Navient Corp (NAVI) 2016 Q3 法說會逐字稿

Good morning. My name is Jacqueline and I will be your conference operator today. At this time I would like to welcome everyone to the Navient third-quarter 2016 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

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

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

Now I will turn the call over to Jack.

Thanks, Joe. Good morning, everyone, and thank you for joining us today. I appreciate your interest and support.

This quarter's results continue to reflect the strength of our business model and the value it delivers for our investors. Earlier this year, market conditions presented questions on a few items including credit and access to funding that placed significant pressure on our funding spreads and our stock price. Our deliberate and directed actions and our performance this quarter should indisputably put these questions to rest.

Our actions also contributed to this quarter's strong results and put us in excellent position to continue to execute on our business plan and deliver value.

I plan to focus my comments this morning on credit performance, funding, including the rating agency legal final maturity topic, new business opportunities and creating shareholder value.

Our results this quarter were particularly strong at $0.51 adjusted core earnings per share. The clear standout this quarter and this year has been credit performance. For our private loan portfolio, we have seen consistent and significant improvement in year-over-year delinquency and default trends. Credit charges this quarter were down 24% versus last year and the charge-off rate for the quarter fell to 1.9%. The federal loans we service are also experiencing strong credit performance trends.

While the continued recovery in the economy and the jobs market are the prime drivers here, our data-driven approach to loan servicing helps us identify and increase contact rates with at risk borrowers. Once in contact, we can help identify solutions including income-driven repayment programs that allow borrowers to successfully stay on track. As an example, the Department of Education released its latest three-year cohort default data last month. Once again, Navient service borrowers experienced significantly lower default rates, 31% lower than all other servicers.

We are also a leader in enrolling federal loan customers into income driven repayment plans. We are proud of these positive borrower experiences and outcomes and welcome policymakers to visit one of our servicing centers to see first-hand how we consistently deliver superior results.

A major priority this year was to demonstrate our access to a broad array of funding options and to materially reduce our near-term unsecured debt maturities. With a well-designed plan and clear demonstration of strong credit and liquidity, we completed new financings in every area of our liability structure including our first secured financings of new loan types and assets. This activity was capped this quarter with our successful return to the unsecured debt markets with both a five-year and later seven-year issuance.

Earlier this year, we demonstrated our ability to issue FFELP ABS despite rating agency uncertainty on legacy deals. Year-to-date, we have now completed six FFELP deals totaling $4.9 billion using different structures and funding all loan types including our first bond backed 100% by Federal Rehabilitation loans. Investor participation has been strong and growing and funding spreads improve with each deal.

This summer both Moody's and Fitch announced their new criteria for rating FFELP ABS transactions and have recently begun to apply their criteria to bonds previously placed on watch. While their modeling is complex and we do not always agree with their predicted impact on cash flows, the issue is finally coming to a close.

While Somsak will cover the details in his comments, we remain committed to working with the rating agencies and investors to minimize ratings impact. Our steady progress and track record in this area is a clear demonstration of this commitment.

As I mentioned, one of our goals this year was to reduce our near-term unsecured debt maturities. Overall, our new financing activity and strong cash flow has allowed us to reduce our 2016 to 2018 unsecured debt maturities by 50%. Including our announced make whole call of a January 2017 bond later this month, unsecured debt maturities are $700 million next year and $2.1 billion in 2018, well below our projected cash flow.

On the revenue front, our proactive management of interest rate and basic risk has allowed us to earn stable margins on both our federal and private loan portfolios this quarter. We are not however immune from market conditions and so we expect to see a larger impact next quarter as spreads between one-month and three-month LIBOR are at historically wide levels.

That said, we do believe the current environment is technically driven and short-term. Somsak will provide more detail on this area and our management of the conditions in his remarks.

Fee revenue was $179 million this quarter up from $166 million in the year ago quarter. We continue to see good growth opportunities that leverage our skills and services particularly in non-education related areas. I was particularly pleased to win a new contract this quarter to work for the IRS and while we don't expect to receive first placements until the spring of next year, all of us are excited to put our expertise to work for the IRS and create value for taxpayers and even more employment opportunities at our New York centers.

The acquisition of federal and private loan portfolios is another priority. Year-to-date we have acquired nearly $3 billion in loans including $662 million this quarter and we continue to see opportunities to add to these totals this year and next.

We also continue to aggressively pursue cost savings particularly efficiency gains and while we made good progress here in 2016, we have more work to do. Sometimes these efforts require us to spend more now to create greater savings in the future.

One such effort involves moving third-party service loans that we own to our in-house platform. Bringing servicing in-house drives down our future costs and drives up loan performance. We are beginning a new effort here this quarter to move $2.7 billion of loans and so we will incur higher upfront operating expense in the fourth quarter as we move this portfolio in-house.

We also create value for our investors through our share repurchase program. With a lower stock price, we were able to purchase more shares than we had planned this year. Year-to-date, we have retired 13% of common shares at an average price of $12.21 per share, a price well below our view of intrinsic value.

While I would much rather that our stock price traded at intrinsic value, the consolation has been the ability to buy shares at a discount, a significant discount, and to capture that value for our shareholders.

Finally, tomorrow we will release the Money Under 35, our second annual study on millennial financial health. The national survey examines who is faring well and who is struggling in today's economy and drills down on the details by education level, debt and other measures. We conduct the study as part of our efforts to inform policy and identify the groups most in need of help. I hope you watch for the study on Thursday.

I will now turn the call over to 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 strong third-quarter results that we reported last night as well as an update on our earnings guidance for the full-year. I will be referencing the earnings call presentation which is available on the Company's website beginning with slide four which provides a summary of our core earnings.

In the third quarter, we reported adjusted core EPS of $0.51 and that compared to $0.48 from a year ago quarter. Our third-quarter adjusted operating expenses totaled $222 million versus $220 million from a year ago quarter. This slide increase in expenses is primarily related to the additional operating cost of Gila and Xtend Healthcare acquisitions.

Excluding the expenses associated with these two acquisitions, our operating expenses were 7% lower than a year ago.

As Jack mentioned during the fourth quarter, we will transfer $2.7 billion of Navient owned FFELP loans that are currently being serviced by a third-party to Navient servicing platform. As a result of this transfer, we will incur an additional $7 million of one-time operating expenses in the fourth quarter. Even though these additional expenses were not included in our previous operating expense guidance, we remain on pace to beat our adjusted annual operating expense guidance of $930 million.

Before I go into more detail on our quarterly results, I would like to discuss on slide 5 the recent widening of the three-month LIBOR that we saw during the quarter compared to the one-month LIBOR in the prime rate and how we manage this basis risk.

Approximately $85 billion of our FFELP loans are indexed to the one-month LIBOR that reset [daily]. After the impact of hedges, about $30 billion of these assets are funded with three-month LIBOR that we assess quarterly. Historically, the spread between these two indices have averaged around 11 basis points. In the quarter the average spread widened to 28 basis points and today this spread is closer to 35 basis points.

We believe the recent increase in the average spread is the result of the ongoing anticipation of rate hikes that have yet to occur and the recent money market fund reforms.

The spread widening of the two indices did not fully impact the third quarter NIM due to the timing of resets associated with our three-month LIBOR debt. Approximately $19 billion of this debt had already reset in July before the significant increase in the spread occurred and will reset again on October 25. The remaining $11 billion of debt reset late in the third quarter and had minimal impact on the third quarter FFELP NIM.

Our private education loan net interest margin is impacted by the timing of when our $15 billion of prime-based earning assets reset versus when our LIBOR-based debt reset. $8 billion of these assets are funded with three-month LIBOR and $7 billion of these assets are funded with one-month LIBOR.

Since the last prime reset in December 2015, we have seen LIBOR increase without a corresponding increase in the prime rate and our guidance will assume LIBOR, higher LIBOR cost of funds for the fourth quarter without an increase in the prime rate.

Due to the impact of the LIBOR basis risk and the additional one-time $7 million servicing expense which were not included in our previous EPS guidance, I expect us to be at the midpoint of our previously issued 2016 core EPS guidance of $1.82 to $1.87.

Let's turn to slide 6 to discuss our FFELP segment results. FFELP core earnings were $69 million for the third quarter of 2016 versus $70 million in the third quarter of 2015. The FFELP net interest margin improved to 87 basis points due to higher hedge in the (inaudible) floor income during the quarter.

While the impact of a widening one-month to three-month LIBOR spread will be larger in the fourth quarter, we still expect the FFELP net interest margin to remain in the low to mid 80s for the full year and in the low 80s for the fourth quarter.

In the quarter, we acquired $596 million of FFELP student loans bringing the year-to-date total acquisitions to $2.7 billion. We are optimistic that we will see a larger portfolio start to move now that Moody's and Fitch have released their final criteria and have started taking action.

We saw significant year-over-year improvement in the credit quality of our FFELP portfolio as late stage delinquency rates declined by 20% and the total delinquency rate declined by nearly 30%.

Let's now move to slide 7 to review our private education loan segment results. Core earnings in this segment declined by $17 million from the year-ago quarter to $60 million. In the quarter the net interest margin was 348 basis points and our guidance for the full-year NIM in the mid-340s remained intact but we expect our fourth-quarter NIM to be in the low 320s. This guidance includes updated repayment assumptions, our cost of funds from our LIBOR-based debt and no increases in the prime rate during the fourth quarter.

Our provision for private education loan losses continued to improve as a result of the overall improvement in delinquency and charge-off trends. Charge-offs declined $36 million or 24% from the prior year and loans greater than 90 days delinquent have decreased by $129 million or 15%. The improved performance demonstrates the strong and improving credit quality of our portfolio.

Slide eight highlights some of these improving trends that we are seeing over the last five years. Our third-quarter charge-off rate fell to 1.9% and our total delinquency rate declined to 6.9%. The chart on the bottom of the slide demonstrates the benefits the improved performance is having on our borrower's most recent FICO scores. FICO scores have improved by 36 basis points for the non-traditional loans and 24 points for the entire portfolio on average over the last five years. We expect to see continued year-over-year improvement in this area.

Let's turn to slide 9 to review our business services segment. In this segment, core earnings were $81 million in the quarter and this compared with $79 million in the third quarter of 2015. Non-education loan related asset recovery revenues increased $18 million from the year-ago quarter two $46 million. This increase in revenues is primarily related to the acquisitions of Gila and Xtend Healthcare in 2015. Overall, we expect our consolidated business services revenue to come in between $620 million and $625 million for the full year.

I would like to highlight our financing activity that took place in the third quarter and give a brief update on the recent actions from the rating agencies on slide 10.

We just issued our second FFELP ABS transaction in 2016-5 that consisted entirely of 100% rehabilitated loans totaling $1 billion in bonds in the quarter. We are seeing an increase in demand for FFELP ABS and investor's willingness to participate in this market. Compared to our prior deal, this transaction saw both an increase in the size of issuance by nearly $0.5 billion and pricing improved by 13 basis points.

It has now been a few months since Moody's and Fitch have released their final updated cash flow assumptions on FFELP asset-backed securities. As of June 30, these two rating agencies have had $56 billion and $51 billion respectively of Navient sponsored bonds on watch for a downgrade. Fitch has since affirmed or upgraded $6 billion of bonds and downgraded $0.5 billion of bonds due to the low investment grade.

Subsequent to the downgrade to non-investment-grade, we were able to successfully extend the legal final maturity date on those particular bonds and Fitch has since upgraded those bonds to AAA.

Since the end of the second quarter, Fitch has affirmed or upgraded $4 billion of bonds and have downgraded $1.2 billion of bonds to below investment grade. While we continue to wait for Moody's and Fitch to complete their final ratings outcomes, we have been actively extending the legal final maturity date on previously issued bonds. In total, we have now extended the legal final maturity dates on $7.3 billion of bonds.

In the quarter, we completed two issuances of unsecured debt totaling $1.3 billion with maturities in 2021 and 2023. The proceeds of these transactions were used to reduce our unsecured debt by $625 million during the quarter. $538 million of this reduction came through repurchases in the open market. Additionally, we issued a make whole call that will be effective on October 25 or an additional $691 million of our unsecured debt that will be due in January 2017.

Including this call, we will have reduced our total unsecured debt maturities by $2.1 billion and our near-term maturities in 2017 and 2018 by $1.8 billion from the prior year.

In the quarter, we repurchased 14.3 million shares of $200 million of an average price of $13.95. At quarter end, we have the remaining authority of $180 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 1.24.

Finally, turning to GAAP results on slide 11, we recorded third-quarter GAAP net income of $230 million or $0.73 a share and that is compared with net income of $237 million or $0.63 per share in the third quarter of 2015. The primary differences between the core earnings and GAAP results are the marks related to our derivative positions and any expenses related to the restructuring of the organization coming from the spin transaction.

I will now open the call for questions.

(Operator Instructions). Moshe Orenbuch, Credit Suisse.

Great, thanks. Just hoping that you could kind of give us a little bit of maybe further look as to how we should think about the one-month, three-month issue kind of progressing. Is it -- I guess is it your hope and expectation that the spread narrows or that there is -- because of the technical factors reversing or is it that you expect the Fed to increase rates at some point? How does this play out over the next couple of quarters?

I think it is a combination of things. We do expect that that spread will continue to narrow. In the guidance that we are providing though, we are assuming for the fourth quarter that that spread remains at current levels for the rest of the fourth quarter. So to the extent it does come in, it will modestly help the fourth-quarter results but will have more of an impact on the first quarter 2017's margins.

Got it. And given the significant progress that you made on the unsecured maturities, is there anything that you are able now to do differently as you are looking into 2017, 2018? Like how do you kind of think about that?

Well, I think one of the things that we have been able to do as Jack mentioned the close to $5 billion of FFELP ABS transactions that we were able to complete, the benefit of having those transactions being completed is that it also creates capacity in our ABCP line that allows us to continue to acquire FFELP loans that might be coming up for sale.

Got it. And then lastly just for me, given the improvement on the private credit side which was actually better than we had seen in the trust data, any way we should think differently about the reserving practices in 2017, is there any chance that the reserve could come down at a faster rate?

Well, I think what we have seen is just that we have seen a continual steady release of the reserve. We are booking about this quarter, we booked $92 million of provision. Just given the trajectory and the seasoning of the portfolio we certainly should expect to see a downward trajectory off of that current run rate that we are working off of.

This is Jack. Our provision is really covering at this stage in the game 2019's expected charge-offs because of our two-year forward-look. And so that is really what is driving this and one of the reasons we put the seasoning charts in our investor presentations is that you can see how loans perform, how loans improve their performance as they move through the number of months in repayment. And that is a big driver here. Certainly the economy is helping quite a bit and you are seeing this across the board in terms of credit performance on student loans. So even our FFELP delinquencies fell 20% year-over-year as an example.

Great. Thanks very much.

Sanjay Sakhrani.

Thanks. Good morning. I guess first question despite this basis issue with the LIBOR and prime, when you look at the FFELP NIM, that kind up improved sequentially and year-over-year. Could you just talk about what is contributing to that?

And then just clarifying the specific EPS impact of this issue rough math we get to like $0.04 or $0.05 in EPS. Could you just validate that? Thanks.

I will answer that last question. You are in the ballpark there in terms of the impact quarter over quarter relative to that spread impact. And obviously we talk about also as we roll into the fourth quarter the one-time impact of the one-time conversion or servicing transfer expenses that we expect to incur. And if you do the math that leads to sequentially leads to the full-year guidance coming in at the midpoint of the range I was referring to of $1.82 to $1.87.

Coming back to your first part of your first question related to improvement of the FFELP NIM, year-over-year that has really been attributable to higher floor income that we have realized from our portfolio and that has largely so far offset the impact of the widening one-month, three-month LIBOR and higher cost of funds that we are seeing period over period.

So we should expect that benefit to continue until rates obviously rise?

Well that is going to be the key component as rates rise, it will impact our unhedged floors. Our hedged floors position is obviously we have locked in on $1.1 billion of that income over the next few years. So that is pretty much locked in. The variable certainly will be the unhedged floor component.

Okay. Second question. Jack, you mentioned some of the larger -- or I'm sorry, Somsak, you mentioned the larger portfolios. Maybe Jack you could talk about it. It seems like they might be on the move sooner than later. Could you just talk about where we are?

Sure. So what we have seen as a result of the widening of the FFELP ABS spreads given the rating agency, the issues I think put a pause on many FFELP loan sales and as those have been unwinding, we are seeing more discussions and more actions or interest coming from potential sellers here. We have been even during this timeframe, we have been able to continue to buy FFELP loans at attractive spreads given our funding costs and we would expect to see that pace accelerate slightly over the next call it two to five quarters here.

Okay, great. One final question. The servicing transfer, obviously there is a cost associated but what is the benefit on an ongoing basis?

We think the benefit is going to be on a run rate basis $5 million to $6 billion a year.

Great. Thank you very much.

That is just on the operating expense. We will, when we moved portfolios from third-party servicers in the past, we have also seen a significant improvement in loan performance which reduces delinquency and default events.

Got it. Thank you very much.

Rick Shane, JPMorgan.

Thanks for taking my questions this morning. You highlight that during the year you have been able to repurchase about 13% of the float. We calculate that assets are down about 9%. We clearly recognize the intrinsic value here but one question we get from investors all of the time and would love to get your view on it is what is the long-term opportunity for growth? This is a transition period, we get that but how do you envision reinvigorating growth over the next five years? And would you talk about your preparations as the standstill on private student lending and what are you putting in place to sort of establish that network?

Thanks for your question, Rick. I think we actually would break our opportunities for growth into a couple of different buckets here and certainly there is an opportunity to add to our existing student loan holdings by purchasing legacy assets. This would include both federal and private and as we said, we think -- we believe we will see some significant opportunities in the next several quarters to acquire portfolios in that space and add to the portfolios that we own.

Those are obviously easy transactions to understand and easy to understand where the value is created there. As we have said all along however, our view is that we are buying cash flows and so any activity to acquire assets here is going to be extremely disciplined that if it doesn't add value, we don't buy it. So those are kind of the parameters in that space.

We also see some opportunity to acquire student loan portfolios that are not legacy portfolios but ongoing kind of origination activities. These are private loans and they include both perhaps campus originated loans as well as refinancing loans. And that piece of the opportunity grows, is a growing opportunity. It is also one that as you point out, the noncompete issues expire at the end of 2018 and give us some flexibility to back into that space or total flexibility I should say if we so choose.

That opportunity I think is one that we are interested in but it is certainly, it is a little bit longer route in terms of the time horizon.

Then finally, where we really have been focusing our activities since the separation is taking advantage of the skills and capabilities that we have developed in our operating environments, our operations areas to leverage those to different areas in other asset classes. And so we have been doing that in the municipal and state area and this is primarily kind of a combination of processing asset recovery related work and the same for the healthcare arena where it is mostly a processing type business. Both of these areas are ones that we think we can grow in double digits and we will continue to work in that space.

Adding to that would be opportunities in the federal space. We just recently were awarded the IRS contract. That is something we are very excited about and we are actively pursuing the Department of Education loan servicing contract which has moved at a slower pace than they had originally indicated but still seems to be on track for being released sometime in the fourth quarter.

Got it. That is helpful. The follow-up question in terms of the FFELP opportunity, we have this weird dynamic which is that the opportunities slowed in part because of the uncertainty of ABS funding and so you have sort of this synchronous growth, synchronous funding scenario. Are you seeing pricing become more competitive because funding has improved?

Well, I think the challenge has been that some of the uncertainty in pricing when you had the wider FFELP ABS spreads, it pushed portfolio values perhaps in some instances below par and for a government guaranteed loan, that is just a difficult transaction for sellers to get excited about. So as you get at back to the par type of marketplace, you have a different environment.

We think the opportunity, why we think FFELP opportunities will be there is that the majority of portfolios that are available are serviced by third parties and the regulatory requirements associated with monitoring third parties and managing that process can start to make some of these deals less attractive, portfolios less attractive to hold and hopefully will result in seeing opportunities to acquire those in the near-term as we've said.

That is great. That is helpful color. Thank you very much.

Mahmood Reza, Omega Advisors.

Good morning. So I had a couple of things I wanted to touch on. First on capital return, so we have $180 million I think you said left on the authorization. First part of this question is can we expect that to be used this calendar year? And when you look forward into 2017, our total return this year has been something like $200 million dividends and $750 million of buyback. Any reason why that would be materially lower next year other than the fact obviously the portfolio continues to run off?

So we do expect to utilize our remaining authority this year in the share buybacks to answer your first question. And our share repurchase authority is something that will be presented and discussed with the Board in upcoming meetings. There has been no discussion to date. Historically though we have set that level of capital return to be a function of the capital we generate from our business that is not required to support balance sheet growth or other operating activity growth and also would include any capital release from the amortization of the portfolios.

As you know, buying FFELP portfolios puts very little demand on capital. Buying private loan portfolios puts much higher demand on capital than a FFELP portfolio does. So it depends a lot on what the opportunities are. But as I said earlier in this call and I have said consistently in the past, buying portfolios has to make sense against all of the alternative activities that we can do which would include share repurchases.

Thank you. Just on the M&A environment, Rick kind of touched on this but if you go back to sort of the second half of 2014 and the first half of 2015, we all know what happened in the second half of 2015 but just that sort of 12-month period where you were able to get a large portfolio transaction on the FFELP side, why would we be in a better position today assuming a normalized market and less rating agency jitters versus that period to be able to be the acquirer were of choice for the portfolios that do come to market?

Look, I think our strengths are crystal clear here. We are first of all capable of executing on very large transactions in single bites rather than having to deal with this over an elongated period of time, one. Two, we have demonstrated an ability, a superior ability, to deal with customer acquisitions and make sure that those customers are properly informed and understand the changes that will take place in a portfolio acquisition including a servicing conversion.

I think the transaction, the accounts that we acquired through the Wells transaction and successfully moved to our portfolio as we have indicated before, we had actually net more customer compliments than kind of questions or complaints in that process. That gets noticed by not only regulators, it gets noticed by sellers.

And then finally, I think the third piece of course is our loan performance. If we can driving -- if moving loans onto are servicing platform we can materially improve the performance of loans from both a delinquency and default perspective helping borrowers become -- better take advantage of different repayment options so that they can successfully repay their loans, all of those things point to us as the preferred. I would say obviously, I am a little biased here, but the preferred buyer of FFELP portfolios.

And so you would say that the competitive intensity is pretty much the same though? In other words, competing bids and the aggressiveness of those bids would probably be equivalent?

I think that point about being able to execute here is a significant and unique advantage from a seller's point of view.

Got it. The final thing from me just on the debt repurchases, I think you mentioned in the prepared remarks and also earlier in the call that you retired or repurchased $625 million which addressed I think the 2017 and 2018 maturities. I am curious if you could bifurcate that between how much was for 2017 and how much was for 2018?

The vast majority of that was the 2018 maturity. And you will see I think on the chart on page 18 there that we have reduced our 2018 maturity now down to $2.1 billion. So that is where the vast majority of the repurchases went against.

Got it. Thank you so much.

Mark DeVries, Barclays.

Yes, thanks. Could you discuss how the funding cost of the unsecured debt you issued in the quarter compared to the debt you retired? I'm just trying to get a sense directionally of what we should expect from the NIM as you continue to push out maturities.

Sure. So the first unsecured deal that we did during the quarter came in at a reoffer price somewhere around LIBOR plus 537. That was the five-year issuance. Our second deal was $0.5 billion and a seven-year deal and that came in at a reoffer spread of LIBOR +577. And the debt it replaced was somewhere in the L plus low 4 neighborhood.

Okay. How has that debt traded since you issued it?

The five-year deal that we did has traded right around 101. So it has traded above par and our second deal to date has traded around par when I last looked at this.

Got it. Then could you discuss what you have seen with FFELP spreads with the reviews that so far have come out from the rating agencies and rating changes? And also discuss how representative what they looked at so far is of the remaining deals that they have yet to evaluate?

Remember new deals that we issue really aren't subject to the legal final maturity issue because we can effectively deal with that by setting the legal final maturity date so that it doesn't become an issue. But one of the things that we have seen is that pricing has continued to come in. Just by way of example, I talk about the two rehab deals that we have done and we have seen sequential 13 basis point improvement in the pricing. And just the other week we are about to price another -- or we just priced another FFELP deal and that has come in, that was priced at a reoffer rate of around L +115 which was a 10 basis point improvement over our last FFELP deal. So it is sequentially from deal to deal, it has come in from 10 to 13 basis points.

I think it is safe to say that investors have certainly bifurcated those bonds that are on watch from those that are not and others have come to I think get a really good understanding of the technical issues here in the process.

Okay, got it, great. And finally, Jack, could you discuss the near-term and long-term earnings potential of this new IRS contract?

So as I said in my comments, we don't expect first placements until the spring of next year. And in a program of this type, your accounts come in and your revenue comes as you actually start to build a pipeline of payers on the unpaid balances. So 2017 earnings contribution will be -- really be minimal if anything. It is really a 2018 type of event and beyond for us.

Okay. As you look beyond 2018, what is kind of your hopes and expectations for how that program may build in size?

It will depend upon how quickly the placements get made and what portion and what size we get so I think in terms of the impact to Navient, I think we really need to see what those placements look like come next spring.

Okay, got it. Thank you.

(Operator Instructions). Eric Beardsley, Goldman Sachs.

Thank you. Just on the private loan margin guidance for the fourth quarter of low 320s, I guess is that solely the prime three-month impact? And if we saw said funds go up in the middle of the quarter or even if we were to look back and say we already had a rate hike, where would that margin be?

Sure. So let me start out by working back to the second part of your question here. So approximately two-thirds of our private portfolio is prime-based so if you think about it, a 25 basis point rate hike applied the two-thirds ratio to that you are going to get to about a 16 to 17 basis point improvement in the spread (inaudible) the FFELP NIM right away. So that is sort of the math there.

And then to the first part of your question, the NIM is going to be impacted by both the spread and then just the higher cost of funds of old debt rolling off and new debt coming on.

Got it. Also just on the FFELP margin, I know there is some seasonality in there which is a little bit tough to parse out sometimes. But where do we typically see that go from the fourth quarter to the first quarter?

That is a really good question. Typically we do see a seasonal impact coming from just the timing of how we earn floor income and how the formula for a floor rebate gets calculated but unfortunately a mismatch there. But typically you will see anywhere from a 2 or 3 basis point lower FFELP spread in the first quarter and then that flips around and comes back into the FFELP spread during the second, third and fourth quarter.

Got it. And then just lastly, just wanted to clarify the OpEx guidance. So did you say inclusive of the $7 million charge to bring those loans onto the platform you would be below $930 million for the year?

That is absolutely correct, yes.

Does that include the regulatory cost save you have incurred to date I think somewhere around $14 million?

It does not.

Okay, got it. So the $7 million is baked into the $940 million (sic) but the $14 million is not?

In the $930 million.

Sorry, in the $930 million, sorry. And are those regulatory costs continuing here at this level?

They have been running at this level pretty consistently for the course of the year and we would expect that to continue at least through the fourth quarter. Obviously would love to see some of these processes come to a close here and working hard toward that. But we don't control the calendar or the time schedule here.

Got it. And then just lastly, I think back to the question about the longer-term growth, if we think about the gradual decline in the collections income on FFELP, is the asset recovery business longer-term or even over the next couple of years a growth business or is it kind of flattened out here as you have some opportunities growing on the healthcare side, municipal side and maybe the IRS offsetting the runoff on the student loan side?

So we do think it is a growth opportunity here. And it is a combination of -- it is a combination of business activities. It is not just asset recovery that we see as the opportunity but actually being more of a processing partner with the entity so that we can manage the end-to-end process of everything from billing to payment processing to pursuing recovery and payment on the invoice.

The IRS contract is a good example, it is certainly larger than the education related space and is something that we are pretty excited about.

And then finally I think some of the changes in the regulatory environment and requirements that are coming from rules and regulations here really play to our strengths and those strengths are really a data driven kind of approach so that this is not just a pure kind of dialing activity that we pursue. We actually work to identify the right contact methods for our customers based on all of the historical success rates we have had in this particular area. And use those to minimize the number of attempts that we make to contact a customer and do so in a way that creates a higher right party contact rate.

And that is the key to default prevention in the student loan space and it is a key to the recovery rates by being able to get a customer on the phone and explain their options to them and work with them to find a solution that fits their budgets.

Great, thank you.

Mark Hammond, Bank of America Merrill Lynch.

Thank you. In the release there is a line about winning a number of new business services contracts during the quarter. I am aware of the IRS win but would you highlight the others?

Yes, a lot of our business activities in our municipal and hospital sides of the equation are smaller contracts and so we don't name them individually. But we are winning proposals in that space on a regular basis. So almost no quarter goes by where we are not adding new clients or new contracts in both of those areas.

Thanks. After acquiring more FFELP during the quarter, I'm wondering if you could put a number on the size of the remaining FFFELP that you think are likely to come up for sale? Just what is out there?

So I would say the market opportunities in the next if you call it the next 12 months would be in terms of what we might see being sold. And then the question would be what portion do we get would be somewhere in the $7 billion to $10 billion range.

Thank you. Then my last question is about delinquencies on the private student loan book. I was wondering what caused the uptick sequentially in the book from 6.1% to 6.9% for total delinquencies?

So that is seasonal related factors that come into play and you would typically see them -- we publish these quarterly statistics so you can see these seasonal factors from period to period come in. Now what you are seeing is lower overall delinquencies in terms of dollars and across the portfolio as the accounts season. And that the greater than 90 day delinquency rate continues to perform extremely well both total delinquencies and 90-day delinquencies are down significantly from the year-over-year comparisons as well.

Thanks for taking the questions.

Michael Tarkan, Compass Point.

Thanks. Just a couple of quick ones here. On those regulatory costs every quarter, can you just remind us what is actually in those?

It is basically legal expenses responding to document requests, things of that nature.

Okay thanks. Regarding the IRS contract, I know the revenues don't ramp until later but is there some frontloading of expenses that we should be contemplating for 2017 before the revenues start going?

Absolutely. So preparing your systems to be ready for the IRS requirements or operating expenses that we will incur at the front end of the process and then of course labor so as accounts are placed and we start incurring salary, postage-related expenses before the revenue comes in, both of those will be factored into our guidance when we provide it at our next earnings call.

Okay, thanks. And then lastly, just wondering if you have any thoughts on the CFPBs, that collection report from earlier this week? I know you haven't really been doing much under the direct loan program anymore but just wondering if any of those recommendations or any of the comments there could have any impact on the FFELP collections work?

The CFPB's annual report on student loans came out and a big section of it was dedicated to the Federal Rehabilitation marketplace. A lot of the recommendations or policy recommendations in that report are actually very consistent with ones that we made almost two years ago now and in terms of creating a more seamless approach of taking a borrower from the reasonable affordable repayments that are required under the rehab program into an income driven repayment plan upon successful completion.

When we take, we have accounts that we acquire in the FFELP space, this is one of the areas that we work extremely hard at in terms of connecting with borrowers immediately upon conversion. Because a lot of this data doesn't transfer from the collector to the servicer, doesn't at all on the Ed side and on the FFELP side. It depends on the guarantor whether they provide that information to us or not.

But we work with those customers to make sure that they are successfully -- that they remain as successful at loan repayment as they did in the rehabilitation process. Our delinquency rates for rehab accounts are substantially better than the national averages and so some of the statistics and projections quoted in the CFPB report would be much, much higher than what we would see in our own service portfolio.

Understood. Thank you.

This really goes to the data driven approach that we apply to help -- so these rehab customers would be considered a high risk customer and are going to get a unique set of treatments and efforts that result as we said earlier in higher rate of right party contacts so that we can walk them through their options and keep them on track.

Got it. Thanks.

[Peter Trosky], Barclays.

Thanks. Just a follow-up on the CFPB. Can you just give an update on where things stand with the previous CFPB matter and maybe more specifically what your thoughts are on the recent decision in the PHH versus CFPB case and how that might affect Navient?

Well, we have been working with the regulators specific to the facts and circumstances in student loans and that is really where our focus has been. Our efforts have really been to help, has been to explain what we do that is unique in this space and how that drives higher rates of customer success. And we can see it in the numbers that are published by the Department of Ed in terms of 31% over delinquency, lower default rates in the federal programs that we service. You can see it in the higher rates of enrollment we have in income driven repayment plans. 40% of the dollars we service for the Department of Ed for example are in income driven repayment programs.

You see it in overall delinquency rates, severe delinquency rates for Navient service borrowers are the best in the industry. And it is really it is those combination of efforts and activities that we are doing is what we are communicating and sharing with regulators to kind of guide some of the direction.

I think most of what their interested in is helping set better, more uniform standards for servicing federal and private loans and we certainly are willing to share in our best practices but any new rules or regulations we believe should be industry-wide and that is kind of the direction of where things are at this moment.

Okay, thanks.

That is the end of the questions. I will turn the call back over to the presenters.

Thank you, Jacqueline. I would 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. Thank you.

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