good morning. Thanks for taking my call. With the acquisition of Xtend, I was curious does this introduce a new regulatory body overseeing Navient?

No, I don't believe so. Most of what we're doing in these types of businesses is more of a business process activity. In this case it would be presentment of the resolution of the payment for the medical services, and not a -- we're not participating in a pure collections-related business activity here. Even if we were, that would be similar to the same rules and regulations that we're governed to in other areas of our collections or asset-recovery businesses.

Okay, thanks. Turning to the debt side, could you go over the debt maturity and buy-back activity you completed during the quarter and then in 4Q so far? I think the $845 of 2018 were mentioned? Then 3-7/8 also matured during the quarter. Just wanted some clarity on that?

Maybe the quarter's activity was all really due to maturities. The $43 million that we bought during October, Mark, really were mostly coming out of the June 18 maturity bucket.

Okay, great. So of the 2018, it was $43 million, okay.

Most of that, yes.

Most of that, okay. The $8 million of regulatory-related costs, is that in any way related to the CFPB NOR notice Navient received, or is that a different $8-million cost?

We have -- there have been a number of regulatory inquiries on both our service and collections business from a couple of different parties. As part of that process, there's an extensive amount of data and analysis that was required to be done and delivered. Setting up that information, putting it into data storage, doing the analytics work, legal-related items, is what it all comprises. The biggest part is on gathering the data and analyzing it and storing it than it is, say, legal fees. But it's comprehensive against all of the inquiries.

Okay. Jack, Somsak, thank you.

You're welcome.

Michael Tarkan, Compass Point.

Thank you. Most of my questions have been answered, but just from a modeling perspective, a couple numbers were thrown around Xtend. I just want to make sure I'm clear. So $70 million run rate revenue and $60 million of annual OpEx? Is that fair, assuming no growth -- which I know is not the case, but is that was just the starting point?

The $15 million I quoted that, Mike, it does include some -- I will call up-front transaction and integration costs, so take that for whatever it's worth. Just as a starting point for modeling purposes, you can probably use that as a starting point. I think you will be okay.

Okay. Then just last one for me on the projected cash flows, are you factoring in any degree of higher servicing costs in those numbers at this point, or is it just still how you were modeling it before? Thank you.

Mike, are you talking about the life-of-loan cash flows of close to $33 billion that we have in the appendix?

That's right.

Yes, those are gross cash flows, so they are -- those are cash flows before any servicing costs.

Perfect, thank you.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you, Kim. We'd like to thank everyone for joining us on today's call. If you have any other follow-up questions feel free to give me a call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.