Navient Corporation (NAVI) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Chrisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient Fourth 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. Mr. Joe Fisher, Vice President of Investor Relations, you may begin your conference, sir.

Thank you, Chrisa . Good morning and welcome to Navient's 2016 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’ll 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 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. Before I address our financial results for the year and the quarter, I would like to provide some color on the announcements of the state Attorney Generals in the CFPB from last week. After three years of engagement and our full efforts to share our servicing practices, our high performance results, the robust programs that drive enhancements in customer tools, communications and education and our extensive list of recommendations to improve our outcomes, it was disappointing that regulators disregarded the facts in order to make a political statement. This political statement is based on a false narrative about the practices and outcomes Navient delivers for borrowers. Just because they say it doesn’t make it true. It ignores the fact that we follow the service and rules and regulations issued by the Department of Education, the owner of the majority of loans we service, it attempts to create a new service at new servicing standards and apply them retroactively via lawsuits versus the rule making process that has been the foundation for establishing servicing rules and regulations in years passed and it ignores the fact that the CFPB has had over five years to develop and implement new servicing standards to their pool making authority yet has failed to do so. In one accusation the claimant said, Navient feared borrowers in to forbearance versus income driven repayment plans. This accusation was made despite the fact that 49% of the balances we service for the federal government are enrolled in an income driven repayment program. It was made despite the fact that borrowers serviced by Navient used forbearance at a lower rate than others. It was made despite the fact that forbearance is often needed to cure a delinquency, as delinquent loans are not eligible for income driven repayment plans. It was made despite the fact that services are actually paid less for our accounts enrolled in forbearance and it calls that end in forbearance are actually longer than other calls. It’s inconceivable and disappointing that these very helpful services would be portrayed as harmful. The irrefutable facts are that Navient service borrowers are more likely to be enrolled in alternative payment plans including IDR. Navient borrowers are also less likely to be severely delinquent and ultimately are 31% less likely to default. This is the exact opposite of borrower firm. Navient welcomes and will continue to support clear and well-designed guidelines that all parties can follow. This is what we work in good faith with the regulators to achieve. We cannot and will not however admit to false accusations, allow penalties or payments for new rules applied retroactively. We have an obligation to defend ourselves and we have faith that our courts will seek and hear the facts and rule accordingly. I’m also committed to keep this action from becoming a distraction to our business. Our team remains focused on executing our business plan and capturing the significant growth opportunities we see in 2017. I will cover these in a moment, after some color on our 2016 results. We started 2016 with our access to the debt capital markets in question. These issues were largely driven by the rating agency review for the timing of FFELP ABS cash flows. We sat out a very specific plan to close this issue with the rating agencies, and to complete a broad range of funding transactions well in excess of our needs. I’m very happy to report we did both. The rating agencies published their revised ratings criteria and are nearly complete with their ratings reviews. The impacts have been better than market expectations and we’ve worked with bond holders to amend terms to return the ratings to triple A on nearly $10 billion of bonds. During the year, we completed nearly 8 billion in term financings across our full stack of liability structures and we materially reduced near-term unsecured debt maturities. We are in an excellent liquidity position as we enter 2017, with only 700 million in unsecured debt maturities this year. Our credit performance in 2016 was exceptional, private credit charge-offs declined a $146 million or 22% over 2015 and loans greater than 90 days past due ended the year at $801 million, $45 million lower than a year ago. We also have more borrowers successfully making payments and amortizing their loan balances. A strong starting point, the improving jobs market and rising pay rates combine to create a very favorable outlook for credit in 2017. Net interest for 2016 was 1.6 billion and reflected the 8% and 12% amortization of our FFELP and private loan portfolios. Net interest income was also impacted by the higher cost of funds and the negative relationship between our asset and funding indices. To be conservative we assume the negative relationship will continue for most of 2017, as the amount and timing of rate increases remain uncertain. Somsak will provide more details on this in his remarks. We made excellent progress in growing our non-education fee revenues in 2016. Total non-education fee revenue for the year was 174 million, a 77% increase over 2015. We added a number of new contracts in 2016 including contracts with the IRS, [pooling] authorities, states and healthcare providers. Other highlights from the year include adjusted core earnings of $1.89, $0.02 better than the high-end of the guidance we provided a year ago. We acquired 17% or 60 million of our common shares, we converted 5.7 billion in FFELP loans on to our servicing platform. We assisted over 628,000 severely delinquent customers who are now current and finding a solution that help them avoid default. We acquired $3.7 billion in student loans and continued to improve our operating efficiency. Our team did a great job this year delivering these results, creating more than adequate liquidity and positioning the company for further success in 2017. And despite the politically driven noise, they continue to hold their heads in pride of the work they do each day. I’m excited about the opportunities ahead of us in 2017 and beyond. I see meaningful opportunities to add value across our business. For example, in our legacy businesses, we expect to see increased opportunities to purchase both federal and private loans, expand our guarantor services and add third party servicing. One aspect of our legacy business is the service we provide the federal loan guarantors. We’re the largest player in this space today, with USA Funds being our largest client. At year end, Great Lakes Higher Education Assistance Corp. assumed control of USA Funds, and as part of this transfer they notified as a guarantant to rebid the work we provide here upon the exploration of our contract at year end. We’re excited about this opportunity and look forward to demonstrating the value we deliver. Any new opportunities or changes here are likely to begin in 2018. In business services, we are excited to begin work for the IRS and see significant opportunity increase revenue from our other non-education clients. In fact, we expect revenues here to grow by more than 20% in 2017. We also believe we are uniquely qualified to deliver on the requirements of the Department of Education servicing RFP. Finally, we plan to increase our participation in the student loan and refinance market place. In 2016, we purchased 225 million of refinancing loans, mostly in the last four months of the year. We see the potential to play a more meaningful role in this market in 2017. Since our separation we have consistently work to increase the value of our business. In 2016, we did this through portfolio of acquisitions, growing fee income and repurchasing 60 million common shares at prices well below intrinsic value. Our focus for 2017 is to continue to create value by increasing the cash flow delivered to our legacy businesses, growing our business services revenue and generating new assets through the refinance market place. We will also continue to return capital to shareholders and will seek to maximize the shares we acquire at discounts to intrinsic value. While the actions brought by regulators is creating noise, we are determined to defend our practices and superior results and not let these items distract us from supporting customer success and capturing the value creating opportunities we see in front of us. Thank you for your interest and support and I look forward to delivering again on our promises. I’ll now turn the call over to Somsak to review the quarter and year in more detail.

Thanks Jack. Good morning everyone. During my prepared remarks, I will review both the quarterly and year-end results for 2016 that we recorded last night, as well as provide guidance for 2017. And I’ll be referencing the earnings call presentation available on our company’s website beginning with slide 4, which provides a summary of our core earnings. In the fourth quarter, we reported an adjusted core EPS of $0.47 compared to $0.48 in the fourth quarter of 2015. For the full year of adjusted EPS, we recorded a $1.89 compared to a $1.82 for 2015. Our fourth quarter adjusted operating expenses totaled $226 million versus $228 million from a year ago. During the fourth quarter, we transitioned $2.7 billion of Navient owned FFELP loans that were being serviced as a third party to Navient servicing platform. As a result of this transition, we incurred an additional $7 million of one-time operating expenses in the quarter. For the full year, total operating expenses before regulatory related and a legal contingency cost were $917 million. Excluding the expenses associated with the Gila and Xtend Healthcare acquisitions and the one-time servicing transition cost, we reduced our operating expenses by 7% which is better than the 6% reduction we guided to at the beginning of the year. In the fourth quarter, the company identified an error which understated previously reported FFELP loan net charge-off and the provision for losses in 2015 and earlier years. The impact of this error to all prior period was immaterial and the numbers throughout this presentation and the earnings release reflect this correct. Let’s now turn to slide 5 discuss our FFELP segment results. In 2016, we acquired $3.5 billion of FFELP loans and while we are optimistic about the opportunity to purchase FFELP portfolios coming to market this year, our 2017 guidance will reflect acquisitions at similar levels that we saw in 2016. Our FFELP core earnings were $68 million for the fourth quarter of 2016 compared with $71 million in the fourth quarter of 2015. The net interest margin for the fourth quarter of 2016 came in at 89 basis points and reflects the revised application of prepayment grades disclosed in the third quarter of 2016 Form 10-Q. As a result of this change, the FFELP loan premium balance increased by $7 million, which resulted in the same increase to our net interest income. The FFELP net interest margin in the quarter was primarily higher than anticipated due to this change. We also saw significant year-over-year improvement in the credit quality of our FFELP portfolio, but the late stage delinquency rate declined by 23%. Let’s now turn to slide 6 in our Private Education Loan segment. Core earnings in this segment declined by $15 million from a year ago quarter to $41 million. In the quarter, our net interest margin was 308 basis points and reflects the impact from the prepayment adjustment mentioned earlier. The private education loan discount balance increased by $9 million, resulting in a corresponding decrease to net interest income and a 14 basis point decrease to the private education loan NIM in the fourth quarter. The decline in the NIM from the prior years and the third quarter is attributable to this adjustment as well as higher cost of funds from our LIBOR based debt and the timing of when our private based earning asset reset versus when our LIBOR based debt [refresh]. The outlook for private education loan losses continued to improve as a result of the overall improvement in our charge-off trends. Charge-offs declined a $146 million or 22% from the prior year. While the total delinquency rate increased slightly from the prior year, our delinquency rate declined by 19% for our non-TDR portfolio and by 3% for our TDR portfolio. In addition, we saw double digit declines in our forbearance rates. Our charge-offs on a dollar basis are expected to decline in the mid-teens in 2017, with provision falling at a slightly lower pace due to the additions of newly acquired private education loans. Let’s turn to slide 7 to review our Business Services segment. In this segment, core earnings were $71 million in the quarter, compared with $81 million in the fourth quarter of 2015. This decline is primarily driven by the increase in reserves for legal contingencies and one-time cost to transfer third party to our servicing system. Our non-education to fee revenues increased 77% from the prior to $174 million, and we’re excited about the growth opportunities in this space in 2017 and beyond. During the year, we grew our total federal loan servicing book by $5 billion and recently submitted our bid for the Department of Education single servicing solution. While the contract was originally anticipated to be awarded in February, the contract is currently under bid protest by another bidder that could potentially delay the announcement of the award. Our guidance for 2017 does not include the impact from this potential contract. I’d like to highlight the financing activity that took place over the course of 2016 on slide 8. In 2016, we completed a renewed financing transaction in every area of our liability structure including returning to the FFELP ABS market where we issued $5.8 billion of FFELP ABS through seven transactions, and FFELPS spreads improved 17% from our 2016-2 transaction to our most recent deals. We also issued term private ABS of $488 million. We renewed conduit facilities in our both FFELP and private - both our private education portfolios. We completed a second private credit residual financing transaction and finally we issued unsecured debt of $1.25 billion through two transactions. In 2016, we reduced our total unsecured debt outstanding by $1.4 billion and reduced through repurchased our near-term debt maturities in both 2017 and ’18 to very reasonable and manageable levels. We’ve reduced our 2017 debt maturities to $700 million and will continue to work towards reducing our 2018 and ’19 debt maturities throughout the year. During the quarter, we repurchased 12.5 million shares for $180 million at an average price of $14.43. And for the full year, we reduced our outstanding shares by 17% through the repurchase of 16 million shares at an average price of $12.68. In total, we’ve returned $956 million to shareholders through both share repurchases and dividends in 2016. On December 8, 2016, we announced a new share repurchase program for up to $600 million from the company’s outstanding common stock. All of this activity was undertaking while maintaining a strong capital position and a tangible net asset ratio of 1.24. And we have managed this ratio within our target range of 1.2 to 1.3 over the past five years. Slide 9 provides a full year 2017 guidance, in addition to the growth opportunities that Jack highlighted for 2017 and beyond. In the third quarter and in recent company presentations, we had highlighted the widening of the three month LIBOR rate compared to the one-month LIBOR and prime rate and how we manage this basis risk. While we have already seen these spreads come down off its most recent highs, our guidance is based on a higher than historical one month or three month spread for the mid-20s for 2017, which is not where we are today. Our guidance also includes the impact of two interest rate hikes of 25 basis points in 2017. As a result of these factors, we expect full year FFELP net interest margin in high 70s and full year private education net interest margin in the mid-320s for 2017. Also included in our 2017 guidance are our operating expenses below $900 million excluding regulatory cost and business services revenue excluding inter-company loan servicing to range between $630 million and $660 million. And finally, while we see potential opportunities to grow EPS from our 2016 levels and are eager to pursue these opportunities, we expect 2017 core earnings per share to be between $1.80 and $1.84 excluding expenses associated with regulatory costs. Finally, turning to GAAP results on slide 10, we recorded fourth quarter GAAP net income of 145 million or $0.48 per share compared with net income of 283 million or $0.73 per share in the fourth quarter of 2015. The primary differences between core earnings and GAAP results are the marks related to our derivative positions and expenses related to structuring of the organization. I will now open the call for questions.

Your first question comes from the line of Sanjay Sakhrani with KBW. Your line is open sir.

My first question on Somsak’s point on the NIM in the guidance, and could you just talk about how you factor that in as the rates rise. Do you expect the spreads to gap out more or maybe if you can give us a little more color on that?

All we’re really doing at this point, because with where rates and one month, three month LIBORs are uncertain. We are just projecting just based on what the curve is telling us today. And if you just - our forward curve is just sliding out that the one-month, three-month LIBOR is going somewhere around the mid-20s for 2017 at this point.

And to the extent that the rate rises don’t happen, what would be the impact on the FFLEP’s NIM?

So if the rate rise doesn’t happen, it will mean that we’ll probably end up picking up a little bit more in unhedged floor income. But one of the things I’ll note Sanjay embedded in this NIM guidance is the fact that as we went in to 2017 we have hedged more of our core position and this was something that we did at the beginning of 2016 anticipating that eventually rates will rise.

And then Jack on the CFPB lawsuit, could you just talk about the next step for you guys in terms of defending of yourselves, and have you had any communication with members of the new administration in terms of the CFPB and their motives as you mentioned?

We didn’t take this action lightly. You never want to be fighting with your regulator, but we really felt like we had no particular choice here just given the facts as they exist in our portfolio versus the accusations. Our focus in the near term here is going to be to continue to communicate and demonstrate how we deliver borrower success. This means helping borrowers manage their payments, as I mentioned a few times in terms of some of our statistics our customers are less likely to be delinquent, they are more likely to be enrolled in income driven repayment programs and they are substantially less likely to default. We believe that those measures are the complete opposite of our harm that actually create far borrower success and we do a better job at that then all the other servicers out there. This process will take some time and I think as it will move through the court systems, it moves at a slower pace than we probably all would like, but we are confident on the facts and the data that backup our position here.

Final question just on this re-fi industry entry in the fourth quarter, can you just talk about the addressable market there and how much growth potential is there for you on the annualized basis in that market?

We believe that the market opportunity here exits through a combination of both borrower balances in the federal and the private loan sector, and as you know virtually every student loan is made today based on the prospective ability of the borrower to pay it. That is that they will complete their education, earn their degree and gain or get a job that produces the income necessary to support that. But there’s risk with that, there’s risk that those things don’t happen. And so in the re-fi market place it’s an opportunity to basically reward customers who have achieved those objectives by providing them with loans that have better terms than their existing student loan product. So we see an opportunity here to significantly increase our participation. But at this stage in the game we haven’t - I’d like to leave it at that. Just that we see a significant opportunity to increase.

Your next question comes from the line of Arren Cyganovich with DA Davidson. Your line is open.

In terms of the FFELP portfolio acquisition opportunities, I think in the past you said 7 billion to 10 billion. So wondering if that still stands is what you think is potential for a 2017 versus the 3.5 billion that you have in your forecast, and whether or not the legal action impacts those discussions at all?

So we do believe that legacy holders of FFELP loans will be more inclined to sell. I think actually some of the regulatory comments and questions might actually accelerate the desire to sell. We don’t believe that they create any barriers for us to be the acquirer.

And then in terms of the private education loan net interest margin, I was wondering if you could talk a little bit about obviously a very sharp decrease year-over-year, you said 14 basis points of that was due to the revised pre-payment rates. Is that just a one-time issue and then that bounces back and what else is in there besides the one month few more spreads it seems like there’s something else that’s causing that decline a little bit more?

Overtime we’ve continued to issue new unsecured debt and new ABS transactions that as they get added on come in at a bit of a higher cost than the legacy debt that replaces. So that overtime puts a little bit of pressure on the NIM. So that’s going to be also a component that we also take in to account in to our private NIM guidance.

And then just lastly the legal reserve that was established, is that to establish expected payments algo is that just expenses that you’re going to anticipate having over the next 12 months. I’m just curious as to what specifically that represents.

It represents expense, it’s unrelated to the CFPB, it’s just normal kind of legal activity in the course of business here.

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

I was wondering if you made a statement that the repurchased shares all have been repurchased well below intrinsic value. I’m just curious if you could kind of articulate your view of intrinsic value and what you’re buying back, as you buy back shares in the market, because the current authorization is about 13% of the market capital of the company, that’s a significant investment and just curious to your view of intrinsic value.

We see intrinsic value in the low to mid 20s per share. The 60 million shares that we acquired last year were purchased a little over $12 a share, so obviously a significant benefit or a significant discount to intrinsic value. And to the extent that we are able to execute at those types of levels obviously has an impact increase as the intrinsic value for the remaining shares outstanding.

It’s probably the academic kind of gad fly question. But with the management and your team working so hard to deliver value to your customer and the regulators being so hostile and the intrinsic value so far above where the stock is trading, have you ever thought about just giving everybody back their money and just kind of out of business and let the government worry about this?

I do believe the actions taken are politically driven here and that they are not uniformly shared across members on the Hill or in Washington. We think we create value for our shareholders in these activities. Clearly our legacy cash flows are a big part of our intrinsic value and that is something that we believe we can add to and continue to maximize and as we have this year and we believe we’ll continue to next year. I think if you look at where our other growth opportunities are in terms of the business services that we have, we are really leveraging the skills and capabilities that we’ve developed in our loan servicing operations scale, data analytics, performance driven results that are valuable to other entities and we see this in terms of some of the new contract we sign like the IRS, some of the tooling authorities and the expansion we’re seeing in healthcare. And then on the re-fi side of the equation, these are real opportunities for us and really are a function of our data. We believe we have a better ability to kind of look at borrowers and their credit profile and understand what their outlook looks like based on 40 years of experience and to be able to use that to capture value in the form of these refinancing loans that are taking place in the market place. So we think at the end of the day, we create more value for shareholders by running our business than we do by not.

Appreciate your efforts that you share with us and hopefully the new administration will appreciate your efforts as well. Good luck.

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

I had a follow-up question of the FFELP NIM. Your new guidance of the high 70s is so material step down from the mid-80s you realized in 2016 and I guess much of the year was impacted by that three month, one month dislocation. Are you saying that much of that incremental step-down is related to the additional hedging cost from what you did to protect floor income this quarter or there are other forces kind of pushing the NIM down further?

Mark it’s not related to the hedging cost at all. It’s related to the fact that as rates rise you will record less unhedged floor income overtime. I know our total floor income that we recorded in 2016 was around 50 basis points and so in that guidance reflects the fact that as rates increase a piece of that floor income will decline depending on what rates are. But I’ll note that while a vast majority of that floor income - it’s at 50 today. We will capture a vast majority of that. A significant greater portion of our floor income next year will come in the form of hedged floor income.

And I would just add to that is that, when we look at our business we are looking at what we expect to generate in terms of cash flows from our portfolio. And the amount of floor income that we were forecasting is based on the forward curve, right as I said earlier. And that number is still $2 billion in terms of estimate based on that forward curve at 12/31/16. And if you think about where it was a year ago, plus what we collected, this number has actually grown not shrunk. So it shows up differently in terms of the spread, but it doesn’t show up, it’s been growing in terms of value to the overall business.

I was hoping to get more color Jack on your comments around the USA Funds acquisitions by Great Lakes. Does Great Lakes compete in that services business for guarantors, are they rebidding it with a view to potentially taking that away, if you were just kind of wondering what the opportunity of risk is around that?

They did not provide the services for other guarantors, they do manage their own book. And most of the work that they do in this space is outsourced. So this would be a continuation of that effort. That’s where we believe it will go, but they obviously are the decider here.

And you indicated you are excited about the opportunities, is there an opportunity for you to pick up more of their business as part of this rebidding?

We don’t provide services to them today. So as they rebid this, we would be hopeful that we would see an opportunity to bid on the entire book of business, not just the funds piece.

Okay, got it. And any color on how meaningful that could be, if you are successful there?

Well the opportunity in this space is like the FFELP loan business, it’s an amortizing business. But the biggest opportunities we provide is helping borrowers who have previously defaulted on their federal student loans recover from that and we rehabilitate their loans. And so our services that we provide here to USA Funds and other guarantors puts us as the top performing entity in this particular space and that’s where we see the opportunity. If we can deliver better results, it increases the cash flows for us, it also increases the cash flows for the guarantors, and it obviously delivers a better result for the customers. So it’s a win-win solution for folks. But there is not RFP outstanding, we’d have to see what that looks like and respond when it’s released.

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

Since Gila and Xtend, company acquisitions on that front have been quite. Is there anything in particular driving this?

I’m not sure what you mean by the question, quite in terms of other acquisitions?

Just what you announced recently, right. Was it more focusing on operations internally or just priced too high kind of thing?

So a couple of things I think in this (inaudible), you know our acquisition philosophy has really always been to kind of - if we’re looking to get in to a new space is to buy something that has enough of a foundation and solid reputation that we can grow off of that organically and that’s been our focus. So in years passed when we moved in to the asset recovery space, that’s exactly what we did and then worked extremely hard to grow those organizations at very significant levels on an organic basis. We see those opportunities in both Gila and Xtend in both our state and municipal and tooling activities as well as our healthcare. We think the opportunities are very significant. We think they leverage our skills and probably more importantly our data analytics capabilities, all of which are designed to deliver higher returns, higher cash flows for our customers. And so the focus has been on organic growth there.

And then timing on those single servicing solutions solicitation award, last I read was February. Is there any better sense from your end?

So February was their original date, they did delay the response, the delivery of the responses of submissions by about a month. They didn’t change their new date. As Somsak mentioned, one of the three bidders did submit a bid protest not against us but against the really another one of the bidders in the process, and so that has to be resolved before any award can take place. In the mix of a transition administrative change we fully expect that there’d be some delays here. And until the Secretary of Education is in place and starts to applying on some of the stuff it would just be guessing.

And then my last one is more of a balance sheet question. Would you talk a bit about the restricted cash balance line items? I had modeled it just falling with the portfolio going lower by about 300 million but it really didn’t change quarter-over-quarter. What’s driving this or how can I think about their strategic cash balance going forward?

I think that can vary from quarter-over-quarter based on seasonality or timing of when interest payments are made, and when distributions are made overtime. So we got a trust that paid at various different months within the course of the year. So year-over-year you should see that restricted cash balance wind up with loan portfolio. But from quarter-over-quarter it can have some seasonal impact come through because of timing of interest payments.

[Operator Instructions] Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is open.

Jack, one of the things that’s been kind of absent from this whole discussion about the CFPB is actually the Department of Ed. Is there any chance that they are going to weigh in on their servicing rules? I mean I assume that they’ve kind of looked at your performance overtime.

I don’t think there’s probably any student loan service out there that has been audited or reviewed more than we have over the last three years in terms of performance and compliance aspects. You’re pointing to something that has been a bit of a frustration for us is that in the student loan space there are multiple entities who are all vying for oversight and responsibility on servicing. You see at the Department of Ed, who is responsible for, you have the CFPB who is supposed to be monitoring some of the stuff and proposing improvements, enhancements in that area. And then you got a whole variety of state entities engaged I think all because of the political headlines around students Ed. The reality is, part of our biggest challenge and then why there are so many people involved is the public narrative is very different from the reality what goes on. The struggling borrower for the most part is someone who has borrowed and has not completed their education. So the statistics here is that two-thirds of all federal loan borrowers who default each year, owe less than $10,000, yet the average media story shows the borrowers owe more than $80,000. Large balance borrowers are generally students who went to graduate schools and they are amongst the best performing loans in any federal loan portfolio. So that is part of the issue, and we certainly have advocated from day one as we’ve been working with the regulators that a successful and appropriate approach would be to have all parties in the room, the Department of Ed, the CFPB and servicers. So that we can work together and say look, this practice doesn’t work and how can we make it better, and a lot of it has to do with federal rules. So I would point to IDRs as just one great example, the application for an income driven repayment plan is 12 pages long. It does not reside on our website because it’s not allowed to. A borrower has to go to studentloans.gov, the Department of Ed website where they complete the form and then it gets returned to us by the Department of Ed and often times that form is not completed accurately or the borrower indicates they want to sign up for a plan that they are not eligible for and we have to move them to a different direct. It’s that kind of complexity in both program design and process that we think could have material benefits in terms of making a process easier for borrowers and therefore improving borrower success.

I got two other smaller questions. Any kind of sense as to the financial terms of entering the refinance private loan market, like are you buying these loans par or premium. Any sense you can give us to that?

So any loans that’s made is - new loans that are made are typically acquired at the equivalent of a premium, whether that’s the cost that we incurred will originate or the reimbursement of those cost bagged out. But when we look at buying portfolios or originating portfolios it takes in to consideration those items and the capital we would allocate to that business and whether or not we can earn an attractive return on equity through that investment. As I said, one of the thing that we have that’s unique to Navient compared to all other players in this space is we have 40 years of data. So a borrower with a particular credit profile, there may be other that we can or not may be, there are other attributes that we would look at on that borrower that would help indicate whether that borrower is going to over-perform or out-perform or under-perform what that credit profile might look like and that’s where we add value. Same on the servicing side of the equation, our servicing processes are all data driven and so we typically see and can identify problems or issues ahead of time and will reach out to that customer for a contact, and the result is that we have higher rates of right party contact on start loaning borrowers, that’s why our delinquency and default rates are lower than everybody else’s and would bring that to bear in the process as well. And then finally our private loan portfolio and we expect this to be less of an issue in the re-fi space. Within our existing portfolio there are borrowers who are struggling and the solutions that we offer to those borrowers we think are not only highly effective in terms of keeping them out of default but also very beneficial for the borrowers. Our programs are designed to allow borrowers to make payments and amortize their balances. So we’re not putting into programs where they are negatively amortizing like many in the income driven repayment plans still or just kicking the can down the road. We are working with them to create a payment amount that is affordable and as I said, and reduces their principal balance each year.

Just one quick follow-up on the private side, I noticed that the TDR balance continues to creep up modestly as the entire portfolio is kind of running down and so if that trend were to continue to the TDR balance could be half of the total portfolio with an 11% reserve against it. Can you talk about how that will impact provisioning at some point in the future and when we might see that change, because you’ve got life of loan reserves against those.

So once a borrower is designated TDR, they are never undesignated TDR. So for a borrower who is non-TDR today has some difficulties that requires a temporarily delay in payment where the modifications to the terms it automatically moves in to the TDR status and stays there. You’re seeing delinquencies and charge-offs in that segment decline year-over-year, and the balances are amortizing, its’ just that there’s a transition going from non-TDR to TDR. As you know in TDR loans we reserve for the life of the loan in that portfolio, and so the periodic provision is less of a function of adding an incremental year of our incremental quarter of periodic expected charge-offs as you see in the non-TDR space and more of a function of how has the life of loan loss expectations changed from the prior period. So most of our provisioning today is a function of adding the additional, the next quarter in the two year window for non-TDR loans and adding the life of loan provision for borrower to moving into TDR status versus adding reserves for the previous TDR portfolio, if that makes sense.

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

Just a quick follow-up on USA Funds, can you just give a sense for how meaningful that was in 2016 for you guys? Any color there.

Mike revenue from the contract low under $170 million for 2016.

And then as a follow-up on the re-fi loans, so I’m assuming the spreads are a little tighter but credit probably a little bit better. I’m just wondering sort of vis-à-vis you current book how to think about the returns there versus sort of you existing private portfolio?

You’re right on both of those points. The spreads are - well they are certainly consistent with a higher quality loans that we made as an originator for in-school volume years ago. They tend to be shorter, average life loans because you are [listening] a lot of times they are because you’ve eliminated the in-school period and they tend to amortize a little bit faster. So fund spread, growth spread is or the coupon is tighter, funding cost should be lower because of the shorter average life servicing cost are more about processing and less about outreach kinds of activities. So net-net when you add those together and you look at the appropriate levels of capital, we think we can earn a return on our capital here, very consistent with what would be our need in our private loan portfolio over the last couple of years.

And then just a clarification, are you servicing those re-fi loans as well?

Yes.

Your next question comes from the line of John Hecht with Jefferies. Your line is open.

Somsak can you remind what’s the seasonality between the 4Q and 1Q spreads? I believe there are inflexions there?

The seasonality really exist in the FFELP loan space where the day count on what we receive in the gross flow income on our entire portfolio versus the day count that’s calculated for a floor rebate that we have to payout to the federal government, the formulas are different. So you will see a little bit of it, all else being equal, you would see a little bit of a dip in the first quarter FFELP NIM from the fourth quarter to the first quarter. But as I see it based on where rates are today, I think at this point we are sticking to the mid to high 70s NIM over the course of 2016. Pretty consistent when you are over the course of all the quarters in ’17 at this point.

And then with respect to the - you seem like you’re indicating a consistent year of acquisitions in the FFELP [play] like last year. Is there a seasonality with respect focusing opportunity or is it just shares kind of pace that over the year?

For purposes of guidance I think it’s fair to pace it over the course of the year.

And then last question more just schematic, we’ve seen both portfolio credit trends looking positive in terms of their trajectories, and I know that the servicing costs are - our working loan is much different than something where you have to have a little bit more hands on. At the current pace of credit trends is there a chance or intermediate or long period of time that you can really reduce overall servicing costs or I guess the servicing margins are relative to total margins, or how should we think about the opportunities here over the long term?

So no question a current borrower making payments has a lower cost structure to the company, because we’re servicing for third party like the Department of Ed at a higher revenue stream as well. You have seen delinquency rates improve across our book of business. I think we track this data pretty closely, borrowers coming into repayment during the recession which peaked for our new graduates in 2010, and we saw early 90 day plus delinquency rates early in the life of repayment cycle six months in north of 20%. Those numbers have come down to about seven, so they are about one-third of where they were in the peak of the economic recession, and there’s not a surprise when joblessness is increasing new graduates have a harder time finding jobs. As the economy has improved and the job markets has improved, those numbers have improved as well. We do expect that to reduce our cost, its cone of the things - but we always look for ways to improve efficiencies across all aspects of loan servicing. We do that through automation, through better services for customers. We just launched a new IVR for example, voice response system for our customers that allows them to speak in a natural language versus pushing buttons for, if you want this, push one, that has dramatically - we think that will result in higher borrower satisfaction but also higher ease of borrowers to find the solution that they’re looking for and also self-serve the things that are relatively easier for them to do.

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

Thank you, Chrisa. I’d like to thank everyone for joining us on today’s call. If you have any other follow-up questions, feel free to reach out to me directly. This concludes today’s call.