Navient Corp

NASDAQ:NAVI

Earnings Call Transcript 2019-Q1

[Operator]

Good day ladies and gentlemen and welcome to the Navient’s First Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we’ll have a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder this conference call is being recorded.

I will now like to introduce your host for today's conference Mr. Joe Fisher, Head of the Investor Relations. Mr. Fisher you may begin.

[Joe Fisher, IR]

Thank you, Nova. Good morning. And welcome to Navient’s 2019 first quarter earnings call. With me today are Jack Remondi, our CEO; and Chris Lown, our CFO. After their prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the first quarter 2019 supplemental earnings disclosure. This is posted on the Investors page at navient.com.

With respect to the proxy contest with Canyon Capital we filed our preliminary proxy with the SEC on April 1, 2019 and we would refer you to that if you have any questions on this matter. We would ask that all questions following our prepared remarks focus entirely on the company’s earnings.

Thank you, and now I’ll turn the call over to Jack.

[Jack Remondi, CEO]

Thanks Joe. Good morning everyone and welcome to our first quarter earnings call. Our results this quarter were particularly strong; they include contributions from our legacy student loan portfolios and growing momentum in our lending and processing businesses.

Importantly, we’re on track to meet or exceed the financial metrics we established for the year and we’re raising full year EPS guidance from the original range of a $1.93 to $2.03 per share to a range of $2.08 to $2.15 per share. This quarter’s result also demonstrates our ongoing ability to increase operating efficiency, maximize cash flows and execute on our capital management plans.

We also show we are delivering on the value creation opportunities in student loan origination and business process services. Let me share some highlights of the quarter. In the first quarter our student loan portfolio is on track to generate over $3 billion of cash flow in 2019, approximately $100 million more than initially forecasted earlier this year.

In addition, we raised over $700 million through financing activity in the quarter. Our ongoing successes in leveraging the over collateralization in our securitization trust are reducing our unsecured borrowing requirements and lowering our interest expense.

Credit performance continues to be a positive in both our FFELP and Private portfolios. We saw significant reductions in delinquencies with the principal balance of loans more than 30 days past due a quarter end declining 25% in FFELP and 11% in private education loans compared to a year ago.

Portfolio performance here is benefiting from the strong economy and the success of our data driven efforts to assist borrowers. We originated over $980 million in re-fi loans in the first quarter. Our product helps borrowers with strong credit and free cash flow, lower the cost of their student loans and pay off their loans faster. Our mobile digital first solution provides a simple application and quick decisioning.

It also allows our customers design a repayment solution customized for their budget and their financial objectives. This nearly doubling the volume from the year ago quarter was combined with higher margins. Our business processing segment generated strong EBITDA margins and 5% growth in revenue. We also added several new clients in the municipal services and healthcare areas demonstrating our strong value proposition. This segment represents an opportunity to leverage our core workflow processing and performance solutions to create value without consuming incremental capital.

Earnings, cash flows and our strong capital ratios allowed us to return a $146 million to investors in the quarter. A $107 million via 9.4 million shares purchased and $39 million in dividends paid. We expect to utilize our remaining $333 million in share repurchase authority in 2019.

A consistent goal for us each year is improving our operating efficiency. Last year comparable operating expenses fell 11%. For the first quarter, comparable operating expenses declined another 9% to $239 million. In achieving these results we delivered improved operating efficiency in all segments and we expect our ongoing operating efficiency efforts to produce continued company-wide improvements in this important financial measure.

Earlier this month, we launched a new education finance loan for undergraduate and graduate students. This product helps students and families finance the cost of going to college. We leveraged our historical student loan experience along with the innovative technology and user experience developed for our refinanced product to create a more modern user friendly and informative solution for students and families. I'm excited about the opportunities in this space and continue to believe we can generate high-teens return on equity as we ramp up production here.

We are very focused on and you can see the very positive momentum we have towards creating value for stakeholders. Our focus continues to be to maximize the amount and accelerate the timing of cash flows from our legacy portfolios. Our track record here speaks for itself. Through December 2018, we delivered $21 billion in cash flow, $6 billion more than our model projected at the separation.

We continue to improve our operating efficiency evidenced by our 9% reduction in operating expense this quarter. We're leveraging our skills and infrastructure to create value in lending, in business processing with $984 million in loans generated this quarter at the best margin to-date in delivering EBITDA margins in our BPS business of 21%.

And finally, we're still returning capital to investors with $146 million return this quarter representing a 107% payout ratio. We've developed and shared with you a clear plan to create and deliver value. As this quarter's results demonstrate we are successfully executing this plan.

Thank you for listening today and I now turn the call over to Chris for a deeper review of the quarter.

[Chris Lown, CFO]

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 first quarter results for 2019. I will be referencing the earnings call presentation, which can be found on the company's website in the investor section.

Starting on slide 3, adjusted core EPS was $0.58 in the first quarter versus $0.43 from the year ago quarter. Key highlights from the quarter include the launch of our digital and school product, nearly $1 billion of refinanced loan originations with improved profitability and strong credit metrics, further credit improvement in our FFELP and legacy loan portfolios and the return of $146 million of capital to shareholders representing a 107% payout ratio. In addition, we benefited from an attractive opportunity to repurchase $46 million of unsecured debt, which resulted in a $15 million pre-tax gain.

Let's move to segment reporting beginning with the federal education loans on slide 4. Core earnings were $127 million for the first quarter. The net interest margin was 80 basis points in-line with our guidance. Total delinquencies for FFELP loans declined to $2.1 billion from the year ago quarter. This performance is consistent with our expectations as a delinquency rates has significantly declined from a year ago and charge-offs have performed as expected. Contingency collections, inventory increased by over $10 billion from the prior year. This increase in volume resulted in 42% year-over-year growth in asset recovery revenue.

Now let's turn to slide 5 in our consumer lending segment. Core earnings in this segment were $65 million for the quarter compared to $50 million a year ago. During the quarter, we originated $984 million of education refinance loans. Importantly this meaningful increase in origination volume was executed at consistent average winning FICO scores, higher average coupons and improved profitability. The first quarter consumer lending, net interest margin was in-line with expectations at 322 basis points compared to 323 basis points a year ago.

Our financing and operational initiatives have resulted in stable net interest margins as our portfolio continues to shift to higher quality refinance loans. At quarter end education refinance loans represented 18% or $4 billion of our consumer lending portfolio compared to 5% or $1.2 billion a year ago.

Let's continue to slide 6 to review our business processing segment. Total revenue in the quarter was $68 million with a 30% increase in healthcare revenue year-over-year. We achieved EBITDA margins of 21% in the quarter driven by disciplined cost management and continued focus on efficiency in automation.

Let's turn to slide 7 to provide additional color on shared services expenses. Nearly 75% of our total expenses are allocated directly to the business segments. The unallocated portion is comprised primarily of costs that are related to the management of the entire corporation and benefits shareholders through increased efficiencies. The few examples of these costs include insurance expenses and services provided by our treasury, audit, accounting, FP&A and human resources teams.

Our IT expenses are the most significant cost within this segment and include infrastructure and operations and IT security that are primarily shared across our federal education and consumer lending business segments. We remain laser focused on improving efficiencies across the company and reduced our shared services expenses by 10% year-over-year.

Let's turn to slide 8, which highlights our financing activity. During the quarter the company repurchased 9.4 million shares for $107 million and we have $333 million of remaining authority under our share repurchase program. In the quarter, we issued to private education loan ABS transactions totaling $1.2 billion and raised over $500 million through additional repurchase facilities involving five previously issued securitizations. Importantly, we did this while maintaining a tangible net asset ratio of 1.25 times which is at the high end of our targeted range.

Before turning to GAAP results, I'd like to quickly remind investors of our established targets on slide 9. During the fourth quarter we established these metrics to provide greater clarity on our view of the business. The performance year-to-date puts us on a path to achieve or exceed these metrics for the full year.

Let's turn to GAAP results on slide 10. We recorded first quarter GAAP net income of $128 million or $0.52 per share compared with net income of $126 million or $0.47 per share in the first 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, as a result of our strong performance in the first quarter across all our segments and our confidence in the remainder of the year, we are increasing our full-year core earnings per share guidance by 7% from a range of a $1.93 to $2.03 to a range of $2.08 to $2.15 which excludes regulatory and restructuring expenses.

I'll now open the call for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Mark DeVries of Barclays.

[Mark DeVries, Barclays]

Yes, thanks. Sorry if I missed this but what exactly changed in the outlook that made you comfortable raising the EPS guidance for the year?

[Jack Remondi, CEO]

There's a combination of factors here. Certainly, our outlook in terms of interest rates and net interest margin and the profitability of our student loan portfolio is a contributing factor continued improvement and credit performance, increases in fee income and ongoing cost efficiency. So, it's really a combination of those factors that combine to drive the forecast up here.

[Mark DeVries, Barclays]

Okay. And my next question I guess Tyson to your comment about the profitability of the student loan portfolio. Jack, what are you seeing on the competitive environment, how intense is competition? And what if any benefit did you get on the origination front this quarter from the expiration of the non-compete?

[Jack Remondi, CEO]

And so we've -- this product is designed to help borrowers, those with student loan debt who've been in the workforce for a number of years, demonstrated a successful pattern or payments and have an income in cash or free cash flow that really make them excellent credits.

And I think what's a little bit unique about this customer base is they're also very focused on kind of managing their student loan liabilities to fit their particular budget. And what we do in this space is really have designed an origination, an application flow that is simpler than the competition and really is designed to allow the borrower to pick their payment term that fits their cash flow.

So, the majority of our customers are picking the payment amount that they want to they want to make each month rather than the term. And that gives them that flexibility to kind of set their loan payment to fit their budget in their financial objectives best. So, the competition in this space is really more about how you are working with the customer and acquiring that customer in the front end.

And I think where we stand out compared to the others is our cost to acquire a loan or a borrower relationship is significantly lower than what we think the competition is spending and our ability to customize the loan product allows us to meet those customers' needs without a direct kind of a dollar-per-dollar price comparison concept.

[Mark DeVries, Barclays]

Okay, got it. And was there any benefit that you saw in the originations from the expiration of the non-compete?

[Jack Remondi, CEO]

We certainly saw some volume pick-up in that area but we've this is an area where we have been competing to get for our customers who are into the repayment mode. And so, the -- some of the private student loans, the newly originated private student loans wouldn’t necessarily be eligible for refinance yet.

[Mark DeVries, Barclays]

Okay, got it. Thank you.

[Operator]

And our next question comes from the line of Arren Cyganovich of Citi.

[Arren Cyganovich, Citi]

Thanks. Just on the consumer lending, net interest margin, that popped us a little bit quarter-over-quarter. I was just curious as to what was driving that. I would think that the adding of the additional refinancings would have a downward pressure on that on a sequential basis?

[Joe Fisher, IR]

I think you've at quarter-on-quarter you also have to look at on a year-on-year basis. And so, I inevitably obviously on a risk adjusted basis while the refi loans are very attractive, they do have a lower NIM.

And so that's flowing through into the portfolio over time will reduce the NIM but again at a attractive risk adjusted return the three - we gave guidance at the beginning of the year at 3.10 to 3.20 for NIM for that portfolio. I'd say we're on track to still be within that range.

[Arren Cyganovich, Citi]

And on the net charge off rate for the consumer lending was kind of [indiscernible] that was also impacted by the disaster recovery relief efforts. But the guidance for the year is still kind of 1.6 to 1.8. Why isn’t that coming down further given kind of the same aspect of adding those new refinancing in terms of the book?

[Joe Fisher, IR]

So, that you are correct the -- if you just look at the delinquencies of our portfolio they’ve been improving significantly year-over-year and what you're seeing in terms of defaults is really the reset for some borrowers who were residing in the disaster forbearance areas.

We see that same phenomena on both the FFELP portfolio as well as the private loan book. And it will - the impact is going to be felt in the first and the second quarter. And so that creates the charge-off rate to be a little bit elevated during those periods before it returns to normal in the second half of the year.

[Arren Cyganovich, Citi]

Okay, thank you.

[Operator]

Thank you. And our next question comes from the line of Sanjay Sakhrani from Keefe, Bruyette & Woods.

[Sanjay Sakhrani]

Thanks, good morning. Jack, I guess following your comment on the in-school product, I was wondering if you just expand a little bit more on the strategy there. Perhaps you could just talk about how much more of this strategy you're going to execute on in the future.

For example, are you thinking of indirect channels such as banks to tell us to work through. And then, as far as the product goes, how will it skew, will it skew more undergrad versus grad. Thanks.

[Jack Remondi, CEO]

So, our goal right now is to take advantage of the student loan experience that we have over 40 years of participating in this marketplace along with some of the innovation that has been brought to the marketplace to our refi products. And combine those together to offer something that we think is pretty unique in the in school origination front.

Our target audience is through the -- is working with consumers directly and versus through partners at this point. Some of the innovative features that we think we brought to bear here are quick kind of approval checks for the consumer so that they can quickly understand and address the anxiety they have about whether or not they'll be able to finance their college education.

The way a co-borrower is invited to participate in the application process is something that we think is also unique. And then, part of what we've been talking about for the last couple of years here is helping students and families better understand the cost of not just how they finance their college education and what that would be, but ways to reduce the cost over the life of the loan.

And we think those are components that will give us a competitive advantage here. We're pretty modest expectations about what we will originate this year at $150 million of disbursements. That equates to about $300 million worth of loans but we think we can capitalize on our experience, our product innovation and design and really ramp this product up pretty quickly over the next several years.

[Sanjay Sakhrani]

And so is the plan to just be direct or work through other parties as well?

[Jack Remondi, CEO]

At this stage in the game, it is to be as a direct originator. And I will say I mean our expectations are to generate - that we can generate mid-teens ROEs in this product which is we think is very attractive in the consumer lending space.

[Sanjay Sakhrani]

Okay. And then maybe a follow-up question. Just on all of these political headlines, obviously there is a lot of noise in the background. Maybe you could just talk through how you see that affecting you in any way and maybe your views on the politics. Thanks.

[Jack Remondi, CEO]

Well, I think as we've talked in the past, the student debt has become a large political and media topic and I think there is any time when you have programs with large numbers like that you have in the federal loan programs in terms of debt outstanding and the number of borrowers and the number of students who are borrowing, it drives a lot of coverage.

We think we still see from our front row seat here a very different set of circumstances that often gets portrayed. And that doesn't mean the stories that are told of individuals are wrong but it's just not the norm. and it really this kind of almost like a bar belling type of situation and for those who go to school and graduate the delinquency and default rates of borrowers have been improving dramatically since the end of the last recession.

And we see that each and every year a continued improvement in the performance of those loans. And again, this is not for credit underwritten products. On the other side of the barbell you have a number, a significant increase in the both the number and the dollar amount of being borrowed in terms of the number of meeting students who are borrowing and the dollar amount that is being borrowed, where kids are not graduating.

So, they start their education process and don’t complete into a lesser extent or take significantly longer than the four to six years to graduate that you see and in kind of more traditional sets of circumstances. That's where the struggling typically occurs. And as we've shared before, 2/3rds of all the defaults in the federal program come from students who borrow less than $10,000.

It's the solutions that really need to be addressed here in our view more about the front end educational side of the equation and helping students and families understand what it's going to cost to earn the degree and how they are planning on financing that and whether or not that financing package makes sense given the income potential of the career they're pursuing.

For giving it on the back end of the equation doesn't solve the problem. It cures the symptoms but it doesn't solve the problem, helping students and families make better decisions at the front end.

[Sanjay Sakhrani]

Alright, thank you.

[Operator]

Our next question comes from the line of Leon Cooperman of Omega Advisors.

[Leon Cooperman, Omega Advisors]

Thank you. I would like to focus if we could on the rationale and your thought process behind the stock repurchase program. Several years ago I remember asking the same question on a conference call and you were forthright in your response and I think at that time we had started buying back stock in the 20s and you said very forcefully we're buying it back because we think it's very undervalued.

We think the business is worth in the low 30s. I think in the last decade or so we have bought back almost half the stock average price under 15. The average analyst expectation is $15.22, the highest is $22. Obviously, that three years ago you thought your business is worth in the 30s and you bought back a bunch of stock material lower price that will create a value.

Those prices seem to be unrealistic relative to with the market you're suggesting. I'm just curious if you could discuss the rationale behind the program, what values you think you're buying when retiring stock etcetera. I'm not being critical, I just really want to learn. Thank you.

[Jack Remondi, CEO]

Sure. Thanks, Leon. So, our share repurchase program has really been designed to return the capital that had previously been invested in our FFELP and private student loan portfolio is back to investors as it is as those loans pay off and then earnings accrete from that. And we've been returning it through dividends and share repurchases.

We do believe and still believe today that our stock priced trades below the intrinsic value of the company and that is a reflection of what we would say is the discounted cash flows associated with the portfolio plus the components of the company that are ongoing businesses. And so, that number has changed, the stock price obviously has reflected different expectations here.

I think today's stock price is very much way the some of our regulatory issues and the law suits weigh heavily on that but we see today the ability to buy back stock at today's prices as a significant value creator for our investors before buying back less than the intrinsic value that we see.

[Leon Cooperman, Omega Advisors]

Do you think you are buying a dollar bull for $0.50 or is that too extreme?

[Jack Remondi, CEO]

Well, I think at this stage we are certainly buying it back for less than a dollar and significantly less than a dollar. I think the range of people's expectations has a wide range as you point out we would say that the stock the intrinsic value of the company is in the 20s.

[Leon Cooperman, Omega Advisors]

Got it. Thank you very much. Good luck. Thank you.

[Operator]

Our next question comes from the line of Scott Valentin of Compass Point.

[Scott Valentin, Compass Point]

Good morning everyone. Thanks for taking my question. Jack and Chris I think one of you refer to as asked about the guidance increase. It was a number of factors. On the interest rate side and the margin I guess they go together, but just wondering given the competitive environment I assume it's still very competitive. Is there something change in your outlook for interest rates either short term or long term that kind of have increased your confidence in the margin going forward?

[Chris Lown, CFO]

Yes, so I think as Jack mentioned one of the benefits of this price increase or the guidance increase is that it was very broad based. It is across the entire business which gives us a lot of confidence but there are a couple of other things taken into account too. Obviously the end repurchase gain is in that guidance as well. That's $0.05. You all have to remember also I mean there has been a dramatic shift in where people thought interest rates are going what the corporate look like. Take yourself back to October, November and there was, was still talking about tightening meaningfully. There were estimates of two rate increases in 2019. The curve is now flat and inverted.

And so we are just in a significantly different environment than we were to our benefit and so that is inevitably is helpful. The other thing that happened through the year into 2019 is amortization slowed. So our portfolio size it was a little bigger than expectation which obviously accursed store benefit. So there are a number of points which is positive because it wasn't one single thing and it's very broad based and what gives us a lot of comfort around raising our guidance for 2019.

[Scott Valentin, Compass Point]

Okay helpful. And to take a look further on that I mean I assume it's the outlook for say LIBOR, some of the rates not going up as much as really provided maybe little more confidence in the outlook?

[Jack Remondi, CEO]

That's right.

[Scott Valentin, Compass Point]

Thanks very much.

[Operator]

Our next question comes from the line of John Hecht of Jeffries.

[John Hecht, Jeffries]

Yes, thanks very much for taking my questions. First one is just with the respect to expenses. You guys have the FDC pass-through and I think that expires middle of this year. How do we think of that with respect to the efficiency guide and any adjustments we should be thinking about there?

[Jack Remondi, CEO]

So that revenue and expenses was roughly $7 million in the quarter. That will continue until we are off their system that is a TBD but you can use that as a guidepost. I mean inevitably it is a zero margin element. It washes the expenses and revenues wash each other. So I think that can give you the guidance. We will obviously give you updates and it depends on when everything moves off of the systems but that is still TBD.

[John Hecht, Jeffries]

I guess we're making the modeling for efficiency ratio should we make that adjustment and expenses?

[Jack Remondi, CEO]

Yes.

[John Hecht, Jeffries]

And second question is a little bit more strategic. You've done a nice job building up the origination and acquisitions in the private education loan segment over the past several quarters, about a billion dollars quarterly now but that seems to be just replenishing a lot of the runoff of that portfolio. How do we think about your intermediate along term origination goals and growth rates in that category?

[Jack Remondi, CEO]

So that wouldn't be replenishing. Obviously these assets run off call it high teens, low 20s and so obviously we'll continue to build the portfolio but obviously have that runoff and a number in a few years will come to a steadier state from a portfolio size but the portfolio will still be growing.

[John Hecht, Jeffries]

So what do you -- maybe in a year or two where do we want to see you guys in terms of origination kind of origination pattern?

[Jack Remondi, CEO]

I think, we put out guidance this year of at least 3 billion. I think we feel comfortable with that guidance if not exceeding it. Obviously after having ramps the portfolio and gotten it to a more of scale the percentage increases year over year on quarter-on-quarter will come down but we still think there's room to grow this business even in the long term in the teens.

[John Hecht, Jeffries]

Thanks very much.

[Operator]

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

[Mark Hammond, Bank of America]

Hi, thanks. Hi Jack, Chris and Joe. I had a couple questions on the cap structure. One, on the bond that you repurchased during the first quarter. Were they another slug of yen bonds?

[Jack Remondi, CEO]

That's right. The 34?

[Mark Hammond, Bank of America]

Yes. So is there more to do there? I guess there is one more remaining?

[Jack Remondi, CEO]

So, a few things to say. There is there is a little more to do. What I tell you is, I'm not whether they come to us or not is uncertain. Obviously we have dialog with bond investors all the time. This is a investor being in contact with us talking to us and it finally got to a point where we felt from capital allocation perspective it made sense to use capital for that purpose given the inevitable return that we received from it but there's still a little left in the 34s but not a meaningful amount and I wouldn't expect to see this come again anytime soon.

[Mark Hammond, Bank of America]

And moving to cash flow one slide 14, the private credit residual cash flow that's forecasted cumulatively went down by 1.1 billion from last quarter's report just what's going on there?

[Jack Remondi, CEO]

Hold on. That represents the structured financing that we do against the over collateralization in the securitization trust. So those cash flows are net of structured debt and before unsecured debt. So when we borrow money against the over collateralization it reduces those cash flows because there's a now an introduction of a liability in the proceeds are used to reduce our unsecured debt balances or do other things.

[Mark Hammond, Bank of America]

Thanks Jack. And then is there any a quantity or way you can frame the capacity to do more of the repurchase facilities on the private side?

[Jack Remondi, CEO]

Well, there is more capacity. I think what we're always looking at is optimization of financing structures what we saw as an ability to tap those cash flow facilities and at a cost and benefit to us that were greater than our other alternatives. There is still some capacity and we should be looking at us to optimize our financing structure at all times but if that is the best price of financing it will be opportunity to utilize.

[Mark Hammond, Bank of America]

Got it and Chris could you quantify that capacity?

[Chris Lown, CFO]

It obviously changes over time but sub a billion.

[Mark Hammond, Bank of America]

That's good enough for me. Thank you all.

[Operator]

[Operator Instructions] Our next question comes from the line of Rick Shane from J.P. Morgan.

[Rick Shane, J.P. Morgan]

Good morning guys. Thanks for taking my questions. When we look at the change to guidance and this was pointed out roughly 30% to 40% of that was from the benefit from the debt repurchase. When we look at the delinquency trends that may are favorable on a year-over-year basis. Is the next biggest component driving that guidance revision a function of a better credit outlook and lower reserve levels as you move through the year?

[Jack Remondi, CEO]

I think as we said the contribution I mean the confidence in our ability to raise guidance at the end of the quarter here is really driven by contributions across the board. So there are contributions as you just mentioned from the net interest margin side of the equation, better portfolio, amortization trends for us improved profitability on the re-fi but also in terms of fee revenue that we're generating. We saw a significant uptake for example in our FFELP related fee revenue in the first quarter and expect that to continue through the balance of the year.

Similarly we're seeing better performance in our BPS origination our BPS businesses and both revenue in margin and then OpEx as a contributing factor as well. And then of course you have to add in the value of our share repurchase programs to those to that component. So I would really look at this as across-the-board contribution versus a single area or one or two areas.

[Rick Shane, J.P. Morgan]

Got it. Okay. That's helpful. The second question you guys talked a lot about your opportunity and private student lending and the emphasis in many ways has been on consolidation and refinance. The other part of that is the opportunity to re-enter the new loan market. I'm curious as you approach that market if you think there's a chance to do that in a different way? Historically it's been about getting on preferred lending lists but as we've seen in origination in different class and asset classes there's an increasing opportunity electronically to go direct consumer. Is that going to be part of the strategy?

[Jack Remondi, CEO]

Well, certainly our marketing approach here is a digital first approach. So some of the big chunk of this in the re-fi related business marketplace for example is a direct mail related function and we are focused instead on generating customer leads and acquisitions on a digital side of the equation. In terms of how private student loans at the campus level for in school or originate today. The students still are working very closely with the financial aid office to understand what their family expected family contribution will be and oftentimes we'll get information about how to finance it.

The financial aid office in the preferred lender lists are different vehicle today in serve a different purpose than what they did five, ten years ago where customers were very much encouraged to move through those channels because it simplified the back-office operations of the school. Today students and families source their financing needs through a variety of channels including digital direct and through the financial aid office. All of our products though are, will be underwritten certified by the school and disbursed with proceeds disbursed directly to the school.

[Rick Shane, J.P. Morgan]

Very helpful, thank you very much guys.

[Operator]

Our next question comes from the line of Dominic Gabriel of Oppenheimer.

[Dominic Gabriel, Oppenheimer]

Thanks for taking my questions. Can you just remind us how many rate hikes that you guys had in your original guidance? And then obviously you had a nice strong start to the year. If you saw a continued acceleration in your various businesses and you said it was pretty broad-based where some of the B came from this quarter. Could you see yourself maybe adding to your remaining 330 repurchase plan for 2019? Thanks so much.

[Jack Remondi, CEO]

So, on the rate increase in our original guidance we have one hike but also remember that the market was expecting future hikes so another decline in rates or flat and the curve. So one rate hike but the curve was still pretty steep and up to the right and then on the return of capital where we are committed is returning excess capital to shareholders we put out a guidance of 1.23 to 1.25 times on a TNA ratio. We clearly feel that is a great B going into C and we like where we are but if we do feel like we are in an excess capital position we will return that capital to shareholders through increased buybacks, etc. So I think you can continue to look at sort of that leverage ratio in our capital generation and think about what could be in store for the rest of the year.

[Dominic Gabriel, Oppenheimer]

Thanks and then if you could talk about was it the better amortization across both the FFELP and private portfolios or was it just one?

[Jack Remondi, CEO]

It was both FFELP versus our internal thoughts.

[Dominic Gabriel, Oppenheimer]

And then, there seems to be some additional disclosure on slide 7 for the other segment on the core do some of the expense breakdown which I really appreciate. Can you just talk about the give and takes there where you can see the leverage given that you're looking to obviously ramp some of the origination yet continue your nice efficiency there to? Thanks so much.

[Jack Remondi, CEO]

So I think it's a great question and we're very focused on this segment because these are the shared services that help us operate our business and trying to scale them as the portfolio amortizes it's very important to us.

So, as you know last year we entered a transaction with first data to variable lies, some of our IT expense and that was a big move to help us control and reduce expenses in shared services. And so we think IT is still a place that we can leverage changes in our business model, changes to the technology world and platforms and infrastructures using things like the cloud, etcetera to reduce fixed costs. So on the IT side we think there are clear expenses that can be saved clearly and in corporate facilities as we continue to manage our business and our footprint that clearly something will be focused on regular regulatory related that's something we obviously clearly hope goes down and our expectation is that we'll over time and then finance, vendor management, legal risk, and audit all these things should scale down and all of them can be used to our benefit to drive reductions.

So, I think it's across the board but there are fixed costs we've now converted to variable. That won't immediately change as far as that that's scaling down but actually as we break them down over the next year or two you will see them go down after they plateau for a year. So there is inherent benefit in that variablization that will take about a year, year and a half to work through the system.

[Dominic Gabriel, Oppenheimer]

Thanks so much for answering my question.

[Operator]

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

[Moshe Orenbuch, Credit Suisse]

Thanks. I saw on a kind of a legal blog that you guys had that Navient got the ability to depose the former student loan Ombudsman in the CFPB lawsuit. I'm not sure that in and of itself is all that meaningful but any kind of updates on the process with respect to that lawsuit?

[Jack Remondi, CEO]

So it continues to move at the pace that takes place in the sole federal court systems which is slow unfortunately. I think at this stage in the game the facts that we have discussed in the past are still the most important that after more than two years of discovery process the CFPB has yet to present a single example of a customer who is harmed in a way that matches up against their initial allegations and it's not surprising considering that they filed their lawsuit before they had listened to a single customer phone call but it had been searching for customers to support their claims from the beginning.

We're hopeful that the legal process will accelerate here. There was a special master appointed that is moving through some of the open items helping that process move on a little bit faster and we do expect the deposition process to continue to support. What we said all along is that these claims are unfounded.

[Moshe Orenbuch, Credit Suisse]

And just kind of following up on Lee's question earlier if you go back to before you did by earnest and that kind of shift in strategy stocks probably down in the upper teens percent in the markets up almost a comparable amount. So I guess I struggle with even how to ask the question but what do you think Navient has to do to get investors to recognize that that strategy has value?

[Jack Remondi, CEO]

Well, I think what we have to do is what we did this quarter which is demonstrate that we can generate very attractive returns from each component of our business and so if you look at the results this quarter you see very strong returns on the legacy portfolio side of the equation. You see strong origination growth with we said higher margins. You see fee revenue increasing and you see operating expense declining. I think that's what we need to do. That's what we control here within the company to delivering and creating value for our stakeholders.

The stock price unfortunately doesn't reflect the value that we see in it and we think a piece of this is the regulatory side of the equation and certainly even some of the noise associated with the recent proposal and retraction from Canyon and now the proxy process. We prefer to be focused on growing the business and executing our business plan and delivering value for shareholders and that's hopefully where we'll be very, very soon.

[Moshe Orenbuch, Credit Suisse]

Thank you.

[Operator]

Our next question comes from the line of Henry Coffey from Wedbush.

[Henry Coffey, Wedbush]

Yes, good morning. Just two questions one on the refinance business my impression and obviously correct me if I'm wrong is that it's mainly sort of a high dollar business focusing on super prime borrowers with classical professional degrees; doctor, lawyer, investment banker, engineer. Is there any thought process of going further down the, not down the FICO food chain but further down the economic chain to other successful professionals teachers whatever to see if there's a refinance product that would work there? Or is it still pretty much focused on that kind of traditional high-end market?

[Jack Remondi, CEO]

So you're correct in saying that this is, we're very much focused on consumers who have a demonstrated track record and free cash flow to support their student loan debt and part of this is designed to be we want to be able to offer a product to the consumer that is significantly better than the loans that they are exiting and that includes both the interest rate and to some extent some of the payment flexibility options that exist in the federal program if those might be needed.

But to your second point is I think this is one of the significant advantages that we bring to the marketplace here having been in the student loan origination and servicing space for private and federal loans for almost 40 years now that we have tremendous insight as to how customers move through the repayment cycles and the ability to identify customers who might look like that super prime customer several years before they get there and be able to offer products to those consumers earlier in the repayment mode saving them interest expense at a larger level and at an earlier time.

Certainly there are other professions and the ones that you mentioned teachers and nurses are great examples of customers with very stable incomes and very stable and predictive payment streams that are attractive customers for us here as well.

[Henry Coffey, Wedbush]

And then earnings are moving higher. You are buying back stock which is wonderful but a lot of the people we talk to that are involved in your stock are there for the income. Why not put some of that increased return of capital into dividends now that earnings per share seem to be moving higher?

[Jack Remondi, CEO]

I think is the capital allocation decision and discussion in inevitably to be honest corporate theory around capital return would suggest that dividends and buybacks produce the same result from the perspective of the shareholder from the return perspective to share price. Clearly we're paying a pretty high dividend today compared to the market and compares to the averages. I did something we do think about and talk about internally and so if we were to change that obviously we would signal that. I do feel like we're in a good place but it's something we do consider and think about.

[Henry Coffey, Wedbush]

I mean is there a view that a 5% dividend yield is pretty much as high as it's going to go and if you add it to the dividend the stock would go up or is the fear that if you add to the dividend the stock won't react?

[Jack Remondi, CEO]

Again the capital is being returned to shareholders in one way or the other either it is coming from a dividend or buybacks, to some degree there is -- to that but if you look at where we rest from a yield perspective versus almost any other stock we are in the top probably -- and so the incremental benefit there versus buying back stock we think it leans towards the buyback program.

[Henry Coffey, Wedbush]

Thank you very much and congratulations on a great quarter.

[Jack Remondi, CEO]

Thank you.

[Operator]

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to you, Joe Fisher for closing remarks.

[Joe Fisher, IR]

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

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the conference and you may now disconnect. Everyone have a wonderful day.