Good morning. My name is Jacqueline and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient Third Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Joe Fisher, Vice President of Investor Relations, you may begin your conference.

Thank you, Jacqueline. Good morning and welcome to Navient's 2016 third quarter earnings call. With me today are, Jack Remondi, our CEO, and Somsak Chivavibul, our CFO. After their prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in the Company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2016 Supplemental Earnings Disclosure. This is posted on the 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. I appreciate your interest and support. This quarter's results continue to reflect the strength of our business model and the value it delivers for our investors. Earlier this year, market conditions presented questions on a few items including credit and access to funding that placed significant pressure on our funding spreads and our stock price. Our deliberate and directed actions and our performance this quarter should indisputably put these questions to rest. Our actions also contributed to this quarter's strong results and put us in excellent position to continue to execute on our business plan and deliver value. I plan to focus my comments this morning on credit performance, funding including the rating agency legal final maturity topic, new business opportunities, and creating shareholder value. Our results this quarter were particularly strong at $0.51 adjusted core earnings per share. The clear standout this quarter and this year has been credit performance. For our private loan portfolio, we have seen consistent and significant improvement in year-over-year delinquency and default trends. Credit charges this quarter were down 24% versus last year, and the charge-off rate for the quarter fell to 1.9%. The federal loans we service are also experiencing strong credit performance trends. While the continued recovery in the economy and the jobs market are the prime drivers here, our data-driven approach to loan servicing helps us identify and increase contact rates with at-risk borrowers. Once in contact, we can help identify solutions including income driven repayment programs that allow borrowers to successfully stay on track. As an example, the Department of Education released its latest three-year cohort default data last month. Once again, Navient’s service borrowers experienced significantly lower default rates, 31% lower than all other servicers. We're also…

Thanks Jack. Good morning, everyone. During my prepared remarks, I will review the strong third quarter results that we reported last night as well as an update on our earnings guidance for the full year. I'll be referencing the earnings call presentation which is available on the Company's Web-site, beginning with Slide 4 which provides a summary of our core earnings. In the third quarter, we reported adjusted core EPS of $0.51, and that compared to $0.48 from a year ago quarter. Our third quarter adjusted operating expenses totaled $223 million versus $220 million from the year ago quarter. This slight increase in expenses is primarily related to the additional operating costs of Gila and Xtend Healthcare acquisitions. Excluding the expenses associated with these two acquisitions, our operating expenses were 7% lower than the year ago. As Jack mentioned, during the fourth quarter, we will transfer $2.7 billion of Navient owned FFELP loans that are currently being serviced by a third-party to Navient servicing platform. As a result of this transfer, we will incur an additional $7 million of one-time operating expenses in the fourth quarter. Even though these additional expenses were not included in our previous operating expense guidance, we remain on pace to beat our adjusted annual operating expense guidance of $930 million. Before I go into more detail on our quarterly results, I would like to discuss on Slide 5 the recent widening of the three-month LIBOR that we saw during the quarter compared to the one-month LIBOR in the Prime rate and how we manage this basis risk. Approximately $85 billion of FFELP loans are indexed to the one-month LIBOR that reset daily. After the impact of hedges, about $30 billion of these assets are funded with three-month LIBOR that reset quarterly. Historically, the spread between…

[Operator Instructions] Your first question comes from Moshe Orenbuch from Credit Suisse. Your line is open.

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

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

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

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

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

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

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

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

I guess first question, despite this basis issue with the LIBOR and Prime, when you look at the FFELP NIM, that kind of improved sequentially and year-over-year. Could you just talk about what's contributing to that? And then just clarifying the specific EPS impact of this issue, rough math we get to like $0.04 or $0.05 in EPS. Could you just validate that?

I'll answer that last part, Sanjay. You're in the ballpark there in terms of the impact of quarter-over-quarter relative to that spread impact, and obviously we talked about that. Also, as we roll into the fourth quarter, the one-time impact would be the one-time conversion or servicing transfer expenses that we expect to incur. And if you do the math, that sequentially leads to the full year guidance coming in at the midpoint of the range I was referring to of $1.82 to $1.87. Coming back to first part or your first question related to the improvement of the FFELP NIM, year-over-year that's really been attributable to higher floor income that we've realized from our portfolio, and that has largely so far offset the impact of the widening one-month/three-month LIBOR, and higher cost of funds that we’re seeing period over period.

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

Yes, that's going to be the key component. As rates rise, it will impact our unhedged floors. Our hedged floor's position, obviously we've locked in on $1.1 billion of that income over the next few years, so that's pretty much locked in. The variable certainly will be the unhedged floor component.

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

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

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

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

Okay, great. Thank you very much.

And Sanjay, that's just on the operating expense. When we've moved portfolios from third-party servicers in the past, we've also seen a significant improvement in loan performance, which reduces delinquency and default events.

Got it. Thank you very much.

Your next question comes from Rick Shane from J.P. Morgan. Your line is open.

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

I think we actually would break our opportunities for growth into a couple of different buckets here. Certainly there's an opportunity to add to our existing student loan holdings by purchasing legacy assets. This would include both federal and private. And as we said, we believe we'll see some significant opportunities in the next several quarters to acquire portfolios in that space and add to the portfolios that we own. Those are obviously easy transactions to understand and easy to understand where the value is created there. As we've said all along, however, our view is that we're buying cash flows, and so any activity to acquire assets here is going to be extremely disciplined that if it doesn't add value, we don't buy it. And so those are kind of the parameters in that space. We also see some opportunity to acquire student loan portfolios that are not legacy portfolios but ongoing kind of origination activities. These are private loans and they include both perhaps campus originated loans as well as refinancing loans, and that piece of the opportunity grows, is a growing opportunity. It's also one that, as you pointed out, the non-compete issues expire at the end of 2018 and give us some flexibility to go back into that space, or total flexibility I should say if we so choose. That opportunity I think is one that we are interested in, but it is certainly, it's a little bit longer route in terms of the time horizon. And then finally, where we really have been focusing our activities since the separation is taking advantage of the skills and capabilities that we've developed in our operating environments, our operations areas, to leverage those two different areas and other asset classes. And so we've been doing that in the municipal and state area, and this is primarily kind of a combination of processing kind of asset recovery related work and the same for the healthcare arena where it is mostly a processing type business. Both of these areas are one that we think we can grow in double digits and we'll continue to work in that space. Adding to that would be opportunities in the federal space. We just recently were awarded the IRS contract. That's something we're very excited about, and we are actively pursuing the Department of Education loan servicing contract which has moved at a slower pace than they had originally indicated, but still seems to be on track for being really sometime in the fourth quarter.

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

I think the challenge has been that some of the uncertainty in pricing, when you had the wider FFELP ABS spreads, it pushed portfolio values perhaps in some instances below par, and for our government-guaranteed loan, that's just a difficult transaction for sellers to get excited about. And so as you get back to the par type of marketplace, you have a different environment. We think the opportunity, why we think FFELP opportunities will be there is that the majority of portfolios that are available are serviced by third parties, and the regulatory requirements associated with kind of monitoring third parties and managing that process can start to make some of these deals less attractive, make portfolios less attractive to hold, and hopefully will result in seeing opportunities to acquire those in the near term, as we said.

That's great. That's helpful color. Thank you very much.

Your next question comes from the line of Mahmood Reza from Omega Advisors. Your line is open.

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

So we do expect to utilize our remaining authority this year in the share buybacks, to answer your first question. And our share repurchase authority is something that will be presented and discussed with the Board in the upcoming meetings. There's been no discussion to date. Historically though, we have set that level of capital return to be a function of the capital we generate from our business that is not required to support balance sheet growth or other operating activity growth, and it also would include any capital release from the amortization of the portfolios. As you know, buying FFELP portfolios puts very little demand on capital. Buying private loan portfolios puts much higher demand on capital than the FFELP portfolio does. So it depends a lot on what the opportunities are, but as I said earlier in this call and I've said consistently in the past, buying portfolios has to make sense against all of the alternative and activities that we can do, which would include share repurchases.

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

I think our strengths are crystal clear here. We are first of all capable of executing on very large transactions in single bites rather than having to deal with this over an elongated period of time, one. Two, we have demonstrated an ability, a superior ability, to deal with customer acquisitions and make sure that those customers are properly informed and understand the changes that will take place in a portfolio acquisition, including a servicing conversion. I think the transaction, the accounts that we acquired through the Wells transaction and successfully moved to our portfolio, as we've indicated before, we had actually net more customer compliments than kind of questions or complaints in that process. That gets noticed by not only regulators, it gets noticed by sellers. And then finally, I think the third piece of courses is our loan performance. If we can drive, if by moving loans on to our servicing platform, we can materially improve the performance of loans from both the delinquency and default perspective, helping borrowers become, better take advantage of different repayment options so they can successfully repay their loans, all of those things point to us as the preferred, I would say, obviously I'm a little biased here, but the preferred buyer of FFELP portfolios.

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

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

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

The vast majority, Mahmood, of that was the 2018 maturity, and you'll see I think on the chart on Page 18 there that we've reduced our 2018 maturity now down to $2.1 billion. So that's where the vast majority of the repurchases went against.

Got it. Thank you so much.

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

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

Sure. So the first unsecured deal that we did during the quarter came in on the re-offer price of somewhere around LIBOR plus 5.37. That was the five-year issuance. So our second deal was $0.5 billion and a seven-year deal and that came in at a re-offer spread of L plus 5.77, and the debt that it replaced was somewhere in the L plus low 4 neighborhood.

Okay. And how has that debt traded since you issued it?

The five-year deal that we did has traded right around [101] [ph]. So, it has traded above par. And our second deal to date, it's traded around par right when I last looked at this.

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

Remember that new deals that we issue really aren't subject to the legal final maturity issue because we can effectively deal with that by setting a legal final maturity date so that it doesn't become an issue. But one of the things that we've seen is that pricing has continued to come in. Just by way of example, I talked about the two rehab deals that we've done and we've seen sequential 13 basis points improvement in the pricing. And just the other week, we were about to price another, or we just priced another FFELP deal, and that has come in, that was priced at a re-offer rate of around L plus 1.15, which was a 10 basis point improvement over our last FFELP deal. So it's continued sequentially from the other deal that's come in from 10 to 13 basis points.

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

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

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

Okay, as you look beyond 2018, what's kind of your hopes and expectations for how that program may build in size?

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

Okay, got it. Thank you.

[Operator Instructions] Your next question comes from the line of Eric Beardsley from Goldman Sachs. Your line is open.

Just on the Private Loan margin guidance for the fourth quarter of low 320s, I guess is that solely the Prime three-month impact, and if we saw Fed funds go up in the middle of the quarter or even we were to look back and say we already had a rate hike, where would that margin be?

Sure. I'll start out by working back to the second part of your question here. So approximately two-thirds of our private portfolio is Prime based, Eric. So if you think about it, a 25 basis point rate hike, apply the two-thirds ratio to that, you're going to get to about a 16 to 17 basis point improvement in the spread in [the ordinary] [ph] FFELP NIM right away. So that's sort of the math there. And then to the first part of your question, the NIM is going to be impacted by both the spread and then just the higher cost of funds of old debt rolling off and new debt coming on.

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

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

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

That's absolutely correct, yes.

Okay, and does that include the regulatory costs you've incurred to date, I think it was somewhere around $14 million?

It does not.

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

In the $930 million.

Sorry, in the $930 million, yes, okay, got it. And I guess are those regulatory costs continuing here at this level?

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

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

So we do think it is a growth opportunity here and it's a combination of business activities. It's not just asset recovery that we see as the opportunity, but actually being more of a processing partner with the entity so that we can manage the end-to-end process of everything from billing to payment processing to pursuing recovery of the and payment on the invoice. The IRS contract is a good example. It's certainly larger than the education related space and is something that we're pretty excited about. And then finally, I think some of the changes in the regulatory environment and requirements that are coming from rules and regulations here really play to our strengths, and those strengths are really a data-driven kind of approach. So this is not just a pure kind of dialing activity that we pursue, we actually work to identify the right contact methods for our customers based on all of the historical success rates we've had in this particular area and use those to minimize the number of attempts that we make to contact a customer and do so in a way that creates a higher right party contact rate. And that is the key to default prevention in the student loan space and it's a key to the recovery rates by being able to get a customer on the phone and explain their options to them and work with them to find a solution that fits their budgets.

Great. Thank you.

Your next question comes from the line of Mark Hammond from Bank of America Merrill Lynch. Your line is open.

In the release, there's a line about winning a number of new Business Services contracts during the quarter. I'm aware of the IRS win, but would you highlight the others?

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

All right, thanks. And after acquiring more FFELP during the quarter, I'm wondering if you could put a number on the size of the remaining FFELP that you think are likely to come up for sale, not just what's out there?

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

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

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

Your next question comes from Michael Tarkan from Compass Point. Your line is open.

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

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

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

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

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

The CFPB's annual report on student loans came out and a big section of it was dedicated to the federal rehabilitation marketplace. A lot of the recommendations or policy recommendations in that report are actually very consistent with ones that we need almost two years ago now and in terms of creating a more seamless approach of taking a borrower from the reasonable affordable repayments that are required under the rehab program into an income-driven repayment plan upon successful completion. When we take rehab accounts that we acquire in the FFELP space, this is one of the areas that we work extremely hard at in terms of connecting with borrowers immediately upon conversion, because we don't – a lot of this data doesn't transfer from the collector to the servicer, doesn't at all on the Ed side and on the FFELP side it depends on the guarantor whether they provide that information to us or not. But we work with those customers to make sure that they are successfully, that they remain as successful at loan repayment as they did in the rehabilitation process. Our delinquency rates per rehab accounts are substantially better than the national averages. And so, some of the statistics and projections quoted in the CFPB report would be much, much higher than what we would see in our own service portfolio.

Understood. Thank you.

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

Got it. Thanks.

Your last question comes from the line of Peter Troisi from Barclays. Your line is open.

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

We have been working with the regulators specific to the facts and circumstances in student loans, and that's really where our focus has been. Our efforts have really been to help, has been to explain what we do that's unique in this space and how that drives higher rates of customer success. And we can see it in the numbers that are published by the Department of Ed in terms of 31% lower delinquency, lower default rates in the federal programs that we service. You can see it in the higher rates of enrolment we have in income-driven repayment plans. 40% of the dollars we service for the Department of Ed for example are in income-driven repayment programs. You see it in overall delinquency rates. Severe delinquency rates for Navient service borrowers are the best in the industry. And it's really, it's those combination of efforts and activities that we're doing is what we're communicating and sharing with regulators to kind of guide some of the direction. I think most of where you know what they are interested in is helping set better, more uniform standards for servicing federal and private loans, and we certainly are willing to share our best practices, but any new rules or regulations we believe should be industry-wide, and that's the kind of the direction at where things are at this moment.

And that is the end of the questions. I'll turn the call back over to presenters.

Thank you, Jacqueline. I'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. You may now disconnect.