SLM Corporation (SLM) Q3 2018 Earnings Report, Transcript and Summary

Good morning. Thank you for standing by and welcome to the 2018 Q3 Sallie Mae Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Mr. Brian Cronin, Vice President of Investor Relations, you may begin your conference.

Thanks Toni. Good morning and welcome to Sallie Mae's third quarter 2018 earnings call. With me today is Ray Quinlan, our CEO, and Steve McGarry, our CFO. After the 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 than 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-Q 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 Form 10-Q for the quarter ended September 30, 2018. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I'll now turn the call over to Ray.

Thank you Brian, and thank you all for calling in and for your interest in our company. It's a pleasure to report on third quarter results and I will go through them in some highlights and then we will turn back to you all for questions. So it was a great quarter and it is a great year thus far. We have had terrific results in the market and on our margin and especially in risk. We are [latent] in credit cycles everybody knows, but our performance continues to improve. The sales growth in the private student lending business at 12.4% for the quarter greatly outpaced any estimate of the growth in the market, which is still typically thought of as 2% to 4%. We will get the final numbers on that sometime during the fourth quarter but our growth rate is multiples ahead of the market and given we are ahead of the industry leader and have over 50% share in private student lending, it is all the more outstanding. The other item, which is improving more rapidly than our expectation, is credit performance. Net charge-offs as a percentage of loans in the period were 88 basis points. The absolute number of write-offs are just about equal to last year on a receivable that is 18% larger. This of course is reflected in our EPS, which is [$0.235] for the quarter, up 42% from the prior year and our ROE 17% in the quarter, 19.6% year-to-date, outstanding numbers. As I said, the volume in the quarter is a great story for us. And if you recall we had estimated that we would be $4.8 billion or so last year. We thought that would go up a couple of hundred million. We have doubled the rate of increase from our expectations and it continues to hold. So that year-to-date we are up 10% over the prior year and this has grown through the quarters, so that was up 12.4% in the current quarter. This has all been done with stable credit quality and through a series of efforts at one segment of the market more carefully than it had been done prior and to the core parent grad partner channels along with several others, as well as concentrating on the actual click by click experience that our customers experience as they go through both an application and in customer service. We are now – over 93% of our interactions with customers are done on the internet, which is their preferred way of doing things without human interaction and we have introduced chat, as well as getting good results on our online application and mobile app. The customer satisfaction for chat remains at 97%, mobile application outstanding at 85%, and this all shows up in our market share, which is increasing but done with a series of efficiency efforts on one hand, greater segmentation on the other expanding our offers with the six grad products and concentrating on multiple variables, no one single silver bullet as it were. In regard to that credit quality, the approved FICOs are absolutely flat at 747. The co-sign rate is flat at 89%. And so the increase in volume was not done while deprecating the quality of the credit portfolio. In delinquency and charge-offs the trends are terrific and as I said, the receivable is up 18% and gratifyingly, the credit losses are flat to last year in absolute numbers. The NIM for the quarter is at 6% despite the fact that the third quarter is an area where from a seasonality standpoint NIM tends to be a little bit depressed, still up from last year’s 5.85%, 2.6%. Operating expenses at $151 million in the quarter, they are a 30% growth. Now this of course is higher than the ongoing growth and something that is not going to be sustained. It is exactly in line with what we told you all we would do several quarters ago so far as detailed investments [indiscernible] initiation and this is 100% in keeping with everything we said. There is no new news on the operating expense basis. We continue to focus on the efficiency ratio, which was over 40% in ’16, 39.6% in 17% and in ’18 we are guiding to 38% to 39% continuing our downward trend despite making investments in the company, and of course, we are not changing that because as I said no new information on the OpEx side, and as we look at ’19 the efficiency ratio will continue to drift on down. So this is part of a 5-to-10 year story that we will have on an ongoing basis. The credit performance continues. Last year we had a 2.6% delinquency rate. This year we have 2.3% and as you know delinquency rate is a forecast model for what the losses will be over the next couple of quarters and so the outlook is very good for us. The balance sheet meantime is up 22% and the risk-based capital stays at a very healthy 12.8%. The leaky bucket portion of this, which is consolidations have remained flat while the receivable and the paid portion of it has increased significantly. So if you look at consolidations for us in absolute numbers in the fourth quarter of ’17, they were $243 million of consolidations and as we went through the three quarters of ’18 they were at $224 million and $221 million and now $228 million. As we said, plateauing there while the receivable is growing. So the consolidations are dropping as a portion of our balance sheet. EPS continues its long-term trend. We have had five very good years there and ROE reflects that. As a backdrop, our relationships in the regulatory environment continue to remain excellent. As with the FDIC, the UDFI as well as the CFPB we have ongoing conversations with all three. We work very closely with our colleagues there and they have been nothing but supportive for all of our efforts. In regard to the market frame of the customer, the competition and the evolution, in regard to that, the customer satisfaction that we mentioned earlier continues to play favorably for us. And as we have looked at our organic personal loan pieces, we are seeing that the Sallie Mae brand on a variety of fronts is much more powerful than we would have thought even eight or nine months ago. It gives us a competitive advantage in originating personal loans because the brand is first, well known; secondly, heavily associated with funding higher education; and third, well thought of by the people who have experience with us, or with student loans more generally. We also remain a standout in the industry as an industry leader in thought process. We are working closely with new initiatives at the margins, remote colleges online learning, all of those things along with our many partners who are in many cases at the forefront of the advancement of technology in regard to the market but also in publishing thought pieces such as how America pays for college and how America values college, both of which have been well received, highly circulated with millions of course contact points. In regard to employees, our turnover rate remains extremely low at 6.7%, our voluntary turnover, which of course accrues to a benefit of us less hiring, fewer downtimes, less training, all of that. And so the evolution of the market to segments is extremely important, the personal loan indicator so far is the receptivity of other products is very good, and as you all know the outlook has upped our EPS guidance to a $1.02 to a $1.03 with $5.2 billion originations we were up sometime during this third quarter, and the efficiency ratio is steady to our expectations at 38% to 39%. So in closing this out, it is right to remind everyone what a great market the private student lending business is. It is a unique niche that is still [void] of very few competitors. It is critical funding for a worthwhile cause by many of America’s families. It results in our having a sought after customer base that has both initially very good performance with us and on an ongoing basis great promise. Attractive returns are a commonplace for [indiscernible] ROEs, which are terrific and our credit profile has been rock-solid. But we within that industry are a unique asset. We are the best known name. We have market share over 50%. We have the largest sales force, which allows us to do the segmentation as I mentioned. We have a modern digital platform, many partners who are diversified across the industry and we have happily very conservative funding and very reliable funding. Our core earnings are high and the leverage is still building within the company which you see in the efficiency ratios five-year decline. As we look out a little bit further, we have a strategic approach that is concentrated on the allocation of capital and high ROEs for all the efforts in which we engage. You have seen us discontinue the purchase of assets non-originated by us because performance was not where we wanted it to be. We are ROE driven. It didn't hit our targets. We have stopped that effort. We will do the same with other efforts. We will also evaluate all opportunities for ROE and the capital allocation that is a derivative from that evaluation as we go forward. And so in keeping with all the things that I have mentioned the performance that we have it is a pleasure to talk to you about our employees’ great work that has been done. We have a franchise that is unique, well managed and I should say that in regard to these quarterly reports that we intend over years to do exactly what we said we would do. It is our effort to not have surprises in these things. To be hitting guidance, not to be routinely beating it because it should be a fair estimate, but to continue to deliver and deliver and deliver in regard to improving this terrific franchise, which we have the privilege of being able to manage. So thank you for your attention this morning. And we will move onto the next phase here.

I think we will open up the call for Q&A.

[Operator Instructions] And your first question comes from the line of Moshe Orenbuch from Credit Suisse.

Great thanks. So congratulations on the really strong credit quality where you talked about that a fair bit. Maybe kind of help us understand how to think about the reserve development kind of as you go forward, the portfolio is going to continue to grow. It looks like you had a smaller reserve for troubled debt restructurings in this quarter, and maybe you could also kind of just clarify how we should think about the reserving on the personal loans, any way to separate that for the stuff you have originated versus stuff you purchased?

Sure Moshe. And it is right to say that we essentially have three loan [indiscernible] that I am going to have Steve to comment on. One is the basic business, which is the [loan loss reserve], which as you can see the delinquency and write-off performance there continues to improve, and then with the purchased personal loans as well as the organic. So Steve I would ask you to go through them.

Sure. Good morning Moshe. So as you pointed out, our TDR default rate has declined pretty substantially in both of the last two quarters. I think annualized this year it is at 4% down from 6% in the prior year comparable quarter. So a pretty sharp drop there and overall defaults were actually lower on a dollar volume basis despite the fact that we had $2 billion and $3.25 billion more loans in full P&I. So credit is performing better than our expectations. I have asked the guys to take a look – the guys and the gals to take a look at our LIFO loan TDR loss forecast because that is the basis on which we do our TDR forecast and the private student loan portfolio is performing very, very well. I think I have joked a couple of times on the call that we keep targeting on 1.5% reserve for the private student loan, and we never quite get there. And that was the forecast I think I gave last quarter and thankfully we are struggling to meet it. On the personal loan product, the vast majority of the build this quarter was for our purchased portfolio. As Ray has pointed out, we are not meeting our return targets there, and one of the primary drivers of that is that losses on that portfolio are exceeding our expectations. If you bifurcate the reserve for the personal loan portfolio this quarter it is running about 5% for the purchased portfolio, 2.5% for the organic portfolio. We believe that our personal loan portfolio should continue to perform better – our organic portfolio should continue or will perform better than our purchased portfolio for the most part because we are dealing only with pre-approved credit. So in essence we underwrite before we offer the product to our clients, which is considerably different than some of the marketplace lenders out there. As we move forward the reserve for the purchased portfolio could grow a little bit more. The organic portfolio reserve should approach 5% as that portfolio grows in seasons. So I think I covered all the questions.

Yes, perfect. Thanks Steve. And maybe just to follow up on the expense front, you talked a little bit about – could you – just maybe describe whether the Q3 expenses are impacted by the level of originations that you had, which obviously was higher than we were expecting. And also you mentioned you spent $19 million of the $40 million you had earmarked for your kind of ongoing strategic efforts – just the rest of it gets spent, how do we think about that?

On the core student loan business, the expenses weren’t really driven by the increase in originations. We are still seeing flat to slightly down applications. We continue to invest in our platform there, so the 14% year-over-year growth in OpEx in the core student loan business, a big chunk of that was from growth in units but there were additional expenses associated with things like [indiscernible], facilities expansion, for example, our call center and collection centers are growing as are our loans in full P&I grow and there are a couple of other projects that we continue to spend money. Ray mentioned chat, for instance, which is one of our newer initiatives. On the expense side, on the $40 million that we have carved out I think it is important for people to understand there that except the $10 million that we are investing to migrate our IT infrastructure into the cloud, the remaining $30 million will continue in 2019 and will be driven by the amount of personal loans that we target to originate. I think we have talked about keeping our volume flat at $500 million into 2019, and it will also be driven by progress on our credit card initiative, which will begin really in earnest in 2019; late in the second quarter and second half of the year. So I think that covered your question?

You did. Thanks Steve.

You are welcome.

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

Thanks. Good morning. On the…

Sanjay, we seem to have lost you. Operator, are you there?

[Operator Instructions].

Toni, do you want to move to the next one and we can come back to Sanjay if we can get him?

Sanjay’s line is open.

Hi. Can you hear me guys?

Yes.

All right. Perfect. Sorry about that. So, what do you attribute the faster than industry origination growth, is it about the strides you have made or has something happened in the competitive environment as well?

No. We actually addressing your last comment first. We don't think the competitive environment is volatile. It is pretty much the same competitors. The offerings we look at very closely and so in the private student lending market, I would say that has not been a factor. I do think that we are aggressively pursuing many facets of this and I believe what we are seeing is the benefit of that. The first is of course the ongoing improvement in our operating platform. Our customer satisfaction numbers continue to improve and are over 90% on our online application which was [indiscernible] three months ago and within that we also look at each stage for [poles row] we also look at in much more detail what people are borrowing money for. And so we work in some sense electronically through the process that are customers to students as well the family that are going through as they think about how they will finance our education and we are more involved in that in the application process now than we have ever been and that has resulted in one higher satisfaction and two higher volume for us. In addition to that what have been created largely at some [indiscernible] market it's clearly not one and the grad offerings which we have introduced six or full slate targeted to the various professions as you might imagine medical, legal, MBAs, that sort of thing and we have received good results there. Our grad volume is up about 18% year-on-year. In addition, we have made a commitment to wrap ourselves around partners in a way that's good for them and good for us, and so our partner business which is a small portion of things overall, but as I said if we look at 1% here, 2% there it adds up over a period of time. Partner business is growing much faster than the market. Good for our partners. Good for us and of course it is for still possibility than any of those partners returning to competitors that they are seeking to participate here and so it is with sort of a [scalpel] around segmentation, around customer experience, and continuing good results with the colleges that has resulted in their performance here which is across the board, but as we said we don't think about this anymore as one lump sum $5 billion we are working now onto the 5 or 6 active segments with varied solutions which give better satisfaction on both ends of that equation. So, next equation nobody change in the market but with series of improvements in product offerings, customer satisfaction pull through and just working with families how they expect to finance their children's higher education, we have received this year gratifying results and way above our expectations that we would have had in January.

Absolutely. And then on expenses, those were up about 30% in the quarter if you exclude the investments more or like mid high [10s]. Is that a better growth rate going forward?

So look [indiscernible] are largely driven by units and full principal and interest repayments. This quarter is a ticked slightly above that growth rate and we focus and offer lot on our efficiency ratio and we are not going to make improvements in that efficiency ratio if that continues to be the case. It just so happened that in this quarter we did have some unavoidable expenses such as the [seashells] investments that I called out but we will work to get that growth rate in OpEx in the core business back below the growth rate of units involved in the portfolio.

One last one, Steve you mentioned the personal loan portfolio losses coming in ahead of your expectations. Could you just elaborate on that like what was driving that? Is it the third party the loans that you selected from the third party or how did that work actually?

Well, so I want to make sure I understand your question, but I'll repeat what I think I said, so in our organic portfolio we look at performance of loans month on book delinquency rates at this point because we don't have a whole lot of loans in the portfolio that are approaching the point at which they start to the fault which I think we did have something like seven defaults but the delinquency rates on that portfolio are trending significantly lower than the delinquency rates at that stage of the season of the portfolio than our purchase portfolio perform. So I am just trying to make the point that we think our organic portfolio will perform significantly better than the business we just terminated and we should be able to meet our return hurdles in that product.

But I think Sanjay your other point was there something about the purchased assets that introduced a dynamic here increasing the loan losses associated with them and I believe the answer that is no. The quality of assets that we're purchasing has been pretty constant, but the expectations of the originators for their losses in a constant segment quality purchase scenario are actually higher. So it's the performance that deteriorated not the purchase screens.

Okay, and do you guys feel comfortable that it won't deteriorate a whole lot more going forward or because we've passed the seasoning cycle or--?

Yes, look we're going to make by many people standards a very acceptable return on these assets. We've just given the nature of our business and the alternatives hold ourselves to a pretty high hurdle rates. So we will not lose money on this portfolio. We will just not make the returns that we think are appropriate given our cost of capital, etc, etc.

Okay, great. Thank you.

You are welcome.

Your next question comes from the line of Arren Cyganovich of Citi.

Steve, you'd mention that the application volumes were kind of roughly the same you had really strong origination growth. You talked about the ticket size going higher. Are you also approving a higher rate? What's the difference there?

So there's no change in our credit box. Our credit standards have remained absolutely the same. It is the case that we are seeing better pull through over all in the application process and as Ray I think explained in some detail we are targeting more effectively different segments of our portfolio and growing for example to the point you made our graduate student loan business grew at a rate of 18% this quarter. So we rolled out those 16 products so you put it all together and the business is firing on all cylinders at this point in time.

Okay. And you mentioned some partners that you have that you're working with and I don't recall you guys talking about that much in the past. It is just banks that previously were involved in the business and now are preferring volume to. How do those relationships work?

Sure and it's a full range of partner profiles, but in general you may think of smaller banks, credit unions, people who have a customer base and they would like to provide the benefits of a private student loan, but they don't have the leverage to develop the platform that we have nor the compliance opportunities or the compliance requirements that are extends for it, and so it's a long list I believe the number is over 750 at this particular juncture of small players that we partner with, it's good for them, it's good for customers and good for us, but largely people who have a financial services platform and don't have as I said the volume that would warrant they're putting together a separate platform for private student lending and we partner with them. It's a number that has to be concentrating on it over the last year and the growth rate in the partner channel is coincidentally 18% as Steve mentioned for the grad piece.

Okay. Thank you.

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

Good morning guys. Thanks. Many of my questions have been asked. I guess just a couple of kind of nuance questions are, for the originated unsecured loans a couple of kind of characteristics I understood is number one for your own originated loans what is the average size and rate and then number two, you mentioned yet some of the kind of channels to get the customers, but I'm wondering how much of them are cross-sells from customers that you either have or had private student loans with versus new customers altogether?

Sure and so first things first, this is a 2018 we’ve launched the product in January. We're doing a bunch of testing in 2018 and so we're looking at people who had some association with Sallie Mae one time, no longer do people who are currently customers, people who have had some familiarity with student lending more generally and others who are credit worthy. And so as we look at that the cross-sell portion of that our customer base is not overly large. It run spending on how you calculate a few million, million and a half and so the cross-sell opportunities are much better than of course a random sample or a targeted non-relationship population. It will be a small portion of things going forward. It is okay so that the general demographics that we're interested in which is young people and how they sort of get started on life of which personal loans piece will be a very important part of the origination. And so right now we're testing across board and I have to say as I alluded to earlier that the Sallie Mae brand is both unique as well as powerful in regard to these tests and the additional poll associated with our brand versus either anonymous or random for people who have had some association with funding higher education is terrifically in access of anything we thought and significantly lowers our origination cost for those large populations which runs in the tens of millions, so the brand actually allows us to have a proxy for cross-sell that others might have with a pre-existing product because we are uniquely associated with higher education and in fact dominant within the private student lending piece. So the average ticket is running about $17,000, the range of APRs is a full range from 5 to 15 or so, so we're testing on this and as we enter in 2019 we'll be taking the results of those tests north towards the profile that we'd like to have for this portfolio.

Okay. That's helpful detail. And then second question just sort of thinking about kind of intermediate term trends. Where – how much is the P&I portion of total loans in full P&I now? Is that going to be balanced with where was it a year from now and then depending on that change what does that mean for things like delinquencies and charge offs how we think about the effects of that?

Sure. So John we're running around 36% full P&I and what happens and hopefully it will continue to happen. We continue originated large volumes of loans so that number tends to rise and fall as our loan origination volume increases. It is on a very gentle trend higher but it is the case that we have I want to say it's $7.5 billion in full P&I and for those who have been with us on this journey we started to have a right around the billion dollars, so we feel very good that having multiplied that by 7.5x, our credit performance is not only meeting, but beating expectations. It could very well be the case that a big chunk of this portfolio is past, its peak to fall rates. So if the portfolio was to stabilize in size we would see the falls trend lower not higher but I think what we're going to see is that they're going to stay remain stable around this 2% level of full P&I going forward.

Very good guys. Thanks for the color.

You are welcome.

[Operator Instructions] And your next question comes from the line of Vincent Caintic from Stephens.

Thanks. Good morning. I just want to take a maybe a step back and talk about the EPS guidance. So you've had a nice raise to the 2018 EPS and it's now that's indicating above 40% year-over-year EPS growth. I'm just kind of wondering maybe if you could describe what's driving you to increase the 2018 EPS guide and then as you're thinking about 2019 and the different components of originations’ name and credit, is that something that you expect trends to continue and maybe not 40% year-over-year but to get to a double-digit EPS growth?

So the key contributors to us raising guidance for the final quarter a year here was credit two thirds, name a third. We do expect the credit performance to continue to be rock solid. I bumped into one of our credit guys yesterday and I said hey this is a time to start second-guessing or life of loan fall rates and he reminded me that we are right smack in the middle of one of the strongest economic environments we've seen in decades. So he was in a big hurry to do that but we're at 3.7% unemployment and as long as those trained trends remain solid I think we can expect the portfolio to do very well but credit is very much economy driven. There are no signs that there is any major deterioration on the horizon. So going into ’19, if things are looking similar to the way they are today we can expect that that will definitely be in the plus column as far as EPS in 2019 is concerned. NIM, look we we're at a situation today where we now have, I think it's 32% of our portfolio is fixed rate that's up substantially from a year ago when it was 22%, 65% of our loan originations are now fixed rate, so that's a much different game that we're playing today than we were a couple of years ago when interest rates were not moving. Fixed rate loans are somewhat more challenging to fund, but we think we are appropriately positioned to maintain the 6% zipcode NIM that we are going to put up this year in subsequent years. We do take a conservative approach to funding and we try to lock that NIM in not take risks that will potentially increase or decrease with the margin.

Okay, great. Thank you. And then just one quick one when you think about the credit card portfolio 2019 roll out any sense for how big of an impact that might be and is there when you think about incremental expenses or anything like that your credit and so forth what does that add to the portfolio. Thanks.

So, in the grand scheme of things there will be zero credit card receivables on the balance sheet at the end of 2019. There will be expenses associated with continuing to build the platform out and credit card is very much a direct-to-consumer marketing game. So to the extent that we are ramping up our marketing machine in 2019 there will be expenses associated with that. I think we're going to have to save that discussion for our January conference call where we give you the finer points on our diversification efforts, but we are very much committed to not harming the core earnings, earnings generated by the core business. Ray has said in public that we would never risk more than 5% of those earnings on any diversification effort. It will be the case as we look at the 2019 that the personal loan will no longer be a drag on earnings. I'm not telling you we're going to spend $0.05 on credit card because I think that that would be way off the mark but we are committed to continuing to generate strong earnings growth at Sallie Mae here.

Okay, great. Thanks very much.

Your next question comes from the line of Richard Shane Jr. with JP Morgan.

Hey guys, thanks for taking my questions. Steve, I sort of have the same question for you that you have for your credit guys which is a year ago you talked about the idea that lifetime losses on the portfolio, on the cohort would be about 8%. You talked about vintages running towards 6%. What I'm curious about is when do you see sort of peak losses in a vintage with the idea that for an individual cohort you could actually take down that cumulative loss expectations?

So peak losses are behind us really by about 30 months into full P&I and in the future state of [indiscernible] I think analysts are going to love some of the byproducts. We will actually be publishing expected remaining defaults by cohort but we have in any given year two and a half billion dollars of loans going into repayment and big chunks of our $7.5 million in full P&I are past that peak to fall rate.

There are a couple of points here right. One is this all loss [indiscernible] follows a similar other consumer lending products. So typical P&I runs the firm as for life of loan loss about seven years and so in the first two years of P&I you get about 50% of the losses. So that's 28% of the clock time two out of seven and it's 50% of our losses. So it's a 2x multiple for the first two years. Then after that things trend on down but it's right to say as Steve has alluded that our credit performance in 2018 has exceeded our expectations significantly and so as he alluded to with this hallway conversation for the credit manager it is the case that we have unexpected good news, we look into the future, people say oh late in the cycle to worry about risk embedded in the portfolio, we have all the data that we need from the last recession. We know that our portfolio is less volatile than many of the other consumer portfolios because of the high quality of the families to whom we lend and so what you're hearing is a good business which has great returns unexpectedly good credit performance and starting to think is this unexpectedly good credit performance a new norm in such a way that we could leverage it either with lower pricing or higher approval rates given that forecast or should we remain cautious given where we are in the economic cycle and the newness of this information. So we are at a fork in the road which says do you want to continue as you were doing which is just fine or could you actually improve your full-year forecasts for the losses as well as the NPV for newly originated accounts and we're debating that right now but it's an opportunity quadrant debate not anything else.

So it's a very interesting way of looking at and I share that to you. If we start with the idea that it is not a new normal, but rather there are certain vintages that have benefited from historically low unemployment and that those vintages will produce lower cumulative loss rates which of the vintages do you think at this point are seasoned enough that you could actually make that assumption due to macroeconomic factors they're going to experience those cohorts will experience lower losses?

Well, if we take that and just plot it on a chronology graph we'd say on average if we made $5.2 billion worth of loans in this calendar year when would they go into P&I on average they will go in about two and a half years after that. So the ones that are entering full P&I today third quarter of 2018 are those people who on average had loans that were in ‘15 and ‘16 and so now plot the unemployment dropping for the macro-environment against that and you would say that people who are in full P&I today in fact were only benefiting from the beginning of this very favorable employment cycle because as we all know it has gotten a rapidly better over the last two years, almost none of the originated loans in the last two years are in fact in P&I. So that improvement that you're anticipating which is like graduate and get a job at a higher level than the prior cohorts is still in front of us.

Got it, thank you.

Your next question comes from the line of Michael Tarkan with Compass Point.

Thanks for taking my questions. Just a couple of follow-ups. On the yield question, can you tell us where yields are on the new originations relative to the on like the average yield on the originations you put at this quarter relative to the 9/16 for the overall outlook?

Some loans that we were purchasing had an average coupon around 10%. We are a zero fee lender in the personal loan business and our coupons are going to be approaching 15%. They're not quite there yet but there will be more yield even more it's currently on the books.

Okay. And then what about on the student loan side, just wondering where average yields are for the peak clinic season?

Sure. So, on student loan side or average yield on the variable portfolio was 7.5 where the LIBOR's were basically 10%. And the average yield on the fixed rate portfolio was 9.75%. Very flat yield curve and the people selecting that fixed rate in our current rising rate environment.

And while I had the microphone, I stated earlier that we were going to have no credit-card receivables on the both should be under 2019 apparently Brian got a few e-mails on that from the team. I stand by my number, it's going to be less than $50 million. On the grand scheme of things as analyst were concerned overdue, no receivables on the board. I'm sorry Michael, you had another question?

Yes, thank you. Just on the personal loan. The five goes that you're seeing come for the organic product versus the purchase product. Are those largely comparable?

They are very similar but of course we are using our own custom credit score cards. So five go's not the only variable that we'll be looking at and I did mention earlier that these are pretty approved credits. So, we do think for a number of reasons sale perform better than what we currently have on our books.

And then just one quick one on that one. So, are you still sourcing primarily those borrowers from your existing student loan pool and at what point you broaden that out as you look to build that product a little bit more?

So, --.

So, go ahead.

Go ahead. We've already broadened that out. As Ray mentioned earlier, our current client bases is just over a million borrowers. So, we could not fill a personal loan business on our portfolio alone. So, we are purchasing less that consist of people very similar to our current borrower list. And it is a little bit more broad as well.

Thank you.

Welcome.

Your next question comes from the line of Dominic Gabriel with Oppenheimer.

Hey, how are you doing? Thanks for taking my questions. Just real quick, the credit did come in better than our expectations as well. And then can you just about any adjustments that you guys have made at SLM over the last year that may have contributed to some of this outside of just good economic conditions?

As we reported, quarter-by-quarter we've been quite consistent in our credit approach both in the cut-offs of through the door population, the cobranding portion, where they come from so far as to schools. And the improvements that we've tried to implement and we've had success in this is on the biggest issue in this type of credit we've talked a little about who is in full P&I who is not in full P&I. As it turns out for me, credit bubbles standpoint. The biggest concern that we have at a business such as ours whether there's differed payments for many customers is the transition from State A to State B; either in a minimum payment; just paying interest to some token amount. And I go to full P&I or I have full deferment and I go to full P&I. And that mini wave is the most difficult thing to forecast; it is most difficult thing to staff again. And we have done everything we can to mitigate that wave height. And so, we are now sending multiple notices to people here in four months you are going to have to make a payment here, in three months you are going to have to do this. Asking people whether or not they're ready to contact us a priority. If in fact they do have some difficulty and we have been quite successful in getting people going from zero to one not to do that. And lowering that initial way because there's a benefit in our staffing or delinquency and ultimately in our losses because the people get behind, catch up is really difficult. And so, this is an operational type of customer approach which calls for partnership between our customer service unit and our question unit which is readily enhanced over something which didn’t really exist in that form three years ago. So, no change attend and many improvements on the back end. But as Steve said, the economic environment is also crucial here. And while our portfolio in the private recession has had a much lower beta than other consumer portfolios because of the high quality and because of the family lending and a cobranding is still the case that we are definitely benefiting as are others from the benign environment.

Great, excellent. Thank you, so much. And then quickly, you guys have done a great job stemming the growth and loan consolidation to third parties. You talked about some of the strategy around this in the past. But when you think about reducing the rate on the loan versus extending the term to lower the payment once someone graduates, how does what's the top process around that and where is the cut-off there? Would you say what this isn’t economic to us, we're going to let this go as well as that maybe lowering the rate or extending the terms with the point where some comes same person may come back for another cut maybe six months later. What's your thought process there and where do we -- where can we maybe see going forward more based on extending the term or lowering the rates, where do you see all these things moving?

Yes. As we've talked about in prior quarters, we've done relatively little in terms of volume either in low win to rate or extending terms. And the customers of course have a focus if you survey them they will say "I want to have a lower rate" but if you ask them how they you think that will show up, it really need a lower payments since the lower rate it means doing it. It's also the case that in press release we've looked at when they're consolidating, they're not out consolidating sadly main loans alone: they're consolidating their credit card business, other loans they have. The objective is a better cash flow for their households. And so, we're continuing to test in regard to this. But as Steve has said on multiple quarterly calls, the backdrop interest rates that have gone up consistently over the last year and a half have mitigated some other competitor's enthusiasm for this business. So, we are going into this in a small way. We have some test plan for 2019. We will continue to build our capability to engage in this type of fighting. We do think it is on its face a margin destroyer. So, our enthusiasm for this type of business is relatively low. The volume as you've seen has plateaued almost exactly from the fourth quarter of last years I see lower than the fourth quarter last year to where we are. And so, we're arming ourselves to be ready in the event that this escalates but we would prefer to keep a low profile in this and that the benign trends that we've experienced on the last four quarters continue. We will operate defensively but not dramatically.

Excellent. Thank you, so much. I really appreciate it.

And your next question comes from the line of Michael Kaye of Wells Fargo.

Good morning. I was hoping you would talk a little bit about your recent investment integer and how that fits with your credit card strategy?

Sure. Deserve is a West Coast, very modern integrated native app for payer of credit cards. And when we looked at our entry into the card business, several things guided us. One is that the card business is filled with very capable competitors both many a firm had excess capacity while we're sitting here. Two; is that we did not want to build an infrastructure that had high fixed cost associated with it. Three is that we wanted to be modern and we thought that we would have an advantage over existing players who frequently are bound by their old un-integrated and not very consumer friendly systems. And so, as we survey who would be a potential partner, we looked at multiple potential capabilities. We hit upon the Deserve folks because they are modern, they're dedicated to us but they are yes relatively a new company and so we made a small investment in them. We have observed a right on their board. We are working closely with them. And as Steve has alluded to we're expecting to have a friends and family type of walkthrough for our product in the within that 45 days of today a second chapter of that in January and we expect to be testing our way into the markets in the second quarter of next year. Which we signed the contract with Deserve in the second quarter of this year. And we can move from a contract signing to a product that is working in less than six months. I believe there will be a new standard in the industry where that lead time is typically measured even for the best competitors in 12, as 12 to 18 months. So, the responsiveness is good, they're very modern, they do have a native app which makes for an integrated customer experience. And so far so good with Deserve but a small investment along the way was called for just because of the fact that they are newish.

Okay. My second question was I just wanted to get some thoughts on the upcoming mid-term elections. Let's look at a couple of scenarios that were public and lose control Congress. How much of a setback would that be for something positive developing on some private standalone expansion? And if the Democrats do gain control, would that just really perpetuate this status quo or is a risk of something negative developing?

I know this isn’t a political discussion but when I look at think about your first comment, if the Republicans were to lose control of Congress, one of my intuition that you think they do have control of Congress. And I think there'd be different opinions on that even within a Republican party. But we've seen over the last we're coming up on our [fifth December, 31], since this has been and we've spent quite a bit of time on the political front. And there were people with extreme dispersion, everything from get rid of the federal program to college should be free for everyone as you know. And what we've seen thus far over the last four years is basically gridlock. We have the high reach case in our heads not been renewed, initiatives have died or lost the day-to-day are announced on the of course the deficit has improved -- has not improved rather has increased. The federal student lending business at $1.6 trillion is a portfolio that no one in Washington seems to want to address at all. Losses embedded in that we now are approaching $0.5 trillion. And so, I would have to say that if you were just forecasting this coldly as opposed to what I might desire or something along those lines, we're going in bed we'd have to be more grid locked. Because even on the Democratic side if you look at, the people who would be in the majority in a blue wave house change house majority change, the student lending is really just not in their top list. And so, we don’t really see any formal plans there. People have said "Oh, the and the government had to get out of grad plus or to get out at parent plus." There are people for that that would greatly benefit our business; no doubt about it. On the other hand, raising the limits for the undergraduate federal loans we've heard it. And so, we've run all those scenarios but so far in the course of four years there's been no change. And so, from the standpoint of empirical feedback should make us humble. I would have to say going into that would be no change.

Okay, thank you.

And there are no further questions.

Okay. And so one, thank you all for your time and attention. And as I said earlier, it's a pleasure to report these very good results. Steve and I were talking about what would happen on this call before the call. And I think if we had a catch phrase for the third quarter of 2018, it would be as we told you the following. The results are right in line with what we thought with three exceptions. 1) The purchase personal loan business has not performed the way we liked and I think discontinuing it is of course the right decision in my opinion but I think it's an illustration to our analysts as well as to our shareholders that we are willing to be bound by ROEs and when they are sufficient as Steve said they're still positive but not sufficient. We will act in keeping with capital allocation that is done rationally. The other two items are the origination volumes and my vantage point is from January, is significantly higher than we thought seeing a payback for our multiple efforts which is extremely gratifying. We will end the year as the industry leader starting with a market share over a 50% up 10%. So, that's a five full share points in a market that we think is growing to the 4%. We think some of our efforts have actually expanded the market volume and we can talk more about that in the future. And as we've talked about significantly in this call: Our credit performance is doing much. much better than we thought and we expect that to continue for the foreseeable. So, in summary, this is a great and unique franchise. It works with an up scaled customer base doing things that are very important to them which result in a high customer satisfaction which we now have at 80% overall. And excellent performance on credit. I should know that the management team strived to do exactly what we told you we would do. We are into no surprises business, we look to hit guidance, and we look for the guidance to be a fair estimate not a low ball piece. And we are in the business of deliver-deliver. We have a great franchise. We will address it as best we can. We will do the capital allocation in a rational basis as we go forward. And I thank you all for your attention today.

Great. Thank for your time and your questions today. A replay of this call and the presentation will be available on the Investor page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

Again, this does conclude today's conference call. You may now disconnect your lines.