Good morning. My name is Keith and I will be your conference operator today. At this time, I'd like to welcome everyone to the Navient First Quarter 2015 Earnings Call. [Operator Instructions] Joe Fisher, you may begin your conference.

Thank you, Keith. Good morning and welcome to Navient's 2015 First Quarter Earnings Call. With me today are Jack Remondi, our CEO, and Somsak Chivavibal, 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 and other filings with the SEC. During this conference call, we will refer to non-GAAP measures we call our core earnings. The description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the first 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 first quarter's earnings call. Thank you for listening. I appreciate your interest and your support. Later this month, on April 30, we will mark our one-year anniversary of Navient. We've accomplished much in this 12-month period, and we're well-positioned to continue our ongoing success in the future. In the past 12 months, we've acquired $13 billion in student loans, assisted over 12 million student loan servicing customers in their path to successfully managing their loans, added $2.6 billion in projected cash flows to our student loan portfolio, and received $4.2 billion from cash collections and financings. We returned over $948 million to shareholders in dividends and share repurchases. We began executing on our growth strategy, most notably with this quarter's acquisition of Gila, and we launched the Navient brand to our customers. This quarter's results, which Somsak will cover in more detail in a few minutes, continued these trends with core earnings of $0.48 a share, $830 million in student loan acquisitions, continued improvement in student loan performance, and $363 million returned to shareholders through share repurchases and dividends. While this quarter's results are good, we can and will do better. We need to move faster to grow and diversify our business revenues. We need to decrease our need for high-cost, unsecured debt and we must continue to do more to make our business efficient. In asset management, in addition to the $830 million in student loans we acquired this quarter, we sold $189 million in third-party serviced FFELP loans, generating a gain of $5 million. The market for loan assets today, including student loans, is a seller's market. While we continue to expect the volume of loans available for sale to be sizeable, we often see very high prices being…

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 first quarter, we reported core earnings of $0.48 per share compared to $0.49 per share from a year ago after adjusting for expenses related to regulatory matters. Our first quarter operating expenses totaled $230 million and that's compared to adjusted operating expenses of $207 million from the year-ago quarter. The increase in operating expenses is related to incremental costs resulting from the recent Gila acquisition, incremental third-party servicing costs related to the $8.5 billion of loans acquired from Wells in the prior quarter, and costs related to operating as a new separate company post-spin. As a result, we do expect our core EPS to be $2.20 in 2015 and operating expenses to come in less than $900 million in 2015. Let's move to slide 5 to discuss our FFELP segment results. FFELP core earnings were $85 million for the first quarter compared with $64 million in the first quarter of 2014. In the quarter, FFELP student loan spread was 96 basis points and the associated NIM was 88 basis points. The full-year spread will be impacted by potential future loan acquisitions, as well as future LIBOR rates, which will impact the amount of unhedged floor income in our portfolio. Going forward, we expect our FFELP student loan spread to be in the low to mid-90s and the net interest margin to be roughly 8 basis points lower than the spread. Let's turn to slide 6 to review our Private Education Loan segment results. Core earnings in this segment increased $3 million from the year-ago quarter to $77 million. Our first quarter student loan spread came in at 3.87% and the…

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch from Credit Suisse.

Great. Could you talk a little bit about the acquisition that you made in terms of the revenues that it has, what you paid for it, and how that might be applied to future acquisitions and maybe a little bit about what's out there as well?

Thanks for your question, Moshe. This is one of the areas that we identified as an opportunity for growth is in the asset recovery space, and particularly, in the state and municipal areas. Gila, which, as I mentioned, has over 600 contracts with clients in 39 states across the country, really has done a great job at building a franchise that does both asset recovery in combination with business process outsourcing. It's this kind of combination of activities that marry both our operations capabilities with our collections performance that is attractive to us and an area that we would expect to grow both organically and through acquisitions. The organic side of the equation is obviously an area where we're most focused on and expect to be able to leverage the skills of both companies to grow faster than we would have otherwise. Somsak, you want to cover the revenues?

Yes. The annual revenues that we expect to generate or that Gila expects to generate is about a little under $70 million for the year.

Just kind of pulling up, Jack, you made a comment, it sounded a little wistful that you don't really get involved with a borrower before the borrower makes that decision to make the loan. Is there any discussion anywhere about having other parties get involved in order to help that borrower make a more informed decision? Any opportunities that you would see for the Company in that?

Yes. So, I think this is one of the challenges in the space in which we operate is that student loan servicers are deemed responsible for how well or not well borrowers do in managing their loans, yet we're handed the account only after the money has been lent and spent, as we say. And one of the things that we've been advocating for, both on a policy side as well as with the Department of Education, is specifically that; is use some of the skills and data that we've built over the years to help customers make better or more informed decisions before they borrow the funds. If you think about all of the efforts that go on in the federal loan programs today, all the borrower initiatives are driven towards helping borrowers who have already or find themselves in a position of having borrowed too much money or more money than they can afford, and we think a portion of that should really go to prevention. It's not as if you're saying, no, you can't go to school, it's just helping borrowers pick the school that better fits their profile or understand what the true cost or the full cost of getting a degree will be and making sure that they have the resources to be able to do that. We have all of that data and skills today. We can use that with a high degree of accuracy to predict performance and allow for very direct and almost customized outreach to borrowers before the loans are made. Of course, someone has to be willing to pay for that level of education and service.

Right. Okay, thank you very much.

Sure.

Your next question comes from the line of David Hochstim from Buckingham Research.

Thanks. I was wondering, is there anything more you can say about the Department of Ed collections contract loss and kind of relating what they did to what you got in your reviews, a better explanation?

Yes. So as we've said, they did not provide us – they simply decided not to extend our contract, they did not terminate it. As a result of that, the view has been that they have not needed to provide us with the detailed information behind some of their statements. We continue to press for that. I think the filing in federal courts delayed a little bit or impacts the ability to share that information. There was a court decision to dismiss the case on jurisdiction grounds. We're still waiting for the actual write-up of the opinion here before we make decisions on the next steps, but we are obviously disappointed in the process. We would expect that if someone is making a claim of non-compliance that we would have the opportunity to review those instances and be able to respond. We know that when we look at our own work here and when we look at the reviews that the Department of Ed conducted over the past year and a half, we don't see similar kinds of issues or findings.

Thanks. Did they say that you were able to bid for future contracts or that's no longer possible?

They continue to say that we remain – our position as one of the finalists in the new collections contract remains.

Okay.

No decision has been made on that contract at this point in time.

Okay. Could you just tell us how much do you have in FFELP loan service by third parties at this point, roughly?

It's a very small percentage of the overall $100 billion FFELP portfolio that we've got.

Do you have a plan for how much long-term debt you might prepay this year?

Our plan is to continue – we have $17 billion in unsecured debt outstanding. Our plan is to continue to reduce that as the portfolio amortizes. One of the challenges in the market place today is that the unsecured debt is clearly our most expensive source of financing for our portfolio. We're really looking at different ways to reduce the demand or the need for that as a source of funding and that includes both ABS funding as well as the prepayment of the debt or repayment of the debt through cash flow and collections.

Okay. Given that condition, you might securitize more of the unencumbered loans and pay down some more?

Right. But regardless of that, the balance of unsecured debt will decline as the portfolio amortizes.

Great. Thanks a lot.

Your next question comes from Michael Tarkan from Compass Point.

Thanks for taking my questions. Jack, I know you mentioned that you'd look to sell maybe FFELP loans that are serviced by a third party, but if pricing really is that high, why not consider selling residuals on the loans that you specifically service yourselves?

It's a good question and it's something that we consider when we're looking at buying or selling the portfolio. We own a financial asset here with a series of cash flows and if we can sell it at better prices or higher prices than what we would pay for it or what we think it's worth, that's certainly something we have to consider.

Is it fair to say, then, that today you're looking at third-party serviced loans, but that may change if pricing continues to accelerate?

It's certainly the first place you would go because of the economics of those transactions relative to ones that are serviced on our platform.

Okay, thank you. On the asset recovery side, you mentioned a quarterly run rate of around $90 million. Can you tell us what percentage of that you expect to receive from the remainder of the Ed collections contract that you've already put in for the rehabilitation funnel and whether or not we should expect that to go away in 2016 at this point?

Sure, Mike. We expect before the Department of Ed decision to receive about $48 million of revenues under the Ed servicing contract. We are still working our existing inventory and do expect to still recognize the vast majority of those revenues in 2015 and that is included in the $90 million per quarter estimate.

Okay. Lastly, just big picture, we've seen a lot of growth or a lot of headlines in the student loan refinance industry, either from these new peer-to-peer lenders or banks that have gotten into the space a little more meaningfully. I know we've seen consolidations to third parties pick up a little bit in your FFELP portfolio. Can you talk about your thoughts there and whether you would contemplate some sort of refi product at this point to capture some of those consolidations or how you're thinking about that space?

The marketplace is definitely, as interest rates remain extremely low, is definitely more attractive right now. It is targeted principally to borrowers coming out of graduate schools, so high balance debt, a good income, good credit profile, very, very high credit profiles of the customers. So it hasn't had a huge impact on our holdings of loans, it's been a bigger issue on the servicing side of the equation. So it's a marketplace that we think has some positive attributes to it and we continue to look at it.

Okay, thank you.

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

Thank you. Good morning. I had a couple of questions. Maybe to drill down on a question before, I mean, Sallie Mae basically sold a bunch of loans at 10.5% premiums. When we think about those levels of premiums, do you think that's something that's attractive for you guys to go out and sell at in terms of a level? Second, how do you think about that in terms of you being able to purchase loans from Sallie Mae going forward?

Obviously, the premiums paid on any portfolio are highly dependent upon the cash flows of the individual transactions. So this was a relatively new portfolio, so long average lives, high-yielding, and high credit quality. There's no question about if it has an impact on our ability to purchase those portfolios. The transaction that you mentioned was sold in both an ABS and then a residual sale. Buyers – I would look at it as being people who are looking at alternatives to just traditional corporate debt. That makes it difficult for us to compete in that particular space. Whether or not we're a buyer or seller of our own portfolios really is a function of the individual cash flows associated with those deals and not so much the price that's being paid. But it is the reflection of what we would expect the cash flows to be, what the appropriate discount rate is, and then what a potential buyer would apply in those set of circumstances. To the extent they match up against what we would expect or be different, that would drive most of those decisions.

Is it fair to say to say that you guys would be actively assessing that on a quarterly basis or a regular basis?

No question. We look at our portfolio of student loans as we own a series of cash flows. Those cash flows happen to be very predictable, sizeable, $35 billion is the expected life of loan cash flows on that. If someone else puts a higher value on those cash flows than we do, it's a financial asset that we own here and we should be looking at it as such.

Perfect. My second question is, Jack, you mentioned that banks are sellers of these assets, but pricing is definitely aggressive or competitive. Could you just talk about what your thoughts are in terms of an acquisition this year and based on the landscape that's shaping up? I think US Bank moved some of its loans to held for sale, Bank of America has done the same. Maybe you could just talk about that a little bit? Thank you.

We did buy $830 million of loans this quarter. We look for portfolios where we can add value. Where we add value is where we can apply our significantly lower cost of servicing to a portfolio and drive better cash flow performance. Our customers default at a lower rate, 40% lower than the national average, and so when you combine those two things, that's where we both deliver and can capture value from acquisitions. Portfolios that are sold with life of loan servicing on third-party platforms, we can't bring any of those benefits to the borrowers or to the portfolio and so our pricing is, by definition, less competitive and those portfolios are less attractive to us. Some of the transactions that we have not acquired this year, the majority of them, are, in fact, those types of transactions, life of loan servicing on a third-party platform.

Okay. Great. Thank you.

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

Hi, thank you. Just to follow up on the acquisitions, as you're looking at these collections platform, where do you see the most opportunity? Is it the state and municipal area? Are there other opportunities in student loans?

What we look for in the asset recovery space is asset classes and programs where, through both a combination of our efforts and the rationale for the consumer to resolve the outstanding debt match up well. We don't do work in things like credit card asset recovery. It's more of a commodity service area that's not particularly attractive. When we do things in the municipal area, it may be fines or taxes that need to be paid in order to renew your license or free up a lien on property, so there's an added incentive to do that. We like the space a lot. It's an area where we have a relatively small market share today, even with the Gila acquisition. We think this space in particular offers an opportunity to combine both asset recovery and business processing services to the entities, which help make the business more leverageable from a margin perspective and that's really where the focus has been in terms of our growth. We do an outstanding job in the education space. We lead the industry in terms of helping customers rehabilitate their loans, a huge benefit to the customer in terms of the value that they receive for resolving a debt obligation owed to the federal government which does not go away. But it is an area on the guarantor side of the equation where the portfolio available to collect is declining as loans are moving to direct lending and the contract moves to the Department of Ed side of the equation. We are very interested in winning a role in the new contract in that space, but it obviously has to be at the economics in terms of both margin and regulatory aspects that combine to make it attractive for us.

Got it. Secondly, as you look out of your earnings over the next year, any expected loan runoff? With the dividend and the buyback, how much excess capital do you expect to generate after repurchases and dividends?

I would look at our balance sheet in kind of two ways here: both the – all of our interest paying liabilities are supporting interest-earning assets, which are basically our student loans. So from that perspective, as cash flows come in and amortize, we would expect the debt capital to decline. Our equity capital is similarly really supporting – the majority of it is supporting our student loan assets as well and principally on the private credit side of the equation. The FFELP assets don't require a whole lot of capital, as you know. So certainly as the portfolio amortizes and the cash flow is generated, we see opportunities of returns to shareholders coming from two sources: the excess spread generated or as you call it, the capital generated that we produce each year, as well as the capital release coming from the amortization of the portfolios.

More specifically, taking into account your planned buybacks with the authorization and the dividend you have in place, will you generate any excess capital above and beyond those levels? In other words, how much dry powder do you have for acquisitions this year?

Again, it depends on the acquisitions, but our plans here for our capital return and what we have received in terms of approval from the Board take into consideration our plans for acquisitions on both portfolio, as well as entity acquisitions in the business services space. We don't break out the math on that equation.

Okay. Thank you.

[Operator Instructions] Your next question comes from comes from Sameer Gokhale from Janney Montgomery.

Thank you. Good morning. I had a couple of questions. The first one was if you can just revisit your commentary around the NIM for private student loans? Sounds like you talked about the year-over-year decline in the NIM and I think you called out $4.2 million –

Yes.

– in accelerated deferred financing fees. Can you just flesh that out, again, what that specifically related to? If one were to look at the sequential decline in the NIM for private student loans, if I'm doing my math correctly, it looks like the dollar impact is closer to $10 million or $11 million. What else might have been flowing through that line item that may have affected the NIM this quarter? If you can just talk about that, that would be helpful.

Sure. The $4.2 million item was really related to a specific piece of financing that was redeemed early. Once it was redeemed early, we have deferred financing fees that we previously capitalized and that gets amortized over the expected remaining life of the debt. Since it was called early, we had to charge off that fee and that amount ran through NIM. As far as the remaining, you're right, I'll call it the other items, as far as the sequential reduction to NIM, probably accounted for about $10 million or so. It's just a variety of other smaller one-time items that ran through this quarter that we don't expect to recur for the rest of the year.

Okay. That's helpful. Just changing gears a little bit, Jack, you talked about your interest in acquiring additional debt recovery companies, collections companies. Now, would you wait until you get additional clarification from the CFPB as far as new rules? Because if proposed rules for, say, the payday lending industry, that's created a significant amount of turmoil for that industry. So my sense is you probably prefer to wait for additional clarity from the CFPB as far as new rules for the debt recovery industry. But I just want to get a sense for whether you feel additional acquisitions are maybe more than 12 months out once we get more clarity or are you willing to, at the right price, pull the trigger sooner than that?

I think it all depends on the type of asset class that the entity is operating within. In the state and municipal side of the equation, to set a combination – these activities can be a combination of both asset recovery and processing. So it may be the billing activities associated with an unpaid receivable, notifications about options to repay on that, and then actually processing the collection work. That's an area where we think the rules are pretty clear. We have a very strong internal compliance program to monitor our activities in this particular space and have built systems and controls that help us do a great job for our clients, while maintaining a strong compliance profile. We, obviously, would continue to work and have a close working relationship with the CFPB to make sure we understand those rules, talk about where there are areas for potential borrower confusion or impact, and make sure we're adjusting our activities accordingly so that it's a network in compliance and doing a better job for our clients.

Okay. In terms of the litigation against the DOE, you provided some commentary earlier, but I just wanted to clarify, it sounds like the judge there has not opined on the merits of the case. As you mentioned, the decision to dismiss the lawsuit was more based on jurisdictional grounds, but where do you stand now in terms of that litigation? Are you going to have a chance to discuss the merits of the case and try to get additional information from the DOE as far as specifically what things you violated or are you going to need a file a separate lawsuit? Can you just tell us where that stands in terms of the legal process?

The case was dismissed on jurisdictional grounds. The opinion has not been issued yet. Next steps would really take place once we've had a chance to read the opinion and understand better what the judge's ruling was based on and then explore what our other options are. But you're correct in that he did not rule on the merits of the case, just the jurisdiction.

Is there a sense for why so much of – at least what we've heard is that a lot of what the judge's decision was based on, that data has been redacted. Any specific reason for why that may have been redacted?

That's just the way that process works, but we need to wait and see what the opinion says here, I think is the next steps. Anything else we would just be speculating or inferring from what has been released so far.

Okay. Okay. Thank you.

You're welcome.

Your last question comes from the line of Mark DeVries from Barclays.

Thanks. First, I wanted to clarify the comments around loan portfolio acquisitions. Jack, I think you indicated it is a bit of a sellers' market here, pricing is aggressive. My question is, are you seeing that same level of competition around portfolios that really are in your sweet spot where there's no financing attached and no life of loan servicing, where presumably there just aren't competitors out there who can bring to bear the same advantages that you can?

The competition is equal, I think, in both whether their loans are servicing released or tied to third-party servicing. The difference is that in a loan portfolio with servicing release, we can actually bring significant advantages, cost advantages, to the equation that others who don't have a servicing platform, which is one of the places where the high prices are coming from, cannot. So that's a big differentiator. The other piece of this is clearly size. The bigger the portfolio, the better, the more competitive we can be, simply because it limits how many people have the availability to come up with that kind of cash to purchase a whole loan portfolio. When selling residuals, even though the notional amount of the loans could be relatively high, the actual check that is required to be written can be relatively small.

Okay. Got it. Just a followup question on capital returns. I think in the past, when you were part of Sallie Mae had a policy of setting a repurchase authorization for the year through the Board and then kind of blowing through it relatively early and then going back and getting permission for more. I think, Jack, you've indicated that your preference going forward is to kind of set the amount at the beginning of the year and having that be what you buy back. You did buy back a little bit more than the annualized pace of $1 billion. Should we still expect that's kind of the number for 2015 or might you go back late in the year and ask for authorization to buy back more stock?

No. We're trying to provide a more visible, predictable pace of activity here, so the $1 billion is what we expect to repurchase this year.

Okay. Thanks.

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

Thanks, Keith. We'd like to thank everyone for joining us on today's call. If you have any other followup questions, please give me a call.

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