Navient Corp (NAVI) 2016 Q2 法說會逐字稿

Good morning. My name is Corina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient second-quarter 2016 earnings conference call.

(Operator Instructions)

Mr. Joe Fisher, you may begin your conference.

Thank you, Corina. Good morning, and welcome to Navient's 2016 second-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 second-quarter 2016 supplemental earnings disclosure. This is posted on the investor's page at Navient.com.

Thank you, and now I will turn the call over to Jack.

Thanks, Joe. Good morning, everyone, and thank you for joining us today. I'm happy to share my thoughts on this quarter's results, which are quite good and are a tangible example of the value our Company can create. I will take the next few minutes to provide some color on our performance this quarter, the progress we have made on new funding, and discuss new business opportunities we are seeing, including the Department of Education servicing contract.

Our financial results this quarter were very good and better than planned. They reflect the efforts we have made in credit, funding, and operating efficiency. The result, we earned an adjusted $0.48 in core earnings for the quarter. Key contributors included private credit loan performance, revenue growth in our non-education business services, and operating expense control.

While the rhetoric implies student loan delinquencies and defaults are rising, I'm happy to report our customers are continuing to experience very different and positive trends. While some borrowers are struggling, overall delinquency and default rates for the federal and private loans we service are at some of the lowest levels since before the financial crisis.

For example, for federal loans we service, we track the performance of recent graduates six months after they first enter repayment following their grace period. For the class of 2015, 7% of borrowers were more than 90 days past due after six months in repayment, three times lower than the class of 2010. It's also 22% lower than the class of 2014.

This is very good news. I'd also encourage those who are having difficulty making payments to contact us. We have solutions that can help.

For our private loan portfolio, charge-offs this quarter totaled $127 million, 29% lower than the year-ago quarter. We saw a similar improvement in loans more than 90 days past due. The balance here declined by 22%, to $668 million at quarter end.

Our charge-off in 90-plus delinquency rates fell to 2.2% and 2.9%, respectively, the lowest level since before the financial crisis. As a result of this steady and significant improvement in credit performance, our provision for private loan losses this quarter declined to $100 million from $104 million in the first quarter and from $191 million in the year-ago period. Our data points to a continuation of these positive trends.

Our total fee income for the quarter was $176 million, with our non-education loan-related revenue totaling $49 million. We continue to see strong growth and good opportunities to grow our business services outside of student loans. Leveraging our skills and infrastructure to grow this segment of our business will continue to be an area of focus for us.

Last year, we launched several initiatives to improve our operating efficiency. Excluding newly acquired entities, expenses fell 8%, as we benefited from efforts to improve efficiency in the conversion of third-party service loans to our platform.

In addition to these strong financial results, we continue to demonstrate the breadth of our access to funding. During the quarter, we completed a $478-million private loan ABS repurchase facility, issued three FFELP term ABS transactions for $1.8 billion, extended our private education loan conduit facility for another year, and repurchased or retired $255 million in unsecured debt. Driven by our cash flows, in the past 12 months, we have repurchased or retired $2.4 billion in unsecured notes with original maturities in 2016, 2017, 2018, and 2019.

We continue to work with the rating agencies as they implement their new cash flow assumptions for term FFELP ABS transactions. While some progress has been made, the pace is much slower and the results much less than we would have hoped. Nonetheless, earlier this year, we decided to move forward, and we have successfully returned to the term FFELP ABS market.

Year-to-date we've completed four deals using different structures and funding all loan types, including our first bond backed exclusively by federal rehabilitation loans. Most importantly, investor participation has been growing, and funding spread is improving with each deal.

Our liquidity profile is very strong and improving. In addition to our demonstration of consistent access to a variety of funding sources, we closed the quarter with cash in unencumbered FFELP loans well in excess of the next 18 months of debt maturities. Our student loan portfolio continues to generate sizable cash flow consistent with our projections. And finally, we still plan to return to the unsecured markets in the second half of this year as we look to smooth out our near-term debt maturities.

As I mentioned, we continue to pursue new business opportunities. This quarter, we acquired $646 million in student loans, including $23 million in private loans. We also added new contracts in our business services, asset recovery, and healthcare business lines. The outlook for future portfolio purchases looks promising, and I remain bullish in our ability to organically grow our non-education loan business services.

Of course, one of the largest business opportunities is the proposed Department of Education loan servicing contract. We were pleased to be chosen along with two others to participate in the next round of this RFP. Secretary King recently wrote about the key skills the Department of Ed is looking for here. I believe our demonstrated track record of scale, efficiency, and customer outcomes, including income-driven repayment plan enrollment, and of course, default prevention, match up well to these requirements.

For example, for Department of Education service borrowers, if all large services achieved our default prevention results, 300,000 fewer borrowers would have defaulted in 2015. In short, we make a difference, a huge difference where it matters most. We look forward to learning more about this opportunity when the next round of the RFP is issued.

Finally, we've continued to deliver value to our investors through our return of excess capital. In addition to our $0.16 quarterly dividend, during the quarter, we purchased 13.6 million shares at an average cost of $12.90 a share, well below our view of the intrinsic value per share. Year-to-date, we have purchased 32.8 million shares, reducing our overall share count by 9%.

While our stock price is up significantly from its lows earlier this year, it still does not reflect our estimate of the intrinsic value of this Company. I believe our strong financial results and accomplishments this is quarter demonstrate our commitment and our ability to preserve and create value for our investors.

I'll now ask Somsak to provide a deeper look at our financial results, and I look forward to taking your questions later.

Thanks, Jack. Good morning, everyone. During my prepared remarks, I will review the solid second-quarter results that we reported last night before highlighting our recent financing activities. I'll be referencing the earnings call presentation available on the Company's website, beginning with slide 4, which provides a summary of our core earnings.

In the second quarter, we reported adjusted core earnings per share of $0.48, which exclude $0.01 per share of regulatory-related costs during the quarter. Our second-quarter adjusted core operating expenses totaled $226 million. That's compared to $221 million from a year ago.

The increase is primarily related to the additional operating costs of the Gila and Xtend Healthcare acquisitions. Excluding the expenses associated with these 2015 acquisitions, operating expenses were 8% lower than a year ago. Based on the results through the first half of 2016, we are on pace to beat our operating expense guidance of $930 million for 2016. I also expect us to be on the higher end of our previously issued 2016 core EPS guidance of $1.82 to $1.87.

Let's move to slide 5 to discuss our FFELP segment results. FFELP core earnings were $68 million in the second quarter of 2016, compared with $93 million in the second quarter of 2015. The decrease in FFELP core earnings was primarily a result of the increased recovery expectations that occurred in the second quarter of last year.

The FFELP net interest margin improved to 85 basis points in the quarter, which came in at the high end of our expectations. And during the quarter, we hedged an additional $205 million of floor income, bringing our future hedge floor income to $1.1 billion. For the full year, we expect our FFELP net interest margin to be in the low to mid 80%s. In the quarter, we acquired $623 million of FFELP student loans, bringing our year-to-date total FFELP acquisitions to $2.2 billion.

Let's turn to slide 6 to review our private education loan segment results. Core earnings in this segment increased $35 million from the year-ago quarter, to $57 million. Our provision for losses continued to improve as a result of the overall improvement in credit quality, delinquencies, and charge-off trends.

In the quarter, the net interest margin came in at 350 basis points. We expect NIM for the full year to be in the mid 340s. The private net interest margin continues to be impacted by the timing of when our prime-based assets reset versus when our LIBOR-based debt resets.

This is a result of the anticipated rate hikes that have not materialized. Since the last prime reset, LIBOR has increased without a corresponding increase in the prime rate. And we're projecting a higher LIBOR cost of funds for the second half of the year without any increase in the prime rate. In addition we've also seen a slight balance increase in programs that temporarily reduce monthly payments through a reduction in interest rate versus a decline in our overall private education loan balance.

Charge-offs declined $52 million, or 29%, from the prior year, and loans greater than 90 days delinquent have decreased by $184 million, or 22%. The improved performance demonstrates the strong and improving credit quality of our portfolio. Slide 7 highlights some of these improvement trends that we've seen over the last five years.

Our second quarter charge-off rate fell to 2.2%, and our total delinquency rate declined to 6.1%. And the chart on the bottom of the slide demonstrates the benefits our improved performance is having on our borrower FICO scores. FICO scores have improved by 36 points for our non-traditional loans and 24 points for our entire portfolio on average over the last five years, and we expect to see continued year-over-year improvement in this area.

Let's turn to slide 8 to review our business services segment. In this segment, core earnings were $81 million in the quarter, compared with $91 million in the second quarter of 2015. The decrease was primarily related to the expected decline in education loan-related revenues.

Our non-education loan-related asset recovery revenues increased by $23 million from the year ago, to $49 million. The increase in revenues is primarily related to the acquisitions of Gila and Xtend Healthcare in 2015. Overall, we continue to expect our consolidated business services revenue to fall between $620 million and $650 million for the full year.

Let's move to slide 9 to highlight our financing activities that took place in the second quarter. During the quarter, we issued three FFELP asset-backed securities totaling $1.8 billion in bonds.

From 2016-2, our first ABS transaction during the quarter, to 2016-3, our second ABS transaction during the quarter, we saw three things. One, the size of the issuance increased by $264 million. Two, we saw pricing improve by 13 basis points. And three, the number of investors increased from 18 to 26.

Our third issuance during the quarter, 2016-4, was the first time we issued a securitization made entirely of rehabilitated FFELP loans. These three transactions during the quarter demonstrate the increased demand for federally guaranteed paper and investors' willingness to participate in this market. We believe the assumptions in Moody's methodology that were recently released were divergent from actual loan performance and are well beyond what we expect to see.

While we continue to wait for Moody's and Fitch to provide final ratings outcome, we have been actively extending the legal final maturity dates on our previously issued bonds. In total, we have now extended the legal final maturity date on $6.8 billion of bonds.

In the quarter we extended our private education loan ABCP facility by another year. We lowered the maximum financings to $750 million and currently have available capacity of $388 million. The facility extension and funding costs are consistent with our plan.

And as we discussed on our prior earnings call, we increased our existing private education loan repurchase facility by an additional $478 million during the quarter. The proceeds from this transaction were used to pay down all unsecured debt.

We reduced our unsecured debt by $255 million during the quarter, to under $14 billion outstanding at quarter end. $219 million of this reduction came through repurchases in the open market. At the same time, the balance of our cash and unencumbered FFELP assets increased by nearly $400 million during the quarter. Today, our cash in unencumbered FFELP loans are in excess of the next 18 months of debt maturities.

In the quarter, we repurchased 13.6 million shares, for $175 million, at an average price of $12.90. And at quarter end, we have a remaining authority of $380 million under our current share repurchase plan. All of this activity was undertaken while maintaining a strong capital position and a tangible net asset ratio of 1.25.

Finally, turning to our GAAP results on slide 10, we recorded second-quarter GAAP net income of $125 million, or $0.38 per share, compared with net income of $182 million, or $0.47 per share, in the second quarter 2015. The primary differences between core earnings and GAAP results are the marks the related to our derivative positions, expenses related to the restructuring and reorganization, and the income associated with SLM BankCo.

With that, I will now open the call for questions.

(Operator Instructions)

Your first question comes from the line of Mark DeVries from Barclays. Your line is open.

Thank you. Yes, thanks for the color around the funding. I think you indicated at least the second deal of the year was 13 basis points inside of the prior one. Could you give us a little more context on where you are today relative to where you were, let's say, prior to when the funding markets really started to widen out late last year, and also where you are relative to your average funding cost?

The -- so prior to the legal final maturity issues, we were probably issuing ABS at somewhere around LIBOR plus 75.

Okay. And today where's that?

Today, well, we've seen -- depends on the assets, the mix of the FFELP assets that are being securitized. We are seeing pricing improve every day on that. If we were to go through and do another deal -- as an example, we are looking at another rehab deal, but we would expect spreads to come in tighter than our previous deal.

Okay. Got it. And I think Jack indicated you're still planning to issue unsecured debt in the back half of the year. Do you have a sense for where you might be able to issue when you do that, and would that be -- and where would that be relative to your blended unsecured funding costs right now?

So today, we're indicative -- if you look at a five-year issuance, the fixed rate that we would issue it would be somewhere in the neighborhood of 7.25% for a 5-year issuance. That's before taking into account any new issuance concession that might be taken into account. And certainly, it is historically more expensive than the debt that's rolling off, but that's all embedded in the spread guidance that have been provided for both FFELP and private credit.

Got it. Thanks. And then just turning to private student loan credit, just curious what your thoughts are on, if we did go into a recession, how might that perform given how seasoned that book is at this point?

I think that's the keyword there is seasoned. So our customers are well beyond their in-school periods or in the beginning of their careers, and we lay out those statistics for you in the earnings presentation, show how it's migrating into how many months of repayment they've been in.

Historically, the volatility as customers season is much, much lower compared to new-to-repayment customers, but you're also starting off from rates that are significantly -- that volatility is measured off rates that are significantly lower than what you would see in year one of repayment. So those are very positive trends.

I would just point out here that the statistical data that is in existence for student loans, whether they be federal or private, is really driven by whether or not the student graduates is the biggest factor. And we definitely had some exposure points in our private loan portfolio coming out of or going into the financial crisis of borrowers who did not earn their degrees, but what's left in the portfolio today is a portfolio that has a demonstrated track record of performance, and we would expect that to be less susceptible to economic swings.

Okay. Thank you.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

Great, thanks. The securitization of the rehab loans, you mentioned that you could do another one. How much liquidity could being able to securitize those loans add?

Well, we did about a $0.5 billion in that first rehab loan we did, but I think we are looking to do at least that much on the second deal this stage of the game.

Most of our FFELP activity, though, comes out of our conduit facilities, so you don't -- they're not -- it's converting from short-term funding sources to permanent funding sources versus a source of liquidity.

Got it. And relating that as well as the better spreads on FFELP, could you talk a little bit about, on FFELP securitizations, could you talk a little bit about whether -- at what point you think it gets to where there's the opportunity for more FFELP sales from banks and others?

So I think we're actually -- as I said, the outlook is quite promising on that front, and I think it's driven by a combination of factors including funding, regulatory, and servicing-related issues. So we are having more dialogue with more institutions on this front already, and no decisions or processes have started, but the direction of the talks and discussions is quite positive.

And, Jack, just to follow up on what you had said in terms of servicing standards, any update that you can give us there in terms of how that process is developing.

On the regulatory side?

On the regulatory side, yes.

So we continue to have an active engagement with regulators here, which are both the federal and state-based regulators. A lot of our activity is still around the processes we use, why customers do and require certain types of transactions over others in different time frames. So one good example is forbearance.

I think there's -- then folks who have thought that forbearance is used more heavily over income-driven repayment, and the reality is, is about 70% of our customers who go into income-driven repayment need some form of forbearance before they are effectively enrolled in that program. As an example, they're either -- need a forbearance to bring their account current or they need a forbearance to give them the time to complete the forms that are required to enroll.

So, we -- the dialogue, I think, has been positive, and hopefully, we're providing more insight for them to understand the different activities and actions that we perform here. I do think at the end of the day, our greatest strength is our ability to work with customers, identify at-risk customers and develop strategies that result in higher rates of right party contact so that they default at lower rates.

When we connect with a delinquent customer, nine times out of ten, we're able to cure that delinquency. And as I said, if everyone performed at our default prevention measures, 300,000 fewer federal borrowers would have defaulted in 2015. That's no small difference there of course.

Do they think that they're helping the process of borrowers, accepting that contact?

Well, so they -- I think a couple of positive things have come out. Treasury, who's been running a pilot project on default collections work, recently issued a report on their results, and they were substantially below private sector collection efforts overall. But what they pointed out is something that we've been saying for quite some time, is that contact is key to resolving this and that contact is hard.

When you are calling a delinquent borrower, it takes a concerted effort and very distinct strategies to improve connection rates. If you just do a mass one-size-fits-all approach, you're going to get default prevention results that I think you see throughout the industry versus the ones that Navient is able to produce. So they -- I do think there's a greater awareness here of that graduation is key, that contact is important, and strategies to create higher right party contact rates, combined together, produce the best results.

Great. Thanks very much.

You saw that in the Treasury report, as I said, and even in the White House report that was issued this week.

Thank you.

Your next question comes from the line of Lee Cooperman from Omega Advisors. Your line is open.

Thank you. Hope you can hear me. I'm using my cell phone in Utah. Can you hear me Jack?

Yes, we can, Lee. Good morning.

Good, good. Congratulations on a good quarter.

You've touched on my questions, but I want to see if I can get you to even be more specific. I think a quarter or two ago, you opened up the call very directly, very forthrightly saying, we've been questioned about our stock repurchase activity. The reason we're as aggressive as we are is we agree with those analysts that have a valuation in the high teens if, in fact, not in the low $20s. We think we're creating great value for our shareholders by buying back shares. In terms of specificity, do you still have a view of value in the high teens, low $20s (multiple speakers)?

Well, actually, as you I think pointed out before, Lee, is that when we're buying shares at $12.90 and buying back 9% of the shares, we actually increase that value to the remaining shareholders.

Okay.

So the value is higher.

And I assume that the $380 million that's left on the program, assuming the stock is approximately in the same area, would be used this year?

That's correct. That is our plan.

Okay. Now without getting you into an earnings forecast, but just looking at your cash flow models in 2017, would we be able to continue, assuming the stock remains undervalued, to buy back meaningful shares in 2017?

So our share repurchase program is very much based on the cash flow that we generate and the equity value or the retained earnings that the business generates, and certainly, as the portfolio amortizes, it comes down a little bit. But, yes, we would expect that that process, barring, of course, opportunities to acquire portfolios of loans that might deploy some of that capital at higher returns, we would expect to be -- the return of capital similar to levels that we've done in the past or similar to our earnings structure as we've done in the past.

Thank you very much. Again, congratulations on a good quarter.

All right. Thanks, Lee.

Your next question comes from the line of Eric Beardsley from Goldman Sachs. Your line is open.

Hi. Thank you. Just wanted to clarify the private loan NIM guidance. Is that mid 340s for the full year?

Yes, it is.

Okay. So given where we've already come in for the first half, does that imply that we should expect low 340 or even high 330s for the second half of the year?

Probably be closer to the low 340s area, Eric. Obviously, it's just all dependent on whether the prime rate really resets or increases or not towards the second half of the year.

Got it. And then just as we think about the buyback going forward, how much unsecured debt issuance do you think you need to do in the second half of this year or the first half of 2017 to maintain at these levels of earnings and also the capital release?

We have very modest needs, and what our goal here is what you'd expect to see, again, barring any portfolio acquisitions, is that our total amount of unsecured debt would be declining, and any issuance here would be replacing near-term debt maturities in 2018, 2019, 2020-type time frames to smooth out the maturities more consistent with the expected cash flows of the portfolio. That is the goal and the driver, so the net financing needs here are relatively modest.

Got it. Is there a way to size that? Would you be looking to do something like $500 million this year and then maybe another $1 billion next year? Is there a good way for us to think about that?

Those -- I think this year is probably a good number, and next year, we'll have to -- a lot of this will depend, of course, in how successful we are in repurchasing unsecured debt in the open market.

Got it. Great. Thank you.

(Operator Instructions)

Your next question comes from the line of Sanjay Sakhrani from KBW. Your line is open.

Yes, thank you. Good morning. Just following up on that private student loan NIM question, is there any way to hedge, to strip out the basis risk between LIBOR and prime? Because it seems like if -- we're in this environment where we're speculating rates might continue to go up, you might have that mismatch and subsequent impact to NIM?

Sanjay, we've looked at this before. You've got to realize, right, is that as rates have declined, our private NIM has benefited from that characteristics. And unfortunately, as rates started increasing, we've seen the spread just work the opposite way here. We have looked at trying to hedge this position before, but it's seen that the cost of doing this hedge was just too expensive for us to take on.

Okay.

That's one of the reasons why we moved our -- when we were back as an originator, we converted our index on new loans to LIBOR from prime.

And where do we stand in terms of the mix between LIBOR and prime on the asset side?

So about 60% of our portfolio today is linked to prime.

Got it. And then this servicing RFP, what's the time line on this? And is the DoE expected to manage the entire process, or will there be another party involved?

So the Department of Ed indicated originally that their intent was to have this RFP wrapped up and signed by the end of the year. The original indication was that round 2's RFP would have been issued sometime in July, so we're probably a little -- running a week or two behind on that schedule right now.

And they would manage it under the proposed terms, although they have indicated that a number of different entities would be involved in the evaluation or have some participation in the decision-making process. The contract terms themselves are not -- the round 1 was really an evaluation of capabilities and less a specific set of criteria of requirements for the final contract. So we're eagerly awaiting the next round's RFP here.

And just to be clear, it's all or none? So to the extent that you guys aren't a part of this relationship going forward, you'd lose your existing business?

So this is -- conversation and comments from the Department of Ed officials over the last couple of weeks have indicated that this is more of a systems RFP, so they're looking to pick a single platform for a common customer experience and branding approach, but that they would use multiple entities to do the call center customer service activities associated with the volume.

Okay. Got it. So when we think about the economic impact, it's probably a subset of what you're making on the servicing you're doing today?

I think we really need to see the next round before we know exactly what the potential is, positive or otherwise.

Got it. And final question just on the collections part of -- that RFP on collections, where are we on that?

So those proposals have been submitted, and sometime this fall is the anticipated time frame.

Okay. Great. Thank you very much.

You're welcome.

Your next question comes from the line of Mark Hammond from BofA Merrill Lynch.

On a slide presentation at a conference back in May, you wrote that a meaningful growth opportunity within business processing is portfolio management. Would you provide some details around what that means?

Sure, our portfolio management business is a service that we have provided primarily to federal guarantors in the student loan arena, and in that business, we manage the book of defaulted receivables for the entity but don't actually do the collections-related work. So we would allocate the business to various collection agencies.

We would monitor it. We capture all of the data, report it back to the owner of the receivables. We monitor compliance, et cetera. And one of the things that we've done very effectively in that business is drive higher performance levels.

So our guarantor customers in that business, I think we have about six guarantors who run through that business today, are in the top eight of collection results in the country. And in some instances, we've signed new guarantors who have been near the bottom and have taken them, and sometimes using the exact same -- some of the same collection agencies they've been working with in the past and have driven them up into the top-10 arena.

So it's a very effective business model, and we believe it has applications outside of the education arena. We have just begun to sign some clients up in that space and do some work in that area.

Thanks. And then regarding some financing transactions, since you bought back $250 million of bonds during the quarter, the private residual repurchase facility during the quarter raised $478 million, I was wondering what the use of the remaining $223 million of proceeds was used for specifically.

Well, Sak indicated our cash balances are higher.

Higher, yes.

And that's primarily where it's been. Our big challenge when we raise liquidity and funding outside of actual debt maturities is to be able to buy back bonds in the marketplace. So despite trading levels and spreads that we think are high, our investor base thinks they're high, too, so they like them and have been unwilling to be sellers in size. So that's been the biggest challenge here.

Yes, and I'll note that the repurchases that we took on during the quarter did not result in any meaningful gain or loss on those repurchases.

Great. And then my last question was broadly with the FFELP rating agency issue, I was wondering, is there a number following the additional amount that was put on review for FFELP ABS that's on review by at least one of the agencies, a round number?

So the amount of bonds that are under review that Navient -- or Navient-sponsored bonds is over $56 billion by Moody's, and I believe the end number of bonds under review by Fitch is about $52 billion.

Thanks. That's all.

Your next question comes from the line of Rick Shane from JPMorgan. Your line is open.

Good morning, guys, and thanks for taking my question. Look, you -- the credit statistics are very compelling, and you've walked through them both on the FFELP and private loan side. I am curious, we're starting to see in most other asset classes a trough in credit and perhaps even in inflection, and your credit trends continue to get better.

I'm curious what you would attribute that to. It doesn't look like it's a FICO issue per se. What are the factors? Is it exogenous, or is it something that you think you're doing internally at this point?

I think it's a couple of things. One is seasoning is clearly a particular benefit. So the further one borrower, particularly a student loan borrower, seasons, they're more entrenched in their career, their income starts to increase, and you have much, much better performance.

For both federal and more recently originated private loans, we're also benefiting from a fact that a higher percentage of that volume has been occurring in more traditional student environments, those kids going to four-year schools. So you've seen a significant reduction, for example, in volume at for-profit institutions. And I do think there's a little bit less occurring on the side of customers recognizing that if they're borrowing for education, they should be borrowing for tuition and less for living expenses. So that's perhaps more anecdotal at this stage in the game.

But if you look at the 2015 graduating class -- and that's the most recent graduating class statistics we have. 2016 has less school, but their grace period doesn't end until December, January of 2016-2017. To be 22% better than the year before is -- remember, these are not underwritten loans. These are entitlement loans.

So these are borrowers who are benefiting from the economy, benefiting from probably better discipline at the front end of the origination process, and certainly, in Navient's case, for Navient's service loans, they are benefiting from our targeted outreach campaigns that put us in contact with those borrowers before they become severely delinquent.

Got it. It sounds like a lot of little things add up to a pretty virtuous trend.

Yes.

Your next question comes from the line of Michael Tarkan from Compass Point.

Most of my questions have been answered, but I do have a couple of modeling ones. On FFELP NIM, I know you mentioned it should stick in the low to mid 80s%, but I think it normally trends up in the back half of the year. I'm just wondering, do you still expect that to be the case? And anything unusual in the spread this quarter that took it up a little sequentially?

Yes. This quarter, I think we probably benefited a little bit more on the floor positions than past quarters. We did have a situation this quarter where we had some old hedges that were rolling off and new hedges that came on that -- where we picked up additional floor income as old hedges ran off and new hedges came on.

I think going forward, the amount of floors will basically dictate what the FFELP NIM for the rest of the year will look like, Mike. So, I think we're sticking to the low to mid 80s% at this stage in the game until we have a little bit more clarity on where LIBOR rates come in and ultimately what the floors will be on our FFELP portfolio.

Okay. Thanks. And then on the servicing side, I saw you have 6.2 million borrowers under the current contract. Do you have the revenue number associated with the contract this quarter?

Probably somewhere around 100 -- I think it was flat from the previous quarter, Mike.

Okay. And then lastly, just as you think about the two fee income lines, I would call it, just the servicing line and the asset recovery lines, this quarter, and we saw a decline on the servicing side and a pretty decent increase sequentially on the asset recovery side. Should these be the new run rates to think about as we go forward on those questions? Thanks.

So on the servicing side, we benefited in the year-ago quarter from a recognition of some higher collection rates on some fees that didn't -- you ran your new baseline and doesn't cause an increase again. In the asset recovery arena, we have -- or the businesses services side of the equation, our non-federal, our non-education loan businesses are growing very nicely, and we're still seeing the trail-off of some of the revenue sides from the Department of Ed contract runoff and the legislative changes to the fee schedule. So that -- I think this is the last quarter we'll see the impact of the legislative changes to the fee schedule.

Okay. Thank you.

You're welcome.

There are no further questions. I now turn the call back over to the speakers.

Thank you, Corina. I'd like to thank everyone for joining us on today's call, and if you have any further questions, feel free to give me a call. Thank you.

This concludes today's call. You may now disconnect.