Navient Corporation (NAVI) Q1 2018 Earnings Report, Transcript and Summary

Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient First Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be question-and-answer session. [Operator Instructions]. I will now turn the conference over to Joe Fisher. Please go ahead.

Thank you, Christie. Good morning and welcome to Navient’s 2018 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 on the company’s Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the first quarter 2018 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 and for your interest in Navient. Our financial results this quarter were very strong and delivered on the potential we outlined in January. We also are presenting our financial results in new business segments this quarter that reflect how we are managing the business. This new format is designed to provide you with greater insight in to the performance of our legacy and new businesses and to shine a more focused light on the potential within each of the new business segments. Our new business segments are; federal educations loans, here we combine the earnings from our FFELP portfolio and the servicing and asset recovery work we provide to federal education loan lenders, guarantors and the Department of Education. The consumer lending segment includes our private education loan assets and servicing including our newly launched refi origination business. The business processing segment includes the various management and processing services we provide to our clients in the government and healthcare markets, and our other segment is where we report our centralized overhead functions and our corporate liquidity portfolio. Starting on a consolidated basis, we are off to a very strong start in 2018 and our financial results reflect this. Our adjusted core earnings of $0.43 per share was driven by strong performance in each business area, expense management and from the lower tax rates implemented with the tax act. The results build off the corporate and student loan acquisitions we made in 2017 and our focused efforts to improve operating efficiency. For example, on a comparable basis operating expenses fell almost 8% from the year ago quarter. Highlights for this quarter include excellent growth in our refi and business processing business lines, continued improvement in credit quality, stable student loan margins, improving operating efficiency and lower taxes. In the federal education loan segment, we delivered improving student loan margin of 83 basis points and a meaningful reduction in operating expense, 17% when you exclude the new revenue recognition accounting rules. In consumer lending, we delivered very strong refi origination volume, $500 million in the quarter, value from the student portfolios we acquired in 2017 and improving student loan margin of 3.23% and improving credit quality evidenced by the $59 million decline in charge-offs. I’m very excited with our success in refi originations in the first quarter and continue to see a very strong ability to grow originations in this environment. Our products deliver meaningful cost savings to customers who have the ability and desire to amortize their student loan debt more rapidly. The ability to create value here can be clearly seen in an analysis of our recent refi ABS transaction completed in the first quarter. And Chris will describe the details of this in his remarks. In business processing, we set out to leverage the workflow skills and high performance results we have demonstrated in student loans and deploy those in the government and healthcare markets. Our strategy has been to acquire the right foundational base and combine these with our operating skills to deliver strong organic growth and attractive margins. Our results this quarter and prospects for 2018 are demonstrating the value we can create in this segment. Results this quarter include revenue growth of $29 million or 66%, with an organic revenue growth rate of 32%. And we delivered increased efficiency and scale that led to a 50% increase in the EBITDA margin to 21% overall. The government and healthcare markets represent a very attractive opportunity for us. Both markets are very large and they continue to move to a partnership services model to deliver lower cost and higher performance. Our service leverage our workflow designs, use of data analytics and strong compliance systems to deliver exceptional value and higher performance. They are also not capital intensive. Most importantly, they allow our clients to focus on the core services they provide to their constituents, patients and other customers. I see continued strong growth trends in this area and more specifically we expect to deliver full year organic revenue growth of 30%, while continuing to improve EBITDA margins. Credit quality in our private loan portfolio was another bright spot this quarter. The provision for loan losses declined by $18 million to $77 million for the quarter. In the charge-off rate for our consumer loan segment fell to 1.4%, the lowest level in more than a decade. Our outreach efforts in alternative payment programs allow us to help borrowers with loan terms they can afford and most importantly programs that amortize their loan balances. We also continue to support federal student loan borrower success, and new department of that data shows, we continue to lead comparable services in enrollment and income group and repayment plans with the lowest of all grades. Lastly, we are and our teaming partners submitted our round one proposal for services under the Department of Education next-gen servicing RFP. We believe this combined comprehensive proposal is best-in-class and look forward to the opportunity to work the department here. By delivering on our mission to enhance the financial success of our customers, we help millions of individuals achieve their goals for themselves and their communities. For 2018, we are focused on delivering outstanding results for our customers, clients and investors. Our goals are to maximize cash flows, create value by growing our refi and business processing businesses and continuing to improve our operating efficiency. This quarter’ results begin to deliver on the potential and promise we talked about in January. As our strong financial results improve our capital ratios, we will return additional capital to shareholders beyond dividends to include share repurchases. Our goal is to create value that is recognized in the share price. Thank you for your interest this morning, and look forward to your questions later in the call. Chris.

Thanks Jack, and thank you to everyone on today’s call for you interest in Navient. During my prepared remarks, I will review the first quarter results for 2018; I will be referencing the earnings call presentation which can be found on the company’s website in the investor section. Starting on slide 3, adjusted core EPS was $0.43 in the first quarter compared to $0.37 from a year ago. And as Jack mentioned, we have changed our reporting segments to provide investors with greater visibility and to Navient’s underlying growth in how we manage and value the business. In conjunction with the filing of our first quarter 10-Q, we will provide three full years of historical financial statements as they would have reported in these new segments beginning with 2015. Let’s now move in to our new segment reporting, beginning with federal education loans on slide 4. Core earnings were a $141 million for the first quarter versus a $129 million in the first quarter of 2017. The interest was primarily related to reduced operating expenses and a lower tax rate, partially offset by a $23 million decrease in fee income associated with the new terms contained in a previously disclosed modified contract. The net interest margin for the first quarter was 83 basis points compared to 78 basis points in the year ago quarter. The recent dislocation in one month versus three month LIBOR rates has been mitigated by our new hedging strategy implemented last year. At quarter end, 93% of this risk was hedged for the remainder of the year. We now expect a full year FFELP student loan NIM to be in the mid to high 70s. Now let’s turn to slide 5 in our consumer lending segment. Core earnings in this segment increased to $50 million from $38 million in the first quarter of 2017. In the first quarter, the consumer lending net interest margin was 323 basis points in line with our expectations. We continue to expect full year NIM to be approximately 325 basis points. However, as we have discussed previously, Navient is negatively bias to a rising environment and we continue to closely monitor the feds and funding rates. On slide 11 in the appendix, we provide additional detail to the long term profitability of newly originated education refinanced loans. As we continue to transition loans from outstanding facilities to securitizations and build our portfolio, we expect the student loan spread on these loans to approach 2%. The economics provided on this slide are based on our most recent private ABS transaction. We are very pleased with the continued improvement in our credit quality, as private education loan losses and delinquencies continue to decline year-over-year, with total delinquency rates declining by 16% from the prior year. Due to a number of significant natural disasters, over the last three quarters, we have seen an elevated use of disaster forbearance compared to a year ago. We believe this will ultimately lead to a higher charge-off level this year, compared to the current quarter. We also expect to see slightly higher charge-offs for the rest of 2018 associated with the $3 billion portfolio that we acquired last year, but are still below our original projections. As a result, we anticipate that quarterly provision for loan losses to be in the low to mid-$80 million range for the remainder of the year. Let’s continue to slide 8 to review our business services segment. Fee revenues in this segment grew 66% from the prior year. Excluding the acquisition of Duncan Solutions, non-education fee revenue grew 32% organically year-over-year. Our EBITDA margins also increased to 21% from 14% last year as a result of our continued focus on expenses and growing our client base. We continue to see organic growth opportunities in both government services and healthcare revenue cycle management and on pace to achieve our guidance of at least 30% revenue growth year-over-year. Let’s turn to slide 7 for additional detail on a reported first quarter total expenses of $282 million. During the quarter, we incurred $7 million of restructuring and other reorganization expenses in connection with our continued efforts to reduce costs and improve operating efficiency. This quarter’s regulatory related legal expenses were $4 million, virtually all of which stem from the CFPB case and related matters. Excluding restructuring and regulatory costs, we reported operating expenses of $271 million in the first quarter compared to $234 million a year ago. Taking a closer look at these expenses, first quarter operating costs related to Duncan Solutions in earnest which were acquired in the second half of 2017 totaled $29 million. We also incurred $3 million of servicing fee and one-time expense of $9 million related to the transfer of a $3 billion third party service portfolio to Navient. This $9 million investment will be accretive to earnings going forward. We adopted the new accounting revenue recognition standard in the first quarter, which resulted in a $14 million increase in operating expenses that primarily impacted our fee base contracts in the federal and education loan segment. Further details can be found in the full earnings release. As a result, only of the newly adopted accounting revenue recognition accounting standards, we now expect operating expenses for 2018 to be $70 million higher than our previous guidance resulting in new guidance between $980 million and $1 billion excluding restructuring and regulatory costs. This does not alter our $1.85 to $1.95 EPS guidance for 2018. Let’s turn to slide 8, which highlights our financing activity. In the quarter, we acquired over $800 million of education loans with $500 million originated organically. At quarter end, we had $2.4 billion of available capacity in our FFELP facilities and $723 million in our private facilities. We expect to further reduce the size of our FFELP facilities in 2018 to more effectively manage expenses associated with unutilized excess capacity. In the quarter, we issued two FFELP ABS transactions for $2 billion. These two transactions were financed at re-offer spreads that were 35% tighter in our first deal of 2017. We also issued our first securitization that consisted entirely of private education refinance loans. There were significant investor interest across the capital structure that led to a re-offer spread to swaps of 56 basis points, a tighter spread of any benchmark student loan refi ABS transaction this year. In addition, we closed our $1.4 billion of ABS repurchase facilities that included the refinancing of $478 million of existing facilities. This raised $849 million of net new cash at a weighted average cost of funds that was nearly a 120 basis points lower than our previous facilities. In addition to reducing our outstanding maturities by $167 million in the quarter, we also announced a $1.2 billion of make whole call effective April 27 for unsecured notes due in June. As a result, our next unsecured maturity isn’t until January 2019. Let’s turn to GAAP results on slide 9; we reported first quarter GAAP net income of $126 million or a $0.47 per share compared with net income of $88 million or $0.30 per share in the first quarter of 2017. The primary difference between core earnings and GAAP results are the marks related to our derivative positions. In summary, our financial results this quarter was strong across the board and were highlighted by robust growth in our refi and business processing business alliance and continued improvement in credit quality, operating efficiencies and financing costs. And with that, I will open the call up for questions.

[Operator Instructions] Your first question comes from Mark DeVries with Barclays. Please go ahead.

This quarter’s implied run rate on the consolidation originations of 2 billion was above what you guided to. Is that a good run rate going forward or do you kind of get off to a harder start than you expected?

Well we certainly got off to a great start in the first quarter and we expect the trends here to continue to be similar to what we are seeing so far this year. Our guidance right now is – we left at the same at $1.5 billion but clearly we’re on a pace to surpass that.

Is there any kind of seasonality in that activity which would suggest this quarter might be bigger than normal?

No.

Okay. Jack can you give us a sense of the addressable market there, both sit at the current rate of closer to 5% and how might that change if benchmarks rates rise enough that you have kind of move the rate and your nuance to 6% or higher?

Well the majority of the customers that are looking to refinance their education loans have been [out] of school for a number of years, and have demonstrated very strong employment trends and earnings profiles. And these are customers that are generally looking to take advantage of the fact that their cash flows are more than sufficient to amortize their debt more rapidly than the standard terms in the federal programs and are taking advantage of that by selecting your program terms that give them a better rate and a lot of them to pay their loan off faster. I think the combination of activities when you look at where the loan products are that we are refinancing their balances that have been outstanding for a number of years. The opportunities are coming as I said from graduates, from those folks who primarily have attended graduate schools and we really don’t see that market place slowing down even though rates have been rising here over the last couple of quarters are expected to continue to increase over the next couple of quarters. So we’re optimistic about the opportunity and the ability to play a meaningful role in this fix.

And then finally for Chris, I heard you indicated that you still got in to a private (inaudible) 325 bps, I think you qualified that I think. You negatively buy at higher rates, could you just give us a sense of what type of rate assumptions are embedded in that guidance and kind of what could happen to the NIM if rates kind of moves materially higher than what you’re assuming.

Sure, so our original guidance in January obviously the move shifted pretty meaningfully after our earnings call in January, and so we are fighting that negative bias and we had in our plan two rate increases. So obviously the expectation now is for the rate of four and timing matters as well. So there is a negative bias, but there is a lot we’re doing to try to stem that bias as well. So we do feel comfortable maintaining that 325 basis point NIM guidance. But it’s just something we do considering and look at if the debt raised is sooner, the dates of when the fed rates matters as well. So we just continue to monitor that. Number of raises will probably have the biggest impact.

So should I take from that we it would need to be in excess of four raises before we would see any kind of erosion from that 325 guidance?

No, I actually think it would be less than that. But as I mentioned that we are employing some other strategies to try to do other things to solidify that NIM. So it’s still a lot of work on our side to try to [switch] that rising rate environment.

Your next question comes from Sanjay Sakhrani with KBW. Please go ahead.

I guess first Jack, I’m just curious. When we think about the competitive environment and the potential for M&A for portfolio acquisitions, is there anything that’s meaningful changed in the market place and maybe you could just qualitatively talk about what’s happening and how you’re positioned?

In the legacy arena this would be FFELP portfolios and older private loan portfolios. The large financial institutions that own portfolios that are no longer in those businesses have for the most part sold their portfolios, and so we definitely had expected and projected I should say and would expect the volume opportunities to decline. The rate environment and the funding capabilities in the ABS phase has certainly made that market place more competitive as well and as you know where as the last five years or so we’ve been very disciplined in terms of on the pricing side of the equation when purchasing portfolios. We view these as basically buying cash flows, its’ not a franchise purchasing opportunity. And so if they don’t generate the returns that we find attractive, we don’t participate. So our view at this stage in the game is that the opportunities or purchase portfolios will be somewhat modest and will be impacted by competitive forces.

And we’ve heard about some of the larger players that actually are sort of retrenching potentially from the market. Is that an avenue or window in for you as we look towards 2019, and maybe reengaging in the market?

You’re talking about for FFELP portfolios or --?

For private.

In loan sales or loan originations?

Origination.

Sorry, I was responding to portfolio purchase opportunities before. I think in the origination side of the equation, the market place is dominated obviously by three large players and certainly we’re seeing one of those players be less aggressive in that space. We look at that market place as being an attractive opportunity for us to potentially play in the future. We have that non-compete that restricts us from participating there until 2019. But it’s certainly something we’re looking at and when we look at the skillsets, the infrastructure, the existing infrastructure that we have in this place, our ability to understand the performance of borrowers and the different risk profiles there, we definitely see ourselves if we play in that spaces having a distinct competitive advantage.

And then Chris, just two questions for you. One, the margins in the business processing segment, they’ve done quite well year-over-year. Obviously you expect them to sort of moderate for the remainder of 2018, but what is the margin potential in that segment overtime? Can we an expansion from these levels and to what levels or what points? And then on (inaudible) have you given any updated dots around (inaudible) and how it might affect you?

On the business processing segment, what you’re seeing in that margin expansion is as we’ve acquired these businesses, we’ve been able to drive synergies through them as well as focus on originating new business and driving value in to these franchises. We’ve only owned these businesses for a couple of years so it’s all starting to come together in a way that we expect it, but it’s obviously from our perspective very attractive and we look forward to the development going forward. The margin of 21% we had historically guided towards to mid-to-high teens EBITDA margins in this business. If there are opportunity to get through 21% sure, but I think we feel very good about the margins we’re producing today and the opportunity and you look at comparable margins at other BPS businesses these actually fairly attractive numbers from that perspective. On the [CESO] perspective, we obviously are monitoring what’s happening very closely. You saw some announcements from the regulators recently, the rating agencies still haven’t given a lot of guidance on how they think about the implementation of CESO. We are starting to do our work and our analysis around that, but we don’t have anything else to plan on at this time.

Your next question comes from Michael Tarkan with Compass Point. Please go ahead.

Just on the credit side, so understand some higher charge-offs flowing through this year with storms, but the TDR portfolios has come down sequentially now for three straight quarters and reserves are flat. The provision guidance is helpful, but how do we think about reserves longer term especially as you’re mixing in earnest loans and then eventually in-school loans. Should that 5.8% of loans in repayment should that start to trend down and then as a follow-up just on the CESO comment, when do you be better positioned on a relative basis given that TDRs are over 40% of your portfolio and you’ve already reserved for life of loan losses.

A few comments there, your comments around the reserve and the blending of the refi product clearly will have an impact and you see the performance in the refi product, you can look at the trust, but not only our trust, but other trust, and cleaved in very strong. So we’d expect the trend that you’re seeing to continue. So that is our expectation and we provided that guidance for the rest of the year. With regard to your second was --?

On CESO and TDR.

So if you look at our portfolio, we have a $24 billion to $25 billion private loan portfolio and as you mentioned roughly 10 billion is TDR and the other 14 plus is non-TDR. That 14 billion of portfolio is still a fairly large portfolio and so inevitably we will be impacted by CESO in a meaningful way given a two-year reserve window given the size of that portfolio. But having that TDR portfolio provisioned for does help. But it does not mean that we won’t be impacted either.

And then just as a follow-up, with the earnest loans how should we think about reserving for those loans? I know loss compens’ is really low, but you have to do the two year forward. Just what kind of reserves do you build for earnest and then where do those stabilize?

Actually if you look in the appendix, you can see sort of the way that we have projected out the trust for that information and you could model that pretty identically going forward with additional originations and as we finance it. So you got a little information on slide 11 in the appendix to give you some numbers.

That’s right. We definitely expect credit losses to be a small fraction of what we see in our legacy private loan portfolio. The charge-offs rates in this portfolio are running 10% of what our legacy portfolio is running to day, and the CESO impact in the TDR side of the equation is 43% of our portfolio overall. The challenge with the CESO implementation is as we discuss this internally any number we give here we all know it’s going to be wrong, right, because it’s a projection of life of loan losses which will vary depending on economics and life impacts of our customers. So that’s just something that we are trying to gauge and provide perhaps a broader range versus a narrow target.

Your next question comes from Moshe Orenbuch with Credit Suisse. Please go ahead.

Maybe could you guys discuss a little bit your thoughts about capital return, given the success you’ve had on the capital markets front, but then again the success you’ve had kind of generating these refi loans and how you think about that particularly in the context of the core FFELP portfolio seems to declining at least in the first quarter at what would be an annualized double digit rate.

As you saw in the earnings presentation, our TNA ratio rose to the level that we had expected in the quarter at 1.21 times. We feel either more confident in our guidance of being at 1.23 or 1.25 times by year-end and our expectation to return to buying back stock in the second half of the year. As you mentioned, there are a number of moving factors that maybe generating a little more capital and I think we’ll be committed in the last call is if there is an opportunity where we see excess capital beyond the guidance we’ve given, we clearly will take advantage of that, but we do feel very confident in the guidance we gave last quarter.

And does the stock price itself factor in to that, in terms of where the stock is thinking about buying it back at current levels versus something could be at a different level at a future point in time?

There’s no question stock price is a factor here and obviously we’d prefer to be buying back stock at lower prices versus higher ones. But we’d also prefer a higher stock price and a lower one in total. But we’re certainly going to take a look at what the opportunities present themselves and how we might take advantage of today’s stock price for third and fourth quarter stock repurchases.

And just on a separate matter, kind of went through some of the restated financials and the regrouping of your groups and it’s a little difficult because that history is not really there for most of the metrics. But could you talk a little bit about how you think about the 80 million in the quarter of essential cost which is a number that I guess is probably significantly higher than you’d had in that other segment before and how it relates to your cost allocations to the government loan segment.

I think the focus of putting centralized overhead and liquidity cost on to another bunker rather than distributing them is in part to sign more focus on that make sure we are being responsible at managing those costs down. We move things around a little bit in the buckets here, but the overall expenses in that side of the equation are trending down as we look to continue our focus on improving operating efficiency. And the focus here on operating efficiency is not just about OpEx. Chris talked about the efforts we’re making on the interest side of the equation and what can we do to reduce the impact of the drag in earnings as caused by maintaining a liquidity portfolio, managing our funding capacity and FFELP programs for example to maintain more lines than we need to the financing transactions that we completed during the quarter. We got much better pricing on our term ABS fields, we refinanced some of our private credit ABS repurchase facilities to materially lower cost and from the prior financing transaction, but they are also substantially lower than unsecured debt cost as well. All of which are contributing to improved operating efficiency.

And I think what we really try to do is make sure that cost with the business leaders that we were embedded within their segments were costs that they could control and that they could manage. Well we found historically that there were some costs there that they really couldn’t control and moved other costs that were uncontrollable in to the overhead bucket where Jack and I can actually focus on and then spend a lot of time in trying to manage them and get them down. So it really was an alignment exercise so that we can all be held accountable and take charge of the costs that are embedded within our business units.

Just kind of following up on that, the question of how much of those costs by each segment particularly on the centralized segment and then the government servicing are fixed versus variable would be extremely helpful to understand as we’re kind of looking at those businesses particularly given that how much you showed on what I think was slide 7 in terms of the performance of that business.

That’s a good thought and we’ll think to [review] that as that’s a good comment.

I do want to point out is, just because something appears to be a fixed cost does not mean we are not focused on ways to reduce it. And I understand your point, but it doesn’t reduce our efforts there.

Your next question comes from Arren Cyganovich with Citi. Please go ahead.

The FFELP margin guidance coming, I guess is a little bit higher than last, but still somewhat lower I think in this past quarter. What’s driving that down for the remainder of the year?

There are a couple of things that resulted in NIM on the FFELP being a little better than expectations. One, slower premium amortization of the portfolio which benefits the NIM margin on the FFELP portfolio and that is partially a result of similar forbearance we saw in the natural disasters and so we would expect that to equalize overtime, although we are just seeing a little slower premium amortization than we had expected. And then also with an asset index mismatch there and there’s the benefit FFELP portfolio in a rising rate environment and so again as that moderate and we see rate stop rising when you look at the curve that rises to our mid-to-high 70s guidance.

Is the hedge that you put on in place of that that includes expectations rising past the hedge – to continue hedging that over time?

So we’ve mitigated the one (inaudible) risk for 2018 as we’re mostly hedged. So it really doesn’t come in to play given all the hedging activity we did last year to really neutralize that risk in the FFELP portfolio. But we’re really eliminate that risk from an impact on the FFELP portfolio. It doesn’t do much to bolster or benefit the NIM.

For the remaining life of the portfolio?

For the remaining 2018. Obviously we are having to keep hedge going in to 2019 and we are actually hedging by going out and buying contract that starts six to nine months out, but inevitably in 2019 we are facing a wider once through these basis versus what we have hedged in 2018.

And then in terms of the combined next gen RFP, maybe you can just give a little bit of a color on some of the nuances around that contract and what your expectations are from a timing standpoint.

So the contract provides basically segments, the services that the department is seeking for in to individual components, and people can bid on the individual components or chose to bid on a comprehensive basis for all of the other components. We chose to bid on comprehensive basis for all of the components. We believe that can drive both higher levels of success in terms of the conversions of portfolios and management of borrower outcomes and also probably most importantly drive lower cost for the Department of Education. In terms of timing, the expectation is that later this summer we will hear from the department on round one selection and then they will issue a timeline for the submission, and more details of the specifics they’re looking for and around two processes and the timelines for that. But there’s a fair amount of noise and discussion on this including some restrictions coming from Congress as to how the department can operate this contract if you have to fully play out.

And with ASC 606, looking at the higher expenses, there were also higher revenues focuses here. Can you talk a little bit about; one, what specifically does that represent? I read through the disclosure and I still don’t fully quite understand the timing impact here and what the ongoing impact it is pertaining to those contracts representing in the financials.

So the majority of our 606 adjustment came through our portfolio management contract which is a gross up of our expenses and revenues. And if you think of that 70 million guidance basically the majority of it is really coming from that what becomes a pass-through for us of a gross up of revenues and expenses on the PM business. You’re right in there, there was a little increase though there is a little delta between the revenue and expenses as a result of the adoption of 606. And that was in particular to one contract where we were expecting to realize the revenue throughout 2018, because of 606 that actually accelerated that acceleration and expenses in to the first quarter versus over more of 2018. That tails off until the majority of it really ends up just becoming the adjustment as a result of the portfolio management 606 adjustment.

I think just to add a little more color there. In the PM contract effectively those expenses that Chris is referring were netted against revenue so this is nothing more than a pass-through process that will now gross up revenues and expenses by an equal amount in that particular contract of the (inaudible).

Our next question comes from Mark Hammond with Bank of America High Yield. Please go ahead.

Three questions and pretty quick. So the first one is, with the new segments, what’s the allocation of unsecured debt between the federal consumer and other segments?

We obviously look at the allocations from a number of perspectives. The reality is a lot of the unsecured today, unsecured debt is allocated against the private portfolio, but there is some minor allocations also to the refi product as well as the FFELP portfolio. But the majority of that unsecured debt is aligned against the private portfolio, and specifically the legacy portfolio versus the refi portfolio.

And the liquidity portfolio.

And the liquidity portfolio.

And that liquidity portfolio that’s in the other segment, right?

That’s right.

And that’s just, trying to get a sense for what’s that is funding, just assets and liabilities. I know the unsecured debt would be funding part of that, but what is it funding exactly?

The liquidity portfolio is there to meet our cash needs of maturing debts. So, one of the things Chris mentioned in his comments is that we did an equal call for the final debt maturity we have in 2018. If we did not do that we would be sitting on a larger balance of cash in anticipation of that debt maturity. So we’re actually sitting on that in March 31, but where if by calling it we were able affectively minimize the impact of that negative drag of short term cash investments versus unsecured debt cost of funds. But the allocation and we look at how we allocated the unsecured debt. It really is about the – and if you look at the advance rates that we get on securitization transactions and FFELP portfolios the advance rate is very high and so therefore they consumer substantially lower levels of unsecured debt in the process.

And inevitably we run liquidity and you can see it on our balance sheet, just as Jack mentioned to manage maturity, but also to make sure that we’re in compliance with buffers etcetera, liquidity buffers that we require to be prudent. So it’s really just the management of that to ensure that we can meet obligations, fund the business and maintain our ratings.

And then moving on with the segment name change, is there any reason why you chose the broader consumer lending name as oppose to be more specific like calling it the education lending segment?

I’ll just take that. The reality of the Earnest business that we acquired, when we acquired it they were originating a very small amount of originate to sell assets in the personal unsecured loan space and on the mortgage space. So these are not balance sheet loans, these are loans that are originated to sell. We like that model, we think that model can potentially be grown. And so in order to accomplish a broader number of products we need to consume the lending. And you’re correct, the reality today it is primarily an education/refi segment, but there is the opportunity for us on the originate to sell basis to grow those businesses, and we are exploring that opportunity.

And then last one is on, typically we hear talk about purchasing performing loan portfolios. Has Navient ever considered purchasing portfolios of delinquent or non-performing consumer loans and then collecting on them?

That business was something we were in many years ago, but we exited that space and have no plans to return to it.

[Operator Instructions] Your next question comes from John Hecht with Jefferies. Please go ahead.

You need to address a certain ways, but we’ve got cost related to Duncan where it was trying to get about 29 million a quarter. How scalable are those costs given some of your growth prospects in each of those segments. And then second related question is, we’ve talked about Earnest and some of the volume opportunities there. I wonder if you can give us some update on Duncan in that same regards.

So both of these businesses have what you would effectively call volume related cost components to them. In the Earnest side of the equation it’s the variable cost that we incur to acquire loans that’s marketing, the digital strategies and efforts that we make in that space. The leverage opportunity in that area is to drive those variable costs down as we become – as our digital marketing strategies become more efficient. That is something that has happened in Q1 versus Q4 as an example. That’s also to leverage the core infrastructure cost associated with running our data analytics, the modeling and strategy build off of a larger base of origination volume. In Duncan, you have similar kinds of metrics here although as volume ramps up the cost opportunities of leveraging the overhead and management structures in the systems are definitely achievable. And I would add one more piece in Duncan that’s different than Earnest and that the efforts that and the customer we serve in that space had some overlap with the work that we were doing and that we do (inaudible) particularly in the total space, and the opportunities to, for lack of a better word, capture synergies out of that combination of business activities is pretty significant. And then the last thing I would just mention in terms of our business processing opportunities broadly is, one of the things that we have done an excellent job at in the student loan servicing side of the equation is using workflows and analytics to automate and materially improve operating efficiency over time and we think there’s a significant opportunity for us to do the same in the BPS phase and working aggressively on that front. That’s part of why you’re seeing the margin expansion in Q1 for this reporting period.

And as a follow-up you mentioned some improvement in customer acquisition costs at Earnest. I am sure you can’t disclose those in detail, but I am wondering can you give us in order to kind of quantify the opportunity what type of percentage decline have you seen recently and how far can you drive that down over the next year or two?

Our efforts right now in the – we’ve owned the company for five months. I think it’s probably a little bit too early to say where we can drive it to. But they had detailed plans on how to reduce those costs over time and build more efficient digital strategies and models there. But we are definitely looking to continue that process. Some of that is of course also just how you originate the loan product as well so that you become more efficient at moving volume through the underwriting pipelines in the process. We’ll talk more about that later in the year I think in terms of where we are headed.

Your next question comes from Rick Shane with JPMorgan. Please go ahead.

When we look at some of the outlook commentary, a little bit of spread compression or mean compression in the FFELP business, higher provision expense in the consumer lending business. It strikes me that those businesses will probably trend flat to down slightly from a Q1 level. I guess the FFELP business probably trend down slightly, the consumer business will be offset by some growth. Impulsively your guidance suggests that there is about $35 million of net income that’s going to be picked up in the remainder of the year. Is the expectation that that’s really going to come from the new business or from the business processing segment? Is that really where we should see that growth?

So the purpose of the new business segments were to provide greater transparency in the performance of the individual segments, but in the federal education loan segment business itself and you’re correct and we’ve had a very declining business, right. No new FFELP loans have been originated and the vast majority of the revenues and earnings in that segment come from either owning FFELP loans or providing services to FFELP loan participants in that process. That would provide the forecast of the cash flows that we expect to derive from that space of 20 years. It’s a sense that portfolio is nationalized in 2010, this has been kind of what that business is. We’ve been able to alter it a bit by buying portfolios, but those opportunities that we see is becoming smaller and smaller. And when we look at where we could drive future earnings growth, it is coming from a combination of activities. It’s primarily coming from growing in the BPS and consumer lending segments as you pointed in refi, but also the opportunity to expand that perhaps in to in-school originations. It’s coming from our focus on operating efficiency, driving down our cost, improving the margins that we have in the business and minimizing or reducing interest expense in the process as well as a component of the overall spread. So those are the principal drivers that we’re focused on for the balance of 2018 and really beyond.

And then also capital return will have impact as well as you get in to the second half of ’18 and in to ’19, which will clearly benefit earnings per share as well.

Look, I want to put a little bit of a final point on this that sort of back the envelope math and I’m talking about assume some repurchase. I understand that obviously the sort of wasting asset nature of the FFELP business, but in 2000 in the back half of the year, it sounds like there’s going to be a little bit of NIM compression. So let’s assume that we saw sort of peak earnings at least for the year in that segment. In the consumer lending business you talk about additional provision expense, certainly there’s going to be growth there, potentially if you move back in to in-school, there’s going to be expense associated with getting back on preferred lenders lists. So, realistically that business is going to be perhaps flat for the year from here and that’s fine. But what I’m trying to understand is, does it really, and again can you sort of walk us through the path in terms of the revenue growth objectives on the EPS to sort of drive that incremental 35 million. And again it is not 35 million per quarter, it’s $35 million gap where you are today and where you would need to be at the end of the year if it hit the low end of guidance. Is that the way to think of this?

Our goal and our guidance in the EPS space is for 30% organic revenue growth in 2018. We certainly benefit from the acquisition we made in terms of total revenue of Duncan mid-way through 2017, but generally speaking we’re looking to drive increased revenue and increased profitability from that business segment, and frankly that’s one of the reasons why we’ve created this new business segment and highlighted it here for you to see and see the revenue grow specifically and see the margins specifically. But everything you’ve said Rick is generally correct, the pressure is on FFELP in private are there. Those are things that we’ve been expecting since the business was nationalized in 2010.

With that in mind I appreciate that you guys are going to provide ’15, ’16, and ’17 numbers broken out annually because of the way that everybody sort of looks at the numbers. Quarterly numbers for ’17 at least, ’16 would be ideal. But if you could include ’17 numbers sooner rather than later, rather than rolling them out when you report each quarter, that would be really helpful as people go back and reconstruct their models.

Noted, thanks.

Your next question comes from Henry Coffey with Wedbush. Please go ahead.

There’s going to be a lot of work, but on that topic, breaking them down and then breaking the line of businesses in to new categories is obviously very helpful. I’ve had some questions around that and this answers all of them, so thank you. The consolidated number are modeling of sort of the revenue and the consolidated businesses, except for the fact that you’ll be achieving your goals of being more effective on certain fronts. That’s not really going to change that much. Is that an accurate way of thinking about it? When I look at the P&L, it’s not going to be radically different.

Well, I do think your mix of components of business is changing, right, because one, your largest business, our largest segment, the federal education segment is amortizing and its amortizing at a pace that’s pretty much in line with what we expected, sometimes it’s’ a little faster, sometimes it’s a little slower, as the ones this quarter. But that is declining and then the other businesses are expected to replace that, not dollar for dollar of course, but they are pieces they are growing and growing at different paces than the – as other businesses are declining. I think probably one of the bigger items that has been and we hope this and I appreciate your comments on the value of the new segments that you provide here is that the amortization and profitability that’s been coming on the portfolio is coming from a spread business which is being replaced with in many instances revenue on a fee based business and the dollars are smaller and profitability on the margins might be attractive and smaller as a result of that. And so that has always been part of the challenge in the mix issues as it gets I think explained and disclosed to investors, breaking it in to the segments is our attempt to make some of those points more transparent and easier for investors to see the results and frankly growth opportunities. So those are -.

No, I agree, I’m just thinking about it from – I agree completely, I had questions around all of this and then now you’ve solved them. But the actual modelling of job is – the challenges are about the same, you headed now the FFELP, you had to think about the loans in here. So it’s a lot of work for you and then we just have to redo our models, but the intellectual task is actually simplified here. On a sort of unrelated topic, you opened the discussion already, but mortgage, the biggest issue facing successful former student loan borrowers now successful professionals is getting a mortgage because their DTI numbers tend to still look horrible, their FICOs are fantastic. I have one so I know. I have one who is going through all this, so I know all this. But the ability to get a mortgage is going to be challenging for this demographic. When you look at doing mortgages it’s just something that they happened to be doing because so far it happened to be doing it or is this an area where you’re going to invest capital and maybe even work on some product innovations and the like with other – in the buy/sell business you’d be working with the buyer of course.

Well a couple of points on this. I think there are broad comments made about student debt and the impact of things. We have a distinct advantage and that we have 12.5 customers and so we actually see details versus broad statistics. When we go through and survey our customers and look at actual borrower activities, borrowers with student debt actually have mortgages at similar rates than they’ve had in prior cycles. The biggest challenge and this is a policy issue that we have advocated for a change here. But the biggest challenge for customers is that when they were coming in to repayment during the great recession and experience an inability to get a job and now they have one is they have delinquencies on their credit bureau report and the stringent mortgage underwriting criteria see that delinquency and denies the borrower a conforming mortgage. And as you know, alternative mortgage products are relatively few and far between these days. That is the biggest challenge facing this demographic, not DTI and the product. It’s that inability to qualify because of our prior delinquency event. In our Earnest side of the equation, this is very much a pilot opportunity for us and we’re just exploring what the opportunity is and how attractive it could be. It is not capital intensive, we have no intentions of owning a service that is originated in services and soul servicing released and we would be expect it to be a modest related business that we think we might have potential to cross out to our customers on a wider scale down the road, but that is to be determined and to be proven concept.

Very much a technology solution.

Exactly, you’re going to supply the intellectual and technology capital. Would you be exploring the delinquency side of the business which means going down cycle a little bit, even though not all cycles are created equal or would you be looking at a project or product for the high net worth side of the student loan equation?

Our customers in this phase are very hi-fi. These customers are very hi-fi, go by a very high income. So if we’re talking about cross-selling products, that’s where we would be focused.

And it’s all the questions that we have for this time. Back to you Joe.

Thank you, Christie. We’d like to thank everyone for joining us on today’s call. If you have any other follow-up questions, feel free to contact me. This concludes today’s call.