Q3 2019 Earnings Call
Thank you for standing by and welcome to the Navigant third quarter 2019 earnings Conference call. At this time all participants are in a listen only mode. Please be advised that today's conference is being recorded.
After the speaker's remarks.
After the speakers presentation, there will be a question and answer session to ask a question. During the section you will need to press star one on your telephone if you require further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today Mr. Joe Fisher. Thank you. Please go ahead Sir.
Thank you Paula.
Good morning, and welcome to NAV into 2019 third quarter earnings call with me today, our Jakone money, our CEO and Chris loan our CFO .
After their prepared remarks, we'll open up the call for questions before we begin keep in mind or discussion will contain predictions expectations and forward looking statements actual results in the future maybe materially different from those discussed here.
This could be due to a variety of factors listeners should refer to the discussion are those factors on the company's Form 10-K , and other filings with the FCC.
During this conference call, we will refer to non-GAAP measures, we call or core earnings a description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2019 supplemental earnings disclosure.
This is posted on the Investor page at Naveen Dotcom. Thank you now I'll turn the call over to John .
Thanks, Joe Good morning, everyone and thank you for joining us today and for your interest Sanabria.
I'm thrilled to be sharing the results of another exceptional what are we saw strong contributions across all business segments delivering core earnings per share of 65 cents.
This quarter, we delivered better net net interest margins saw continued strength in credit.
Delivered a 57% increase in Rifai loan originations and saw an increase in our bps EBITDA margin to 20%.
Through the first nine months to the year, we're exceeding the financial targets, we shared with you back in January .
We are raising full year EPS guidance for the third time this year to a range of 2052 cents to 2055 cents.
Our results this quarter continue to demonstrate our ability to deliver value for our customers clients and investors.
We are delivering high quality earnings maximizing cash flows.
Achieving operating efficiencies and producing strong growth in our new businesses.
And we are leveraging our capital in our capabilities to generate very attractive risk adjusted returns as evidenced by an 18% return on equity this quarter.
Some highlights from the quarter include stronger net interest margins as we continue to develop innovative lower cost options to finance our student loan portfolio.
This is eliminated the need for us to access more expensive unsecured debt this year and reduce the outstanding balance by a billion dollars.
Credit performance continues to show significant strength.
Like once you're right in our FFELP Department of education, and private loan portfolios are either matching record lows are setting new ones.
For example, the 90 day, plus delinquency rate fell to 5.8% for FFELP portfolio and 2.3% for our private loan portfolio.
The charge off rate for our private credit portfolio. This quarter was 1.6% down 25% from a year ago.
[laughter].
Loan originations in the quarter totaled 1.4 billion, a robust 57% increase from a year ago and totaled $3.25 billion year to date.
We continue to see very strong demand for our products, which typically save clients thousands of dollars an interest expense and help them pay off their loans faster.
Credit quality and margins on this year as volume are very strong and are higher than last year.
Earlier this year, we launched in school loan product.
Used in NBP approach, which was designed to create learnings we could use for future enhancements in growth.
Our focus was to talk target high quality borrowers, who wanted to make pain in school payments, both of which are increasingly important given rifai options available in the marketplace.
Loan volume this academic season was disappointingly immaterial due primarily to the inability to offer consistent terms and eligibility nationally.
We have plans to address this and to incorporate what we have learned as we prepare for the next academic season.
And our business processing segment, we signed several new clients in government transportation and health care. Our continued focus on automation and data driven solutions help support an increase in the segment EBITDA margin into 20% for the quarter.
Finally, we returned $166 million to shareholders this quarter, including 130 million to purchase 9.7 million shares.
We've been actively engaged with the department of Education next generation servicing solution.
Each segment of the proposed solution has now gone to bid with the major components awaiting award.
Under today's contract we provide end to end servicing to approximately 5.7 million borrowers.
And this contract generates just under 8% of our total annual revenue.
We submitted a very competitive proposal that focuses on how we help student loan borrowers successfully managed our loans. Our history here is exceptional as we consistently lead others and default prevention.
And enrollment in alternative payment plans, including income driven repayment options.
January we will adopt new accounting the new accounting policy on loan losses. This policy known as Cecil requires financial institutions to establish reserves for loan losses expected over the life of alone.
Preparing for this new rule was a major effort and Chris will provide our estimate for the implementation of this policy a in his remarks.
The requirement to estimate life of loan losses includes numerous estimates on economic environments at different stages of alone lifecycle, along with predictions of graduation rates unemployment rates et cetera.
We've built a robust models using our extensive data in experience to produce this life of loan loss estimate.
This new accounting policy will alter our capital ratios in the annual GAAP profitability of newly originated or acquired loans.
In January the implementation of this policy will result in a one time reclassification of equity to loan loss reserves.
And while this will change our capital ratios, we do not anticipate any changes to our capital return plans in the fourth quarter or in 2020.
We plan to maintain our dividend and we plan to utilize the remaining $77 million available under our existing share repurchase authority. This year.
Furthermore, today, we are announcing a new $1 billion multi <expletive> multi year share repurchase authority.
We expect to allocate approximately $400 million from this plan. In addition to the $77 million remaining in the prior plan to purchases through 2020.
As this quarter's results illustrate we are continuing to exceed our financial objectives, including maximizing cash flows.
Improving operating efficiency.
Generating growth and our new businesses and returning capital to investors.
We're also well positioned to do the same in 2020.
Thanks for listening in today, and Chris will now provide a deeper review of the quarter's results course.
Thank you Jack and thank you to everyone on today's call for your interest in NAV is.
During my prepared remarks, I review, the third quarter results for 2009 team.
I will be referencing the earnings call presentation, which can be found on the company's website and the investors section.
Starting on slide three adjusted core EPS was 65 cents in the third quarter versus 56 cents from the year ago quarter.
Highlights from the quarter include 57% year over year increase and refinance loan originations at attractive spreads and strong credit.
Further improvement in credit quality across our education loan portfolio.
Continued optimization of our capital structure as a result of additional securitizations and improved facilities structures.
Core return on equity of 18%.
And the return of $166 million to shareholders through dividends and the repurchase of 9.7 million shares.
Let's move to segment reporting beginning with the federal education loans on slide four.
Core earnings were $128 million for the third quarter.
The net interest margin was 82 basis points inline with our guidance.
Both the delinquency and charge off rates significantly declined from a year ago for the charge off rate at six basis points.
I said recovery revenue increased 36% or $15 million from the prior year.
This increase demonstrates our continued success rehabilitating new placements.
Now, let's turn to slide five and our consumer lending segment.
Core earnings in this segment increased 10% year over year to $79 million.
Credit quality in this segment continued its strong performance has a total delinquency rate declined 24% and the forbearance rate declined 23% your full year.
During the quarter, we originated $1.4 billion of education refinanced loans at attractive spreads.
The total private education portfolio declined less than 3% year over year.
The net interest margin increased 23 basis points from the second quarter to 345 basis points.
Well, we continue to see that benefit of more efficient financing initiatives. This increase was primarily driven by the favorable interest rate environment and we now expect net interest margins for the full year to be in the mid three twentys.
Let's continue to slide six to review our business processing segment.
Total revenues in the quarter were $66 million as both health care RCM and government services, one and implemented multiple engagements.
This was accomplished while growing EBITDA margins to 20%.
Exceeding our targets and driven by continued synergies increased automation and disciplined cost management.
Before highlighting our financing activity, let's turn to slide seven to discuss the estimated impact of the adoption of Cecil to our balance sheet income statement and capital allocation philosophy.
The anticipated implementation of Cecil is expected to result in an incremental allowance between 750 and $850 million.
This increase is primarily driven by the change in our non TDR portfolio and FFELP portfolio from a two year reserve to a life of loan reserve.
The after tax impact is estimated to decrease equity by $590 million to $655 million.
This will initially increased leverage ratios on day one of implementation.
After implementation our ongoing profitability is expected to benefit from a significantly reduced provision expense compared to prior periods.
The provision in 2020 will primarily be driven by the amount of new education loans that originated which will we reserved for for the life of the loan.
This change is expected to temporarily pressure our capital ratios, which will rebuild quickly as a result of the increase profitability in 2020.
As a result, we do not see any change to our capital return philosophy.
As Jack mentioned, our board approved a 1 billion dollar multi year share buyback program and we expect our 2020 capital return to be broadly in line with 29 team.
Let's turn to slide eight which highlights our financing activity.
We began increasing our share repurchase activity in the second quarter as a result of the increased confidence in our financial outlook.
The $130 million share repurchases that occurred in the third quarter represent a 21% increase from the first quarters activity, while maintaining 18, a ratio of 1.27 times.
In the quarter, we issued $535 million of term private education, ABS and $749 million of term FFELP ABS.
In the quarter. We also called two legacy private education, ABS transactions in order to optimize existing capacity in our warehouse facilities.
Earlier. This week, we also issued notice for a make whole call for $1 billion of March 2020 unsecured debt.
Some of you may have seen this incorrectly reported by DTCC as a full redemption.
This is in the process of being corrected.
This call is expected to reduce our total unsecured debt outstanding balance to approximately $9.6 billion.
We expect this to generate an accounting loss in the fourth quarter of approximately $15 million.
Moving to slide nine as part of the proxy settlement agreement disclosed earlier. This year, we hired a third party to review our cash flow assumptions and model. The third party has completed their analysis and our third quarter cash flow forecast includes enhancements as a result of that review in addition to our regular quarterly updates.
Moving to slide 10, we remain focused on the 2019 targets outlined at the beginning of the year.
As a result of the exceptional performance through the first nine months, we're raising our core earnings per share guidance to a range of $2.52 to $2.55, excluding regulatory and restructuring expense.
This guidance represents a 28% increase from our original 2019 guidance and includes the estimated 15 million dollar loss from the recently announced a fourth quarter make whole call of $1 billion.
Finally, let's turn to GAAP results on slide 11.
We reported third quarter GAAP net income of $145 million or 63 cents per share compared with net income of $114 million or 43 cents per share third quarter of 2018.
Differences between core earnings and GAAP results are the marks related to our derivative positions and the accounting for goodwill and intangible assets.
In summary, we continue to exceed expectations across the entire company and we look forward to a strong finish to the fourth quarter.
I'll now open the call for questions.
Poly.
We're ready for questions.
And if you would like to ask a question simply press star one your telephone keypad, well pause for just a moment to compile picking in a roster.
And your first question comes from the line of Sanjay Sakhrani with KBW.
Thanks, Good morning, Chris I got to for you and one for Jack.
Chris on the EPS guidance upgrade could you just talk about how much of that is driven by the interest rate movements in the basis impacts related the related basis impact just wanted to make sure I understand how that plays out over the course of the Aaron and how we should think about it going into next year and then secondly, you mentioned that the capital.
Ill return isn't really impacted by seasonal I was just wondering if you've had a chance to talk to the rating agencies and what their thoughts were thanks.
Oh, sorry to sex second question first on your next for the questions. We have talked to the rating agencies. We have reviewed our preliminary results. Obviously this is a preliminary number as of today.
But they were generally in line with our views as well, which give us comfort to announce these numbers. So we did have.
Input and insight from them and their fair share that this quarter on the on the interest rate question. Obviously, there was a benefit in the third quarter from our prime assets, which we said at the end of the of the last quarter versus the benefit received during the full quarter.
We are our projection is in for a big benefit in the fourth quarter.
We are.
Our expectation is probably at this point on the one more rate cut and Thats at December .
Clearly it is unclear at this point, if we're going to see a rate cut in October or December .
But I'd say that most of that benefit has come through in the third quarter.
Okay, Great and then Jack could you maybe elaborate a little bit on the ins goal loan growth disappointment there.
Could you maybe just talk about the strategies to tackle that thanks.
Sure.
So one of the things that we had developed and plan to use a state licensing approach similar to the what we do on the student loan re Fi product for our in school loans and one of the features or one of the items that we encountered during that process is the kind of the inability to make too.
Capitalize interest for accounts that differ.
During during the in school period in certain states.
So that meant that we were depending on what state. The bar was in and the co borrower was residing in terms and conditions of our offering would differ and that just created a fairly significant.
Obstacle for schools as they were promoting are recommending different lenders in that side of the equation for the customers that did move through our process I think we saw very strong.
Acceptance of some of the unique features that we offered for example, how we invite a co sign or into signing the process.
Quicker rate check that they can deploy and I think one of the things that we were able to.
That I was particularly satisfied with was.
And acceptance and an understanding of the value of our cost is that the customers saw in making payments while in school and as I said, both that high quality customers and a willingness to make payments in school I think is particularly important.
In a marketplace that could see.
Where students and borrowers have an opportunity to refinance loans after they the risk factors.
Decrease upon graduation.
How do we address that we will be working with the bank partner next year, which would allow us to.
Basically have a single set of terms and conditions that we can offer nationally to our customers are across the marketplace.
Okay great.
Okay.
And your next question comes from the line of Lee Cooperman with Omega family Office.
Thank you very much appreciate it you disclose the seasonal impact on our book value, which I guess is something like we want to $3 a share, but what does the pro forma impact on our earnings.
I assume its should lift of earnings quite a bit. So there will be question number. One question number two you earned 80% an equity would you say that were over earning no or is this a number that you view is being.
Reasonably sustainable.
So on the first question Cecil is a is.
Currently be best described as a very strange accounting policy.
Because it's all based on estimates and you're correct in that adjust it adjusts book value, but really what the accounting policy is as a movement of geography right. It takes it takes balances that were in equity in moves them into loan losses.
You know estimates over the life of the loan.
We would expect at the end of the cycle. The lifecycle of alone that the earnings would be the same regardless of whether cecil existed or did not.
So it's really just a temporary.
Geographical change there.
In terms of earnings one of the the changes that happens with Cecil is of course year, you would be eliminating if you. If you get your estimates right on the C. So at adoption you would not be making future provisions on the existing loan portfolio for the remaining life. So we do expect a loan loss provision.
<unk> expense to decline materially in 2020 and beyond.
The only charges that you will you should see is any adjustments to life of loan loss estimates and of course, as we make loans or purchase loans, we would have to book a loan loss provision for the full life of the loans over that timeframe.
On terms of return on equity.
You know this.
These this number is something that we think is is what we're targeting and we hopefully to be able to continue to achieve obviously, we'll see so book equity will go down so.
Ironically are always will actually rise.
As we as we move into 2020.
The.
For my knowledge of financials companies that are in 17, 18% an equity are generally selling it probably two times book or more.
We're showing on the pro forma book, maybe 1.2 or something like that so I assume this stems from the.
Legal overhang.
And the concerns over Elizabeth Warren forgetting liz's worn for the moment.
We can't forecast the future yet the resolution of the legal overhang.
Any insight as to when you think that might choose some clarity for us.
Sure I do agree that the legal overhang is a is not an insight as a significant issue for us.
Yeah. This as I think I've mentioned in prior calls to the civil litigation process as a slow grinding process.
We have completed the fact discovery process, we expect expert discovery to end.
Early next year.
And that then sets up the stage for setting a court court date in process there.
One of the things that we think is important to note here is when this lawsuit was filed it was filed without.
Having any kind of extensive or meaning at really any.
Listening to customer phone call, so they made and allegation without without.
Actually listening to customer phone calls in the first place and as anyone can see from the fact discovery process, which is available is publicly disclose at this point.
15 witnesses at the CPB has identified as supposedly supporting their claims of steering in fact, all have said no navient did provide me information on income driven repayment plans. So.
No. It's unfortunate that this case was which was brought for political reasons continues to exist, but we are.
Confident in our our defense and this is the reason why we are fighting this case because the allegations are baseless.
Right.
When the theoretical question.
The three rig was probably practical.
We have been consistent keeping a dividend flat and buying back stock.
What level of stock price would you suggest would you think would be necessary viewed should be looking at returning more money through the dividend rather the repurchase.
When we look at the enterprise value here, it's a function of of the expected cash flows coming off the legacy portfolio and then of course, the and the business franchise value of the ongoing business activities.
That's that's going to be something.
Look I love to have the luxury high class problem of addressing that issue, but I think thats somewhere.
That begins with a to handle on the stock price.
So you can assume that you're doing a very fine job when the company I. Appreciate it. Thank you very much for your responses.
Absolutely.
Your next question comes from the line of John Hecht with Jefferies.
Thanks, very much walls.
Jack you talked a little bit about that maybe John Christian will you talked about the impact of rates.
The latter part of this year, but.
Just thinking through next year.
Lower rates have a variety of different influences you talked about the basis risk, but it also influences volumes I think if the opportunity set for volumes in the refi Mark and so forth. So maybe can you just talk us through remind us of all the elements we want to think about.
Over the next several quarters, when we think about a declining rate environment.
Sure. So about a couple of points there on the lower rate environment clearly it as a increased interest in the refi product and we continue to see that going into the fourth quarter, where a spread lender in that product. So as Jack mentioned, we're capturing very attractive spreads and returns off the product.
Today, even at lower rates and.
That should continue into 2020 is right to the decline or stay where they are.
One of the places wherever the biggest beneficiaries, where there's an anticipation of declining rates, but rates don't actually decline and so we'll be watching that through the rest of this year and into next year, depending on a rate cuts we have.
But there is that continued mismatch given our prime portfolio.
Where the assets are pegged to prime and funded with LIBOR and LIBOR rates continue to be lower than a prime reset so that should continue isn't our models in our forecast, but if.
That environment continues or are there more rate cuts than expected there clearly could be upside as well.
Okay, and then obviously very strong momentum or move private equals refinance loans in the quarter.
Can you is there any characteristics you can give is there any geographical.
Trends, you're seeing or tight.
Borrower any any any light you can shine enough for us.
So the Rifai loan product is marketed primarily to.
Students, who have successfully completed their education in a route in the workplace.
With the demonstrated track record of making payments on their loans.
The real the balance or the rail target audience in those cases customers, who typically have both undergraduate and graduate degrees. They have larger debt balances as a result of that but when you look at the characteristics of our borrowers loan balances tend to be and not in the high Def.
Well digits or five five figures or low six figures.
Other income as well into the six figure range to FICO scores are in the high seven hundreds and they typically had been in repayment successfully making payments for somewhere between three and five years.
That means credit losses on this portfolio are extremely low.
And that has been born out by the actual experience today as I mentioned this year as loan volume.
Has even though it's been up it's up 60% year to date.
Is also seeing both better margins and better quality characteristics associated with that.
Chris mentioned, the the ability or the interest rate environment and the in the options there.
The customers that are refinancing.
Particularly federal student loans in this space typically have coupons and the in the high fives, all the way up into the Sevens and so we're able to offer terms and conditions that can save them thousands of dollars and interest expense and give them the ability to.
Repay their loans faster. This is kind of indirect contrast, with the federal programs, which really are designed to.
Push out payments and extended term yeah, I think it's important to emphasize even with the increased volumes, we are seeing stable or even better credit metrics on FICO and free cash flow et cetera. So.
It really has been a great year for us on the refinance side.
Great well, that's great color and if I can ask one quick question, Jeff what was the timing of phase 477 million phase one of the buyback that we should think about.
So.
That will be the amount that we expect to return through share repurchases through the end of 2020.
Perfect. Thank you very much.
Your next question comes from the line of Mark Hammond with Bank of America.
Thanks, Jack person Joe.
Cecil.
Can you give any insight as to what type of economic cycle is assume there.
So the seasonal models actually were require that you use multi economic scenarios to drive the seasonal model and you can choose the number of options to choose but so.
We've chosen three scenarios those scenarios are can be a mix of different scenarios stable deterioration significant recession et cetera, and then you wait those three scenarios to drive an outcome and so it is a multi variable analysis year blending a number of economic Sarah scenarios, what I can tell you in general most people.
Thank you are assuming sort of stable to deteriorations last recession, and some waiting and there's in their models and we would be no different in that regard.
Thanks, and then also regarding Cecil just quickly estimated your tangible net asset ratio remaining above 1.2 times when Cecil his first shown in the GAAP statements at the end of the first quarter generally the ballpark or what you're targeting is still to be above 1.2.
Yes. So so so that is generally ballpark what I'd also highlight is because we have been so efficient with our balance sheet over the last year and being able to optimize our capital structure and our assets and pay down unsecured debt utilizing assets on our balance sheet.
We're clearly facing in the future is.
Other constraints from a capital spread perspective, and Merck paying more attention to things like wreckage risk adjusted capital ratios in the rating agency models.
So the 10 a ratio to some degree is becoming less of an influence on our capital management as we look towards the risk adjusted capital analyses to drive capital allocation plans and we'll talk more about that in the fourth quarter.
Okay, Great and then last one for me is of the two and a half billion unencumbered private loans on the balance sheet.
Can you describe the collateral for me just.
You can in terms of seasoning whether its.
In soles lounge, and re Fi loans have invested you can represent them.
Most of it as private credit and see how very seasoned loans that we clearly could achieve leverage against if we needed to and is in our portfolio and in the portfolio stats and so it is just private credit.
Unencumbered that Oh, we have the option to monetize or to create some leverage against in the future.
Thanks, Chris Jakone, Joe appreciate it.
Thank you.
As a reminder to ask a question simply press Star then the number one on your telephone keypad. Your next question comes from the line of Mark day for use with Barclays.
Yeah. Thanks, how to follow up question on the private loan originations.
Well the impact has as the rally in rates. We've seen this year had on on the rate incentive, but you can offer and as you've seen a.
Bruce demand and also what impact if any as it had on your abilities.
Spreads you can generate as origination.
Sure so.
As Chris said were spread lender. So what we are looking for us is less about the absolute yield on the alone and more about the difference between the yield and our cost of funds.
And in this environment as we said, we're able to generate both were seeing both higher quality credit quality metrics on the loans, we originated year to date as well as a higher margin.
On the loans, there's no question that the lower interest rate environment is.
You know Sparks more demand I think it's just greater awareness of the product and opportunity in this space.
But we're really what we see as the largest driver of demand for re Fi is borrowers coming out of the in school status being in a period of repayment and having the opportunity to take a six or 7% interest rate loan and convert it into a.
Somewhere in the for three or 4% interest rate loan today saving as I said thousands of dollars and interest expense.
So we really don't look at it on an absolute rate base as we look at it on a spread basis when I'd highlight that probably starting in the second half of last year. The industry started becoming much more rational and that rationality is continue throughout this entire year. So there hasn't been any.
People looking to gain share from a pricing perspective et cetera that rationality is continued which we've been very pleased with.
Okay and your volumes have exceeded your expectations this year.
Is that due in part to to the more rational environment. You just alluded to are you getting more effective marketing are there other drivers of that.
I think it's it's all of the above.
Certainly the demand based on the rate environment as a factor, but our marketing strategies and approach here continue to evolve then.
And get better I would also add that our origination and underwriting process.
<unk> is a very easy process for consumers to participate in and there are features of our product offering that really are designed to kind of.
Provide a solution that is customized for each customer they get to select the.
Effectively the monthly payment term that they want to make and that allows the the loan balance to meet in the payment obligations to meet their budget and their pay down objectives. So it's a really the combination of those those factors that are driving.
Demand in and volume for us.
Okay got it and then just finally, well what drove the strengths on the asset recovery income during the quarter.
So I'm in the last.
Here and a half.
20 months, we received a.
A large placement of.
Accounts from the Department of Education, We also signed some new guarantors in the old FFELP relationship side. So it was increased placement activity that is driving that and the performance on that portfolio our ability to demonstrate what we do vast which is connected customers educate them on the different options. They have.
Available to them and get them back into a payment plan that they can.
Forward and more importantly.
Yes.
Basically satisfy their obligations on the federal student loan side of the equation. We look at in the Department of Ed Book as an example, two entities receive placements over that timeframe and we outperformed the competition by 46% in.
In terms of.
Recoveries.
Okay, great. Thank you.
Your next question comes from the line of Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions. This morning, I just wanted to focus on slide eight on financing component.
Jackie views the board efficiency and that's clearly what's going on here.
To understand on a static basis, what all of these actions would do to your NIM and then on a dynamic basis curious with putting swaps in place or not if these actions increase your liability sensitivity into 2020.
On the liability sensitivity they actually have muted our hedging programs have muted our interest rate sensitivity or where we published so sensitivities you can see them, but we have been able to even mute further hedging activities and the interest rate sensitivity and inevitably we think thats a huge benefit to the story over the last couple of years.
As in what we've been able to generate from a return perspective.
You know your question on dynamic versus static on the financing side.
I think I could answer it this way obviously, we think about two things from a financing perspective, we think about rate we think about term.
We're always looking for ways to.
Reduce rate on our financing financings of biggest costs in the company is something we focus a lot on until we can find opportunities to finance assets at a lower costs versus using unsecured debt. We we aggressively pursue those opportunities, but we've been able to do over the last couple of years is do things like that or to call Trust and repackaged.
To them and put them into lower cost facilities, we've had banks approach us about bit ones and create on balance sheet, Securitizations and really just take assets to term.
The savings generally can be two to 250 basis points. So it's very attractive, but you clearly don't have the term you have in the high yield market.
Which is that like I said about 250 basis points more expensive. So you know we keep our eye on that terms sensitivity the cost perspective, but we've been very pleased with our ability to really optimize our assets in our capital structure to improve our cost of financing and just get much more efficient around it I don't know, Jeff if you want.
I would just add I mean this the the innovation.
The solutions that we're tapping into here.
Our not just lowering our costs that are they're not taking on additional interest rate risk or liquidity risk for the company.
It's not like changing the profile.
Got it I'm just wondering if in an environment, where we expect rates to go lower if these funding strategies by shifting things a little bit more floating rate or actually potentially going to enhance your sensitivity to that.
No I mean, we're sort of our asset liability mix is along that.
Lines that where you capture is just adult in financing costs in that kind of float so it's.
Thank you really just book is to optimize the ultimate cost because we have some liabilities.
Float generally.
Terrific Okay, great. Thank you guys.
Your next question comes from the line of Moshe Orenbuch with credit Suisse.
Thanks, guys. Most of my questions have actually been asked and answered although I thought check could you just talk a little bit about a little bit more about the contract renewal.
And what elements when we're likely to here.
About the death of various pieces.
Yeah. So.
As a couple of moving parts and this and this space.
Clearly the next generation component is where the department has signaled it intends to go those contract responses have been solicited and submitted we're now waiting award.
Our expectation is that even with an award that's going to take time for implementation. So the current contracts that the major servicers have with the department of that actually are set to expire in December of this year.
They have signaled and intent to extend those but we haven't seen.
You know the specific proposals at this stage and again.
As I said, we service 5.7 million accounts for the department of Ed today.
It certainly this is an important contract for us and we think we do it and outstanding job on this side of the on for the Department and more importantly for the customers.
But the entire contract represents less than 8% of our total revenue.
Gotcha.
All of a follow ups, Chris you've done a really great job kind of tapping cash from various parts of the balance sheet.
Have you have you talked about how you're going to finance the billion dollars the call on the 2020 maturity.
Well I would I'd say as we don't need to use we don't need to issue high yields. So we found additional options to raise the cash and we feel like we're an incredibly strong position not only for the building, though it may go call, but for 2020 as well.
Got you that's.
Talking about Moshe will talk in terms of in the fourth quarter call about what we what weve executed.
Got it.
Then just lastly, I mean that.
Kind of expenses in general.
The you've had a better results kind of on the fee based business a little more expense because of the originations on.
On the private loan re Fi side, just talk a little bit about how you see that going forward and maybe just about act how acquisition cost are behaving in that.
And that refine markets.
So you know operating expense.
And particularly operating expense efficiency is is one of our top objectives.
Within the company.
<unk> expenses this quarter where were flat.
Relative to a year ago.
Lot of that has to do at some of the growth items that you mentioned, if you think about like our contingency collection work, whether we do it ourselves or we do it through agents you know there are direct variable costs that come come with that revenue.
That show up in that side of the equation.
But look at the end of the day, our portfolio is amortizing and we need to continue to find ways to more efficiently run the business and and reflect the the run off for the amortization that comes on that side of the equation on our Rifai business I think one of the things that we have done.
Exceptionally well on on that front is not just about credit quality and spread metrics, but it's also our cost to acquire.
We do have a process that is realized.
More heavily than the competition on digital strategies, we think this this creates a.
Ceta or cost to acquire in the refi space that is typically about half.
The average that are.
Competition is spending to originate loans.
So you think thats persisted, even as you stepped up the volume.
Yes, great. Thanks, so much.
You're welcome.
Your next question comes from him be coffee with Wedbush.
Yes, good morning, everyone and thanks for taking my questions.
Great when when you're looking at the the your dialogue with the rating agencies are they.
It seems that there is being very flexible about Cecil and just kind of slumping. It off of is that an accurate description about how they're they're looking at it.
And.
They seem to have digested it very well is there the risks that there's an event on the horizon, where they suddenly wake up and say works, we didn't mean to be so nice about all this because it it seems like there just looking at it from a finance point of view and just saying go which geography, we don't care, where your reserves in capital or or or is that decision.
Inaccurate.
So to be clear I would not so they're flipping it off FFO, but what I would say is that they clearly are cognizant of the fact that this is a geography issue.
I understand there's a phased in element to this.
I think that they have digestive well some of them, we'll come out with with statements and some research that actually said just what you said and that this is a geography issue and they don't see any change in saying that obviously, we want to be cognizant of the potential issues. It may pick a face if they change stacked and so over the last year year and a half we've been trying to.
Get to this point to manage this transition in a way that really was as least disruptive to this company as possible and I think weve navigated those water as well, thus far and so what we'll see how it transpires in 2020, but I do think the restate they do see it as geography. They do see it has an impact and they're going to work it in overtime, but they are.
Our cognizant of the fact that.
You do have a lot of loss absorbing capital on the balance sheet as a result of this and I do not expected. They are looking for a build back to the levels that would include.
Or that would include additional equity capital as a result.
The bank regulators don't seem to be as flexible.
Does this is creating a competitive advantage for for a non bank lenders like yourself or do you have any thoughts on that yet.
So that's an interesting question and I think the regulators are still there may be less flexible weather, obviously, giving more time and there's the phase and.
Three years is a very long time, and see where things go.
Inevitably one of the benefits a diversified has company has always had over a bank is it's not having a strong a regulatory requirement or capital return requirements at the banks have and so that could play out as an advantage.
Depending on the regulatory actions, so clearly be a benefit we want to get through 2020 smoothly and then we'll see what the opportunity is but we feel very good about where we are today.
And then finally sort of an unrelated question, it's very clear and listening to how you're describing boasts the refinance program and the in school lending program that you're you're you're focused on.
Upper end of the quality spectrum, you have billions and billions of dollars of experience collecting.
Lower credit quality loans, you've had a lot of experience in the and the private.
Education market et cetera et cetera.
Is there a prospect overtime that you'll evolve a product for the in essence lower quality, but still.
Very durable borrowers are.
What are your thoughts in that process.
So there's no question one of the.
You Jack assets of this company is our history and experience.
Working with borrowers across.
All all types of borrowers across all types of economic cycles in the federal loan programs. They are entitlements and so a customer is able to obtain alone from the department of education, regardless of.
What were there what type of degree they're pursuing how long they.
And that will take to get there if they get there at all and what whether or not that adds any value and we see that as problematic.
That doesn't mean low quality FICO score customers are bad credits and this and the education space, but we do need to focus on students and borrowers here, who have a high propensity to graduate are taking on reasonable amounts of debt for the type of degree that.
They expect to earn and I think more importantly, it's a demonstration that there's a and an acknowledgment that they want to make payments. So that they are paying down their loans I think one of the philosophically one of the challenges with the federal loan programs is.
This desire for all borrowers to be in income driven repayment plans.
The majority of whom are negatively amortizing and then you know then there's somewhat of a shock that borrower balances are not declining well.
What did you expect right. So we wanted we want to target a different customer base here customers that are using the loan products, we offer to help them improve their economic outlook.
Graduate on time, and as importantly make payments to amortize their loan balances as quickly as they can afford.
Another way of thinking about the question would do you would your existing skill set.
Allow you to.
Make more loans into the into the for profit business. If you felt you you had to a borrower that met your criteria.
I think our experience allows us to identify customers, who are more likely to be successful across the spectrum and.
So that is looking at.
Customer persistence in terms of graduation rates.
Got levels and.
Willingness and ability to make payments. So it took its really a combination of those things. There are good borrowers across all different types of schools. There are bad borrowers credit borrowers across all different types of schools.
Great. Thank you very much.
Your next question comes from the line of deal Ryan with Compass point.
Good morning, I have a question regulated to the run off analysis on slide nine.
Looking at the prior quarter.
It's like there may have been some adjustment in the expected run off cash flows of both the FFELP and private portfolio and you mentioned an independent analysis that was performed.
Were there any material adjustments made as a result of the independent analysis and second.
In relation to the runoff analysis does it pretty much at this point incorporate the Cecil expectations, you're going to be embedding in your numbers next year. Thank you.
So on the third quarter adjustment the primary adjustments to third quarter actually were just our annual or quarterly updates around interest rate curves and as you can see we increased some of our CPR. So those are the primary adjustments as well as realized cash flow in the quarter. The cash flow analysis that the third party did.
With US was very helpful. In that you know what allowed us to feel even more confident in our analysis in our projections what I'd say is on that on a net basis. It ended up being relatively some puts and takes and inevitably not a significant impact other than just verification of the process in the models that we have two that we put out every.
Quarter.
Okay, and then just in relation Bert the loss estimates are assess arts ours, not with the C. So loss estimates for sure, but we don't have two different models there okay. Thanks.
Your next question comes from the line up Peter Coffee with Barclays.
Thanks, I think my question, which was just asked but just just a follow up the did you say that the the figures that cashel figures on page nine do incorporate.
Cecil economic assumptions.
They do.
Okay. Thank you.
Your final question comes from the line of Dominic Gabriel with Oppenheimer.
Hi, Thanks, so much for taking my questions I just wanted to clarify did you mention that you would likely not raise the dividend unless the stock was above roughly $20 did I hear that correctly.
We don't I mean, that's as I said that would be a high class problem for us to be addressing.
I think we would take a look at where we are and what what are the drivers behind our view of enterprise value at that particular point in time, but as it stands right now are our plan and approach is to return the lion share the capital that we are returning to investors through share repurchases.
Great. Thank you and just real quick.
If we look at the core NPS summer and I believe you may have said this earlier in the call but would that include the 15 million expense in the fourth quarter for the number look thinking about the kind of base level of core earnings for 2019, new guidance that that's rights or to 52 to 255.
Full year estimate includes that 15 million dollar loss from the make whole call in the fourth quarter.
Okay, Great and then is there any chance that you could provide perhaps some of the.
NIM benefit between themselves segment and private consumer segment.
And when it comes to a 25 basis point.
Cutting rates that kind of geography, there the split.
So it's a little more complicated than that and maybe we can take that offline and talk about that you mean, Joe can get on the phone. It's interesting it depends on the data the rate cut because some dates are better than others and when we can incorporate those changes into our assets or not and so we can have that discussion on sort of how the FFELP and.
Private portfolios impact from are impacted by a rate cut offline.
Great. Thanks, so much I really appreciate it.
Thank you.
And this concludes the Q and <unk> question on the call. We will now go back to Mr. Fischer for closing remarks.
Okay. Thank you probably like to thank everyone for joining us on todays call. Please contact me or my colleague Nathan Rutledge. If you have any other follow up questions. This concludes today's call.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.