Navient Corporation (NAVI) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Kim and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Navient Third Quarter 2015 Earnings Conference 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] Thank you. Mr. Joe Fisher, Vice President of Investor Relations, you may begin your conference, sir.

Good morning and welcome to Navient’s 2015 third quarter earnings call. With me today are Jack Remondi, our CEO; and Somsak Chivavibul, our CFO. After their prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors 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 2015 supplemental earnings disclosure. This is posted, along with the earnings press release on the Investors page at navient.com. Thank you. And now I’ll turn the call over to Jack.

Thanks, Joe. Good morning, everyone, and welcome to our third quarter’s earnings call. Thank you for listening. I appreciate your interest and your support. Our results this quarter of $0.48 excluding regulatory expenses, are holding in line with our expectations. They demonstrate the quality of our loan portfolio, the earnings they generate, and our strong capabilities and delinquency in default prevention. Our provision for private credit loan losses declined to 117 million this quarter, a reduction of 39% from the prior quarter and 10% from the year ago period. For federal education loans we own and service, performance trends continue to improve since the peak of the recession, with Navient delivering results 38% better than our peers. Our results also benefited from our continued expansion into services beyond student loans. Year-to-date, our non-student loan related revenue totaled $75 million, twice the amount earned in the first nine months of 2014. Gila which we acquired earlier this year as part of our strategy to leverage our asset recovery and business services capabilities has generated a 38% increase in net income year-over-year. In addition to the $8 million in regulatory expense, this quarter’s results also included the impact of $11 million in loan servicing conversion expense, $6 million from the reduction in asset recovery revenue from a change in interpretation of the Department of Education allowed collection fees, and the write-off of $5 million in deferred financing costs as a result of our calling ABS securities. Today we also completed the acquisition of Xtend Healthcare. This acquisition is consistent with our previously announced intentions. It leverages our core capabilities in the asset recovery and business services area to the attractive healthcare payment sector. Xtend works with over a 130 hospitals and medical providers to process payments for the large and rapidly growing patient pay marketplace. This transaction provides a footprint in this attractive sector from which we believe we can drive significant organic growth. This transaction will bring value to our shareholders and our franchise will be more accretive than share repurchases even in current market conditions and after the purchase price is cash flow positive. We are delighted to welcome the Xtend team to Navient. Our business units continued to deliver on the operations front. For example, we successfully completed the conversion of nearly $5 billion in FFELP loans from a third-party servicer platform to our own; our conversion methodology met or exceeded best practices, including robust data mapping and testing, multiple communications prior to and after the conversion to the customer; and a dedicated and especially trained call center team. Our team worked hard to deliver a positive experience for customers. And I’m pleased with rewarding customer feedback. This past week, we launched a new customer online portal designed to simplify the experience of the customers and improve operating efficiency. We also continued our conversion to a new collections platform that will create flexibility for on-boarding new clients as well as drive lower operating costs. We continue to leverage automation tools to support compliance and consistency while delivering operating efficiency. In addition, we continue to assist our customers in the successful management of their loans. Last month, the Department of Education released the 2012, three-year cohort default rates. And once again Navient service federal loans defaulted at a significantly lower rate than other borrowers; as I stated earlier, 38% lower. Our efforts to help customers succeed drive these results we help our customer successfully manage their loans through extensive and targeted outreach efforts to remote affordable payment solutions. For example, nearly one in five borrowers and a third of all dollars serviced are enrolled in income driven repayment plans. We promote repayment options to our 10 million federal loan customers through over a 170 million letters, emails and text each year. And we assisted 345,000 borrowers who paid their loans in full this year. As you and certainly we as management and fellow shareholders are well aware, several items including industry specific issues are weighing heavily on our stock price and credit spreads. These factors have put limits on our access to new sources of liquidity, particularly new issuance of unsecured notes. Ironically, while the price of our unsecured debt makes it very attractive for us to repurchase, it’s very difficult to find willing sellers. While these issues have created some uncertainty for our investors, I consider the market reaction to be significantly out of proportion. As a result, I will address the main issues of the legal final maturity date in the current regulatory environment directly. Earlier this year, Moody’s and Fitch placed $34 billion of FFELP ABS on credit watch due to concerns that trust cash flows will not be sufficient to pay all bonds by the legal final maturity date. This concern is based largely on the increased use of income driven repayment programs and other repayment options. While borrowers are in fact using these important options, particularly income driven repayment programs at higher rates, we still expect borrower payments will be sufficient to meet the legal final maturity dates. To provide added assurance, we’ve added call rights on most trusts that allow us to purchase up to 20% of the original balance of student loan sold to the trust. To help put this issue in perspective of the $34 billion in bonds on credit watch, less than 2.2 billion have a maturity date in the next five years. Even at a 0% prepayment speed, a rate our trusts have never experienced, we expect loan cash flows to be sufficient to meet the maturity dates. Our data show borrower payment did slow with the recovery of the economy and the improvement in the job markets due to a rapidly falling default rates. This is a good thing. Since then borrower prepayment speeds have returned to historical levels and remain at levels that are significantly greater than 0%. Last week, we released an in-depth loan payment data package including an audio explanation of the slides. And earlier this week, we filed a very detailed response to Moody’s request for comment. We’ll continue to work with the rating agencies to produce the appropriate outcome. As you know, the CFPB and state agencies have been reviewing our servicing and collections operations. The common public narrative is that the majority of borrowers are struggling with excessive student loan debt. And further if only servicers inform borrowers of the available repayment options, delinquency and defaults would all but disappear. In reality, the vast majority of all borrowers are successfully meeting their payment obligations. And we have assisted more than half of borrowers that we service, covering nearly 70% of balances to select and enroll in an alternative payment program. At Navient, we’ve developed sophisticated data driven strategies to reach struggling borrowers. When we do connect, more than 9 out of 10 times, we are able to enroll the customer in a program that keeps them out of default. Sadly, over 90% of our borrowers that do reach default do not respond to our hundreds of attempts to contact them. It goes without saying we cannot enroll a borrower in an alternative payment program, if we cannot connect with them. Some also believe that all borrowers should be enrolled in income driven repayment options. And for some borrowers, enrollment in an income driven payment plan is the right choice. Income driven repayment plans however extend the loan term. As a result for many borrowers, this would significantly increase the total amount paid over the life of the loan. For example, a borrower with $30,000 in loans and a starting salary of $30,000 per year, they would pay 33% more under payee than under the standard repayment term, even though a small portion of the loan would be forgiven after 20 years. For some borrowers, this is just not an attractive alternative. Finally, there are some concerns that regulatory changes will create significant increases in servicing costs. While we expect regulators to issue standard practices for student loan service in a collection, we believe these standards will establish consistency within the industry and will be beneficial to borrowers and servicers. We would welcome the introduction of standards that are recognized by all of our regulators. These factors have combined to weigh heavily on our stock price. Many analysts have written that a reasonable discounted value of our stable and predictable cash flows support a stock price north of $20 a share. I agree. Since quarter end, we have purchased 4.7 million shares at an average price of $11.81, bringing our year-to-date purchases to 46.7 million shares at an average price of $17.80. Also since quarter-end, we repurchased 43 million of unsecured debt, mainly at the July 2018 issue. Our near-term objective is to take advantage of these current market prices. And while we have ample liquidity to service our debt for the next few years, we’re aggressively pursuing options that would allow us to increase our activities in both debt and share repurchases. We have substantial assets available to do so, and I’m confident in our ability to execute here. For example, we have $5.2 billion in unencumbered student loans, $11.5 billion in net assets in our securitization trusts, and close to $5 billion when servicing cash flows from our securitization trusts. Bottom-line, our business is sound and is generating the earnings and cash flows we expect. Our student loan assets represent a rock solid foundation of value that we’re well prepared to capture. These assets and our existing operating capabilities will allow us to continue to create value for our investors. Somsak will now provide more details on the results of the quarter.

Thanks Jack. Good morning everyone. During my prepared remarks, I’ll be referencing the earnings call presentation beginning with slide four, which provides a summary of our core earnings. In the third quarter, we reported $0.47 of share of core earnings. These results included $0.01 per share or $8 million impact of regulatory related costs and $0.02 per share or $11 million of one-time conversion costs to move nearly $5 billion of FFELP loans to our servicing system. Our third quarter operating expenses totaled $228 million compared to operating expenses of $195 million a year ago. The increase is related to the cost previously mentioned and additional cost resulting from the recent acquisition of Gila. We expect 2015 core EPS to be approximately $1.85 and operating expenses of less than $900 million. These items do exclude regulatory related costs as well as the impact of the acquisition of Xtend. And before I go into our segment results, I’d like to highlight the financing activities that took place in the third quarter, on slide five. In the quarter, we issued a $700 million private loan securitization transaction; the collateral for this transaction was made up of well-seasoned high-quality loans primarily from our SLM 2010-B trust. This transaction resulted in lower cost of funds overall and raised over $70 million of cash after paying off the 2010-B transaction. As Jack mentioned, we submitted our comments addressing the legal final maturity issue to Moody’s earlier this week. And to help address this issue during the quarter, we funded $852 million of cleanup calls associated with 7 FFELP trusts. Year-to-date, we have funded $1.1 billion of cleanup calls through our FFELP ABCP conduit. And additionally, we amended another 16 trusts to include 10% optional servicer purchase loan. Our unsecured debt declined by $428 million to less than $16 billion outstanding at quarter end. We maintained a tangible net asset ratio of 1.25 times and purchased an additional $43 million of unsecured debt in October. In the quarter, we repurchased 12.1 million shares for $175 million and have repurchased an additional 4.8 million shares as of October 20th. We have remaining authority of $168 million under our current share repurchase plan as of October 20 although this activity was undertaken while maintaining a strong capital position. And we will look for ways to manage the timing of our future cash flows from our student loan portfolio to better match maturity profile of our unsecured debt. Let’s turn to slide six to discuss our FFELP segment results. FFELP core earnings were $70 million for the third quarter of 2015 and that compared with $79 million in the third quarter of 2014. For the quarter, FFELP net interest margin was at 81 basis points. And going forward FFELP NIM may be impacted by future LIBOR rates which will impact the amount of floor income in our portfolio. We expect the fourth quarter FFELP net interest margin to remain in the low 80s. I’m going to move to slide seven to review our private education loans segment. Core earnings in this segment decreased $21 million from a year-ago quarter to $77 million. Third quarter net interest margin came in at 3.77%. The private net interest margin was 6 basis points lower than our expectations, primarily due to a decrease in the spreads between our prime earning assets that were funded with LIBOR based debt. For the fourth quarter, we expect the private student loan net interest margin to be approximately 3.65%. The decrease in our provision for losses of $74 million from the prior quarter is as a result of the additional reserve we booked in the second quarter for a segment of borrowers who exited the firm in 2014 and are experiencing unfavorable credit trends compared to those who exited the firm in previous years. Slide eight shares our private education loan asset quality trends over the last five years. This is a portfolio that is well-seasoned with 94% of our loans in repayment status having made more than 12 payments. The third quarter charge-offs were at 2.3% or $10 million lower than the third quarter of last year. Our total delinquency rate was at 7.4% and that’s compared to 7.9% from year ago quarter. Do expect our annualized charge-off rates for the full year to be approximately 2.6%. Let’s turn to slide nine to review our business services segment. In this segment, the core earnings were $79 million in the quarter compared with $85 million in the third quarter of 2014. We saw an increase in our asset recovery revenues of $20 million versus the prior year. This increase was primarily related to the full integration of Gila which expanded our footprint in the asset recovery and business process outsourcing space. The decline in asset recovery revenues from the prior quarter is written mainly related to three items: First, an expected reduction of volume for student loan collections; second, an expected rate change to our flat unit fee structure associated with the Department of Education collection contract which became effective on July 1; and third, the change in the interpretation of Department of Education which impacted allowed collection fee for FFELP loans that Jack mentioned earlier. During the quarter, we were awarded the state tax amnesty contract that resulted in an increase in our contingency asset recovery receivable inventory of $5.7 billion. The amnesty program will be conducted from September 15th through November 16th of this year. In the past 10 years, we’ve recovered over $1 billion under similar tax amnesty contracts for states and large municipalities. We expect our asset recovery revenues to be approximately $355 million for 2015. Finally, turning to GAAP results on slide 10, we recorded third quarter GAAP net income of $237 million or $0.63 per share that’s compared with net income of $359 million or $0.85 per share in the third quarter 2014. And just as a reminder, the primary differences between core earnings and GAAP are the marks related to our derivative position, expenses related to the restructuring or reorganization, and the income associated with SLM BankCo. With that let’s open the call up for questions.

[Operator Instructions] Our first question comes from the line of Mark DeVries from Barclays. Your line is now open.

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

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

And what’s your optimism about your ability to do something in the near-term in terms of securitizing some of those unencumbered assets?

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

And should we expect you’re going to be focused more on securitizing your unencumbered private student loans rather than FFELP at this point?

Yes.

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

I think a lot of this depends on what you’re actually financing. So to the extent that you’re financing cash flows that you would otherwise expect to be -- that would be financed with our unsecured debt today, clearly those proceeds would go to repurchasing our unsecured debt maturities. Our long-term goal here has been to -- and what we’ve actually accomplished has been to pay down our unsecured debt for the most part but smooth it out. So, we’ve been steady issuers in the unsecured arena over the last several years to flatten out our maturity profile there to better match our cash flows while at the same time we’ve substantially reduced the amount of our unsecured debt outstanding and continue to do so year-to-date in 2015. To the extent that we’re financing and pulling in future earnings, that’s where you’d really look to creating the capability of enhancing our stock repurchase program.

And then finally, just one last question on the private student loan NIM. Could you give us a little better sense of why guidance on that has fallen; what are the moving pieces here that are causing them to come and kind of below previous expectations?

The issue on the private NIM is just really more than anything a timing issue, when our asset resets and when -- what our liabilities that fund those assets are tied to. So, there was an expectation there that the prime -- our assets -- two thirds of our private portfolio is tied to the prime rate which as you know has not increased and it’s typically tied to the fed funds rate and meanwhile the underlying LIBOR rates have steadily increased. Once there is an -- I’ll call it an increase in the prime rate, you will see a recovery in that spread between prime and LIBOR.

Okay, got it, but you’re just not willing to call for that in the fourth quarter, so you took the NIM there.

That’s correct.

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

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

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

That item effectively reduced the NIM by about 2 basis points, Sanjay.

And so is that going to be ongoing?

No, that’s….

That’s a one-time item. And just -- you think about it right, the $852 million of that we call represents less than 1% of our overall FFELP portfolio.

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

So, on the first point of the regulatory items, we have responded to the CFPB’s list of issues and we are now waiting to hear back from them. There is not a specific timeframe for that process, but certainly we’re eager to engage and begin to resolve some of these items. I think it’s important to note that several of the items here on this list are items that were previously covered through other regulatory settlements, particularly with the FDIC. Some items are related to Department of Ed policies and regulations, and to my earlier comments, we and borrowers I think would certainly benefit from a common understanding of regulators of what the rules and program terms and conditions should be. And some we just will continue to work with them are items that we have addressed and changed in prior years, just as we continue to work with customers to make the process of managing their loans easier. On the legal final maturity date issue, it’s obviously a complicated issue and has lots of moving parts. But at the end of the day, we believe that borrower payments and cash flows coming off the student loan portfolios, while they did slow during that 2008 and 2013 period for lots of various reasons, the activities or the performance in those periods really don’t form a baseline in which one should extrapolate off of. And then if you look at historical norms and that is probably closer to what we’re experiencing today, prepayment speeds for borrower loans are substantially higher than they were during that timeframe. And when you run cash flows and expected borrower behavior off of those numbers, you do get very, very different results. And so having -- we would certainly rather the rating agencies take more time to evaluate the data and get a more comprehensive understanding of potential cash flows here in borrower behavior than to make a short-term answer or solution. So obviously, we’d like the issue resolved, but it’s certainly better to have it resolved right or appropriately.

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

No, I mean obviously -- so, our philosophy here and practice has been to as we generate excess capital, both through earnings and through the release of capital from the amortization of our loan portfolios that that would be returned to shareholders through share repurchases and dividends; I don’t think anything has changed here on that side of the equation. Clearly, the current stock price would encourage us and makes it far more attractive for us to be more aggressive on that front. But that does require the ability to be able to issue in the unsecured markets to be able to smooth out our debt maturities. That’s one of the things we’re very eager to do. We believe that as we address some of the items that investors have, as I said, I would describe them as being out of proportion that you would see credit spreads continue to tighten as we have over the last couple of weeks here and then return to more normalized levels.

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

I guess, just a follow-up on that stock buyback question. I guess it kind of looks like you’ve been doing in the neighborhood 60 million a month through the Q3 and I guess a little faster in October, it’s full month yet. I guess what factors, which is -- and I guess probably slightly slower actually in dollars that you were doing previously; is there any constraint in terms of the trading volumes of the stock?

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

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

Well, this is really the first time for us through that with the bureau. So, I think that’s really going to be a wait and see. We feel like we have outstanding controls and practices here to protect borrowers and service their loans appropriately. I think the most important thing we do and the thing that we feel most strongly about is helping customers avoid default and the severe consequences of that that means getting them into repayment programs they can afford. And as the Department of Ed default statistics illustrate here, we do this better than anybody. I mean to take loans that are basically the same across all servicers and deliver a 38% lower default rate, those are the results people are looking for here, right, getting borrowers into programs they can afford. As I mentioned, some folks do believe that income driven repayment is the ultimate solution. What we do is we really work with customers to let them understand the range of options that they have available to them and they get to pick the one that fits their budget best. And 70% of our dollar volume is enrolled in an alternative payment program which would include everything from income driven repayment solutions to loan consolidation which extends the loan term out. So, these are the solutions that work for our customers and drive the substantially lower default rates. I think that’s kind of how we’ve been working with the regulators in this. And if it means changing some of our practices to be -- to improve outcomes, we’re all-in in that.

I mean I was struck by the fact that GAO and their report pointed to the federal government for not advertising some of the repayment options as opposed to the servicers. I don’t know maybe you can kind of put those in the process and kind of round that out little bit.

Well, certainly, we would argue here that there is a couple of things that need to happen. I mean certainly encouraging borrowers to contact their servicers is something that we would like to see more of, because when we do contact the customer or connect with them, more than 9 times out of 10, we’re able to resolve that delinquency. And the other big issue here which we’ve talked about before and I have written about is simplification of the program. The share volume and terms of some of these repayment options can be very overwhelming to people who are not dealing with this day to day. It’s hard for them to understand which program produces the best results for them. And if we can simplify them, narrow them, shrink them down into fewer but more simple programs t understand, I think everyone benefits from that.

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

Well, we have -- sure and that’s right. One of the things that we’ve looked at as we completed the separation is what are our core capabilities and how are those transferable into different areas or different asset classes. And in the asset recovery business services sector, this is an area where we have developed a very, very strong and successful track record of helping our customers manage their cash flows through either asset recovery or business process types of things. And for years, our focus here was on education loans almost exclusively. And we began to develop alternatives, working with state agencies and municipalities. Somsak referenced the state tax amnesty program that we’re running, as an example. We’ve had long standing contracts with a number of cities and states managing their receivables book. And we thought that there are couple of places that we could go to expand our footprint and really put us in a place that we can grow rapidly on an organically basis off of that. Gila, the acquisition of Gila earlier this year was one example of leveraging those skills and capabilities into a broader municipal arena and geographic areas where we were not strong, to begin with; and Xtend does the same thing for us in a new area of healthcare payments. Our view here was that an acquisition in this space was really necessary for us to bring a resume [ph] to bear and the activities that they do are very, very similar to what we do with other asset classes. And so bringing our scale, our data, sophistication, and strategies to that process is something that we think will allow us to grow those businesses rapidly. And when you look at the opportunity there relatively to share repurchases, that’s where we do our math and understand what we can drive in terms of economics. It’s a better deal for shareholders in our view to allocate that capital to that acquisition than it is to do share repurchases. I want to be clear, however though that these are small -- relatively small acquisitions that have helped us build the footprint. It’s not -- our strategy is not to buy these businesses through or series of acquisitions, but fill the footprint and grow organically.

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

I appreciate the call, Jack. It’s really more observations, philosophical rather than a question but they are important to me. I think if my numbers are right that since the spin, we have spent $1.242 billion buying back 69 million shares at average price of 18. And when you increased the repurchase program, I think the response in the Company generally has been that you believe the net asset value is the area of 22 or 23 and that repurchasing to make sense. We agree with that by the way, and number is 23. If we still believe that, we would urge you to find ways of being creative to raise additional funds to double down or triple down. I think you are in sympathy with that, but we would just urge you. There is no better use of shareholder money than buying something back at $0.50 and a $1, particularly in this environment where there is very few things selling at $0.50 and $1. So that’s kind of an advocacy question -- not a question but an advocacy statement. Second, I noticed recently that a company by name Winthrop Realty announced intention to liquidate. And when I called the CEO -- I was not a shareholder in the company, when I called the CEO, I knew [ph] I asked him what motivated him, he said the thought that the prospect of hidden game of stock to sell at the net asset value that he believed the company had was so remote that he felt the best thing to do is to liquidate the company, return the money to shareholders. And kind of a theme out of that book, you deal with many regulators, some of which have conflicting views. We’re living in with constant criticism and a hostile environment despite the social good you do for the people that borrow money from you. Has the Board considered the advice the ability of liquidating the company by going into runoff to return the money to shareholders, so they can invest in companies that are more appreciated by shareholders or the government? And so that’s the kind of a philosophical question. And third, your comment, I thought it was very interesting, I have no problem with the Xtend acquisition. Companies cannot repurchase stock to success; you got to grow the business. But when you said that it’s more accretive to stock repurchase, I will probably challenge that because essentially when you buy back stock, you’re probably looking at the earnings per share impact of what earnings you got versus the quest of money et cetera. But in the stock repurchase, you are retiring a 5% dividend and you’re capturing a $9 discount to NAV. And obviously as you retire more shares at $9 discount to NAV then NAV goes up. So, I am not sure you’re calculating correctly the virtue of Xtend versus a stock repurchase, but that’s not a big deal because I think you try to grow the Company. So those are just observations. I don’t know if you want to comment on them, but I mean good luck to you. But we’re very supportive of management. It’s not a complaint, just an observation.

Thank you, Lee. We definitely agree with your first point and we are working hard to find those creative alternatives to allow us to do more. And more both in -- two things are on sale here, right, at both the debt end and the share price. And so we’re aggressively working on both of those. And one of the unique parts of our business is if we can finance assets through an ADS transaction, we’re able to raise funds substantially cheaper than our cost of debt in the unsecured arena. So, it’s an easy arbitrage to take advantage of and one that we would like to do, see more of that, same is true on the share repurchase side. I do want to spend a little bit of time just on your comment about the liquidation issue here. The value or the franchise value of this Company is really anchored in the cash flows coming from the student loan portfolios. And I would say the regulatory issues are coming from our service -- the servicing of student loans. In effect, not because we chose this, it was chosen by Congress, we are liquidating our student loan holdings. They are amortizing portfolio, no new FFELP loans are being created and those loans will -- those portfolios will go to zero over time. And our job is to maximize the earnings of that portfolio. We think we can -- we are doing that and running the operation on that side of the equation. It is frankly not a whole lot different in either kind of alternative structure. On the servicing side of equation, there is no question that as a business, we do a great job in this space and we deliver value for our customers and tax payers and the results that we generate. If the regulatory environment is not going to allow that business to work can be profitable then it’s not an attractive business. And that is certainly something we would take a look at. We need to work with regulators today to resolve this -- the open issues with the state AGs and CFPB and we are going to do that. And a big part of our strategy is really about driving and producing the results of that all including the regulators are looking for here. So, that’s to be determined opportunity for sure.

I would be willing to take a higher cost temporarily and issuing unsecured debt to buy an asset back at $0.50 and a $1. And the only thing just to keep you seek to the fire little bit and I like you guys, but in the second quarter of 2015, we spent $300 million at 19.76; in the first quarter of 2015, we spent $300 million at 20.52. If we spend $300 million at the -- $600 million at the 20 level, we should be spending $1 billion at this level. That’s all. But easy for me that it is a 20 -- the hindsight is 2020 but we should just find a way of being more aggressive down here because we’re on sale.

I agree. Thank you.

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

Just a few follow-up questions on the Xtend acquisition; I guess one, are you going to complete the $1 billion buyback? In other words, are we going to see $225 million on the fourth quarter even with the account [ph] acquisition?

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

We’ve got $168 million of remaining authority left there as of yesterday.

Got it, and then what level of OpEx should we expect following the acquisition? I know you’re originally guiding to somewhere on a $50 million reduction OpEx next year of the 2Q run rate that was getting somewhere at $850 million. I guess how much growth from this deal will we see?

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

In the 50?

15.

Okay. So, run rate OpEx annually going $15 million, and I think the presentation mentioned…

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

So, if I am looking at the presentation correctly mentioned $70 million of revenue. So, I mean is that coming right into the collections line?

It would be part of the asset recovery revenues line. And remember, the guidance I provided, does not include the impact of Xtend, just as a clarification.

So the 355 million for the year did not include any Xtend revenue?

Right.

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

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

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

Remember 70 is an annual amount.

And the 15 million of OpEx was quarterly or is that annual as well?

Quarterly.

Quarterly, okay; so 60 million. Got it, okay. And then I guess where would you need to see the unsecured debt tightened to before you issued?

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

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

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

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

And your 1.85 guidance, that doesn’t include any debt tender cost, does it?

It does not.

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

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

And then just lastly, I guess we’re still yet to see the final terms of what the repay program will look like. Is your expectation that that’ll be open to the FFELP program? And if not, would you expect seeing any consolidation of loans at a FFELP into the direct loan program for that?

So, re-payee is an expansion as yet another income driven repayment solution. And the primary benefit of this program is going to be the customers who are new to repayment. So, there are income-driven repayment options available under FFELP. We certainly would see -- expect to see some accounts consolidate into direct lending to capture that program, but the benefits of it are not. If you’ve been paying your loan for five years, you are far better off working through the repayment options available to you in FFELP than you would be to start over again and repay.

And your next question comes from the line of Sameer Gokhale with Janney Montgomery Scott. Your line is open.

Thank you. It just seems apparent to me that you guys don’t have a cash flow issue, but it’s the timing of cash flow concern that the unsecured market seem to have. And I know Jack you talked about this earlier, there are several things that seem to have come together all at one-time from a headline perspective that I think made perhaps bondholders nervous and also some stockholders nervous explaining to sell off. And it seems like to a certain extent when the bond spreads are widened out, that’s also resulted in the kind of cycle where the stock has sold off as well just because people wonder the bond market in nervous then we should nervous as well. So, I was just curious in terms of trying to figure out the famous events going forward. I mean clearly we find out from Moody’s what their thinking is, but you’ve given announced that showing pretty fairly that you have the cash flows to comfortably meet the legal maturity dates and also cash flows over time to meet your unsecured debt maturities and yet now that seems to matter. So, what are you serious about, to ask question is a little bit differently from what Lee was asking earlier, rather than going to liquidation. In your discussions with fixed income investors, is a concern here in the widening of credit spreads for you guys more a function of some concern that you might split the company up in different sort of servicing and asset management business such that try to spread -- that would be spread widening; is there a concern that maybe you take the company private, given all the headline risks that are out there? Is that something you would contemplate; is this we how sort of get your thinking around that because something here doesn’t seem to add up? So, just your thoughts would be helpful there. Thank you.

Well, first of all, I think the items that were on the table both the legal final maturity and the regulatory stuff create but the outcome is unclear that uncertainty creates the opportunity for the events that you just described to happen. Some of those were certainly interpreted by some, incorrectly. So there was a view earlier on that early in the process that the legal final maturity date issue would cause us to span liquidity that would otherwise be used to service our unsecured debt to clean up those asset backhauls. I think we’ve clearly explained that that is not the case, as an example. And as we’ve kind of responded to some of the theses here and items I think you’ve seen both our credit spreads tightened and our stock price improve. Our goal and objective is of course to produce the outcomes that -- make sure people understanding the outcomes that are likely to occur here. And that’s what we’ve been working on, on both the legal final maturity and the regulatory cost side of the equation. But we do need those items to resolve before I think you get back to completely normal. As I mentioned at the beginning of the call, one of the challenges we’re facing is even though, it’s attractive for us to buy back debt, it’s difficult for us to get any kind of meaningful volume here. And that I think tells you a little bit about how the fixed income investors are; they see the same value that we do and if we’re unwilling to sell.

And your next question comes from the line of Mark Hammond with Bank of America. Your line is open.

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

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

And then turning to the debt side, could you give also the debt maturity and buyback activity you’ve completed during the quarter? And then in 4Q so far, I think the 8.45s of ‘18 were mentioned and then 3.875 also matured during the quarter, just want some clarity on that?

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

Okay. So of ‘18’s, it was 43. And then…

The most of that.

Most of that. Okay. The 8 million of regulatory related costs, is that does any way related to the CFPB NORA notice Navient received or is that a different 8 million cost?

So we have -- there have been a number of regulatory inquiries, both our service and in collections business from a couple of different parties. And as part of that process, there is an extensive amount of data and analysis that was required to be done and delivered just -- and so setting up that information, put it into data storage, doing the analytics work, legal related items is what it all comprises. The biggest part is on gathering the data and analyzing and storing it, then it is say legal fees. But it’s comprehensive against all of the inquiries.

And your next question comes from the line of Michael Tarkan with Compass Point. Your line is open.

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

So the $15 million I quoted, Mike that does include some, I’ll call upfront transaction and integration costs. So pick that whatever is worth. But just as a starting point for modeling purposes, you can probably use that as a starting point, I think it would be okay.

And then just last one from me. On the projected cash flows, are you factoring in any degree of higher servicing costs in those numbers at this point, or is it just still sort of how you were modeling it before? Thank you.

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

That’s right.

Yes, those are gross cash flows, so they are -- those are cash flows before any service and cost.

And there are no further questions at this time. I’ll turn the call back over to presenters.

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

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