Navient Corp (NAVI) 2018 Q3 法說會逐字稿

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Navient Third Quarter 2018 Earnings Call. (Operator Instructions) Mr. Fisher, you may begin your conference.

Thank you, Lisa. Good morning, and welcome to Navient's 2018 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 2018 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 thank you for your interest in Navient.

Our third quarter results continue this year's strong performance. With adjusted core earnings per share of $0.56, we saw contributions from each of our business segments leading to higher earnings, improved cash flow and stronger equity ratios.

Earnings this quarter are once again driven by continued success in refi originations, consistent private credit performance, stable student loan margins and lower operating expense.

As a result, we are confident in our ability to meet or exceed the high end of our earnings expectations for the year. Highlights for the quarter include $903 million of refi loan originations, a 44% increase from the second quarter. Year-to-date, we have originated $2 billion in loans, significantly above our original target of $1.5 billion for all of 2018.

The unique technology platform and digital marketing tools, our Earnest colleagues have developed, provide a strong competitive advantage. These platforms have allowed us to capture increasing volume, while maintaining very strong credit profiles. In addition, we are also executing at a significantly lower cost of acquisition compared to industry averages. Even in a rising rate environment, our value proposition remains very attractive, and current market conditions have not reduced overall demand. With $2 billion originated to date, we now expect full year originations of $2.9 billion.

In our Business Processing segment, we saw a 13% increase in contingent receivables inventory, and we remain confident in our ability to capture organic growth opportunities in the health care and municipal market places.

Earnings and EBITDA margins in this segment could be more variable, especially as we ramp up to board new clients, as we saw this quarter. This quarter, we were notified that our contract to provide toll services in Puerto Rico will end sometime next year. As a result, this quarter's GAAP results include the write-off of the balance of the amortizing intangible asset we assigned to this contract at the time of the acquisition.

We have previously discussed the impact from the major natural disasters that took place last year. In both our federal and private loan programs, we grant temporary payment relief to delinquent borrowers impacted by a natural disaster. This results in loans in various stages of payment being brought current. As a result, for some, defaults are delayed and concentrated in a few quarters. This is the principal driver of the higher defaults this period. For example, roughly $40 million in private loan defaults this quarter were related to borrowers who were experiencing payment difficulty before the hurricanes and other disasters hit, and then received payment relief as a result of the natural disaster declaration.

We will see a similar, but substantially smaller event next quarter. This default experience was expected, and we had appropriate reserves established prior to the natural disasters. As a result, while defaults are higher this quarter, our provision for loan losses remained stable.

A high priority for the management team is delivering ongoing improvements in operating efficiency, and we have a very successful and long track record in achieving operating savings each year, though the gains we make here are sometimes difficult to see due to business growth within the segments, new account -- and new accounting rules. Slide 7 in the earnings presentation released this morning highlights some of these items more clearly.

More specifically, our operating expenses declined when compared to the year ago quarter by 17% in our federal loan segment, 28% in the Consumer Lending segment and 17% in our other segment after adjusting this quarter's operating expenses for acquisitions, accounting changes that require new gross up of revenue and expense, and also the transition services we are providing to First Data, which are offset by an equal amount of revenue.

The Department of Education servicing contract RFP has moved to the next stage this quarter. In this latest round, the department has changed the structure of the RFP and some of their original objectives. We are continuing to work with our teaming partners to construct a response that helps improve the program, and more importantly create appropriate business opportunities.

Finally, our financial performance has us within our target range for equity. This allowed us to announce a new $500 million share repurchase program, while continuing to maintain a strong balance sheet. Our share repurchase program is consistent with our long-stated plan of returning excess capital via dividends and share repurchases.

Overall, this quarter's results reflect our ability to execute our business plan and deliver strong value for our customers and investors.

I'm pleased with the results of the quarter and the strong commitment and focus of my teammates. I'm also pleased to announce that our board has, again, been recognized for gender diversity, this time by the Forum of Executive Women in Philadelphia.

I'll now turn the call over to Chris for a more detailed review of our financial results, and I look forward to your questions later in the call. 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 2018. I will be referencing the earnings call presentation, which can be found on the company's website in the Investors section.

Starting on Slide 3. Adjusted core EPS was $0.56 in the third quarter versus $0.56 from the year ago quarter. This brings our year-to-date adjusted core EPS to $1.51. A few key highlights from the quarter include: our 44% quarter-over-quarter growth in refinance loan originations; improved net interest margins; 16% year-over-year growth in Business Processing revenue; and continued focus on expense management.

Let's now move into segment reporting, beginning with the Federal Education Loans on Slide 4. Core earnings were $148 million for the third quarter versus $157 million in the third quarter of 2017. Contingent collections inventory increased $12 billion in the quarter. The increase in placements beginning in the fourth quarter of 2017 contributed to the 24% growth in asset recovery revenue for the prior quarter.

The provision for FFELP loans in the quarter was unchanged from the year ago quarter and declined $30 million from the prior quarter. This is consistent with our expectations as the charge-off rate and late-stage delinquency rates, while elevated from a year ago as a result of natural disasters, have improved from the prior quarter.

Our current allowance for loan losses for both our FFELP and private loans reflect the estimated impact from the most recent hurricanes. We encourage every borrower to contact their servicer if they have any questions.

The net interest margin for the third quarter was 82 basis points, unchanged from the prior quarter and higher than the 71 basis points in the year ago quarter.

Operating expenses increased primarily due to a $14 million expense increase from a revenue recognition accounting standard adopted in 2018 and a temporary $9 million expense increase from a transition services agreement with First Data. Both expenses are offset by corresponding revenue. Excluding these items, operating expenses declined 17% in the segment from a year ago quarter.

Now let's turn to Slide 5, and our Consumer Lending segment.

Core earnings in this segment increased to $72 million from $60 million in the third quarter of 2017. The Consumer Lending net interest margin was 335 basis points, in line with our expectations. The increase from the prior quarter was primarily attributable to the timing of the resets on the underlying assets, a reduction in the use of loan modifications and lower cost of funds. During the quarter, we originated $903 million of education refinance loans, and through the first 9 months we have originated $2 billion.

We continue to see healthy demand and strong credit performance in this product, with late-stage delinquency and charge-off rates at or below 10 basis points. Education refinance loans now represent over 10% of our Consumer Lending portfolio.

During the quarter, we updated our long-term recovery rate expectations from 21% to 19.5%, resulting in a $32 million increase in charge-offs. Provisions declined $20 million year-over-year as the charge-off rate and delinquencies were in line with expectations.

Let's continue to Slide 6 to review our business services segment.

Fee revenues in the segment grew 16% from the year ago quarter. The 30% quarter-over-quarter increase in contingent collection inventory is primarily a result of increased placements from federal and local government services contracts.

Let's turn to Slide 7 to provide additional color on our continued focus on expenses.

We continue to build on our strong track record of improving operating efficiency and managing an expense structure that compares very favorably to our peers. Year-to-date, our ongoing operating expense initiatives have resulted in a 10% decline in adjusted operating expenses, exceeding the decline in the average balance of our total education loan portfolio.

Let's turn to Slide 8, which highlights our financing activity. During the quarter, we increased our unrestricted cash by $520 million, primarily through the refinancing of the FFELP loan facility that was set to expire in 2021. We refinanced these assets into another facility with more favorable overall economics, and we continue to aggressively pursue additional financing efficiencies.

In the quarter, we issued $992 million FFELP ABS transaction, and a $632 million private educational loan ABS transaction. Year-to-date, we have issued $2.3 billion of private education loan ABS compared to $662 million for all of 2017.

We retired or repurchased $86 million of unsecured notes in the quarter, which resulted in a $1 million loss, and do not have any remaining maturities due in 2018.

During the quarter, the company repurchased 6.9 million shares for $95 million, and have $565 million of remaining authority under our share repurchase program. At the end of the quarter, our TNA ratio was 1.23x, and we continue to expect to end the year between 1.23 and 1.25x.

Let's turn to GAAP results on Slide 9. We recorded third quarter GAAP net income of $114 million or $0.43 per share compared with net income of $176 million or $0.64 per share in the third quarter of 2017. The primary differences between core earnings and GAAP results are the marks related to our derivative positions.

In summary, we delivered positive results across-the-board. We remain laser-focused on driving efficiencies. We expect to meet or exceed the high end of our full year 2018 earnings per share guidance, and we are well positioned for 2019.

I will now open the call for questions.

(Operator Instructions) Your first question comes from the line of Mark DeVries with Barclays.

Can you talk more about the services agreement with First Data? And what kind of expense savings or changes we can expect to see after the transition?

So the agreement basically converts -- we sold our platform to First Data principally to create a more variable cost structure for the company, but also to convert the platform from what, we believe, is the industry-leading platform, used exclusively by us, to a more neutral platform that could be leveraged to other student loan servicers. It's more a variable cost structure arrangement for us versus a major cost reduction-related effort, as our portfolio amortizes, and depending on what happens with the Department of Ed contract.

The expenses that both Chris and I referenced for the transition services agreement is -- once the platform was sold, it's -- you can't just pick it up and move it day 1. And so we are continuing to run that platform in our data center for First Data, and we are billing them for the costs that we incur. So it's basically a pass-through structure from an operating expense until the portfolio -- until the system is converted likely sometime in 2019.

Got it. And Jack, I think you indicated despite higher rates, you're not really seeing much of an impact on the incentive for borrowers to refinance. Can you just confirm that you're kind of effectively passing on most of the cost of higher rates and, therefore, more or less preserving margins here as the rates move higher?

Yes. So we have been steadily increasing rates in the refi program as interest rates have risen in 2018. We still would like to see wider margins in this space and have been gradually working towards that goal. But demand for the program is really a function of a combination of the higher rates that consumers are paying principally on PLUS and Grad PLUS loans and, to a lesser extent, private student loans. And that demand has not -- while the savings that a consumer can achieve might be smaller, they are still significant, and so the demand for the product remains very robust.

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

I had three quick questions. So the first one, in the federal segment, would you be able to break down the $18 million in other revenue that occurred this quarter?

Yes. So you should think half of that has to relate with our transaction with First Data, and half of it was pass-through revenue from the TSA agreement that we discussed. So think about it roughly a 50-50 split. So half of it is pass-through and half of it is roughly the gain that we realized on the platform.

All right. And then on the FFELP cash flow slide, I see the cash flow from residuals in the secured FFELP is $6.1 billion that's down $700 million sequentially. Just asking what drove that?

Yes. The biggest [drive] is what I talked about earlier as we refinanced our FFELP portfolio from one facility to another, one of our facilities, while attractively priced from a financing perspective, had fairly strong or -- had fairly wide advance rates. And so we were able to move those assets into another facility in an all-in cost that was better than that facility. So that was the primary result. You see the big increase in the cash position on our balance sheet. Obviously, we are storing capital with the maturities we have coming up. So we feel very comfortable with our ability to not only to address the '19 maturities, but also the '20 maturities.

Got it. And then lastly, on Slide 11, too, unsecured debt is labeled pro forma, what's it pro forma for?

I think it's pro forma for just that calculation. It's just the calculation for what we say. I mean, it is the outstanding debt today. It's a good question. It's probably an appendage from something historically, but it's just the number that our debt outstanding is today.

Your next question comes from the line of Moshe Orenbuch with Crédit Suisse.

Chris, the financing that you just referenced, could you talk a little about whether that sort of thing helps or hurts the TNA ratio? And kind of related, whether given that you're kind of at the lower end of that, are you going to be able to use more than a quarter's earnings? Or how do you think about the amount available for share repurchase in that context?

Well, so obviously what we gave guidance when we refined the TNA ratio, 1.23 to 1.25x was by year-end. We managed to achieve within that sooner than expected. That financing actually helps our TNA ratio. What it does is it raises cash off our balance sheet instead of -- to pay down debt, instead of having to go to the high-yield market to issue more debt longer-term to pay it off. So what you see us really aggressively looking at is our asset base and looking for opportunities to raise cash off of our assets instead of refinancing simply by rolling. And so all of that inevitably inures to the benefit of our TNA ratio and our capital structure.

I'd also highlight in this situation, it was at a much better cost, so it was really a win-win. As you are well aware, we have a very strong treasury team, we spend a lot of time looking to optimize our financing structure. And that was a great transaction for us to realize cash at a lower cost to improve our capital position. So for us, it really was -- just shows the strength of the team, and also the desire to continue to look for efficiencies across-the-board.

Got it. And kind of on a separate matter, given what you mentioned about the Puerto Rican toll collecting contract, is there a way to give us some breakdown of the various contracts and when they're up for renewal, so that we can kind of have a sense as to what's coming down the pike with respect to this, because it just seems like we tend to find out after the fact.

So we have thousands of contracts broadly defined within our company. And so I clearly understand the question, but we don't generally talk about contracts individually. And it clearly was a surprise to us what happened and we're working with the island to ensure a smooth transition. But we don't provide that specific guidance on individual contracts.

Well, maybe it's something you should consider for the more material ones.

I would just add on the funding side of the equation. Our operating efficiency efforts are really not just focused on operating expense, but also the operating efficiency of our financing activities. And I think some of the things you see this quarter, both in terms of hedging, the basis risk and some of these new financing vehicles, whether they are residual financings or just different structured deals are really designed to improve the cash flows of the company, improve the net interest margins, and they do also benefit the TNA ratio structure as well. So it's really been a solid performance on that front for us in addition to the operating expense efficiency.

Your next question comes from the line of Sanjay Sakhrani with KBW.

So the NIMs have been coming in better than your expectations, FFELP and the loan portfolios. Could you just talk about what's driving that?

Sure. I think it goes back to what both Jack and I just said is that there has been as we rolled into the year, this year, we had a lot of thoughts and ideas around how we could improve financing structures and things we could do to keep NIM in place. Obviously, last year, if you remember, we put in place the 1 3's programmatic hedging policy that's been very helpful in stabilizing our NIM. Our financing benefits on warehouse costs on advance rates have been very helpful. This FFELP transaction that we just did, again, very helpful to how we think about our capital structure and the cost of financing.

And then finally, we just continue to look for under every rock to see what we can find. And so there's just been a strong push to try to improve our costs from a financing perspective and that inevitably benefits NIM. It's hard going -- going into the year, we thought we could make some of this happen, but obviously, you need the markets be conducive, you need to find partners to be able to do these transactions with you and we've been fortunate enough to do that. And so again, we feel very confident and comfortable with where we are on our NIM, but there has been a lot of work that's gone in behind it.

So is this a sustainable level for both those asset classes?

Well, sustainable is, obviously, dependent on a number of things, but we feel very good about our NIMs in the short to medium term. And what I'd highlight is, the only thing you may see on private credit portfolio is, obviously, as that portfolio amortizes, we are replacing the legacy portfolio today with the refi portfolio, which on a risk-adjusted basis, we think, is a very attractive return, but clearly has a lower NIM than the private credit portfolio. So you should see -- you'll see that NIM come down not because there is deterioration in the NIM. It's just we're replacing assets with the refi assets. But otherwise, like-for-like, NIMs are -- historic NIMs are at or potentially even better than where they've been.

Okay. And then on the refi product, I mean, those have trended well ahead of your expectations by almost like 50%. And you've only been able to focus on like half the market. So should we assume these levels are pretty good run rate for the future because you now have another opportunity as we move into the next year?

So we haven't made a decision on that other opportunity. Obviously, that's a decision we can't make until January 1. What I would say to you is, the team has done a phenomenal job building out the portfolio, the technology efficiencies behind it, and really driving a better result in an acquisition cost result. We are today as focused with volume as we are improving or achieving margins that we're looking for.

So I think, as Jack mentioned, the rest of our year, we're looking for $2.9 billion of total refi volume, which is basically on par from an origination perspective, fourth quarter versus third quarter should be relatively similar. And so you should look us, going forward, to maintain that sort of volume, but also try to improve margins, et cetera. And if there is that opportunity in 2019, clearly, we will be looking to take advantage of it.

Your next question comes from John Hecht with Jefferies.

I guess, the first one is just sort of a follow up one from Sanjay's question. It sounds like your -- the FFELP portfolio margin's NIM has been pretty stable, and based on your hedging and so forth and your efficiencies, you're suggesting that you anticipate that at least for the visible future. I'm wondering though for the Consumer Lending segment it has been a little bit more variable, and my assumption is because there is mix shift there, seasoning and so forth. Can you just clarify for that specific portfolio what we should think about for the next few quarters in terms of margin?

So we gave guidance for the full year of 3.25% for private credit. You saw in the first half of the year, we are below that. In the end the second half of the year, we expect to be above it. I would say that we still feel good about that from a guidance perspective and maybe even a little bit above that, but that guidance still holds firm. Going into 2019, our finance position for private credit for some of the financing actually starts to improve some things roll off, so we feel very good about the cost structure of that business.

I would just highlight that there is going to be a bigger refi portfolio within that Consumer Lending segment, which is going to start to reduce the NIM overall. But again on a risk-adjusted basis, we feel very good about those assets and the return profile, but you would just have that attrition. And we'll, obviously, provide a 2019 guidance in our fourth quarter call for the full year '19. But again, the shift will be almost purely because of a shift in the portfolio and not because of deterioration in NIM in the legacy portfolio.

Okay. That's helpful. Second question is, over time, we've talked about different opportunities for you guys to buy various portfolios for certain banks. I know it's competition-oriented, market-oriented and rate-oriented. Do you guys have any update about opportunities in that regard?

So on the FFELP side of the equation, most of the large bank-held portfolios have transacted at this point in time. And so the opportunities are really would be from entities that have traditionally been long-term holders, nonprofits, state agencies. We certainly remain opportunistic in that space. And if we see opportunities to buy portfolios, we're active in bidding on them. But we're not going to see repeats of what we saw in prior years.

On the private credit side of the equation, all of the legacy portfolios where banks were originating loans and stopped have been sold. We are really the prime and natural buyer in that space, and certainly to the extent if any portfolios were to be made available, we'd be active in that front. One of the things we bring -- we have some significant advantages in that arena, and that is we have really honed our strategies with customers to help identify high-risk borrowers, offer them alternative payment plans that keep them -- keep their payments manageable and help them successfully stay current on their loans. We see that when we buy portfolios both in the FFELP and private side of the equation that as they're moved onto our platform, we materially improve the overall performance. And so those advantages help, but we need -- you need willing sellers, too.

Okay. And then a final question. I think you guys referred to reduced recovery rate in some of the Consumer Lending segment. Maybe can -- is that just a onetime adjustment? Or how do we think about the catalyst for that, and anything going forward from that adjustment?

So that is a onetime adjustment. You should think about it as we've been monitoring our recovery rates. We monitor them, obviously, quarterly, but we're monitoring them over the year. And what we've been doing over the year is provisioning for that potential change, in case we had to change the recovery rate, so our change from 21% to 19.5%, that's why there was no impact on the provision this quarter. It's already been accounted for, and our expectation is that that recovery rate today holds very well to our portfolio and what we're seeing in the market. And therefore, there shouldn't be any other adjustments going forward. It's just something we monitor all the time to ensure that our portfolio will recover back what we expect from charge-offs.

(Operator Instructions) Your next question comes from the line of Michael Tarkan with Compass Point.

Just back on the earnings mix shift on NIM. Can you talk about how to think about the mix shift as it relates to credit and maybe reserves? So specifically I'm looking at a reserves 5.6% of loans in repayment. I know Earnest losses are coming in much lower, but can you talk about sort of where you're reserving for those loans and how to think about that metric as we think -- as we move forward?

So I think it's in the refi side of the equation we have talked about life of loan loss expectations of under 2%. Our performance would certainly support that number and more. So we're very confident about where we're heading here. Remember, these are portfolios unlike traditional private student loans that are made during the in-school period, these are borrowers who have been in successful repayment for a number of years, have established themselves and their career in income opportunities. And you see, as a result, not unlike what we would see the same results in our legacy private loan, but borrowers who reach that stage have very, very low levels of delinquency and default.

On the expense side, you've lapped Duncan, I guess, in July, you're going to lap Earnest in November. Is it fair to say that -- I know you don't want to give guidance on 2019, but how do we think about the migration of expenses? I mean, should they be lower in 2019 as your core numbers are actually going lower?

So our focus, as both Chris and I have mentioned, is really on improving operating efficiencies. And so when we've looked at some of these BP -- these Business Processing business lines, as an example, we've been able to take their expertise, the acquired entity's expertise in this product space or service space and marry it with our operating efficiency expertise. So improving workflows, adding automation, adding data analytics to the process to dramatically improve operating results.

You see it very clearly in the refi space. For example, Earnest had developed excellent technology in terms of the underwriting capabilities, the modeling capabilities, the digital marketing strategies. We were able to marry that with some of the operating workflows that we've developed and become experts in -- to improve flows and, as we said, lead the industry in what we believe is the lowest cost of acquiring an account in that space. We do the same things little bit less visible because of the smaller business sizes in public transparencies at other entities in the health care and the municipal arenas, but we've done exactly the same things there as well.

And I'd say it also permeates through the middle and back office as well. In the CFO group, we've enacted automation and robotics. We're reconciling thousands of monthly transactions automatically today versus manual intervention. So there, it's just an all across-the-board focused on driving efficiencies, driving automation, improving the business, not only as it amortizes down, but as we continue to scale our growth businesses. So I think, your question was on the expense side, we continue to expect to push that expense base down and drive efficiencies as the business continues to mature.

And then just last one for me. Just the increase in inventory in the asset recovery side. I know the placements are very fluid, but we should expect that revenue associated with those fed inventory not to really pick up until, I guess, back half of '19. Is that fair to say?

That's right. We started receiving placements at the end of '17 and, obviously, '18, and we received more and that will roll through a little bit starting the end of this year, but then really start to roll through in '19 and into '20.

Your next question comes from the line of Henry Coffey with Wedbush.

Two items sort of unrelated, but, number one, on the private student loan margin. There's been the reset timing has been an issue. As rates rise, is that still likely to be an issue where rates rise and there's a month or 2 lag before everything kind of realigns itself? Or have -- with all the refinancing and other work you've done this year, do you think you've adjusted that to the point where there's more of a simple correlation between rising rates and trends in margin?

So there are still short-term variability, but again, there's always the catch up. It's interesting. We look that -- the fed date is very important and what day of the month the fed date falls on determines whether you get caught in that quarter's reset or that monthly reset, so we follow those closely. But again, there's usually less than a month lag. And some of these resets also are on our amortizing portfolio, so it becomes less and less an issue as time goes on.

I'd also highlight when we get to the top of this rate environment and end up on the backside where rates come back, we are that short-term beneficiary as well. So it is a minor issue. It is something we aggressively follow on and track. But in the totality of our cash flows and our revenue, it is -- these are blips. They aren't real meaningful issues.

And then completely unrelated question, when you look at most of the complaints and lawsuits, et cetera, around student loan servicing, it seems the primary culprit is just how complex the process is for everybody. Can you give us some sense of where the Department of Ed is going to go once they finally get through this whole contract process? I mean, are they -- I mean, there's been a lot of a rhetoric, but how do you think they will change, hopefully improve, simplify the servicing business for both, obviously, servicers and students, student borrowers?

Sure. You're correct on the first point. I mean, we've -- when we look at, for example, the inquiries that are submitted to the CFPB portal, 98 in the last year's review of that -- 98% of those comments were comments or complaints about federal program design. I don't like my interest rate. I want a credit bureau delinquency reporting retraction, those types of items. And it points to the overall complexity of the program, there are 56 different repayment options available to borrowers in the federal loan programs. The income-based repayment application is over 10 pages long, it's filled with typical government jargon. It's definitely something that we have been advocating to simplify.

Some of the tools that we've been able to bring to the table have dramatically improved results, and we're advocating that we'd be able to bring those to the Department of Ed portfolio as a whole as well. For example, on income-driven repayment forms, we've been able to increase the successful completion rate from 27% within 60 days to over 70% in 10 days, simply by helping borrowers complete the forms on the FFELP side and use, you would think, not super modern technology, but like e-signatures to be able to simplify the process for consumers. I would love to be able to bring that to the direct loan portfolio as well. But that is in their hands.

I mean, they haven't -- have they really laid out anything per se in the RFP process or is this...

Some of it's in the RFP and some of it would require legislative changes as well.

Your next question comes from the line of Rick Shane with JPMorgan.

When we look at the capital markets activity over the last year, you guys have done a good job buying back stock, balancing maturities and funding -- rotating the funding. In 2019, you have $2.2 billion remaining maturities. You have $2.9 billion of unencumbered assets. I'm assuming that you will continue -- that if the unsecured markets are available, you'll try to keep a high percentage of unencumbered assets just as a cushion, but I'm curious what the plan is headed into 2019 to meet those maturities, and where you see, on the term structure, the best opportunities for unsecured issuance?

So as you've seen in the last year, one of the things we've been trying to aggressively pursue is finance or raise capital off of our balance sheet instead of raising high-yield debt. Obviously, we haven't issued for a little while. And you know I think from our perspective what we're trying to do is, in these markets, raise additional cash from the balance sheet instead of going to the high-yield market, you saw that from the transaction we talked about on the FFELP side.

As you mentioned, we have a pretty large unencumbered portfolio that we think a lot about, and there are other things that we can be doing around some facilities as they get close to expiration that can realize some cash as well. So you mentioned the maturities we have in 2019, we have over $2 billion of cash on our balance sheet today from the activities we've done. We obviously are going to generate a huge amount of cash over the next year as well for 2020. And so I would -- there will be a mixed use of -- there could potentially be high-yield issuance in 2019. We'll look to raise additional cash off the balance sheet. We're in a very strong cash position today.

So I think we feel really comfortable with where we are in '19 and '20, almost regardless of any scenario, but we also have a lot of levers to pull to get over that last maturity in the unencumbered and the high-yield market in this asset base. So I'm not sure if that exactly answers your question, but I think a mixture of all but a strong desire to reduce our high-yield footprint if possible.

Okay, no. That's actually very helpful. It sounds to me -- I kind of looked at as repositioning to optimizing the secured structures in Q3 in anticipation of some unsecured issuance in '19, but it sounds to me, now hearing the answer to that question, like you're going to, from a funding mix percentage, reduce the unsecured going forward.

We will continue to pay down our unsecured debt. Jack reminds me almost every day that the highest cost to this company is financing costs. And therefore, our goal is to continue to reduce that cost, and looking for ways to finance away from the high-yield market clearly benefit the company overall and, quite honestly, it's the things that we should be doing. It's what finance companies do and it's what we should be thinking about.

Your next question comes from the line of Ashish Nair with Citi.

I just had a quick couple of follow ups, one on Mark's question earlier. Could you remind us what the underlying NIM assumptions are for the 2019 sort of cash flow you show on your slides, the $1.5 billion?

We don't provide that guidance for -- we will be providing a fourth quarter NIM guidance for 2019, but you can assume that our -- the NIMs that are broadly within those forecasts assume current market broadly defined. And then any -- obviously, things happen to that NIM over time, right, the floor income will go away over time. We've increased our disclosure around floor income. We showed you sort of the 3 years forward locked in floor income, you see that amortized down over time. But away from that, we feel very comfortable with what we've locked in from a NIM structure.

Got it. And also just want to clarify on the provisions. I want to make sure you said that the current disaster FIRB you've seen this year is already in that sort of number you have provisioned. And so should we assume the $75 million that you had talked about earlier for 4Q? And also related, if you could sort of talk about how a higher rate environment affects your private loan portfolio, private education loan portfolio?

I'm sorry, which portfolio?

The private education loan portfolio.

Right. So let's talk first about the provision guidance. We still -- that $75 million for the second half of the year still holds true. We feel very good about that going into the fourth quarter, so no change there on the $75 million. And then on the rising rate environment, it was a little bit -- that was discussed before. Our assets do reset, our costs reset quicker, but they -- all these costs do reset, and so there is some short-term negative drag as you miss a month or 2 of that reset, but it inevitably catches up.

And like I said, when we get on the backside of this rate environment, it goes the other way, and that short-term benefit helps us. And so as we think about the long-term value of this company and the cash flows that we generate, and we think about this company as much on a DCF basis as anything else, that is contemplated through the cycle of those cash flows and, therefore, those drags are already encompassed within our thought process.

I should have clarified. I meant the impact on sort of charge-offs and provisions.

The biggest driver, of course, of charge-offs in federal and private student loans is the jobs market and the economy. And the economy is, obviously, extremely strong right now. Unemployment rates for across-the-board are at decades lows. And we're seeing that in terms of both our existing loan portfolios as well as new borrowers entering repayment. If you look at the last graduating class that has entered repayment, which would be the 2018 graduating class has not yet entered repayment. But for '17, the delinquency rates of that portfolio, 6 months into repayment, are 60% lower than where they were at the peak of the recession. And that's really all driven by the strength of the economy and the jobs opportunities there versus interest rates.

Great. That's very helpful. And just another point I wanted to clarify, I don't know how much you are able to discuss at this point, but it was great to hear that you're looking to reduce your unsecured debt footprint. I assume you would -- that will be consistent with any new issuance or rolling of maturities would be consistent with your sort of 1.23x to 1.25x TNA ratio target. Do you foresee increasing that? Or that's sort of the level you are comfortable with for the long term?

No. I will -- let me break that into 2 points. I mean, the refined guidance was to provide both equity and debt investors just an understanding of the capital that was available on our balance sheet and how we were going to run leverage in the company and, therefore, how would we pay down debt and also capital we could return to shareholders to stay within that guidance. You should assume that -- we haven't formalized it for 2019, but you should assume that 1.23 to 1.25x is a good range for 2019.

I think it's important to remember all these -- every financial institution is heading into CECL for 2020, and we're all being prepared for that. And we think that 1.23 to 1.25x area provides us a good position to head into CECL and manage with adjustments from CECL. So there are a lot of reasons and rationale for that guidance and, clearly, holds true going into CECL.

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

Most of my questions have been answered. Just maybe a general question around the attraction of the refi book. Great job, exceeding expectations, but I'm curious what is your thinking around how you're attracting those assets or those borrowers, given the competition out there? How do you attract them and differentiate yourself besides, obviously, just the lower rate and the compellingness to the borrower?

So it is principally a financial benefit to the consumer that is the driver of a consumer looking to refinance their loans, and we're able to take a relatively high coupon, Grad PLUS loan or a private loan and lower that rate materially based on their exceptional credit profile. How we attract those customers to our portals ahead of the competition is really a digital marketing approach that has been developed here. We are principally marketing through those digital channels versus direct mail channels that most of our competitors focus on primarily. That allows us to get to the customer in the venue that they're most likely to be searching, which is digitally versus mail.

We're also -- our origination platforms and capabilities internally allow us to provide rate quotes to the consumer earlier on in the application process based on minimal amounts of information provided and then to close those loans far more quickly than others. And so that combination of search, rate check and processing speed are really the things that differentiate us compared to our peers.

Great. And would you say there's any of these particular attributes that could be extended to the new opportunity in the primary market in January? Or should I think about them distinctly different in terms of the marketing proposition and kind of winning market share?

Well, I think there's -- in the refi space, we are presently not refinancing private student loans from the second largest holder of private loans, Sallie Mae...

After us.

After us, sorry. And so that opportunity is available to us in January. And then the other opportunity, of course, is in-school lending is available to us beginning in January as well, and that's something that we're evaluating, but cannot say under -- until January what our intentions are and pursuits in that space will be.

That concludes our Q&A session for today. Mr. Fisher, do you have any closing remarks?

Thank you, Lisa. I'd like to thank everyone for joining us on today's call. If you have any follow-up questions, feel free to call me directly. This concludes today's call.

Thank you for participating in today's conference. You may now disconnect.