Navient Corporation (NAVI) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Jessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient First Quarter 2016 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Joe Fisher, Vice President of Investor Relations, you may begin your conference.

Thank you, Jessa. Good morning and welcome to Navient’s 2016 first 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 maybe materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of our core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the first quarter 2016 supplemental earnings disclosure. This is posted along with the earnings press release on the Investors page at navient.com. Thank you. And now, I will turn the call over to Jack.

Thanks, Joe. Good morning, everyone and thank you for joining us today. Our results for the first quarter are consistent with our plans. We earned an adjusted $0.44 in core earnings per share, with student loan margins and operating expenses in line with expectations. Credit was a bright spot this quarter and I will touch on this topic a bit more in a moment. During the quarter, we continued to focus on several key areas: improving our access to and the cost of funding, delivering value to our customers and clients, capturing new business opportunities, improving our operating efficiency and growing the value of our company. While the work in these areas is never complete, I am pleased with our efforts, execution and results this quarter. We have been working on a number of fronts to address our access to funding and specifically funding for our government guaranteed FFELP assets. As you know, Moody’s and Fitch have been reviewing their criteria for rating term FFELP asset-backed loans. Unfortunately today, they have not issued any updated guidance. While we currently believe that the final criteria will be more favorable than the initial draft proposals, we have decided not to wait any longer to restart our FFELP ABS program. We completed our first FFELP ABS transaction in the first quarter, followed earlier this month with the second sale. Combined, we have now issued $1.6 billion in FFELP ABS bonds, investor reception was good and more importantly, even stronger in the second deal. We also completed an extension of our FFELP conduit facility, pushing the maturity date out 1 year to 2018. This facility was also scheduled to decline to $7 billion in size. Given the potential for FFELP portfolio purchases, we increased the size to $7.5 billion. And extending this facility and returning to the FFELP ABS market demonstrates the high quality of the FFELP portfolio in the confidence of lenders and investors in our securities. We are also addressing the potential rating agency impacts on outstanding bonds. As of today, we have extended the legal final maturity date on $4.8 billion in bonds. While we believe the assumptions used to determine the new maturity date of these extensions are unnecessarily long or said differently, we certainly expect the loans to payoff prior to the new maturity dates. We have worked with bondholders to extend the maturity date of their bonds in order to protect the value of their investment. Also on the financing front, we completed a private loan securitization in the first quarter. And last week, we completed our second private credit residual financing. Combined, these transactions raised over $525 million in free cash. The proceeds will be used to further reduce our unsecured debt. Combined, our steady and significant financing activity ensures that we have ample liquidity to run our business, pursue portfolio acquisitions and increase the intrinsic value for shareholders. As we all know, it’s an election year. So student loan performance and indebtedness continues to be a regular political and media topic. The data reported here is often misleading, confusing and driven by anecdotes instead of facts. For example, it was recently reported that few student loan borrowers are making payments on their loans. The calculation here is complicated by the way the program reports outstanding balances. Unique to the federal loan program is that cumulative defaults are included in delinquency and repayment statistics since there is no charge-off for bad debt used by the federal government. This would be fine if the statistics also included the balances that were paid down, but they do not. As a result, borrowers who successfully repaid their loans are excluded from the analysis. For the record, the loans we own our customers are successfully making payments on their loans, having made over $3.6 billion in payments to principal in the first quarter. What we see from over 12 million customers with over $300 billion in balances is continued improvement in credit performance. For our private loans, our 90 plus delinquency rate fell to 3.2% at March 31, down from 3.6% a year ago. And importantly, the dollar balance of loans over 90 days past due declined over 20% from a year ago to $749 million. The charge-off rate also improved declining 17% from the year ago quarter to 2.4%. And the performance this quarter and the reductions in delinquent dollar balances at quarter end are positive signs for the remainder of the year. We continue to work to capture new business opportunities. During the quarter, we acquired $1.5 billion in FFELP Loans. We are beginning to see signs that opportunities to purchase additional student loan portfolios will increase. Our processing business in the municipal and healthcare areas is also growing nicely. For example, we have recently won a new multiyear contract in New Jersey as well as new contracts in Arizona, Pennsylvania, California and Mississippi to name a few. And we expanded our healthcare receivable services to new hospitals in New Hampshire, Pennsylvania, Maryland and Wisconsin. This month, the Department of Education issued an RFP for a single servicing platform. The request for proposals is to provide a servicing platform not loan services. Our existing servicing contract extends into 2019. Our team here is actively engaged in evaluating the opportunity with respect to the system RFP. Like most financial services entities, we are working to continuously improve our operating efficiency and we have several initiatives underway to accelerate our pace here. We plan to exit 2016 with a lower run rate operating expense level and where we are today. This is another example of our efforts to add value for our clients and other stakeholders. During the quarter, we purchased 19.2 million shares at an average price of $10.42, a level significantly below what we see as the intrinsic value of the company. Capturing the opportunity here allows us to increase the intrinsic value per share to non-selling shareholders. Our stock price is up significantly from its low earlier this year. Still, it does not reflect the full value of the company as we see it. Our focus on funding, capturing new business opportunities, improving operating efficiency and taking advantage of the mis-priced market has allowed us to add value. We will continue this focus and execution going forward. Now, I will turn the call over to Somsak for a deeper look at our financial results and I look forward to taking your questions later. Sak?

Thanks Jack. Good morning everyone. During my prepared remarks, I will review the first quarter results before highlighting recent financing activities that took place. I will be referencing the earnings call presentation available on the company’s website, beginning with Slide 4, which provides a summary of our core earnings. In the first quarter, we reported adjusted core earnings per share of $0.44, which excludes regulatory-related costs during the quarter. Our first quarter adjusted operating expenses totaled $243 million versus $230 million a year ago. The increase in these expenses is related to the additional costs resulting from the acquisitions of Gila and Xtend Healthcare. Excluding the expenses associated with these acquisitions, operating expenses were lower – 6% lower than a year ago. Let’s turn to Slide 5 and discuss our FFELP segment results. In the quarter, we acquired $1.5 billion of FFELP student loans. While many major holders continue to wait for the resolution from the rating agencies related to the legal final maturities, we are beginning to see renewed interest in portfolio sales as well as FFELP ABS transactions. FFELP core earnings were $66 million for the first quarter of 2016 compared with $85 million in the first quarter of 2015. The decrease in FFELP core earnings was primarily a result of the lower FFELP balance compared to the prior year and a net interest margin of 81 basis points, which was in line with our expectations. The FFELP net interest margin declined from the fourth quarter, due mainly to the seasonal impact of floor income rebates that occurred during the first quarter of each year. During the quarter, we did had some additional $295 million of floor income, bringing future hedge floor income to $1 billion. We are also seeing improving credit trends in our FFELP portfolio, as demonstrated by the 17% improvement in our 90-day delinquency rate. Let’s now turn to Slide 6, for a review of our private education loan segment. Core earnings in this segment decreased $16 million in the year ago quarter to $61 million. The decline is primarily the result of the declining balance in our private education loan portfolio and lower net interest margin. The decline in NIM was partially offset by the $16 million reduction in our loan loss provision. This reduction came as a result of the improved credit performance that we continued to see in our delinquency forbearance and charge-off rates. Charge-offs declined $46 million or 24% from the prior year. The improved performance demonstrates the power of seasoning that we have seen in our portfolio. Slide 7 highlights some of those improvements in our private education loan asset quality trends over the last 5 years. This portfolio is well seasoned with 95% of our loans in repayment status having made more than 12 payments. Our first quarter charge-offs came in at 2.4% and our total delinquency rate declined to 6.2%. The chart on the bottom of this slide demonstrates the benefits of improved performance it’s having in our borrower’s FICO scores. The non-traditional loans that we have in our portfolio today have improved their FICO scores by 35 points on average over the last 5 years. Today, these loans are non-traditional in the name only and we expect to see continued year-over-year improvement in this segment of the portfolio. Let’s turn to Slide 8 to review our business services segment. In this segment, core earnings were $75 million in the quarter compared with $86 million in the first quarter of 2015. The decrease was primarily related to the expected decline in education related revenues. Our non-federal student loan related asset recovery revenues increased by $30 million from the year ago quarter to $51 million. The increase in these revenues was primarily related to the additions of Gila and Xtend Healthcare in 2015. As Jack noted, we have been leveraging our skills and platforms to grow our non-federal student loan related businesses steadily over the last few quarters and we continued to win additional contracts in this space. On Slide 9, I would like to highlight our recent financing activities that we completed so far in 2016. In the past two months, we have issued over $1.6 billion of FFELP asset backed securities. $1.1 billion in 2016-1 transaction that took place in the first quarter was the largest FFELP securitization in over 2 years. This transaction was done in conjunction with the loan acquisition from the third party and was unique because we did not utilize any funding capacity for this transaction. Lastly, we closed down an additional $497 million FFELP securitization. This was the first broadly marketed FFELP transaction since June of last year. And this securitization was met a strong investment demand and included over 18 unique investors receiving allocation. This portfolio reduced securities priced at one month LIBOR plus 138 basis points, with the weighted average life of 5.2 years, with rest rating agencies safety concerns, both these transactions are structured with long legal final maturity dates and is date specific full turbo feature. While we continued to wait for Moody’s and Fitch to provide final ratings methodology, we have been actively extending the legal final maturity dates on various trusts. Just on Monday, we announced the maturity extension on $1.2 billion of bonds. And since December 2015, we have now extended the legal final maturity date on $4.8 billion of bonds. As Jack mentioned earlier, we also increased and extended our FFELP A, B, C, D facilities. This facility’s revolving period was extended to March 2018. The maximum financing amount, which was originally scheduled for step down of $7 billion was increased to $7.5 billion. Facility extension and funding costs were consistent with our plan. Not all of our activity was related to FFELP during the quarter. We also issued a $488 million private education loan ABS in January in the AAA portion of this transaction priced at one month LIBOR plus 231 basis points, with a 4.9 year weighted average life. On April 15, we added three trusts to our existing private education loan repurchase facility, providing an additional $478 million of financing. This facility allows us to borrow against private student loan over-prioritization and our private education loan securitization that is like full turbo repayment feature. The proceeds from these transactions will be used to pay down our unsecured debt. On that front, our unsecured debt declined by $1 billion in the quarter to $14.2 billion outstanding at quarter end. And I will note that over the last 15 months, we have reduced our unsecured debt outstanding by $3.3 billion or 19%. So as you can see, we remained focused on reducing the total amount of unsecured debt outstanding and smoothing out the maturity profile that are not predictable cash flows from our education loan portfolio. In the quarter, we have repurchased 19.2 million shares for $200 million, at an average price of $10.42. And at quarter end, we have the remaining authority of $565 million under our share repurchase authority. All of this activity was undertaking, while maintaining a strong capital position and a tangible net asset ratio of 1.25x. Finally turning to GAAP results on Slide 10, we recorded first quarter GAAP net income of $181 million or $0.53 per share and that’s compared with net income of $292 million or $0.72 per share in the first quarter of 2015. The primary differences between core earnings and GAAP results are the months related to our dilutive position, expenses related to the restructuring and reorganization and the income associated with SLM bank that we spun from. That concludes my remarks and we will open now the call to questions.

[Operator Instructions] Your first question comes from the line of Eric Beardsley from Goldman Sachs. Please go ahead.

Hi, thank you. Just wondering if you could talk a little bit about how the business services revenue should ramp up over the course of the year and if we should still think about the guidance of $620 million to $650 million as still being the target?

Eric, that is absolutely still the target there. I think we are on track to meet this target based on these first quarter results.

Got it. And then just on the credit I guess given the strength that you saw in the first quarter, I think certainly the trend is implying better than the guidance for 2.3% to 2.5% that you had, I guess how much upside could we think about to the provision here for the year into the charge-off rate?

Still obviously, it’s just the first quarter, but the trends here are positive. I think the big number to look at is the amount that is in the 90-day plus delinquency balance, so $749 million gives you an indication of what the potential of what’s available and in fact the default over the next 9 months. But we are – we are keeping our guidance the same here and we certainly look to benefit from better performance and expected.

Got it. And then just lastly, after you did the latest private loan O/C deal, how much capacity left to do you have in those turbo loans through similar deals and could you just talk about your appetite to issue unsecured debt still over the rest of the year?

Well, let me take the first part of that question, Eric. So as of today, we have got about $2.1 million of O/C balances left in these turbo deals that we have not finished yet. However, those balances will grow over time and by the time they reach their call date it’s expected to grow to about $3.1 billion. Then the second piece of the question was related to the unsecured debt. Certainly, yes, we would like to access the unsecured debt market, but the cost right now is high relative to other sources of financings that we can access. But certainly, we think that once we get through the legal final maturity issue and some of the other unknowns out there, we want to be able to access the unsecured market hopefully in the second half of the year.

Okay, great. Thank you.

And I would just add to that, we have more than enough liquidity to meet and service our debt obligations here, including our peak maturity periods. What we really want to do is as Somsak said smooth out those items to create a little bit more flexibly for us, particularly if we see opportunities to buy student loan portfolios. It’s – we are certainly pleased with the improvements we have seen in terms of access to funding and liquidity over the last both what we did in the fourth quarter of last year and what we were able to accomplish this quarter. The return to the FFELP ABS market is a good indication of the broadening of that access and we will continue to be opportunistic where we see those opportunities.

Great, thank you.

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

Thank you. Good morning. First question, I feel like I asked the question in many calls. Could you just talk about maybe the timing of potential ruling for Moody’s or kind of resolvement of the issue and then where your discussions are with CFPB? Thanks.

Sure. So, on the rating agency side, obviously, this has been an open item now for over a year. It’s – we are clearly disappointed in terms of the amount of time it’s taking to get to a resolution. You know the challenge here is the cash flow aspects of federal student loans are fairly complex, there is over 56 different repayment options available to borrowers, including I think nine income driven repayment solutions alone. And what we have seen historically is that while borrowers can in fact take advantage of multiple opportunities in some form of sequential fashion that’s actually not – that’s not how the practice actually unfolds. And so I think the struggle has been what the customer – what customers are eligible to do versus what they really do. And what we are seeing on the FFELP side of the equation as we see in our private loan is that as the portfolios season, borrowers grow, their actual income and their income potential grows and delinquencies fall and repayments increase. So, we are looking to get the rating agencies and work with the rating agencies to get this issue resolved as quickly as possible. But as we said in our comments, at this point in time, we decided to not wait for those resolutions and return to the FFELP ABS market. On the regulatory front, we continue to have ongoing dialogue with the entities. I think a lot of the issues and items are related to how borrowers access and understand the different programs that are available to them. We are a firm believer that the program terms and options are too many and too complex, but at the end of the day, we know that when 9 times out of 10 when we reach a delinquent customer, we are able to explain those options to them and get them into a repayment plan that keeps them out of default. Our biggest challenge in preventing defaults and helping people enroll in income driven repayment programs is contact with the customer. Over 90% of the loans, federal loans that we service that do end up in default and we are at a much smaller rate than all other servicers, not those consumers do not respond to the extensive efforts we make, to reach them. And as you know, we can’t help a delinquent customer take advantage of the opportunities that are available to them if we can’t reach them.

Do you envision both of these issues being resolved over the next 6 months or so or is it more open-ended?

Well, if you are asking me what I wish and what we are able to do, I mean, we are one side of the transaction and so we can’t – we have been very responsive to the rating agencies. We provided them with extensive amounts of data and analytics to help them along in their way, but we can’t convene the meetings and take the votes. On the regulatory side of the equation, we are working aggressively with the regulators to make sure that they understand what we are doing, how we run our business and certainly, more than willing to work with them to improve the way the federal student loan program works and operates so that we produce better results. We and our peers in the industry produce better results. But I can’t tell you when, we are one side of the transaction, I can’t help – I can’t predict when all of these things unfold and resolved.

That’s fair. One quick follow-up on, for Somsak, I guess Somsak you mentioned there is renewed interest in portfolio sales, can you just talk about the nature of those M&A potential deals?

Sure. This particular, the first deal was one that I think came in conjunction with that ABS transaction. The fact that we are able to get back to an ABS deal I think opens the door for future transactions nearly because there was that avenue previously over the last year to be able to acquire portfolios unless you had access to term funding. So, I think the fact that we return to the ABS market with two ABS transactions will open the door to acquisitions and I will remind you if we did, we did acquire in addition to the $1.1 billion portfolio. We did acquire another $400 million of loans. So, I think once we get through this and then get through the legal final maturity issue, I think the opportunities for acquired portfolios will open up.

And to be clear, the motivation is still there by the larger banks to sell their portfolios not to retain them?

Yes. But as you know, right the pricing will be – was partly determined by what the funding cost is to fund these assets and the cost or assets to funding is not there or the cost is elevated, it’s going to impact the pricing that sellers might be willing to accept.

Okay, great. Thank you.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Please go ahead.

Great. Just a follow-up on the whole FFELP situation, the spreads on those transactions were still on the wider end, does it require the kind of resolution by Moody’s to get the spreads down, how do you think about that recognizing, you would obviously rather have it rather sooner, but do you have any thoughts there?

I think we saw spreads tightened and there are tightening even without a resolution from the rating agencies side. But your point is correct, I mean we believe they would tighten it even further if we were able to close this issue. The legal final maturity dates that we are embedding in new deals and the dates we are using to amend old deals is very long. And so we believe that is providing the protection to investors to make sure that the ratings will exist throughout the life of the bond. At the end of the day, what the rating agency assumptions are however, don’t really don’t impact what the cash flows actually are in the transactions. And we are confident based on the payment activity that we see of our behavior that those maturity dates are – those legal final maturity dates are well in excess of what’s required. The deals that we acquired, the portfolios, the 1.5 billion of FFELP loans that we acquired this quarter, reflect current spreads and funding costs and term ABS. And so from our perspective, we believe we aren’t – the earnings that we will generate from those transactions is similar spreads were tighter. We just believe that as spreads tightened, we will see increased opportunities to buy loans, which is obviously what we are hoping for.

Got it. And maybe could you just talk a little bit about where you would want to see unsecured spreads before you actually were kind of willing to issue unsecured debt because it just feels like I mean you have done so much of varied sources of financing, but there still seems to be some doubt and I think that would probably put people’s mind at ease a little more, could you just discuss that?

Yes. I think the – I don’t – I am not sure we want to provide an exact level of where we would be issuing here. I think the big opportunity for us is we don’t need to borrow funds to grow our liability base. We just want to smooth out our unsecured debt maturities. So to the extent that spreads are unattractive, we just changes the timing of certain cash flow distributions, but it doesn’t change the aggregate story. When we look at the financing transactions that we have done, particularly these private credit residual financings, those cost of funds are several hundreds of basis points inside where our unsecured debt levels trade in and that’s kind of the trade-off we look at is, what’s the opportunity between different alternatives there. Frankly our biggest challenge right now is the – and this I think tells the story a little bit of where we see unsecured spreads going is buying unsecured debt in the open market. Our investors that are telling us they are very happy with what they hold and not looking to sell. And that is the biggest challenge, but it also tells you that where the direction is likely to go in spreads here.

Thanks so much.

Your next question comes from the line of Rick Shane from JPMorgan. Please go ahead.

Hi guys. Thanks for taking my questions and mostly have been answered. I will make an observation and then ask the question, it does feel like in the last three months, the environment has changed immeasurably, I think it’s interesting that I think throughout this you guys have just sort of consistently done the same thing and I think that’s a good sign, I would love to talk a little bit more following up on what Sanjay and Moshe asked about the FFELP markets, my takeaway from what you just said is that the pricing on asset sales has recalibrated so that the returns on those deals offer a different for you from what you have experienced historically, I am curious you talked about the spread on the $1.1 billion deal you did last quarter, I am curious where pricing was on the second deal?

Sure. The second deal came in at we talked about that on my prepared remarks actually. The second deal came in as a LIBOR plus 138 basis points, with approximately 2-year weighted average life.

I am sorry I transposed things, what was the first deal…?

The first deal was 109, but that was a privately placed deal.

Got it, okay. That’s what I missed, okay. I got 138 in my notes, got it. Thank you.

Your next question comes from the line of Lee Cooperman from Omega. Please go ahead.

Thank you very much. I just want to go back to the last call that you had and I just want to kind of do a reality check. Jack, you very forcibly opened up the call basically saying that the reason I think up until this quarterly you had booked back about $1.3 billion stock average price pay $17.20, the stock was hovering around $9 or $10, and you said that the reason we are returning money aggressively through share repurchase is because we agree with those analysts to have value in the high-teens actually you had said low-20s and this was a justification of the buyback. We kind of agree with that, I am just curious whether your view is similar and that the $555 million remaining on your repurchase program that your plan is to execute that this year, so that will be question one, just kind of update us on your thinking about valuation and the repurchase program. And second, if there is an order of magnitude, I would think operating expenses were to be lower, given the business shrinking as we pay down loans, what kind of leverage is there to the shareholders from reduced operating expenses? Thank you.

Thanks Lee. So, our view on the intrinsic value of the company is not changed. In fact, our ability to buyback 19.2 million shares at $10.42 actually increases that value for our remaining shareholders. And that’s the type of activity that I said when we see a mis-price market like this we are trying to take advantage of that in order to add value to the base here and we will continually continue that process. We do expect to utilize our remaining authority in this year. We were a little frontloaded in the first quarter, taking advantage of what we saw is a very low or ridiculously low stock price and bought back more shares than kind of the pro rata portion there. On OpEx, first quarter’s OpEx are always a little bit elevated because of basically taxes and compensation in taxes on composition and compensation pay expenses that take place for the annual programs in February. So we do expect those numbers to come down. And as I have said, we fully expect to exit the year on a lower run rate than where we were – where we entered the year for 2016. When we look at OpEx, some of the things that we do look at, we take a look at, it’s not just the absolute levels but where we are spending, what it cost us to perform different levels of activity, so that we are working to become more efficient in that side of the equation. I will say some of the areas that we are operating in have the fee income side of the equation have different ratios of OpEx to revenues than what you would see saying FFELP loan ownership versus FFELP versus federal loan servicing as examples. But there is no question, we are working to try and become and continue our process and our success rate of becoming more efficient here. And as the FFELP and private loan portfolios amortize, you will see those expenses decline.

Just a housekeeping question currently, is this 330 million shares outstanding or less than 330 million the actual shares outstanding at the present time?

The ending is.

It’s a little over that.

Yes, on a common share equivalent, I think it’s about 338 at the end of the quarter.

Yes, got it. Okay, so if we execute the program, we bought back another 13% of the company by the end of the year?

At these prices, yes.

Great, okay. Thank you. Good luck. Thank you very much.

Alright. Thanks a lot.

[Operator Instructions] Your next question comes from the line of Michael Tarkan from Compass Point. Please go ahead.

Thanks for taking my questions. So, on the servicing side, regarding that service portal RFP, just curious do you have a sense for what kind of impact that could have on the business? And then is that a contract that you could theoretically bid on or would be interested in even though you are still one of that servicers?

So, the Department of Ed is interested in having all of its loans serviced on a single platform and the RFP at this stage in the game I would say is round one here is initial proposals and concepts. So, terms and conditions are not set forth yet and even the final business requirements are not established. So, it’s premature to say what kind of impact this might have. Are we interested? Yes. I mean, we are the largest servicer of federal loans. We have a system that is highly efficient, highly scalable, probably more importantly, highly automated. So that it’s not just the IT operating infrastructure components, but what it means for the back office servicing as well and we look forward to responding to the RFP.

Okay, thanks. And then I guess from a prepayment perspective, are you seeing any major changes in loans that are getting consolidated away from you guys? It seems like that may have picked up a little bit this quarter.

So as you know, the repay program was launched last quarter, fourth quarter, and there was a small increase in prepayments for customers who needed to move into the direct loan program in order to be eligible for that income driven repayment solution. But for borrowers who are eligible for some of the other repayment income-based repayment solutions, they are usually better programs, because they have shorter repayment terms for the larger balance accounts. So, we don’t expect to see any more significant increase here. We already have a higher – a high percentage of our customers that are in repayment signed up for income driven payment solutions as well. We have been actively marketing and promoting this program for a number of years and again for borrowers who have signed up for those programs, they are generally better off persisting in them rather than converting to a new one.

Okay, thanks. And then just last couple of modeling ones, are you still expecting NIM on FFELP in the low to mid-80s and then private in the mid 350s for the year? And then just one more on OpEx, I think previously you had guided to a number of less than $930 million for the year, ex-regulatory expenses, is that still the case? Thanks.

Hi, this is Somsak here. Yes, we are not changing any of those guidance from what we have provided in the last quarter.

Thank you.

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

Yes, thanks. Just to follow-up on the Department of Ed RFP, is that part of the move for them to eventually move the servicing in-house or are they just looking to get all of their outsourced servicers on the same platform?

It’s not clear where what they would want to do long-term in this side of the equation on that front, but they made no indications of any desire to bring operations in-house to-date.

Okay. And sorry if I missed this, could you remind us on what your total capacity is in terms of unencumbered assets that you could securitize whether that be the POC or just unencumbered loans?

Okay. So, let me provide a breakdown of unencumbered assets and O/C with a few different things. Today, we have got a little over $700 million of unencumbered FFELP longer, $4 billion of unencumbered deposit. But in terms of our private credit O/Cs that are tied to our turbo deals today, we have got $2.1 billion of balance that we can continue to finance, but that balance is expected to grow over time and is expected to go to about $3.1 billion by the time we reach the call date for those particular deals.

Okay. And is that the primary source of liquidity you look to tap as you look towards smoothing out the kind of chunky 2017 unsecured debt maturity coming up?

Well, yes, those are the primary sources we have been tapping. Remember that we have been accessing these resources of liquidity that we have an access in the past. I know there were some questions about whether we could access them. I think the activities we have entered into over the last few quarters clearly demonstrate that we have been able to access those. And I think between that and the cash flows that we generate from our operations should give everyone confidence that we are going to be able to service our unsecured debt. And obviously we want to be able to access unsecured debt going forward to provide flexibility, to continue to grow our business going forward.

Okay, great. And just one more, have your spreads gotten tight enough on the latest FFELP deals you have done that it’s the economic to look to securitize some of the FFELP loans you have acquired or do you need to see more tightening?

Well, I think we have done so with the second FFELP deal we have just completed. But you know, so the second FFELP deal we did was securitization that came out of our Blue Ridge APCP facility. So, there was a securitization of the ones that we acquired as well as the first deal that we did.

Okay. So, you are already at levels that enables you to still check your IRR on this one?

Yes. Remember as Jack mentioned, the most that we have acquired today reflect the price to reflect current funding.

Yes, sure. But the wells deals you acquired before the market really kind of blew out, but you are already at levels now we are still attractive enough to fund those markets in the FFELP market?

Yes.

Okay, got it. Alright, thanks.

Your last question comes from the line of Mark Hammond from Bank of America Merrill Lynch. Please go ahead.

Thank you. Good morning. On the private student loan repurchase facility, I was wondering what O/C was pledged to get to $478 million I am looking to get some sort of advance rate?

Yes. So, you are looking for the particular deals, Mark?

That would be helpful as well, yes.

Sure. So, the deals that we did with the 2012-A trust, the 2012-B trust and 2013-A trust. I am sorry?

As when you say collectively, how much O/C was that?

A little over $1 billion.

Okay, thanks. And then a follow-up question, so Moody’s has written about a $4 billion unencumbered asset threshold that have gone below can prompt a ratings downgrade on the unsecureds. At the end of the quarter, unencumbered student loans now total about $3.8 billion. S&P has seemed to flag something like this as well. Have you had any recent conversations with the rating agencies not on the FFELP ABS, but actually just on unsecured ratings?

Well, I think the issue is here what your cash flows look like in your debt maturities to ensure that you can repay your – meet your obligations without financing activities. And one of the things that we have been clear in our comments and analysis that we have provided to the rating agencies is that we have sufficient cash flows to service our debt maturities as they occur. And that’s the kind of the critical component here. So, if one were to encumber the unencumbered loans and use the proceeds for something other than debt service, I could see where that might be a concern. But if you were to encumber the loans and pay down the debt, I am not sure why that changes the credit profile of the company. Well, I know it would not change the…

As a matter of fact, it’s going through that exercise actually improves our net tangible assets and coverage ratio.

Alright. Thanks, that’s all.

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

Thank you, Jessa. I would like to thank everyone for joining us on today’s call. If you have any other follow-up questions, feel free to contact me directly. Thank you.