Navient Corporation (NAVI) Q3 2019 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Navient 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 speakers' remarks -- after the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today Mr. Joe Fisher. Thank you. Please go ahead, sir.

Thank you, Pauley. Good morning and welcome to Navient's 2019 third 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 third quarter 2019 supplemental earnings disclosure. This is posted on the Investors page at navient.com. Thank you. 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. I'm thrilled to be sharing the results of another exceptional quarter. We saw strong contributions across all business segments, delivering core earnings per share of $0.65. This quarter we delivered better net interest margins, saw continued strength in credit, delivered a 57% increase in refi loan originations and saw an increase in our EPS -- EBITDA margin to 20%. Through the first nine months of the year, we are exceeding the financial targets we shared with you back in January and we are raising full-year EPS guidance for the third time this year to a range of $2.52 to $2.55. Our results this quarter continue to demonstrate our ability to deliver value for our customers, clients and investors. We're delivering high-quality earnings, maximizing cash flows, achieving operating efficiencies and producing strong growth in our new businesses. And we are leveraging our capital and 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 has eliminated the need for us to access more expensive unsecured debt this year and reduce the outstanding balance by $1 billion. Credit performance continues to show significant strength. Delinquency rates in our FFELP Department of Education and Private Loan portfolios are either matching record lows or setting new ones. For example, the 90-day plus delinquency rate fell to 5.8% for our 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. Loan originations in the quarter totaled $1.4 billion, a robust 57% increase from a year-ago and total $3.25 billion year-to-date. We continue to see very strong demand for our products, which typically save clients thousands of dollars in interest expense and help them pay off their loans faster. Credit quality and margins on this year's volume are very strong and are higher than last year. Earlier this year we launched an in-school loan product. We used an MVP approach, which was designed to create learnings we could use for future enhancements and growth. Our focus was to target high-quality borrowers who wanted to make paying -- in-school payments, both of which are increasingly important given refi 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've learned as we prepare for the next academic season. In our Business Processing segment, we signed several new clients in government, transportation and healthcare. Our continued focus on automation and data-driven solutions help support an increase in the segment EBITDA margin to 20% for the quarter. Finally, we returned a $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's 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 manage their loans. Our history here is exceptional as we consistently lead others in default prevention and enrollment in alternative payment plans, including income driven repayment options. In January, we will adopt new accounting, the new accounting policy on loan losses. This policy known as CECL requires financial institutions to establish reserves for loan losses expected over the life of the loan. Preparing for this new rule is a major effort and Chris will provide our estimate for the implementation of this policy in his remarks. The requirement to estimate life of loan losses includes numerous estimates on economic environments at different stages of the loan lifecycle along with predictions of graduation rates and employment rates etcetera. We’ve built a robust model using our extensive data and experience to produce this life of loan loss estimate. This new accounting policy will alter our capital ratios and 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-ship -- multiyear 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 in our new businesses and returning capital to investors. We are 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. 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 third quarter results for 2019. I will be referencing the earnings call presentation, which can be found in the company's website in the Investors Section. Starting on Slide 3, adjusted core EPS was $0.65 in the third quarter versus $0.56 from the year-ago quarter. Key highlights from the quarter include: a 57% year-over-year increase in 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 facility 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 4. Core earnings were $128 million for the third quarter. The net interest margin was 82 basis points in line with our guidance. Both the delinquency and charge-off rates has significantly declined from a year-ago with a charge-off rate at 6 basis points. Asset 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 5 on our Consumer Lending segment. Core earnings in this segment increased 10% year-over-year to $79 million. Credit quality in the segment continued its strong performance as the total delinquency rate declined 24% and the forbearance rate declined 23% year-over-year. During the quarter, we originated $1.4 billion of education refinance 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. While we continue to see the 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 320s. Let's continue to Slide 6 to review our Business Processing segment. Total revenues in the quarter were $66 million as both healthcare RCM and government services won 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 7 to discuss the estimated impact of the adoption of CECL to our balance sheet, income statement and capital allocation philosophy. The anticipated implementation of CECL is expected to result in an incremental allowance between $750 million and $850 million. This increase is primarily driven by the change in our non-TDR portfolio and FFELP portfolio from a 2-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 increase 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 are originated, which will be reserved 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 increased 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 multi-year share buyback program and we expect our 2020 capital return to be broadly in line with 2019. Let's turn to Slide 8, 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 quarter's activity while maintaining a TNA ratio of 1.27x. In the quarter, we issued $535 million of term Private Education ABS and $749 million of term FFELP ABS. In the quarter, we also call 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 cause 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 9. 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 update. 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 are 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 loss from the recently announced fourth-quarter make-whole call of $1 billion. Finally, let's turn to GAAP results on Slide 11. We recorded third quarter GAAP net income of $145 million or $0.63 per share compared with net income of $114 million or $0.43 per share in the third 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. In summary, we continue to exceed expectations across the entire company and we look forward to a strong finish to the fourth quarter. I will now open the call for questions.

Pauley, we are ready for questions.

[Operator Instructions] And your first question comes from the line of Sanjay Sakhrani with KBW.

Thanks. Good morning. Chris, I got two 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 and the basis impacts -- the related basis impacts? Just wanted to make sure I understand how that plays out over the course of the year and how we should think about it going into next year? And then secondly, you mentioned that the capital return isn't really impacted by CECL. I was just wondering if you’ve had a chance to talk to the rating agencies and what their thoughts were? Thanks.

So I will start with your second question first on and thanks for the questions. We have talks with 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 therefore I’ve shared that this quarter. 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 isn't for a big benefit in the fourth quarter. We are -- our expectation is probably at this point on the -- one more rate cut and that's at December. It 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 in-school 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 what we do on the student loan refi 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 capitalize interest for accounts that differ during the in-school period in certain states. And so that meant that we were depending on what state the borrower 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 or recommending different lenders in that side of the equation. For the customers that did move through our process, I think we saw a very strong acceptance of some of the unique features that we offered. For example, how we invite a cosigner into signing the process, the 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 an acceptance and an understanding of the value of our -- that the customer saw in making payments while in-school. And as I said, both -- they’re high-quality customers and a willingness to make payments in-school. I think it was particularly important in a marketplace that could see where students and borrowers have an opportunity to refinance the 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 across the marketplace.

Okay, great.

Thank you. Our question comes from the line of Lee Cooperman with Omega Family Office.

Thank you very much. Appreciate it. You disclosed the CECL impact on our book value, which I guess is something like we won the $3 a share, but what is the pro forma impact on our earnings? Because I assume it should lift our earnings quite a bit. So that will be question number one. Question number two, you earned 18% in equity. Would you say that we're over earning now or is this just a number that you view as being reasonably sustainable?

So on the first question, CECL is a -- can only be best described as a very strange accounting policy because it's all based on estimates. And you're correct in that, it adjusts -- it adjust book value, but really what the accounting policy is, is a movement of geography, right? It takes balances that were in equity and moves them into loan losses, estimates over the life of the loan. We would expect at the end of the cycle the lifecycle of the loan that the earnings would be the same regardless of whether CECL existed or did not. So it's really just a temporary geographical change there. In terms of earnings, one of the changes that happens with CECL is of course you’re -- you would be eliminating -- if you get your estimates right on the CECL at adoption, you would not be making future provisions on the existing loan portfolio for the remaining life. So we do expect the loan loss provision expense to decline materially in 2020 and beyond. The only charges that you'll -- 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. In terms of return on equity, this -- these -- this number is something that we think is what we’re targeting and we hope to be able to continue to achieve, obviously, with CECL book equity will go down. So ironically our lease will actually rise as we move into 2020.

Right. The -- for my knowledge of financials, companies that are in 17%, 18% on equity are generally selling probably 2x book or more. We're selling on the pro forma book maybe 1.2 or something like that. So I assume this stems from the legal overhang and the concerns of Elizabeth Warren, forgetting Elizabeth Warren for the moment because we can't forecast the future yet. The resolution of the legal overhang, any insight as to when you think that might achieve some clarity for us?

I do agree that the legal overhang is a -- is not an -- is a significant issue for us. This as I think I've mentioned in prior calls that the civil litigation process is 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 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 -- really any listening to customer phone call, so they made an allegation 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 disclosed at this point. The 15 witnesses that the CFPB 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 it's unfortunate that this case which was brought for political reasons continues to exist, but we are confident in our defense. And this is the reason why we are fighting this case, because the allegations are baseless.

Right. One theoretical question necessarily reckless, 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 for you to be looking at returning more money for the dividend rather than repurchase?

When we look at the enterprise value here, it's a function of the expected cash flows coming off the legacy portfolio and then, of course, the business franchise value of the ongoing business activities. That's going to be something -- look, I’d love to have the luxury of the high-class problem of addressing that issue, but I think that’s somewhere -- that begins with a two handle on the stock-price.

Got you. All right. I thought you're going to say that. You’re doing a very fine job when it comes. I appreciate it. Thank you very much for your responses.

Thank you, Lee.

And your next question comes from the line of John Hecht with Jefferies.

Thanks very much, guys. Jack, you talked a little bit about the -- or maybe John or I mean, Chris did it. 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 market and so forth. So maybe can you just talk us through or 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 a couple of points there. On the lower rate environment, clearly it has increased interest in the refi product and we continue to see that going into the fourth quarter. We are 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 as rates of the decline stay where they’re. One of the places where we are the biggest beneficiaries, where there's an anticipation of declining rates, but rate zone actually declined. And so we'll be watching that through the rest of this year and into next year depending on the 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. It is in our models and our forecast, but if that environment continues, there are more rate cuts than expected, it clearly could be upside as well.

Okay. And then, obviously, very strong momentum in the private education refinance loans in the quarter. Can you -- is there any characteristics you can give us or any geographical trends you’re seeing or type of borrower? Any light you can shed in that for us?

So the refi loan product is marketed primarily to students who have successfully completed their education and are out in the workplace with demonstrated track record of making payments on their loans. The real -- the balance or the real target audience in this case is 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 in the high double digits or five figures or low six figures, their income is well into the six-figure range. Their FICO scores are in the high 700s. And they typically have been in repayment successfully making payments for somewhere between 3 and 5 years. That means credit losses on this portfolio are extremely low and that has been borne out by the actual experience to date. As I mentioned, this year's 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 ability, the interest rate environment and the options there, the customers that are refinancing, particularly federal student loans in the space, typically have coupons 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 in 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 extend term.

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 etcetera. So really it's been a great year for us on the refinance side.

Great. Well, that's great color. And if I can ask one quick question. Jack, what was the timing of Phase -- that $477 million stage one of the buyback that we should think about?

So that'll be the amount that we expect to return through share repurchases through the end of 2020.

Perfect. Thank you very much.

And your next question comes from the line of Mark Hammond with Bank of America.

Thanks. Hi, Jack, Chris and Joe. On CECL, can you give any insight as to what type of economic cycles is assumed there?

So the CECL model is actually require that you use multi-economic scenarios to drive the CECL model and you can chose the number of options you choose. But so we've chosen three scenarios, those scenarios are can be a mix of different scenarios, stable, deterioration, significant recession etcetera and then you wait those three scenarios to drive an outcome. And so it is a multi-variable analysis. You’re blending a number of economic scenarios. What I can tell you in general, most people I would think are assuming sort of stable to deterioration/recession and some waiting in their models and we would be no different in that regard.

Thanks. And then also regarding CECL, just quickly estimated your tangible net asset ratio remaining above 1.2x when CECL was first shared in the GAAP statements at the end of the first quarter. Is that generally the ballpark or what you’re targeting is still to be above 1.2x?

Yes. So that is generally ballpark. What it also highlight is because we’ve 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. What we’re clearly facing in the future is other constraints from a capital perspective and we’re paying more attention to things like risk-adjusted capital ratios in the rating agency models. And so the TNA ratio to some degree is becoming less of an influence on our capital management as we look towards risk-adjusted capital analysis 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 $2.5 billion unencumbered private loans on the balance sheet, can you describe the collateral for me, just however you can in terms of seasoning, whether it's some in-school loans or refi loans, however best you can represent them.

Most of it is private credit very seasoned loans that we clearly could achieve leverage against, if we needed to and it's in our portfolio and it's in the portfolio stats. And so it is just private credit unencumbered that we have the option to monetize or to create some leverage against in the future.

Thanks, Chris, Jack and Joe. I appreciate it.

Welcome.

Thank you.

[Operator Instructions] Your next question comes from the line of Mark DeVries with Barclays.

Yes, thanks. I had a follow-up question on the private loan originations. What impact has the rallying rates we’ve seen this year had on the rate incentive that you can offer? And have you seen that boost demand and also what impact, if any, is it had on your ability to -- on the spreads you can generate as origination?

Sure. So as Chris said, we're a spread lender. So what we are looking for is less about the absolute yield on the loan 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. We are 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 sparks more demand. I think it's just a greater awareness of the product and opportunity in the space. But really what we see as the largest driver of demand for refi is borrowers coming out of the in-school status being in a period of repayment and having the opportunity to take a 6% or 7% interest rate loan and convert it into a somewhere in the 4% -- 3% or 4% interest rate loan today saving, as I said, thousands of dollars in interest expense. So we really don't look at it on an absolute rate basis, we look at it on a spread basis.

What I would highlight that probably starting in the second half of last year, the industry started becoming much more rational and that rationality has continued throughout this entire year. So there hasn't been any people looking to gain share from a pricing perspective etcetera, that rationality has continued which we’ve been very pleased with.

Okay. And your volumes have exceeded your expectations this year. Is that due in part to the more rational environment you just alluded to, or are you getting more effective at marketing, or are there other drivers of that?

I think it's is all of the above. Certainly the demand based on the rate environment is a factor. But our marketing strategies and approach here continue to evolve and get better. I would also add that our origination and underwriting process 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 loan balance to meet in the payment obligations to meet their budget and their pay down objectives. So it's really the combination of those factors that are driving demand and volume for us.

Okay, got it. And then just finally, what drove the strength in asset recovery income during the quarter?

So in the last year and a half, 20 months, we received 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 best, which is connect with customers, educate them on the different options they have available to them and get them back into a payment plan that they can afford and more importantly, 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 received placements over that timeframe and we outperformed the competition by 46% in terms of recoveries.

Okay, great. Thank you.

You’re welcome.

And your next question comes from the line of Rick Shane with J.P. Morgan.

Hey, guys. Thanks for taking my questions this morning. I just want to focus on slide 8 on the financing component. Jack, you’ve use the word efficiency and that’s clearly what's going on here. I would love 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 reliability sensitivity into 2020?

So on the liability sensitivity they actually have muted our hedging programs and muted our interest rate sensitivity. We’ve -- we publish those sensitivities, you can see them. but we’ve been able to even mute further hedging activities and the interest rate sensitivity and that we think that’s a huge benefit to the story over the last couple of years and what we’ve been able to generate from a return perspective. 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 are always looking for ways to reduce rate on our financing. Financing is a biggest cost in the company. It's something we focus a lot on. And so we can find opportunities to finance asset at a lower cost for us using unsecured debt. We aggressively pursue those deals what we've been able to do over the last couple of years is do things like that or to call, trust and repackage them and put them into lower cost facilities. We’ve had banks approach us about a bit want to create on-balance sheet securitizations and really just take assets to term the savings generally can be 2 basis points 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 then like I said about 250 basis points more expensive. So, we keep our eye on that term sensitivity the cost perspective, but we've been very pleased with our ability to really optimize our assets and our capital structure to improve our cost of financing and just get much more efficient around it. I don't know Jack do you want to add anything?

I would just add, I mean, the innovation, the solutions that we are tapping into here are not just lowering our costs. 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 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 think it's sort of our asset liability mix is along that lines that we capture is just a dealt in financing costs and that kind of float. So, its -- I think, what you really just look this to optimize the ultimate cost because we have our assets and liabilities flow generally.

Terrific. Okay, great. Thank you, guys.

And 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, Jack, could you just talk a little bit about, a little bit more about the contract renewal and what elements and when we're likely to hear about the various pieces?

Yes, so there's a couple of moving parts in this space. Clearly the next generation component is where the department has signaled an intent to go those contract responses have been solicited and submitted. We are now waiting award. Our expectation is that even with an award it's going to take time for implementation. So, the current contracts that the major servicers have with the Department of Ed actually are set to expire in December of this year. They have signaled an intent to extend those, but we haven't seen the specific proposals at this stage in the game. As I said we service 5.7 million accounts for the Department of Ed today. Certainly this is an important contract for us and we think we do an outstanding job on this side of the -- for the department and more importantly for the customers, but the entire contract represents less than 8% of our total revenue.

Got you. Then a couple of follow-ups. Chris, you've done a really great job kind of tapping cash from various parts of the balance sheet. Have you talked about how you're going to finance the $1 billion of the call on the 2020 maturity?

Well, what I say is we don't need to use. We don't need to issue high yield. So we found additional options to raise the cash and we feel like we're in an incredibly strong position not only for the $1 billion make-whole call but for 2020 as well.

Got you. That’s …

We will talk about -- Moshe, we will talk it in the fourth quarter call about what we've executed.

Got it. And then just lastly, I mean, the kind of expenses in general you've had better results kind of on the fee based business a little more expense because of the originations on the private loan refi side. Just talk a little bit about how you see that going forward and maybe just about how acquisition costs are behaving in that refi market.

So operating expense -- particularly, operating expense efficiency is one of our top objectives within the company expenses this quarter were flat relative to a year-ago. A lot of that has to do with 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. There are direct variable cost that 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 reflect the run off or the amortization that comes on that side of the equation. On our refi business I think one of the things that we have done exceptionally well 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 rely more heavily than the competition on digital strategies. We think this creates a CTA or a cost to acquire in the refi space that is typically about half the average that our competition is spending to originate loans.

So you think that's persisted even as you stepped up the volumes?

Yes.

Great. Thanks very much.

You're welcome.

And your next question comes from Henry Coffey with Wedbush.

Yes. Good morning, everyone, and thanks for taking my questions. When you are looking at the -- your dialog with the rating agencies are they -- it seems that they are being very flexible about CECL and just kind of fluffing it off. Is that an accurate description about how they're looking at it and they seem to have digested it very well. Is the risk that there's an event on the horizon when they suddenly wake up and say, oops, we didn't mean to be so nice about all this, because it seems like they're just looking at it from a finance point of view and just saying, oh, it's geography we don't care where your reserves and capital are or is that just inaccurate?

So, to be clear, I would not say they are fluffing it off. But what I would say is that they clearly are cognizant of the fact that this is a geography issue that they understand there is a phase in element to this. I think that they have digested it well. Some of them will come out with statements and some research that actually said just what you said. And 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 face if they change tact. 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 least disruptive to this company as possible, and I think we've navigated those water as well thus far. And so, what we will see how it transpires in 2020, but I do think to restate, they do see it as geography. They do see it as an impact and they're going to work it in over time, but they are 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 expect that 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 this creating a competitive advantage for a non-bank lender like yourself or do you have any thoughts on that yet?

So, that's an interesting question. And I think the regulators are still they may be less flexible, but they are obviously giving more time and there is a phase in. And three years is a very long time and see where things go. Inevitably one of the benefits, a diversified finance company has always had over a bank is not having a stronger regulatory requirement or capital requirements that the banks have. And so that could play out as an advantage depending on the regulatory actions. So, it could clearly be a benefit. We want to get through 2020 smoothly and then we will 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 in listening to how you're describing both the refinance program and the in-school lending program that you're focused on the 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 private education market etcetera, etcetera. Is there a prospect over time that you will evolve a product for in essence lower quality, but still a very durable borrowers or what are your thoughts in that process?

So, there is no question, one of the huge assets of this company is our history and experience working with borrowers across all types of borrowers across all types of economic cycles. In the federal loan programs there are entitlements. And so a customer is able to obtain a loan from the Department of Education regardless of what type of degree they're pursuing how long they will take to get there if they get there at all. And 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 in 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 is a, in an acknowledgment that they want to make payments so that they're paying down their loans. I think one of the, philosophically, one of the challenges with the federal loan programs is this desire for our borrowers to be an income driven repayment plans. The majority of whom are negatively amortizing. And then there is 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 your existing skill set allow you to make more loans into the four profit business if you felt you had 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, debt levels and willingness and ability to make payments. So it's 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.

And your next question comes from the line of Bill Ryan with Compass Point.

Good morning. I have a question related to the run-off analysis on Slide 9. Looking at the prior quarter it's like there may have been some adjustment in the expected run-off cash flows at both the FFELP and the 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 run-off analysis. Is it pretty much at this point incorporate the CECL 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 were 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 and that it allowed us to feel even more confident in our analysis in our projections. What I would say is on a net basis, it ended up being relatively some puts some takes and inevitably not a significant impact other than just verification of the process and the models that we’ve to -- that we put out every quarter.

Okay. And then just in relation to …

The loss estimates are -- that’s our estimate with the CECL loss estimates for sure. We don't have different models there.

Okay. Thanks.

Your next question comes from the line of Peter Troisi with Barclays.

Thanks. I think my question was just asked, but just a follow-up. Did you say that the figures, the cash flow figures on page nine do incorporate CECL economic assumptions?

They do.

Okay. Thank you.

And your final question comes from the line of Dominick Gabriele with Oppenheimer.

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 about 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’d take a look at where we are and what are the drivers behind our view of enterprise value at that particular point in time, but as it stands right now our plan and approach is to return the lion's share of the capital that we are returning to investors through share repurchases.

Great. Thank you. And just real quick if we look at the core EPS number 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 -- when we're thinking about the kind of base level of core earnings for 2019 in your new guidance?

That right. So our 252 to 255 full-year estimate includes that $15 million 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 the segment and the private consumer segment when it comes to a 25 basis point cut in rates those 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 date of 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 are impacted by a rate cut offline.

Okay, great. Thanks so much. I really appreciate it.

Thank you.

And this concludes the Q&A portion of the call. We will now go back to Mr. Fisher for closing remarks.

Okay. Thank you, Pauley. 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.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect.