Good morning. My name is Shannon and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Navient Fourth Quarter 2015 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] It is now my pleasure to turn today’s call over to Mr. Joe Fisher, Vice President, Investor Relations. Mr. Fisher, you may begin your conference.

Thank you, Shannon. Good morning and welcome to Navient’s 2015 fourth 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 fourth quarter 2015 supplemental earnings disclosure. This is posted, along with our earnings press release on the Investors page at navient.com. Thank you. And now I’ll turn the call over to Jack.

Thank you, Joe. Good morning everyone and thank you for joining us today. Today’s call is particularly important. The financial markets have created pressure on both our debt and equity erasing significant value from investors. This morning I’ll address the factors impacting our enterprise value, what we're doing to manage them and demonstrate why the intrinsic value of our company remains strong and intact. Front and center for us and I know many of you, is our access to and cost of liquidity. The legal final maturity date topic has caused spreads to widen and trading to be limited in the FFELP ABS market. This, along with the disruptive high-yield market, has caused our unsecured debt spreads to widen. Some investors have asked about our ability to continue to return excess capital to shareholders while meeting our unsecured debt maturities. Let me be perfectly clear: I am confident we can continue to do both. In fact, we have a plan to do so. I am confident because our $123 billion portfolio of student loans generate sizable and predictable cash flow. This cash flow totaled $3 billion in 2015 and is projected to be $2.7 billion in 2016. In addition, we have a very long track record of securing funding from the assets we own. For example, in the fourth quarter we completed two new first-time financings for over $900 million at a cost that was several hundred basis points inside of our unsecured debt spreads. We used the proceeds to take advantage of market conditions and we repurchased $691 million of unsecured debt generating a gain of $21 million. We also confirmed our confidence in our cash flows with the new $700 million share repurchase program. And we used our authority, in 2015 we repurchased 56 million shares and since…

Thanks, Jack. Good morning everyone. During my prepared remarks, I will be addressing the fourth quarter results, highlighting the recent financing activity and I’ll provide additional detail behind the company's 2016 earnings guidance. I will be referencing the earnings call presentation which is available on the company's website and let me start with Slide 4 which provides a summary of our core earnings. In the fourth quarter, we reported adjusted core earnings per share of $0.49. These results exclude $0.01 per share or $7 million of regulatory related costs during the quarter. Our full year 2015 core EPS was $1.85, excluding regulatory related costs. In our fourth quarter, adjusted operating expenses totaled $228 million versus $206 million a year ago. This increase is related to the additional cost resulting from the acquisition of Gila and Xtend Healthcare. And as Jack mentioned, we expect our full year 2016 core EPS to range between $1.82 and $1.87 and we expect our operating expenses to be under $930 million for 2016. Both these items exclude the impact of any regulatory related costs. The primary driver for the increase in operating expenses from 2015 will be the full year run rate for Xtend and Gila. Excluding the operating expenses from the two companies, our 2016 projected core operating expenses will be 6% lower than 2015 levels. Let’s turn to Slide 5 to discuss our FFELP segment results. FFELP core earnings were $74 million for the fourth quarter of 2015 compared with $85 million in the fourth quarter of 2014. In the quarter, our FFELP NIM was at 84 basis points, and we expect the full year 2016 FFELP NIM to remain in the low to mid 80s. Our FFELP NIM may be impacted by future LIBOR rates which will determine the amount of floor…

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

Great, thanks so much, and nice work on the debt side, and comments on the equity side also. Jack, I was wondering if you can kind of elaborate a little bit, given the tools that you have, like how do you see the progression over the next few months or quarters with respect to dealing with the outstanding unsecureds?

So I think we made – to your point, we made great progress at the end of 2015, reducing 2016 debt maturities and our focus really now is on continuing to access the capital markets to knock down our maturities in 2018 and ’19. So that’s really where the focus is. When we look at our liquidity balances, both cash on hand and assets that we believe are financeable, we feel we’re in a pretty good position here to be able to access the liquidity we need to address our unsecured debt maturity, the higher balances in ‘18 and ’19.

Kind of separate question, you did buy some FFELP assets this quarter. Could you just talk a little bit about what is going on there and you did mention that you expect to be able to do FFELP securitizations, so can you talk about what you're seeing is the likely terms on that?

Yes, so we do buy FFELP. We continue to buy FFELP assets where prices make sense. A lot of that activity is associated with rehabilitation loans and the economics of those transactions even at current funding levels generate a good economic returns for us and we will continue to see more of that we believe in 2016. On the FFELP side of the equation, as I said, I think we are of the view that the criteria for the stress test scenarios will come inside of where the rating agencies have discussed to date, which means that we believe we can get deals rated and plan to test that market in the near term for a FFELP transaction, there will be some unique characteristics to this that – well, I can’t probably talk about at the moment but we think it will be something that can get done and get done at levels that make sense.

Just to follow up on that, I understand you can’t talk about what the characteristics are, but what’s the outcome? In other words, to the extent that you can do that, does that mean it would become more efficient to buy portfolios?

So, on that particular point, we are always willing to buy portfolios. The question is more is there --is the seller willing to sell at the prices that make sense given the cost of funds? So we have more than ample liquidity to buy FFELP loans primarily through our conduit facilities. We ended the year with about 3.6 billion of liquidity in that size -- in those areas. The issue is more particularly for banks who own these portfolios, these loans are government guaranteed, there’s not a credit risk, they’re funding them with deposits. They’re not willing to sell at a loss.

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

Yes thanks. I was hoping you could elaborate a little bit more on why you expect the private student loan margin to be 3.5% which is down I guess from the 3.8% you expected going into 2015, and the 3.65% you guided to for this quarter. Are you expecting that, that whole timing mismatch issue to persist for the full year?

Yes. Mark, this is Somsak here. Certainly, what you saw was an increase in the prime rate that occurred late in 2015. I expect that, that timing issue will, from a seasonal perspective, benefit the first quarter private spread. But to the extent there is an increase in LIBOR rates for after the first quarter 2016, without a corresponding increase in the prime rate, you might see some of that timing mismatch for the remainder of 2016. So that’s what we’re reflecting in the guidance there.

And then Jack, given the anxiety that’s clearly reflected in both the equity and the debt markets, did it make sense at all to think about suspending the dividends, so you can use that cash flow to either buy back more stock or retire even more debt than you are? Certainly seems like a better use of cash flow to buy back your stock at half of what we analysts think as the intrinsic value than just give it back to shareholders?

Mark, that’s a good question. We’re going to spend over almost $220 million in dividends in 2016 and it would clearly be better used in share repurchases. I think when we look at the dividend and we just confirmed and declared the same dividend rate for the first quarter here. We’re really not looking to create or add to some of the investor concerns about liquidity access, what it means and so while we debate at that topic, I think it’s best that we keep the dividend rate as it stands today.

Do you think you could address this by announcing like a simultaneous cut to the dividend and increase to the repurchase authorization?

Yes, no, I think, I mean it makes economic sense. I don’t disagree with that. It’s really – it’s growing, making sure what the market sentiment is a reaction to that, when there is already concerns about liquidity.

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

Thank you. It’s a little bit of a different approach to prior gentleman who asked this question. I am going to give you credit for knowing more about your business and its value than myself, given the complications and actually my confidence in management, I think you guys do a very fine job and you keep us informed. I wanted to verify some numbers and better understand the motivation for the buyback. I think you’ve given all the answers. You said that the net present value in the high teens, low 20s, you strongly agree, et cetera. And this is my observation. In 2014, you spent $600 million to buy 30.4 million shares, you paid $19.70. In 2015, you spent $945 million, or 56 million shares at $16.88. On 12/31/ 2015 you said, you had $755 million left, you bought $55 million worth of stock, 5.4 million shares, you paid $10.19 so far this year and you have left $700 million which I believe is roughly 23% of the market cap of the company. Why are we not – and the stock is somewhere between 6% and 7%. Why don’t we engage in accelerated repurchase and spend that $700 million now because we’re seeing with the stock so far disjointed from the economic realities as you portray them, and being uncertain environment in the market which creates this opportunity, it seems to me that we should really accelerate the repurchase program retire [22 within the company] and by the way, unless I am missing something, if you bought back 23% to the company at call it, $10 or $11 and you think the real value to low 20s, that creates significant value to remaining shares, so the value goes up, not exponentially but goes up quite significantly. So my question is, we paid the prices of $20, $17 for so much stock, why don’t we accelerate it, how dangerous it is, how risky is it to buy 11 months in advance today? I am going to leave the operational questions to my partner, Mahmood who knows more about the business than me.

So well, first of all, thank you for your comments on our confidence here, we appreciate that. We are being aggressive on our share repurchase programs and as we begin the process here after the earnings call, I think you'll see us be more aggressive than we were in the first month of the year to acquire those shares. If you look at the daily trading volume we are already through the first month of the year acquiring roughly a little over 10% of trading volume. So we’ve been fairly active to begin with. And to the extent that we can accelerate those and capture today's prices which we totally agree are far, far below the net present value or the intrinsic value of the company. We should hit -- we will continue to do so.

Yes, I don’t know what your limitations are but I noticed the other day that Ashland, the ASH symbol accelerated a very large repurchase program and this is commonly done, I guess, through -- separates the men from the boys is making these right judgments, if you really believe your business is worth more than twice what is trading for, and you can legally engage an accelerated repurchase, I would strike when the iron is hot, rather than when everybody's optimistic and the stock is trading at a more realistic level. But I will shut up and just try to plant that seed, it seems to be the most logical thing to do. So thank you and good luck.

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

Thank you. Good morning. I just wanted to clarify the commentary, Somsak, on the private loans, student loan NIM. So assuming the spreads remain static as they are today prime to LIBOR, your NIM would probably be much higher than what you are guiding to, right? I understand you're looking at the forward curve assuming rates might go up across the year but if that gets deferred, delayed and that gap doesn’t happen, your NIM should outperform your expectations?

Yes.

And then I guess following up, Jack, given your opening remarks on the impact of the Moody's downgrades, potential downgrade. I was wondering what your discussions with the agency lead you to believe in terms of their understanding of the gravity of the situation. I am just still surprised we haven't gotten any clarity yet.

Yes, I think we’re all surprised or disappointed that the analysis has not been complete yet. This has been a long, long process and too long obviously. We’ve provided -- part of the issues here I think are just the significant complexity of the programs and not just understanding what options are available to borrowers but how they interconnect. And as the analysis -- and you can see from the reports that we published, and we shared everything on our website with what we've responded to both Moody’s and Fitch. You can just see that there's a fair amount of complexity here. I do think we made some excellent progress with both Moody’s and Fitch on this topic helping to provide the data that they need to -- that can drive assumptions or stress scenarios that can at least theoretically happen, instead of impossible to happen. And we are continuing to work with them. We do – do make them aware of the consequences that the delays are having in the financial markets and across our capital stack. And they assure us they are aware of them and working hard to get this resolved as quickly as possible. But as I said in my comments, our plan to come to market now ahead of likely a decision -- final decision from the agencies is really a reflection that we need to – you just can’t wait forever for the process to unfold here. And I do think we’ve got enough information out there that investors can make informed decisions and understand that any new deal won't be subject to – we’re doing the right things to make sure any new deal won’t be subject to downgrade risk base on new criteria.

Maybe a similar question on the CFPB issue, I mean we haven't really heard much from them as well. I was just wondering if you guys have any thoughts on kind of timing?

We don't. There hasn’t been any kind of meaningful activity here on that particular topic. Again I think the process that we have utilized here as we engage with regulators is to be responsive to their needs, make sure that they understand the purpose of our policies and practices. For Department of Education loans, I mean a lot of the typical consumer arguments is that someone is doing something that generates more interest or fees or whatever for the lender in the Department of Education loan servicing side, we have – we don’t benefit from any duration extension or get harmed by duration shortening. We don't – there are no fees that are assessed to consumers and our job is really to work with the customers according to the guidelines of the Department of Ed set for us and within the fee structure that they pay us to help customers find solutions that make sense. And we’ve touted this number more times than I can count but our customers default at a 38% lower rate than all other services combined. Our view is helping customers stay out of default and no one works harder to collect a liability due to them than the federal government. Keeping them out of default is the best thing that we can do and it helps to minimize their expenses and the total cost of loan ownership and we excel at that.

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

Hi, thank you. I just wanted to dig in a little bit into the OpEx guidance of less than $930 million. I guess relative to the fourth-quarter run rate, excluding the regulatory costs, what are the moving parts for us to think about next year, or I guess I should say this year?

Well, Eric, that $930 million guidance reflects really the full year impact of the Gila and Xtend acquisition. One of the things I will remind you is that the Xtend acquisition happened in – towards the latter end of October, October 22 I believe. And so as a result, you’re going to picking up close to a full year’s operating expense load for Xtend Healthcare and to a certain extent you’re going to see an increase in expenses for Gila also. So if you were to -- like I said, if you were to strip out the two -- the expense impact from the two companies, we expect to see a 6% reduction in operating expenses year-over-year.

So, next year, it's really the elevated -- or maybe just say that you don't have any cost savings on a net basis because you have further investments in those two businesses. And I guess what kind of revenues are we seeing on the other side of that?

Well, on the other side of that, as we noted during my comments, our full year non-federal student loan related asset recovery revenues increased by $70 million from 2014 to ’15, and most of that increase really came from the impact of Xtend and Gila.

And I guess the guidance for $620 million to $630 million of the business services revenue, is there a way to think about how much of that is from student loans and how much is from the non-student loan business?

Just a clarification that, that guidance is – that range is $620 million to $650 million. And then just as a frame of reference, our non-federal student loan asset recovery revenue was $118 million in 2015 and we expect that to grow fairly aggressively given the fact that we've got a full year of Gila and Xtend that we’re going to incorporate.

And do you have any clarity at this point in terms of the new allocation model that the Department of Education will be using on the servicing side?

No, not yet. They have not issued their numbers yet for the first six months of the year.

[Operator Instructions] Our next question comes from the line of Mark Hammond from Bank of America.

Thanks for taking my questions. I have two or three here. You mentioned a plan to meet unsecured debt maturities. By my numbers, you don't have to come back to market in 2016. So, would you share some details of that plan you mentioned to explain why you'd be back in the market on the unsecured side in 2016?

Sure. So our goal is to raise liquidity well before it’s needed and certainly to the extent that we can issue unsecured debt, we can take advantage of opportunities that the market is presenting today to buy back unsecured -- older issues of unsecured debt with near-term maturities at attractive prices. I think one of the things for investors to keep in mind is that trading prices of our debt are not necessarily reflective of economics to us because most of those are fixed-rate securities that we have swapped back to floating, and even bonds that might be trading over par could still produce economic gains for us as we unwind the hedge as well.

So, your bonds are between 9% and 10% in the long end of the curve, call it, ‘24 even out to the ‘33s]. So, what yield would you want to issue at, that would be advantageous and what's the roadmap to get that yield down to the area that you'd like it?

Well I think for us it's going to really be – so as I said our plan is not to come to market in the first part of 2016, because these spreads are too high. But it really depends on how we can use it and how we can put that fund -- those funds to work. And the fourth quarter of last year is a good example of what we did, when we tap into two new forms of financings for this company, securitizing our non-traditional loans and borrowing against the over-collateralization in some of our private credit ABS trust, those transactions not only just demonstrate that we can actually tap funding off of our balance sheet but more importantly do so at substantially lower rates than our unsecured debt costs as you just mentioned. So when we look at our funding alternatives, that's exactly what we do. We look at what the alternatives are and what the use of proceeds are and make decisions accordingly. I like our balance sheet as it sits today. I like our liquidity position. We’re not in a position where we’re being forced to issue -- to do things. Obviously the ability to declare and get authorization for a $700 million share repurchase program speaks about the confidence in our cash flows and we plan to utilize that as I said, so we are in good shape. And the last thing I would just say is that we recognize here that our ability to produce value for shareholders is dependent upon us having a stable access to the unsecured market. So both sides – we have both of those investor groups in our mind here.

And then my last question is more of just an idea. So, instead of accelerating share repurchases, which would favor shareholders over bondholders, why not buy your ‘33s that are trading at $0.67 on the $1 today, booking a gain of $0.33? So, that would benefit shareholders and bondholders at the same time.

We have bought some of those bonds back in 2015. They are very thinly traded and when their opportunities present themselves we are usually there.

Your next question comes from the line of Richard Shane from JPMorgan.

Thanks, guys. Can you hear me this morning?

Yes.

Excellent, okay. Sorry, we are having a little bit of a phone problem here. Anyway, just want to talk a little bit about the maturity wall, Jack. You had talked about -- you'd addressed the 2018 wall. Historically, it looks like the pattern is, entering the year you try to knock down the maturities to about $1 billion, $1.1 billion, before you get into the year, and then address that during the year. With the big spike in 2018, is it possible that you will approach this by leapfrogging the 2017 maturities, and start knocking away at the 2018 and 2019 wall?

First of all, the phraseology of a wall here -- these numbers are larger in ’18 than they are in ‘17 but they’re certainly very manageable for us and much much lower than they had been in prior years. Our goal is to –so where would we play? We would play where we have and can drive the most economic value and as we get closer to the ‘17 debt maturities, they tend to – there tends to be little economic value that we can extract by repurchasing them in the new open market other than carrying costs, right? So we end up with liquidity on our balance sheet ahead of the -- in preparation for the debt maturity. So ‘18 has been -- as we said it really at the end of 2015, our focus has been ’18 and then as we move into ‘16 it's going to push those – push that out a bit. End of Q&A

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

Thank you, Shannon. 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. Thank you.

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