Navient Corporation (NAVI) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Deborah and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient First Quarter 2017 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. I will now turn the call over to Joe Fisher. Mr. Fisher, you may begin.

Thank you, Deborah. Good morning and welcome to Navient 2017 first quarter earnings call. With me today are, Jack Remondi, our CEO; and Chris Lown, 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 first quarter 2017 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 in Navient. Before I share my perspectives on the recent quarter, I want to speak to two new roles in our executive leadership team. Somsak Chivavibul, our CFO since 2014 has taken on a new role in Decision Science, a role that will help us further leverage our data assets and data management expertise to enhance our industry-leading performance and to support our growth prospects. This new function is of priority to me, and I am thrilled that Sak will be leading our efforts in this area. I also want to welcome our new CFO, Chris Lown. I am pleased that he has joined Navient and is contributing his expertise and skills to help us grow. Welcome Chris, and you’ll hear from Chris later in the call. Now for my perspectives on the quarter. In short, our performance this quarter clearly shows our ability to stay focused on executing our business plan. The highlight here is our agreement to acquire the federal and private student loan portfolios from Chase, but we also delivered on our goal to grow our non-education loan related businesses, maximize the cash flows from our student loan portfolios, reduce our near-term debt maturities, and capture value for our shareholders through our share repurchase program. The agreement to purchase $6.9 billion in federal and private loans represents our unique capabilities to execute large complex transactions. There is also a strong recognition of our ability to convert hundreds of thousands of borrowers to our servicing platform using a highly-regarded, well-tested and customer-centric conversion approach. It also represents confidence in our ability to deliver superior results for our newest customers. We will close on this $6.9 billion portfolio in the second quarter with the conversion of the loans to our platforms beginning later, and we look forward to welcoming the over 385,000 customers to Navient. Separate from this agreement, we acquired $686 million of FFELP loans and a $112 million of private loans in the first quarter, and we’ll continue to look for opportunities to acquire federal and private loans in the future. Our earnings this quarter fell short of our objectives. The rising rate environment created pressure on our net interest margin from reductions in unhedged floor income and our prime index assets as any rate increases significantly lag increases in LIBOR, the primary index of our liabilities and credit performance in our private loan portfolio was a bit below expectations this quarter. However, we saw much better performance in March, and April projects to be better too. The changes in the portfolio statistics this quarter reflect the changing mix of loans as our TDR designated portfolio amortizes more slowly than the rest of the portfolio. Our servicing operation continues to deliver superior results for our customers. The delinquency and default performance continues the multi-year trend of improvement with Navient continuing to lead in helping borrowers avoid the negative consequences of delinquency and default. Recently, the government temporarily ceased its use of an automated link that provides the IRS income data used for income-driven plan enrollment and renewals. This tool reduces the documentation burdens or requirements for consumers and allows borrowers to move into affordable repayment plan more quickly. Despite this, we are meeting all our internal and external servicing standards, even though there is a substantial increase in manual and paper processing required due to the temporary suspension. There’s been quite a bit of media coverage on the new Department of Education servicing contract in the last few weeks. This has not, however, led to any updates as to timing or direction. We support the objectives of the contract design and the clear standards that will set the loan servicing. To be clear, we have not publicly or privately opposed the servicing concepts outlined in the Mitchell and the King memorandums. However, we have been public with several recommendations, which we believe would improve borrower outcomes and keep borrowers out of default. We will continue to share the expertise we’ve developed from our over 40 years of experience, and we are committed to working with policy makers on approving the effectiveness and outcomes of this important program. In our business process outsourcing area, we continue to grow our non-education related business lines. We signed several new contracts during the quarter with hospitals and municipalities, and we’ll begin generating revenue under some of our new larger contracts like that with the IRS. These new business lines leverage our skills, data analytics, compliance controls, and they allow us to help our customers manage the complex tax they face. We remain on track to produce a 20% increase in revenue in these areas in 2017. Last year, we demonstrated our ability to access funding and reduced our unsecured debt maturities. This process continued in the first quarter where we completed term asset backed financings, extended the maturity of our bank conduit facilities, and initiated unsecured debt. We also continue to reduce our near term debt maturities. And as a March 31, our remaining unsecured debt maturities in 2017 and 2018 were reduced to less than $500 million and $1.7 billion respectively, both well below our projected cash flow. During the quarter, we returned $156 million to shareholders through dividends and share repurchases. For the quarter, we repurchased 7.4 million shares at prices well below our estimate of the intrinsic value of the Company. Looking forward, I continue to see opportunities to add to our loan portfolios, continue to deliver superior results for our customers, and to grow our fee revenues. We’ll continue to leverage our skills and deliver value for our customers, clients, and shareholders. Before we move to Chris for the financial results for the quarter, I want to provide my perspective on the recent media coverage and commentary by some on the work we do at Navient. The noise level these past few weeks has been higher than normal and the coverage has often been inaccurate and misleading. I can only speculate as to the motivations of those who distort our record and the facts. Amazingly, the distorted statements have been repeated without any apparent effort to independently verify their accuracy. It’s also notable that the comments do not offer solutions to help borrowers repay their loans, nor do they contribute to the national conversation on college affordability, better upfront counseling before the loan is made, or program simplification to make it easier for borrowers, particularly at risk borrowers to navigate the complex array of federal student loan repayment options. In one example, a recent report painted a picture that delinquencies and defaults in the federal loan program are on the rise. The data used to support this story was based on the cumulative number of borrowers in default, not the number of new borrowers entering default. Of course, a cumulative number will always be higher than the prior years. This report was then re-quoted by several media outlets. However, the facts are that in the last year for federal loans, delinquencies declined 9% and the number of borrowers entering default declined 5%. That’s despite the fact that the number of borrowers in repayment increased 8.5% in the same period. The result is the overall default rate declined 14%. Stories that imply that defaults are rising here are disingenuous at best. Of course, the real objective is helping borrowers avoid default, and we have advocated for several years for policy changes that would help achieve this objective including better counseling before loans are made, program simplification, program investment, and most critically, encouraging borrower contact. In the past, I have shared facts about the remarkable results Navient delivers for our customers, particularly on default prevention. And I think they’re worth repeating here. For the 10 million federal loan borrowers we service, they are 31% less likely to default. In fact, if all services were as effective as Navient, 300,000 fewer borrowers would have defaulted in 2015. 49% of the loan balance we service for the government are enrolled in income-driven repayment plans. We achieve these results in part due to the more than 170 million communications we share about repayment options each year with our customers. And nine times out of 10 when we connect with a distressed federal borrower, we are able to successfully help them avoid default. Regrettably, 90% of those who default have never responded to our outreach in a year leading up to default. As was said before, contact works and we should encourage it. These results are due to the efforts of a great team of employees. Our critics may think they are attacking a company but they should know they are really questioning the integrity and hard work of our 7,000 teammates from communities like Wilkes-Barre, Pennsylvania; Fishers and Muncie, Indiana; Perry, Arcade and Horseheads, New York; and Wilmington, Delaware. Each day customers reach out to express their appreciation of a support provided by these members of team Navient, and I would like to share a few examples. Shaun recently wrote, I cannot begin to thank Brandon enough for his diligence, kindness, sense of empathy and stellar assistance in assisting me with options during some challenging times. He made himself available to me over the course of a few weeks and I sense that he was genuinely sensitive and carrying to my situation. Celine said, Anthony just basically spent an hour on the phone with me, going above and beyond, super helpful, couldn’t be happier. And Kelsea commented, couldn’t have been more happy with the service today; your representative was an excellent speaker, listening and knew her job well; it was nice to take the stress off and to feel like I have a company who truly understands that sometime life happens. As we said, contact works. These customer expressions are not anomalies. They are representative of what we hear every day. At Navient, we are proud of the work we do and the extraordinary support we provide to millions of borrowers. To those interested in the facts, our industry-leading performance statistics and our statements in response to the public commentary can be found on our facts page at navient.com. Let me now turn the call over to Chris for deeper look at our financial performance and I look forward to your questions after Chris’s remarks. Chris?

Thank you, Jack, and thank you to everyone on today’s call for your interest in Navient. Throughout this call, I will be referencing the earnings call presentation, which can be found on the Company’s website in the Investors section. Starting on slide three, we reported adjusted core EPS of $0.37 in the first quarter compared to $0.44 from the prior year. The decline from a year ago was mainly due to the reduction in net interest income, primarily resulting from the amortization of the total education loan portfolio. This was partially offset by reductions in operating expenses due to improved operating efficiencies, continued growth in our fee businesses and a lower average share count. Now, let’s move into our segment reporting, beginning with FFELP on slide four. In the first quarter, we acquired $686 million of FFELP loans, primarily from not-for-profit agencies. We believe that yesterday’s announcement regarding our agreement to acquire the $6.9 billion JPMorgan Chase portfolio will encourage other institutions to evaluate the sale of their education portfolios as well. We expect this transaction to contribute approximately $0.09 per share to 2017 EPS. The acquisition of this portfolio at a discount requires that we record provision as charge-offs occur. As we migrate the portfolio from its current 120-day charge-off policy to our 212-day charge-off policy, the complete impact of charge-offs will not be fully reflected until 2018. We need to fully assess the impact of this change in charge-off policy will ultimately have on losses. And as a result, we will provide an update on the impact of this transaction on 2018 earnings upon closing of the sale. Any delays to the timing of closing and the transfer of servicing could alter the 2017 impact to earnings as well. FFELP core earnings were $51 million for the first quarter of 2017 compared with $66 million in the first quarter of 2016. The net interest margin for the first quarter of 2017 was 77 basis points compared to 81 basis points a year ago. FFELP credit quality improved meaningfully year-over-year as total delinquency rates declined nearly 20% and forbearance rates declined 6%. Let’s now turn to slide five and our private education loans segment. Core earnings in this segment declined by $26 million from the year ago quarter to $35 million. In the quarter, the net interest margin was 316 basis points. The net interest margin was lower than anticipated in the quarter, primarily due to the following three drivers: One, a higher cost of funds related to a steeper than expected yield curve in the first quarter; two, the timing of when our prime-based earning assets reset versus when our LIBOR based debt resets; and three, higher than forecasted prepayments fees on our older trusts that resulted in higher cost of funds. As Jack mentioned in his remarks, we expect headwinds from the rising rate environment as 52% of our private loan assets are indexed to prime, which in a rising rate environment resets as per our liabilities which are primarily indexed to LIBOR. Private education loan losses and delinquencies continue to decline as the portfolio amortizes. Charge-offs declined 5% from the prior year to a $137 million. While the total delinquency rate declined from the fourth quarter, the mix of the portfolio compared to the prior year contributed to an increase in the total delinquency rate year-over-year. At the end of the quarter, our TDR portfolio represented 46% of the total portfolio and 86% of delinquencies versus 40% and 79% respectively in the first quarter of 2016. These loans are reserved for on a line of loan basis and are amortizing at a slower rate in the remainder of the portfolio. I’ll now turn to slide six to review our business services segment. In this segment, core earnings were $77 million in the quarter compared with $75 million in the first quarter of 2016. Total federal loans serviced by Navient is approaching $300 billion and is at the highest levels in our 40 year history of servicing federal loans. Non-education fee revenues totaled $44 million for the first quarter. We continue to win new contracts and look forward to initiating work on multiple contracts at the state level in the second quarter along with the federal contracts with the IRS that Jack mentioned in his prepared remarks. Let’s turn to slide seven, which highlights our financing activity in the quarter. In the first quarter, we issued $843 million of unsecured debt through two transactions. In March, we returned to the unsecured market with a $750 million five-year bond that priced 100 basis points tighter than our previous five-year issuance and had over 150 investors in the order book. We used a significant portion of these proceeds to reduce our 2018 maturities to $1.7 billion and in the past year have reduced our 2008 maturities by 35%. In the quarter, we also issued two FFELP ABS transactions totaling $1.9 billion. On April 10th, just 61 days after pricing this year’s first deal, we priced our third ABS transaction which was financed at an all-in cost of funds that represented a 10% improvement in cost. Combined, these transactions will bring our year-to-date ABS issuance to nearly $3 billion. In addition, we extended our FFELP ABCP facility to April 2019. This facility gives us additional flexibility to acquire FFELP loans. During the quarter, we also purchased 7.4 million shares for $110 million at an average price of $14.95. In total, we returned a $156 million to shareholders through share repurchases and dividends. Importantly, this activity was successfully executed while maintaining a strong capital position and a tangible net asset ratio of 1.23 times. Finally, let’s turn to GAAP results on slide eight. We reported first quarter GAAP net income of $88 million or $0.30 per share compared with net income of a $181 million or $0.53 per share in the first quarter of 2016. The primary differences between core earnings and GAAP results are the marks related to our derivative positions. Before I turn the call over for questions, I wanted to express my excitement at joining the Navient team, which is dedicated to creating innovative solutions to help our customers achieve their goals. Our recently announced portfolio acquisition highlights the strength of our platform and robust capabilities in student loan servicing, coupled with the attractive opportunities in our other growth segments, and I’m extremely excited about Navient’s future. With that, I’ll now open the call for questions.

[Operator Instructions] And our first question comes from Arren Cyganovich with DA Davidson.

Thank you. Congratulations on portfolio win.

Thank you.

And I was wondering if you could talk a little bit about what else is out there, what’s remaining. This is likely the largest portfolio I would assume that you had available to purchase, and the likelihood to be able to close on anything else later this year.

Well, there are a number of banks that still have legacy FFELP, and to a lesser extent, private loan portfolios. We certainly demonstrated our ability to acquire the largest ones out there with the Wells portfolio and now the Chase portfolio. So, those are things that are on our radar and things that we’ve been actively pursuing. This Chase deal is a great transaction for us. We’ve worked with the bank for a long period of time on this transaction and have a great relationship with them and really worked very closely to make this happen. Our focus right now is really just going to be converting these loans and getting the customers on to our platform.

Okay, thanks. And in terms of the guidance that you previously had for 2017, I don’t think I heard any update to that during this call. Do you have any update in terms of EPS or NIM guidance that you provided on the last quarter call?

I think what you can look to expect is as the portfolio acquisition closes, and our expectation around June, we will be providing some updated guidance at that point. So, I think the only guidance you heard from us out of this was the EPS accretion for 2017 as a result of the portfolio acquisition.

Your next question comes from John Hecht with Jefferies. Mr. Hecht, your line is open.

I’m sorry, guys. I had it on mute. I appreciate the time. Jack, you did talk about the DOE contract update and some of the components of it that you’re supportive of. I’m wondering, could you guys just give us an update on the timing and how the process might work as we flow through the year?

Sure. So, the timing of the contract was held up a bit by a bid protest that was just dismissed this month. And so, there is no requirement that the Department make a decision or ruling on the RFP responses with any calendar time. The new administration’s made some announcements on this area but not any relating to the timing issues. I think the challenge in this contract and the RFP is really understanding both a clear set of requirements that would be expected in terms of performance and customer service levels of the service providers and then how that fits within the federal budget constraints. We’re excited about the opportunity here. We think our skill sets are unique in terms of our -- the ability to meet the objectives of the Department of Ed, which in terms really relate to the scale and capacity of managing all of the loans on a single platform and importantly using data analytics to drive strategies or create strategies that help borrowers manage their loans and avoid default. Our performance that I mentioned is 31% better than other servicers, and if you put that metric out, hundreds of thousands of fewer defaults would occur each year.

Yes. Okay, thanks very much for that. And then, if you could remind us, I think you started taking some of the IRS -- I guess some of the IRS receivables just recently. Can you tell us how that might ramp throughout the year? And then you mentioned some state contracts that you are on-boarding; maybe can you give us a little bit more detail around that?

Sure. So, on the IRS side of the equation, we began taking placements this month under that contract. The way those -- the way that recovery contract works is you receive placements of accounts that are past due; we then work with those customers to establish payment plans; and we earn revenue based on the periodic payments that they will make over an extended period of time. So, placements ramp up. There is a delay or lag and when revenue is received, we don’t expect this contract to contribute to earnings in 2017, in fact there will be a slight drag on earnings in 2017 that’s in our forecast. And we look forward to it being a significant contributor to revenue and earnings for us as it matures and seasons. On the state level, we do business with a number of municipalities across the country. We recently won some contracts to do some state tax amnesty programs that are up and running that are fairly large, and then a recurring revenue program in a state that deals with driver assessments for fines of speeding and driving without a license et cetera that are meaningful to us, so. But, there is lots of contracts in this area and there is not one individual that I would say that is a major component of the business. One of the reasons we like it is, it’s a pretty diverse book of business that in the aggregate is very attractive.

Perfect. Thank you guys so much for the color.

Sure.

Your next question comes from Rick Shane with JP Morgan.

Hey, guys. Thanks for taking my questions this morning. In light of first quarter earnings, it is definitely worth revisiting previous guidance, and I understand that you’re going to wait to sort of give a roll forward based on the timing and the acquisition. But, I do think it’s important to talk about what was embedded in the old guidance. I am presuming that there were no significant acquisitions, and at least where you are after first quarter versus that previous guidance because I think there is concern about the trajectory.

Sure. So, our earnings guidance for the year would have had the first quarter at about $0.39. And I think one of the challenges that we’ve talked about in the past and I’ll let Chris talk about some of the headwinds that we experienced in the quarter specifically. But in the first quarter, there are a couple of things that impact earnings seasonally, if you will. One is the way the floor rebate calculation is calculated by the Department of Ed which creates an unevenness in that expense and the second is the upfront loading of payroll taxes and things that we incur as a result of the start of the year and bonuses -- bonus payments, et cetera. So, I would just say the delta here is not as great as the Street consensus issue. But, Chris?

Yes. And I would just highlight off of the NIM we recorded in the first quarter, the three drivers that did impact it again, the higher cost of funds related to steeper than expected yield curve in the first quarter. Obviously, the yield curve shifted meaningfully versus January, and that had an impact. We discussed the timing of when our prime-based earning assets reset versus when our LIBOR-based get resets; with the majority of our private loans indexed to prime that that’ll be an ongoing issue in a rising rate environment. And then finally, higher-than-forecasted prepayment speeds on our older trust that resulted in higher cost of funds. And I think what we’re seeing with where the curves are and what people are projecting for rate increases that these headwinds will be with us through 2017.

Got it. Hey, guys, first of all, thank you for the specificity versus -- your budget versus what actually happened this quarter. That really helps. And also thanks for the sort of contours of how to think about this going throughout the year? It’s very helpful.

You’re welcome.

Your next question comes from Lee Cooper, Omega Advisors.

Hi. It’s Lee Cooperman. Good morning. Just a couple of questions. What implications for the buyback does the JPMorgan transaction have? I think you bought about $110 million worth of stock in the first quarter, $14.90 average price, had about $490 million I think it is left on the repurchase. Will that be impacted by this transaction? And secondly, a lot of time has gone by, but I think about two, two and a half years ago, Jack, when you got on to one of the calls, you explained why the Company was as aggressive in buying back stock as it was, where you thought that you agreed with the analyst that had NAVs, liquidating values, whatever in the low 20s. Since that time, we bought back probably 25% of the Company at prices materially below that. I’m just curious how you look at the NAV at the Company today, which seems to be very, very much different than where the stock is trading. And so, I’m just curious how you kind of relate all these different numbers together. So, first of buyback and second your view of NAV.

Yes. Thanks Lee for the questions. On the buyback, we don’t expect this transaction to have any impact in terms of our plans for share repurchases during the year. This acquisition -- first of all, on the FFELP side of the equation, there’s very little capital required for that. And on the private loan side, this was something that we had been pursuing and was on our radar. So, we had capital that was unallocated to other businesses available to support this acquisition. On the intrinsic value, there is no question that we see one of the big value generators for shareholders as our ability to repurchase shares at prices significantly below intrinsic value. And when we do so, it actually increases the intrinsic value for the remaining shareholders. As you point out we’ve been able to buy back a significant portion of our shares, we’d like to continue that process in 2017; we plan to continue that process in 2017, and the beneficiaries are those shareholders who stay with the Company, for sure.

I guess my only point was if two to two and a half years ago you thought the intrinsic value was low 20s, having brought back as much stock as you bought, the intrinsic value will probably be in the mid or the high 20s and then even -- and nobody respects that view. I am willing to bet on you as I have, but I am just making an observation.

Yes.

Just prove I’m wrong.

Well, the beauty here in the intrinsic value as you know is driven by the cash flows that will be generated primarily from our student loan portfolios and the passage of time, and the return of that is where the proof will come, if not from market recognition.

Got you. Good luck. Thank you very much.

Thank you.

Your next question comes from Michael Tarkan with Compass Point.

Thanks for taking my question. Just a little bit more granularity on the NIM expectations from here. I mean, on the FFELP side, can we expect a pickup from here, given recent tightening in one-month, three-month LIBOR? And then on a private side, I would expect that there would be some catch up a little bit in the second quarter if not beyond that as prime picked up later in the quarter, just kind of curious where we are relative to that sort of high 70s guidance on FFELP for the year and the mid 320s for private? Thanks.

I think we feel very comfortable with our FFELP NIM guidance to be in the high 70s throughout the rest of the years. And as I mentioned, from a NIM perspective on the private side, we’re not formally going to update our guidance. So, I just would reiterate that we continue to see the headwinds that we saw in the first quarter throughout the rest of the year, based on the shape of the curve and based on projections of rate increases and therefore expect those headwinds to persist.

Just on the FFELP side, I mean, isn’t there a thought that it should be a little bit higher now than the high 70s, given that I think the last time we talked the one-month, three-month LIBOR was in the 25 basis-point range, now we’re much lower than that?

So, we had anticipated a tightening of that spread as we entered into 2017. And the offset to that improving spread is the unhedged floor income as rates rise, becomes smaller. So, those were components of the forecast in the guidance we gave there.

Okay. On the buyback, it looked a little lower on the first quarter. Was there anything sort of unusual about the activity in the first quarter? And then, just a follow-up on that, the $600 million authorization, should we expect that will still be exhausted in full year 2017?

Surely. In the first quarter, there were some blackout periods that kept aside of the market due to SEC rules but we were active in all other days that we were there and we fully expect to expand the full authority in 2017.

Okay, thanks. And then last one on the credit side. So, you mentioned that it was a little bit lower than expectations in the first quarter, but March and April look to be a little bit better. Can you just remind us about your reserving policy here for TDRs versus non-TDRs? I mean, with TDRs, at nearly half of the portfolio now, how should we think about future provisions from here and just overall charge-offs et cetera?

So, TDR is -- a loan becomes a TDR account when we do something to modify the original loan terms of the promissory note. And what we have -- the two primary drivers that cause that are use of temporary forbearance that’s to send [ph] payments for customers during periods of unemployment or job search, et cetera; and then modifications to the terms of the loan, either the interest rate or the duration of the asset. We have a policy and practice internally at Navient that we are very aggressive working with customers to find solutions and are very willing to make those accommodations, where appropriate. So, that results in a higher percentage of the accounts being TDR status. When a loan is TDR status, it is reserved for the -- we make a provision for the remaining life of the loan losses that we expect to incur over the remaining life. For non-TDR accounts, we look at the next two years out and forecast expected losses and reserve for that. So, for non-TDR loans, the two-year loss forecast is a very high percentage of life of loan losses, and TDR obviously covers the full life of the loan.

[Operator Instructions] And your next question comes from Mark DeVries with Barclays.

Yes, thanks. I was hoping to drill down a little bit more on the private loan NIM. Could you give us a sense of how much of the pressure on the quarter was due to the rate related causes you mentioned, the lag and prime and the steepness of the curve and how much was related to the prepays, the accelerated prepays and the private trust? And could he also discuss a little bit and kind of what’s driving those elevated prepays?

So, from a macro perspective, the three headwinds I spoke about, the three drivers represented roughly around 6% -- I’m sorry, 6 basis points of deterioration in NIM, and it was actually pretty evenly spread between the three drivers I mentioned.

Okay. And could you discuss specifically on the elevated prepays? I mean, I guess, the roughly 2 bps of pressure from that, is that being caused by loans getting refied away or getting refied through your own kind of internal efforts?

It’s actually a mix of a number of factors. And there clearly are -- there is some refinancing away for both the Department of Ed as well as SoFis [ph] as well. I’d highlight that there is a lot less pressure from that element versus the Department of Ed. So, clearly, there’s an issue there. In addition, it may be a better economic environment and people are just paying down their loans faster, which obviously would be a positive. And so, there are number of factors going into it that are taking into account the faster prepayment speeds.

Okay. And I think you mentioned you expect the headwinds persist for all 2017 for these factors. Do you expect -- how should we think about the pace of prepays going forward? Is there an initial kind of upfront push on some of these refinancing efforts from an initial move in rates that may subside after the markets kind of reacted to a newer level of rates or should we expect kind of continued pressure there?

We have seen heightened activity when there is news around the rate increase potentially coming in that specific month ahead of that and so there is a little bit of that that can be taken into account throughout the year.

Okay, got it. Thank you.

Yes. As we said, the vast majority of prepayment dollars are coming from normal customer payments, not from refi activity.

Your next question comes from Moshe Orenbuch with Credit Suisse.

Great, thanks. Most of my questions actually have been asked and answered. But, when you talked about the $0.09 of accretion in 2017, how much of that is coming from essentially the lower level of losses as you extend that charge-off period because obviously that would be somewhat one time?

We’re not providing specific breakouts of that. Clearly that is a benefit that will catch up in 2018 as the charge-off run through the P&L on a quarterly basis. However, we do expect accretion to increase going into 2018. So, inevitably, it doesn’t completely account for all the accretion that we’ll see in 2017.

Your next question comes from Sanjay Sakhrani with KBW.

Yes, thanks. Most of my questions have been answered as well, but just a quick one as we dive back in the credit quality. As we think about the charge-off trajectory in the private student loan product, I mean, should that start declining? Because I mean we this quarter actually saw a reversal of a trend that we’ve seen for quite some time and that there has been year-over-year improvement. Will that now shift back and should we see year-over-year improvement by the end of the year?

Credit losses dollars improved, the rate changed a little bit because of the mix of the loans, right? So that I think you have to look at the two items a bit independently there. We would expect and that credit performance would continue to improve as the portfolio seasons and accounts kind of move through their process. And even for customers who are experiencing difficulty, our objective in our repayment options for them are to keep them amortizing their principal balance so that they are making progress towards paying off their loan. I mean, it is in kind of direct contrast to what the federal loan programs do, which is really lower payments but negatively amortize the accounts. We prefer to adjust rates and keep the borrower amortizing in that process. So, we’re optimistic on the overall default trajectories here and seasoning, as you’ve seen in the past is a big factor behind that in the economy.

So, maybe I’ll go back to your like guidance discussion before, when we think about the trajectory of the provision for the year, is that any different than what you envisioned it to be after this quarter?

Well, it’s certainly higher this quarter than we would have -- slightly higher than this quarter than we would have expected, but that really is a catch-up for the actual, slight increase in defaults that we saw versus planned. Our expectations are we’re going to think that the performance as I said got better in March and April is looking good as well.

Okay, great. And then, another question on just the previous point that, Chris, you mentioned on the accretion expected from the portfolio acquisition. That $0.09 obviously includes as you mentioned and as was asked, some benefit this year from the deferral of the charge-offs, but you would expect that $0.09 to be higher in 2018, net of the catch-up that occurs this -- or the benefit you have this year?

We do expect it to be higher. But again, it’s important to highlight that obviously the charge-offs will roll into 2018. So, there will be -- the impact will be fully felt. And so, you won’t clearly have a continuation of the $0.09 accretion into 2018 for the full year. You’ll have to model in an impact of the charge-offs, which will reduce that full year impact.

Okay. And that $0.09 is a full year impact or is that the partial year impact of the portfolio being on your portfolio -- in your portfolio?

That’s a 2017 EPS impact per share.

So, shouldn’t it be higher if you have a full year worth of that portfolio?

Well, 2018, yes, it will be.

And then, you have the difference in the charge-off rate from the deferral?

Right. So, if you have no charge-offs in 2017, you obviously have a higher EPS impact for the year; in 2018, you clearly have the full year impact of having the portfolio but the offset is going to be the charge-offs that are going to be flowing through on a quarterly basis, which will clearly reduce that full year impact versus nine years -- $0.09 annualized.

Okay. All right. Great. Thank you.

Is that clear? Great.

Yes. So, the $0.09 is an annualized number for 2017.

No. The $0.09 is the actual impact that we expect in 2017 EPS.

But that -- from an accounting perspective, we will not be incurring -- charge-offs really won’t start hitting until the fourth quarter, but we won’t bear the full impact of charge-offs until 2018. And then, through those all four quarters, we will have a full impact of charge-offs. So inevitably, in 2018, we’ll enjoy the benefit of having that portfolio for the entire year, the deduct from the charge-offs on a quarterly basis, and so you clearly can’t take that $0.09 and annualize it times it by two for full year because you’re going to have to offset charge-offs against it.

Right. I guess, what I was asking at the outset was, is that $0.09 higher net of all of that in 2018?

Yes, it will be higher, but it clearly won’t be an annualized higher number.

Got it, perfect. Thank you very much.

Your next question comes from Mark Hammond with BoA.

Good morning. Would you walk me through how Navient’s going to finance the acquisition of JPMorgan’s education loan portfolio?

Sure. As you’re well aware, we have ample capacity in our facilities to handle the financing of this on both the FFELP and the credit -- on the private credit side. So, we believe our financing partners are there to support the transaction. We also have excess capital. And therefore, we believe we can handle this transaction from a balance sheet and our current financing partners.

On the private side, how much capacity do you have available in facilities? I thought it was a few hundred, not a few billion.

We do have a few hundred million dollars of capacity on the private side. But as I mentioned, we believe our financing partners will help us finance this transaction at close and that both feel confident in our ability to finance this transaction with our excess capital and financing partners.

Okay. And then, could you speak to the credit quality of the loan portfolio of JPMorgan relative to your loan portfolios on the self and private side?

Like our portfolio, it’s a seasoned portfolio of private loans. And there is certainly some pockets that are different than others but that’s all considered as part of the purchase price and the analysis that we made here. I think we’ll share some of the data and activities on the accounts related to cosigners and FICO score averages et cetera once the deal closes.

Okay. And then, going back to the first question about financing the acquisition, is financing partners including unsecured bondholders, is just -- I am trying to drill down what exactly is meant by financing partners?

So, we have obviously over the next two months until the close of transaction, we’ll be looking to optimize the financing package, how we put together for the benefit of shareholders. Inevitably, we have the conduits available; we have our balance sheet capital available. And if the unsecured markets are available at an attractive price, we could potentially tap those markets as well. So, we have ample resources and what we’ll be looking to do is to optimize the financing package for this acquisition.

Great, thank you all.

Just to be clear. We have the capacity to do this, execute this transaction, and we’re looking at this; if there is better options, we take advantage of those as we have in the past.

Your final question comes from Henry Coffey with Wedbush.

Good morning and thanks for taking my question. I caught the $0.09 discussion early on, but was there mention of some boarding cost or other items that might reduce earnings from a GAAP point of view?

The $0.09 estimate includes cost that is our net EPS impact.

And did you kind of quantify what some of those costs look like or?

So, there are normal -- when you convert a portfolio from one servicer to another, there are internal costs that we incur to communicate with the borrowers for the accounts et cetera and then often times there is a de-conversion fee that’s paid to the departing servicer for packaging the files and moving them over. Those are -- there is no difference between GAAP and core and how those are accounted for. And they are included in our $0.09 estimate here.

And then, in terms of assessing the credit quality performance of this portfolio, should be any different then what JPMorgan Chase has seen in recent years or is your view that you’re going to be able to make the portfolio perform better, make -- it’s going to perform worse for a while during the transition or just I think everyone is trying to get a sense of what 2018 charge-offs will look like?

So, most banks including this portfolio use third parties to service their loans. And we have demonstrated consistently over time that we produce better results for our customers than other third-party servicers doing. A lot of that is driven by the data analytics and creating unique strategies, so that we can connect with the customer, inform them of the different options, get them on repayment plans that they can afford. And so, we do expect to see improved performance on both the federal and private loans as a result of the conversion of those portfolios to our platforms.

Just to switch topics, the press was talking about Betsy Devos’ memorandums as more of a reset. Do you see what she did is sort of a technical adjustment to the RFP process or is this part of a whole deck clearing -- I mean, deck clearing, which might sort of refresh everybody’s relationships with the Department of Ed? I know it’s probably early, but we’re trying to sort of read into where she’s going to go with them.

So, I mean, we don’t -- I don’t know exactly what the motivations were here. I mean, during an RFP process, dialogue actually is fairly nonexistent because of government rules here. The memorandums in the RFP are separate documents, and I think they have been -- there are some differences between what was asked for in the RFP versus what was stated as objectives in the memorandums. And this was an attempt to say my speculation here, but this was an attempt to say we need a clear set of rules for servicing, not competing sets of rules for servicing. I think the objectives of the RFP are very clear in terms of what the Department is looking for. They are looking for single platform to make it easier for customers, uniform experience for customers and easier for them to identify where to go for servicing assistance. They’re looking for different types of communications with customers, particularly high risk customers, and they’re looking for better default performance. And those three things, we do exceptionally well.

I will now turn the call back over to Mr. Joe Fisher for closing remarks.

Thank you, Deborah. We’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.