Navient Corporation (NAVI) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Felicia and I'll be your conference operator today. At this time, I would like to welcome everyone to Navient Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. At this time, I would turn the conference to Mr. Joe Fisher, Vice President of Investor Relations. Mr. Fisher, you may begin.

Thank you, Felicia. Good morning. And welcome to Navient's 2019 second 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 2019 supplemental earnings disclosure. This is posted on the Investors page at navient.com. Thank you. And now, I'll 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 results this quarter were exceptional. We saw strong contributions across the board, leading to core earnings per share of $0.74. Results for the quarter include gains from debt repurchases and the sale of refi loans of $0.10 and $0.5 respectively. In addition, net interest income and fee revenue was strong, and combined with credit costs and operating expenses that were better than plan. Through the first half, we are firmly on track to meet or exceed the financial metrics we established at the beginning of the year and we are raising full-year EPS guidance again this quarter by 16% to between $2.43 and $2.48 for the year. This quarter's results highlight the effectiveness of our efforts to meet our customers' and clients' needs, maximize earnings and cash flows, achieve operating efficiency gains and leverage our capital to deliver attractive risk-adjusted returns. Highlights from the quarter include stronger net interest income as we continue to execute efficient financing strategies. These strategies include leveraging the over-collateralization in our securitization trusts and capitalizing on unique opportunities to repurchase unsecured debt. Credit trends improved significantly in both our FFELP and private loan portfolios, reducing the provision for future credit losses. Our data driven strategies are delivering delinquency rates in both portfolios that are at or near historical lows, pointing to continued improvement in future defaults. We originated $846 million in refi loans this quarter, a 34% increase year-over-year, and our data and digital driven approach continues to generate high quality loans at attractive margins. In fact, the highest quarterly margins to date. And our technology platform and digital marketing delivers an industry best cost of acquisition. One of the things we're proud of is our human-centered design that has produced innovative features such as allowing customers to pick their monthly payment. This feature, along with others, allow customers to significantly reduce the interest cost of their student debt and achieve their financial goals faster. We completed our first pass-through financing this quarter, consisting of $412 million in refi loans, generating a gain of $16 million or 3.9% net of capitalized origination costs. This opens a new financing channel for the product and clearly highlights the value created by the refi origination business. In our federal segment, we produced a $24 million increase in asset recovery revenue this quarter, capitalizing on a large account placement. Our performance for this client was 45% better than our competitor. And we generated $2 billion of cash flow, including $1.3 billion from financing activities, allowing us to return $163 million to shareholders through dividends and share repurchases this quarter. In addition to our goal of growing top line revenue from new loan originations and business processing revenue, we're very focused on continued improvements in operating efficiency. The result, adjusted operating expense for the quarter decreased $4 million versus the year ago quarter to $229 million even as we saw significant growth in fee revenue, refi originations and the launch of our in-school loan product this quarter. Our efforts this year have been focused on interest on increased automation, driven by data analytics. These efforts have also boosted customer success and satisfaction. In addition, this quarter includes $10 million in insurance reimbursement for our regulatory related legal expense and we will be submitting future claims against those policies going forward. Earlier this year, we launched our in-school loan product with a goal of achieving mid to high teens return on equity. Our product design and technology platform are designed to simplify the application process and help students and families make informed financing decisions, features that distinguish our product from other similar products in the marketplace. Early reviews of our product and technology have been positive. The mailing of tuition bills which began mid-July and will continue into August is the main catalyst for application demand. We're optimistic on this product and we recognize the time required to establish our Earnest brand in the marketplace. In January, we outlined our key objectives for the year – maximize the amount and accelerate the timing of cash flows from our loan portfolios, continue to improve operating efficiency, leverage our skills and infrastructure to create value and lending in business processing, and return any excess capital to investors. As this quarter's results and actions indicate, we are successfully delivering on these objectives. I'd like to thank my teammates for a great quarter and I look forward to continuing success in the second half of the year. Thank you for listening in today and I'll now turn the call over to Chris for a deeper review of the quarter. Chris?

Thank you, Jack. And thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2019. I will be referencing the earnings call presentation which can be found on the company's website, in the Investors section. Starting on slide three, adjusted core EPS was $0.74 in the second quarter versus $0.52 from the year-ago quarter. Key highlights from the quarter include a 34% year-over-year increase in refinance loan originations at the most attractive refi spreads to date. Continued improvement in credit quality, further optimization of our capital and financing structure, nearly a $1 billion reduction of unsecured debt and the return of $163 million of capital to shareholders through dividends and the repurchase of 9.6 million shares. Let's move to segment reporting beginning with the federal education loans on slide four. Core earnings were $131 million for the second quarter. The net interest margin was 81 basis points, in line with our guidance. Both the delinquency and charge-off rates have significantly declined from a year ago, with the charge-off rate at 5 basis points, Navient's lowest level in the last 10 years. Contingency collections inventory increased by nearly $11 billion from the prior year. This increase in volume resulted in a stronger-than-expected 71% year-over-year increase in asset recovery revenue. Now, let's turn to slide five and our consumer lending segment. Core earnings in this segment increased 29% year-over-year, from $66 million to $85 million this quarter. During the quarter, we originated $846 million of education refinance loans at attractive spreads. The total private education portfolio declined less than 4% year-over-year, while the net interest margin increased slightly to 322 basis points as a result of more efficient financing initiatives. As a result of these initiatives and a favorable interest rate environment forecasted for the second half of the year, we are raising our private education loan net interest margin guidance to the low to mid 320s for the full year. Credit quality in the segment continued its strong performance as the total delinquency rate declined 15% and the forbearance rate declined 24% year-over-year. Let's continue to slide six to review our business processing segment. Total revenues in the quarter were $65 million and we continued to expand our healthcare RCM services by adding new full service revenue cycle clients. We achieved EBITDA margins of 17%, in line with our guidance and driven by disciplined cost management. Let's turn to slide seven which highlights our financing activity. As a result of our stronger profitability and capital position, Navient increased its share repurchase activity by 18% in the second quarter from the first quarter to $126 million. We expect this accelerated share repurchase activity to continue into the third quarter and still expect to end the year at the high-end of our targeted TNA range of 1.23 to 1.25 times. As we continue our dialogues with the rating agencies and approach the implementation of CECL in 2020, we expect to be in a position to provide an estimated range of the impact of this accounting change during the third quarter's earnings call. In the quarter, we issued $1.9 billion of term ABS and executed Navient's first pass-through transaction consisting of $412 million of securities backed entirely of high-quality, fixed rate private education refinance loans. This transaction resulted in a gain of $16 million, demonstrated the value of these assets and generated a new financing structure for the company. In the quarter, we also reduced our unsecured debt outstanding by nearly $1 billion. This included the repurchase of 108 $30 million [ph] of yen-denominated bonds, which resulted in a pretax gain of $32 million net of terminated hedges. This transaction was attractively priced, reduced the complexity of our balance sheet, improved our future profitability and retired all of our outstanding in bonds. Moving to slide eight, we remain focused on the 2019 targets outlined at the beginning of the year. Through the first half of the year, we are on track to meet or exceed these targets. As a result of the exceptional performance in the first half of the year, we are raising our core earnings per share guidance to a range of $2.43 to $2.48 excluding regulatory and restructuring expense. This guidance represents a 24% increase from our original 2019 guidance. Finally, let's turn to GAAP results on slide nine. We recorded second-quarter GAAP net income of $153 million or $0.64 per share compared with net income of $83 million or $0.31 per share in the second quarter of 2018. The differences between core earnings and GAAP results are the marks related to our derivative positions and the accounting for goodwill and intangible assets. With that, I'll now open the call to questions.

[Operator Instructions]. Your first question comes from the line of Sanjay Sakhrani of KBW.

Hi. Thanks for taking my questions. It's actually Steven Kwok filling in for Sanjay. Just first on the guidance. You raised guidance by about $0.33 to $0.35 relative to the prior. And this quarter, there was about a $0.20 beat. Just was wondering if you can help us think about where the rest of the upside from. Is it all coming from the better consumer lending NIM now or are there other factors we should consider?

I'll highlight a couple of things. Obviously, the rate environment has changed dramatically over the last year. And so, there are benefits that we'll realize going into the second half of the year. We are projecting two rate cuts to happen in 2019, of which we continue to be a beneficiary. So, net interest income, we believe, will continue to perform. I think we continue to have strong expectations around our fee businesses. And as you saw in the quarter, it really was an across-the-board beat and we expect a lot of those trends to continue.

Got it. And then, just around the – are there further opportunities for loan sales or debt repurchases as we look into the rest of this year?

The primary purpose for us for the loan sale opportunity was a few things. One, from a structure perspective, it was important for us to do a transaction because it will reduce the time to be able to do it the next time, and time is an important element into the actual results that you achieve in the loan sale process. And so, first and foremost is creating another form of financing for the company. Obviously, we have a lot of opportunities in the market today, but inevitably we wanted to have that opportunity as well. It also was very attractive to us from a return perspective. Obviously, the loan sale is just an acceleration of future cash flows to today, and so, for us, we saw that as a relatively attractive opportunity from a pricing perspective. We do not expect to continue to do loan sales as part of our business plan, but, obviously, if opportunities arose where we could achieve very attractive returns, we will take that opportunity. But we will not be putting that into our business plan going forward.

And on the debt repurchase, that was a pretty unique opportunity. We're about to see more of them, but they don't show up there very often.

Great. Thanks for taking my questions.

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

Yeah, hi. I'm going to ask you the same question I've been asking for five years. Clearly, the most aggressive use of our capital has been returning it to shareholders through repurchase. What do you think you're buying when you retire your shares? Like, in the last quarter, I guess you paid $13.23. Over the history of our buyback going over the last five or six year, you probably paid on average much more than $13.23. The stock has been relatively unresponsive. What is it that you – to me, buying back stock is justified under the one scenario. You're buying back something that is undervalued relative to what your expectations are. Can you share with us kind of what you're thinking about the value of the business?

Sure. Thanks for your question, Lee. We continue to believe that returning capital through share repurchases is an attractive transaction for our investors. In the last 18 months, we have repurchased almost a little over 36 million shares. The average price has been somewhere around $12.5 a share during that timeframe. Year-to-date, it's $12.24. So, when we look at the value that we can deliver from the legacy portfolio, the additions that we think we can add to value from loan originations in our business processing areas, we think we're buying the shares back at a substantial discount to the intrinsic value of the company. And that's been consistent with our approach. Obviously, the purchase prices in the last 18 months have been more attractive than in prior years and we accelerated the share repurchases in the second quarter reflecting that point of view.

The $207 million that you have left, do you intend to use it this year? And if you had to make a preliminary guesstimate about what kind of capital you'd have available in 2020, what would you say?

So, we do plan on completing the repurchases with the remaining authority this year. And ultimately, the amount that we repurchase next year is a combination of our forecasts and a board discussion process that will be happening later this year.

But I assume order of magnitude to be at least 10%?

I don't want to get ahead of – it's just a board process. You can look at what the cash flows are and the capital generation. You wouldn't see material changes year to year in that kind of activity.

And, clearly, your preference would be to put the excess cash flow into repurchase rather than making a dividend at this point?

Yes.

Okay, thank you.

You're welcome. Thanks. Thanks for your participation.

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

Morning. Thanks very much. The first question, just on the quarter, the expenses – I know you had the – the $6 million from the proxy resolution, but there was also $5 million from a transition service agreement. I'm just wondering what is that.

So, that is the agreement, you may remember, the first data outsourcing transaction we did where we have revenue and expenses offsetting each other. So, it really is a wash, but it's just part of our agreement as we transition services away from our platform that they are taking over. It really has zero impact on the bottom line.

Yep. Yep. I remember that now. And then, I wonder, can you give a sense for – given the kind of forward curve and what's going to change – I know you guys have done a lot of hedging in your margin, but what kind of opportunities the lower rate environment going forward might present for you?

So, first, on the hedging point, the rate environment really isn't impacted to the hedges. Just remember, we're really hedging our ones, threes risk. And so, what we've done is really neutralize that risk and provided certainty. There are times it outperforms. There are times it underperforms. But it really does just provide certainty to our cash flows. So, the rising or declining rate environment – what we really try to do is lock in 12 months out, really what the portfolio needs to be hedged at. So, less of an impact there, but where we clearly can pick up some value in the rate environment we're in today which is a decline rate environment. There's a few things. One, obviously, for income, it becomes a little more important as rates decline and then we pick up some margin there. It's also important to note that while we're fairly well match funded from an asset and liability perspective. In a stable or declining rate environment, there are short-term benefits as those rates move that enter to our net interest income. And we're experiencing those benefits currently. So, if the rate environment continues, we should see that flow through. So, on the third and fourth quarter, as we could see, improvements in net interest income and also for income benefits as well if we see the rate cuts expected.

Great. Thanks very much.

The next question comes from the line of Rick Shane of J.P. Morgan.

Hey, guys. Thanks for taking my questions this morning. Look, you guys have a steady sort of wall of maturities or a steady line of maturities coming forward and you've done a good job every year of sort of knocking them down in advance. 2020, you have $2.1 billion. 2021, you have $1.4 billion. I'm assuming, as we move into the second half of the year, you're going to start address those 2020 maturities. I'm curious, when you look at where rates are today, if there's opportunity to benefit from lower rates or how those maturities or addressing those maturities sort of impact margin over the next couple of years?

So, it's a great question. Obviously, 2020 represents the last maturity over $2 billion. When I take a look at the liquidity on our balance sheet, today we have over $1.7 billion of cash. We have unencumbered assets in meaningful scale. So, we feel very good about our ability to address 2020 and going forward. What we're really focused on is the continued optimization of our balance sheet, so looking for opportunities to finance assets at attractive rates versus where the unsecured market may be. Also, doing [indiscernible] potentially. So, we are continuing to review and analyze our position and optimize the outcome for shareholders, and that is the exercise we're engaging on. But the opportunities clearly are there and we will focus on them in the second half of the year.

Okay, great. And, look, given the strength of the earnings, you guys have a variety of options – buying back shares, meeting maturities, acquisition. I am curious when you, as a management team, sit down and look at the profitability that you're enjoying today and think about redeploying some of that profitability into organic opportunities, where do you see the best place to deploy capital?

So, when we look at the business outlook here, in a combination of things that you mentioned, we actually think we have the ability to do multiple things simultaneously. That includes growing the business organically. You see that in the 34% increase in refi originations, the launch of our in-school loan product, our business processing area has less of a capital demand side of the equation to grow that business. But, nonetheless, we still see an opportunity to really leverage the infrastructure and the operating skills of the company there. As Chris mentioned, we have significant cash flow and cash resources on hand to meet our liabilities and our maturities there. You saw it this year to date, we've reduced our unsecured debt balance by $1 billion while adding to our cash position and returning excess capital to shareholders. All three of those things, organic growth, debt reduction – unsecured debt reduction and capital return are on the table. And we see the ability to kind of manage through those very effectively. Look, at the end of the day, if we had our – the best use of capital is that we can redeploy it for shareholders and investors at higher returns than they can get elsewhere, that's obviously what we would love to be able to do. And in our case, because our capital generation is so high, we're actually able to do all three things.

Great. Thank you, guys.

And your next question comes from the line of Moshe Orenbuch of Credit Suisse.

Great, thanks. I guess congratulations on being able to drive the TNA ratio to better than your expectations. I was wondering if you could just talk a little bit about, number one, what were the major factors in how you get there, how you're going to use through that excess? Kind of dovetailing perhaps Rick's question, as you look out into 2020, are there steps to actually improve value?

That's a great question. Appreciate it. A couple of things. one, obviously, the TNA ratio guidance we gave was first end of year guidance. So, we do expect to end up in the higher end of that 1.23 to 1.25 times. We clearly are above that at 1.27 times. Some of that was driven by the benefits we saw from the debt buyback and the loan sale. But, inevitably, clearly, in a very strong position from a capital perspective. And what you saw us do is, once we realized that early in this quarter as we accelerated our share repurchase activity, to try to catch up a little bit on that. And as I mentioned in my remarks, we will continue at the same pace we saw in the second quarter for the third quarter. So, the dollar number should be relatively similar. That's what we will shoot for. Inevitably, the big thing, as you're all aware, is the implementation of CECL coming. We're finalizing our views and the impact to capital and how we manage through that. We feel good about our position today. We've put ourselves in this capital position over the last year to be able to successfully manage through that. And so, we will be giving you some pretty clear update and guidance at the end of the third quarter to help you see through the impact and how we're managing capital. But we clearly feel good and we accelerated our share repurchase activity to be able to manage that capital position where we are today because, clearly, we did a little better than we were expecting.

Got it. Thanks, Chris. And just on a second topic, you obviously have had strong success relative to peers with servicing it. But I'm just wondering if there's any thought from a longer-term perspective given the fact that the Department of Ed is still kind of thinking about how that contract is going to [indiscernible] look longer-term. Maybe kind of any big picture thoughts there as to how you could leverage that perhaps, but use it also in a way that allows you to manage your expenses?

One of the larger skills of this company is our operational expertise, particularly how we execute that in loan servicing. The benefits come to us in a variety of ways. We are very analytical and data-driven in our process that allows us to be very specific at how we assist individual customers. You see it in our delinquency and default rates. The federal cohort default rate, which is a uniform measure of federal loan performance across all schools, we consistently deliver 30-plus-percent better results than all the other services around. We don't have a different portfolio. These are measures that you could look at individual schools or across the entire platform. That's a skill set that we think is valuable to the Department of Ed. How they utilize that and execute that will be really dependent on how the RFP form gets issued and how it gets executed. So, those are things that have changed around quite a bit over the last couple of years. There's a RFP that we're in the process of responding to now for the back office and call center related functions and we hope to be able to demonstrate our expertise and the value that we generate versus just a commodity-type service. The last piece I would just add to that is that the regulatory environment associated with that business is a challenge and it's something that needs to be addressed to make that contract and that kind of business attractive and profitable.

Moshe, are you still there?

I am. I had to kind of think about – Jack, you kind of left that hanging a little bit at the end there. Anything to report with respect to your discussions with the regulator on that?

So, on the regulatory side of the equation, there've been a number of unsubstantiated accusations that have been made about the work that we do. If you look at the CFPB claim when they filed their lawsuit more than two years ago was that we were steering hundreds of thousands of borrowers unnecessarily into forbearance. We've now been through two years of fact discovery and the CFPB has yet to find a single customer to support their claim. I think that fact pattern speaks volumes about the situation in the regulatory environment and where we stand.

Thanks.

[Operator Instructions]. And your next question comes from the line of Arren Cyganovich of Citigroup.

Thanks. I was just wondering how the lower rate environment should impact your refi originations going forward? Does that make it more challenging or create an opportunity from the financing [indiscernible]?

So, the lower rate – the refi business is a product that helps customers who have higher coupon student loans, an established credit record and sufficient cash flow to be able to easily service those accounts to refinance those loans at a lower rate, save money and pay down their debt faster. So, a falling interest rate environment marginally improves demand for that product overall. Whereas a rising rate environment marginally reduces demand for the product, but it's really the absolute differences between the coupons on their original student loan debt versus the current market rates that are available to them.

Okay. I guess the new plus originations from this current academic year will be at lower rates because of where the 10-year was. So, I would imagine…

They're lower, although they are still grad plus interest rates. In today's rate environment, we would be able to refinance those loans at a lower rate than what the borrower is paying on a new grad plus loan, obviously depending on their credit situation.

Okay. And on the in-school piece, I know it's quite early days for that, but is there anything that would indicate that you'll be able to do more or less than what your original expectations were?

Students and families begin to apply for loans once their tuition bills are received. The early schools start sending them in kind of mid – just in the last couple of weeks and then the volume of that process accelerates into August. So, we're just starting to see kind of application flows associated with that. The increases – the percentage increases are kind of what we would expect to see at this stage in the game, but it is still very early in the process.

Okay. And then, just lastly, the federal segment collection and the asset recovery have been quite strong recently. Is that something that you expect to be to continue for a while with the tail on the ability to continue to generate those stronger collection rates?

So, that opportunity came from more or less a large one-time placement that we've been executing over the last year or so. You can see the inventory of accounts in that space continues to be quite large. We've executed that extremely well. And as I said, there were two of us who got large placements in that transaction. We have outperformed our competitor by 45% in that space. We'll certainly see continued revenue gains from that, but it does have a finite life. It was a single one-time placement, not an ongoing large placement.

Okay, thank you.

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

Thanks. And good morning, Jack, Chris and Joe. The first question was on the Earnest refi product, how has pricing held up in a declining rate environment? Have you been able to keep pricing relatively higher than the general rate environment has declined?

As we said in the prepared remarks, this last quarter's origination volume was at the highest margins. So, we look at it in terms of not just what the absolute rate is, but what's the rate relative to our funding costs. And the portfolio of loans that we generated in the second quarter had the highest net margins of any quarter's originations to date. Now, that march has been steadily improving since we got into the refi origination business. And we continue to expect and see kind of – the competition in that marketplaces is high, but people – our competitors and ourselves are pricing the product relative to the general interest rate environment. We think our advantages in that space come from the way our product is designed and featured for customers. It allows them to select and manage the monthly payment process to fit their budget, which allows them to save more funds over time and achieve their financial goals faster. Our cost of acquisition is also significant advantage for us. We are principally a digital shop, meaning that we're originating this – generating leads through a digital process rather than a direct mail process. And as a result of that and the technology we deploy to underwrite the loans, our cost of acquiring a loan is, in our estimate, about half the industry average. So, when you combine those features together, we think we've got a very attractive product set. Obviously, you saw it in the pass-through transaction that we did, generating a gain of 3.9% net of capitalized costs, given the credit quality of this portfolio, shows the value that we can generate from the refi origination business.

Thanks, Jack. And then, switching to credit ratings, I noticed your goal is to maintain your current credit ratings. And then, a few months ago, Fitch had moved to a negative outlook. Wondering if you guys have done anything over the past couple of months to mitigate or have any conversations about getting that outlook taken off negative.

All I can say is we continue to execute on our plan and continue to achieve their concerns, in that when they – if you look about – their primary concern has been focused on the maturities and, clearly, we've been taking care of those without any issue and our liquidity position should give them a lot of comfort. They have had regulatory concerns. And I think as every day goes by, and as Jack mentioned, sort of the lack of evidence, they get a little more comfortable with that aspect, although it remains an unknown. And from a business plan perspective, our execution has been better than expectations, the Earnest build. So, I think all we do is execute and execute well. And as you said, we do want to maintain our ratings, and so we'll see where Fitch ends up. But we do seem to be addressing their issues. And so, now we'll just have to see what their ultimate goal is.

I would just add to that. We have consistently delivered on every aspect of the capital and debt financing forecast that we have presented to the rating agencies. And the way we have managed our liability structure through some very challenging environments in the recession, Great Recession, and some of the liquidity issues associated after that, the end of the day here is we have outperformed our rating in every single period.

And our ratios show that. I think most people would admit that our rating do not reflect where our ratios are and where our capital structure is. And we continue to push on those points whenever we meet with them.

Got it. Thanks, Jack, Chris and Joe.

And your next question comes from the line of Henry Coffey of Wedbush.

Yeah. Good morning, everyone. Great quarter if it's in there. But can you give me your end-of-period share count?

We had ending CFCs of 233.

Okay. And then, it's July. You've had six good months of credit metrics. You have a fairly deep insight into the specifics behind that. What are your thoughts really on two different fronts? When you look at your FFELP portfolio, what insights do you have into where today's student borrower probably is and what are your thoughts about credit metrics over the next 6 to 12 months?

Sure. So, there's really three different metrics that we look at in credit here. You have your legacy FFELP, your legacy private and your newly originated refi loans. When we look at – and all three of those segments of our portfolio are performing extremely well and delinquency rates, as I said in the call earlier, are at or near historical lows. That's a reflection of the strong economy. It's a reflection of the work we do to help customers who need assistance find the right payment plan and, ultimately, avoid default. In the student loan space, the storyline is that generally students are having significant difficulty meeting or making their payments on student loans. Our delinquency statistics would tell you kind of the opposite. And that doesn't mean there are customers who are not experiencing difficulties. There are customers who are, but we work with them and try and find solutions to them. But the overwhelming majority of students who take on debt and graduate with a degree are successfully managing their payments, and you see it in the delinquency statistics here.

When you take everything you know about your slice of the business and apply it to what you, obviously, see in the entire direct portfolio, would you make that same observation?

Yes.

And then, finally on CECL, obviously, you will tell us about capital expectations, but will you be able to tell us – give us some insight into how we should factor CECL into our earnings estimates for 2020 or what are your thoughts there?

I think we'll give you a complete roadmap in the third quarter CECL implications, capital, et cetera for 2020.

Great. Thank you very much.

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

Yeah, thanks. It sounds like the biggest driver of kind of improved guidance on both the private NIM and earnings is those two expected Fed rate cuts presumably helping the prime LIBOR mismatch on the private side and also the floor income. Can you give us a sense if you see other upside to NIM if we get three cuts instead of two and/or from any other kind of funding efficiencies that you might realize in the back half of the year? And if so, can you help us kind of think about kind of what 25 basis points of rate cut might mean to the private student loan NIM?

So, I think as we've tried to highlight this morning, the earnings momentum of this company and the results for the first half of the year and the forecast for the second are really coming from an across-the-board levels of contribution. In the top line, we're seeing stronger loan originations in the refi space, better margins. Our fee revenue is better. And as you point out, the interest rate environment is helping us on our legacy portfolio, both in terms of floor income and the prime LIBOR related issues. We're also benefiting from improving credit. We saw significant double-digit delinquencies declines in both our FFELP and private portfolios that's leading to lower provisions. And on the operating expense side of the equation, we continue to deliver efficiency gains in how we run and operate the business. When you combine that with the lower share count, that is what's driving the earnings momentum of the company. So, I think it's important just to note that it's coming from across the board contributions versus just a single area. And then, maybe, Chris, you want to add a little bit more about what a 25 basis point cut would mean?

Yeah. So, as for more cuts, obviously, it really depends on timing. Dates of the Fed meetings are important. Where the market expects to be, what happens to LIBOR and financing costs. So, it's not as straightforward. As I've mentioned, we do have two rate cuts in our forecast, one for July and one for October. Another rate cut expectation clearly would be beneficial, but it depends on timing of when it happened, when the market would think it would happen. So, all I can say, it clearly would be beneficial. It's just difficult to quantify given our expectations for two. And if a third was coming, it will probably be at year-end. So, it's just a little more opaque from that perspective.

Okay. And as far as extracting additional funding efficiencies, how much more opportunity is there for you and how active should we expect you to be in the coming quarters?

I think that there is a lot of opportunity. And, obviously, we continually assess the costs of our financing, the term of our financing, the cash flow expectations that we expect to realize over the coming years and weight them against each other. We have still $8 billion of over-collateralization. There are other opportunities. We have unencumbered assets on the balance sheet. So, I think our perspective is we continue to push on those opportunities. I can tell you the financing markets are very healthy. We continue to get reverse inquiry into those opportunities. And so, you should expect us to continue to weigh those benefits and make optimal capital structure decisions. The only thing I'd highlight is 10-year is obviously important as well, and so we weigh all those factors.

Got it, thank you.

Your next question comes from the line of Travis Pascavis with PIMCO.

Hello, everyone. Thanks for taking my call. Just wanted to see if you could comment – I noticed the legacy private loan book seems to have amortized a little bit more this quarter. Could you kind of comment on why that might be? Is it kind of just reflection of the economy and people refinancing them or is there something else going on that I should think about?

From our model's perspective, our expectation and actually was relatively in line from what we were expecting. And so, again, I'm not sure what your expectations were. But we haven't seen outsize amortization versus our plan. In fact, I would say, year-to-date, we were actually probably a little better than we would've thought on where balances are ending up. So, again, I'm just unsure what your expectation was, but ours are relatively in line to even slightly better than expected.

Just given the new loan generation, kind of how do you think about the timing of when the loan – at least on the private side, the loan book would stabilize? Is that something…

It's a great question. As I mentioned in my remarks, it's 4% year-over-year decline. That's continue to come in. We, obviously, have seen refi originations be better than our expectations at the best spreads we've seen. And we continue to see a lot of opportunity there. Obviously, on a risk-adjusted basis, we really like those loans. From a return perspective, against the capital we put against them. And so, I would say that we're getting closer to that position, but we don't have a forecast of when the private portfolio would stabilize and grow. But we clearly are – we like what we're seeing thus far.

Great. There's a lot of proposals out there by the new candidates that are coming out. A lot of is noise, a lot of it is headlines. But maybe if you could kind of – anything that stands out that you think is particularly interesting or has potential traction on your side that you think is important to maybe call out or highlight anything in general?

I think as you noted, there are a lot of proposals surrounding student debt, given the election cycle. At this stage in the game, they are proposals at this point. And how the government and taxpayers decide to assist students and families in paying for college is really a political decision. So, we'll have to wait and see how that all unfolds.

Totally understand. And maybe just my final question. Just maybe – could you refresh, the Department of Education's servicing contract, there's been lot of stops and starts. Maybe what is the timeline for conclusion of that or anything in particular you could update us with?

So, the current state is that the contract has been kind of segmented into different components that are out for RFP. Their expectations have been that the decisions would've been made by now, but various components are still out for response to RFPs. And others that have been issued have not been concluded yet. It's really difficult to say exactly how this is going to go in part because every single action seems to be accompanied by some form of bid protest by somebody in the industry and we certainly would expect bid protests – that bid protest process to continue even as decisions are made and contracts awarded.

And our current contract was extended through December, and so we'll see what happens when we get to December, but that was an [indiscernible] six-month extension if they wanted to choose to implement, which they did. And so, again, per Jack's comment, that could continue to be extended, but it's unclear. But we have been extended through December.

Great. Well said. Thanks for the update.

Welcome.

And there are no further questions at this time. And I'll turn the call back over to Mr. Joe Fisher.

Thank you, Felicia. I'd like to thank everyone for joining us on today's 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 for participating. You may now disconnect at this time.