SLM Corporation (SLM) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Cedarius and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae 2018 Fourth Quarter Earnings 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.

Thank you, Cedarius. Good morning and welcome to Sallie Mae’s fourth 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 maybe materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in 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 earnings supplement for the quarter ended December 31, 2018. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I will now turn the call over to Ray.

Okay. Thanks, Brian and good morning to everyone. It’s a pleasure to talk to you today about a great quarter for Sallie Mae. We had great results in the market. We had great results on our margins. We had great results in risk management. Sales growth of 15.6% in the fourth quarter outpaces both our previous experience as well as the market, up 10.7% for the full year, represents our best performance ever in absolute dollar increase and a market leading growth as well as reflects the fact that we gained market share once again. We will talk in some more detail about how that occurred, but the overall results are excellent. Our credit performance continues to be ahead of our expectations as the portfolio matures. I am sure there will be ups and downs in regard to that, but through 2018, we did better than we would have thought so far as losses. We continued to enhance the franchise. We have increased segmentation in several different market offerings and the segmentation segments are growing at twice the rate of the existing market, reflecting the fact that by adjusting ourselves from a broad-based single solution for most problems to fitting our solutions around the customer we are getting better results. The EPS at $1.07 versus a $0.72 normalized last year is a 49% growth rate. Obviously, we think that’s terrific. And the ROE at 20.2% reflects the fact that we are getting not just good growth, but also excellent returns. We, this quarter, of course announced a capital return program initiating with a dividend of $0.03 a share per quarter, $0.12 for the year, approximately 440 million shares outstanding, $53 million. We start the dividend and we expect it to continue as far as the eye can see in perpetuity and so we think this is not a one-time deal in our intentions and we expect that to just become part of the woodwork. The buyback of $200 million was announced, we will talk about that in more detail and that reflects our overall modeling both for the core business as well as the impact of CECL starting on January 1, 2020 as well as excellent relationships with our regulators. So in summary, welcome to the next chapter of Sallie Mae. For those of you who have been with us since the spin, you know we have had three chapters, the first of which was launch and establish, which was 2014 and 2015 during which time we spent most of our time setting up the company, improving regulatory relations, which were horrendous when we split and getting the business to a point of self-sustaining. Then as you know, we had an undersized balance sheet, so we had extraordinary growth in ‘16, ‘17 and ‘18, compounded 40% increase in EPS, part of which was good performance, part of which was filling up the balance sheet to be of commensurate size with the originations engine. Now, as we enter the third chapter, we hit balance. And so the balance will have good growth, high quality earnings and we will be generating capital. During the first 5 years, we were capital consumers and as we model things out of the ongoing business, even in the face of CECL will be a capital generator and we will allocate that capital rationally as you can see. Going through some of the results in a little more detail, the student loan disbursements in the fourth quarter at $733 million were $99 million higher than the prior year, 15.6% growth and the increase overall from last year’s $4.8 billion in originations to this year’s $5.3 billion, that $515 million is a significant number for us all by itself. We continue to improve our customer performance. We continue to expand to chat, chatbot, our overall satisfaction for these type of activity at the margin is running 96% and 85% for online application. We have fewer false starts, we have higher customer satisfaction and we are lowering the cost of servicing. While we are expanding this volume, it’s important to note that credit quality has remained consistent. As you can see in the numbers that we published, the FICO scores are identical to the prior year. The cosigned rates are also identical. Cosigned rates will vary depending upon the segment so that some schools, distance learning, for-profit schools have lower cosigner rates, because the students are typically older and can stand on their own from a credit standpoint, do not need the support of a second signer. Impressively, our NIM at 6.11% is the number that we continue to be quite proud of. And as you know that from the 2, 3 years ago, where the number was 5.7% despite noise, despite increases in receivables and despite increases in interest rates, our NIM has continued to march on up and at 6.11%, we are quite happy with it. Our operating expenses at $146 million in the quarter were up from prior year’s $119 million. You all know that that was an increase where we decided to make some investment funded in part by the change in the tax law and specific expansions and improvements. I am happy to say that at this point the cloud migration in particular is 99.8% done. So as we enter the year, we have greater capability so far as the expansion of our core capacity as well as flexibility within that. The efficiency ratio, as you can see in our guidance, continues to march on down despite these investments in enhancements. Credit performance, as I noted earlier, is terrific. We had 1% write-off in the quarter down from 1.07% in the prior year and we continue to both manage that very closely as well as be happy with the results. The overall expansion in the balance sheet, which had ended the year at $26.638 billion, was 22%. You note that we have funded that in a stable and conservative way still getting good results on NIM with no surprises from anyone either on the capital side or on the funding side. Our risk-based capital rate despite our high growth is excellent at 13.3%, up from last year’s 13.1% and reflects the capital generation which I mentioned. So, the ROE at 20.2% gives us quite a bit of satisfaction in regard to one, it as a standalone point, but two, as a point of departure in modeling our financial results for the years’ ahead which also allow for the capital return. I will note in passing that our regulatory relationships which also are reflected in the approval for that capital return are excellent with the FDIC, the UDFI in Utah as well as with the CFPB. And so as we turn to the market frame, customer competition and the evolution, it’s continuing story. As we said, our customer satisfaction rate is high. Our market share continues to improve. Our segmentation is multiplicatively more tailored than it was 3 years ago and we have had good results all through competition appears to be both capable and folks like Discover and Wells as well as rational, which is a good circumstance for both us as well as for our clients. The outlook, as you saw in the guidance for EPS $1.22 to $1.26; originations at $5.7 billion and the efficiency ratio at 35% to 36% represents in some sense no surprises, continued good performance with an increased emphasis on balance, which as you see, the capital return program which we started today, we expect to continue as far as we can see. And so in closing, I just want to reinforce certain points. One is that the student loan business is a fine business satisfying an important need for middle class families in the United States. It is consistent. It has consistently grown. It is a need that is increasing. There were hundreds of articles about the training required for younger generations to meet the needs and the demands of the next 20 years to 50 years of working and so it’s a good business where we satisfy a true need at a fair price. Within that industry, we are a unique asset. We are the most recognized brand. We have the largest sales force. We have the best relationship with the schools. We have great regulatory relationships. We have an advanced digital platform and we offer the best service in the industry. On top of that, we have conservative funding. So we are there consistently, I am not in and out depending upon what happens at the Fed. Our core earnings power as you can see with the 20.2% ROE is very good. The third chapter of balance will be our story going forward. We have a strategic returns based and returns focused management. And so for the first time you see that as we enter this next chapter we will allocate money to the company for improvements for our service and our product offerings as well as to return it to our shareholders as appropriate given our regulatory requirements. And so with those couple of remarks, I want to thank you all for attending, welcome to the new chapter of Sallie Mae, and once again, thank you for your attention. And I will turn this over to questions, I guess.

[Operator Instructions] And your first question comes from Michael Kaye from Wells Fargo.

Hi, good morning. First question on the EPS guidance, the guide $1.22 to $1.26 what are some of the key variables to get you to the lower and top end of the guidance and secondarily, how much of the share repurchase is included in that EPS guidance?

Sure, Michael. So good morning, good question. We layered in the share repurchase at $50 million a quarter across the year at a price of 10.5% – I am sorry, you had a price of $10.5. So there is variable number one. The impact to the guidance on EPS was $0.03 a share. And look clearly the impacts that can move us to the top range or the bottom range of that forecast are all the usuals, operating expenses, an important one will be credit performance. Loan originations don’t have all that much of an impact, because we originate them in big lumps, spread out in the early – in the latter part of the year so that won’t really be a factor there. But I would say one of the biggest in 2018 was credit. We did see very favorable credit performance and that was a very big contributor to our $0.07 or $0.08 beat from our initial EPS guidance. As you saw in the numbers, we did see delinquencies and forbearances tick back up. That is incorporated into our guidance. What we think we are seeing here is normalization in our credit performance and that is baked into the forecast that we have provided here. The cost of funds, the NIM, as Ray pointed out in his opening remarks, so we are an interesting company. We will grow our balance sheet this year to close to $30 billion. And over the course of the year we will raise just $7 billion of new funding. So, we do think that the spread should be pretty tight there. And while we are on that topic, we are looking for a NIM of just over 6% for the full year, so hopefully that helps, Mike.

Sure.

Steve, one comment on the shares outstanding to remember is the calculation that Steve mentioned is a weighted average through the year and the terminus point would be, of course, down 4% to 5% in shares outstanding, but the weighted average for ‘19 which is reflected in the guidance will reflect the timing of the purchases and indeed how much we pay for those, but that’s a TBD as we go through things.

Okay, thank you. That’s helpful. Second question, we saw an uptick in consolidation this quarter. I mean some of its seasonality, but it picked up a little more than I expected. So where are you seeing the most pressure from consolidations? Are the FinTechs like the SoFis of the world? Are they more from banks like Citizens, First Republic? And secondly, does Steve have any guidance for consolidations for 2019?

So look, consolidations did tick up in the fourth quarter. They typically do tick up in the fourth quarter as the consolidators go after loans that are entering full principal and interest repayment in November and December. So, we weren’t surprised to see the increase. It ticked up 0.3%. Obviously, we don’t want to see any loan walk out the door, but it is part of being in the student loan business. When you look at who is consolidating the loans, it’s a pretty long list. There is three or four companies at the top of the list. You mentioned one of them. The banks, Citizens is a consolidator, First Republic doesn’t do much at all in our portfolio, but it is spread pretty evenly once you get off of those top three or four consolidators.

How about guidance? Do you have any thoughts on guidance?

So look, we expect like $1.25 billion of loans to consolidate in 2019. We continue to see the heaviest consolidation coming from the newer repay cohorts and it does trail off pretty quickly. So in future years as the portfolio seasons and the consolidation impact starts to curtail, we think it will be less and less of an impact on the portfolio.

Okay, thank you.

You’re welcome.

And your next question comes from Sanjay Sakhrani from KBW.

Thanks. Good morning and good quarter. I guess when I look at the origination outlook, it seems fairly robust. Could you guys talk about sort of what’s driving the optimism there and how you guys see yourself positioned to the industry?

Sure. A couple of things. One is the industry growth does continue. And two is that we have found through certain enhancements that have been made in the application process and indeed in the financial planning process for American families that a better articulation of the funds available from a student loan actually leads to an increase in the average loan amount and we expect some of that lift which we had some of in 2018 to continue into 2019. On the other hand as we look at individual segments, we have a partner channel with over 800 partners that is expanding nicely. We have a parent loan which is growing well. The grad loans which we introduced this year are only partially in place. Grad schools are a school by school sale and there is quite a bit of explanation and needs to go into that in direct competition with Grad PLUS with the government. And so as we focus on smaller segments, we are finding that segment growth within those categories and if you were to look at our smaller segments, they make up about 14% of our originations, but they were growing at twice the rate of the overall portfolio and so they made up 34% of our increase year-to-year. And many of those are in-flight as opposed to at a terminus point. And so as we look at a weighted average increase of each one of the segments into the detailed forecast not across the board, we feel pretty good about the number that we have and it does represent another increase in market share. So, it is an aggressive number, but is in perfect keeping with the performance that we have up to the moment.

Okay. And is there an estimate of sort of what market share you guys are assuming in that forecast?

There is, but the market is a little bit fuzzy to define as a core market there is lenders, there is other funding that doesn’t show up as student loans. And so we typically rather than get into a long explanation of how we are defining the market, don’t think about that in public.

Okay. And then great start on capital return as we look ahead, could we talk about sort of how you guys see the payout progressing over time, I know you have CECL to deal with, but can that payout step up as we move through time? Thanks.

Anything could happen as we move through time. And so what we have done is we have taken a multiyear forecast. We have incorporated to the best of our ability the current status of the CECL rules and the CECL implementation. And so as we look out over the next 3 or 4 years, we feel that while we have announced for today is a good start. It’s certainly not the end, but at this juncture, we are not publishing any guidelines so far as what would be a second slug of buyback or any change in the dividend. And so as Steve said earlier, we have some numbers in our models for how the buyback will go. We actually haven’t tested the demand elasticity of our pricing structure. We don’t know what happens at tail ends of things so as we go through, there’ll be both the efficacy of the buyback itself and then the underlying performance of capital generation we it’s right to say that categorically speaking, up till the end of 2018 we were capital users in the sense that our balance sheet was growing faster than our ROE so our balance sheets was growing 27% to 30%, our ROEs are growing at about 20% so from an algebraic standpoint, we had capital consumption we have now sort of reversed those trends so that our balance sheet will continue to grow in the 15% to 20% range our ROE will grow in the 20% range we expect to be capital generators we think there’s a good start and we’ll see how 2019 goes.

Thank you.

And your next question comes from Michael Tarkan from Compass Point.

Thank you. Steve, just following up on the NIM guidance you said it is a little over 6% is there some element of conservatism in there? I’m just trying to figure out why or what you’re suggesting if we ended the year in 2018 at 6.1%, what will be the driver of any kind of compression there?

So, look Michael, if we’re talking about 5 basis points, I don’t think that’s compression I also wouldn’t call it major conservatism I mean we’re going to as I mentioned earlier, we’re going to lay in $7 billion of new funding there will be some run off of brokered CDs that were put on the books in an environment where spreads were plus 30% to 40% we’re now in an environment where they’re well in excess of plus 50% the ABS market is backed up a little bit so when you take a look at the cost of funds at the present time, our best guess is that the NIM for the full year should be in that 6% to 6.05% area it comes in a little bit higher, would I be shocked? No, would I be delighted? Absolutely.

Understood. On the credit side, you talked about a little bit of normalization I’m just curious what that means for reserves on private student loans as we think about 2019 year-end 2019? You’ve talked about a 1.5% level before are we sort of migrating to that level next year?

So, we have talked about that 1.5% aspiration and we still haven’t gotten there when I look at the forecast for the reserve at the end of the year, it coincidentally does turn out to be 1.5% so the normalization is, when we look basically at our cure rates in our collection buckets, we got well below trends for the last three to six months Kudos to our collection shop on that one, with little assist from the economy, we do think that those cure rates might normalize a little bit and that is the basis for our forecast going into 2019.

Understood. And then last question for me is, what tax rates should we assume for ‘19?

So, we’re looking at 26% tax rates for the full-year and there will be continue to be noise as our tax positions that we set up at the spin run off and mature over the course of 2019 on certain tax positions.

Thanks.

You’re welcome.

And your next question comes from Rick Shane from JPMorgan.

Hey guys. Thanks for taking my questions. Look, today I think marks an important point in the evolution of the Company in terms of starting to return some capital longer-term we’ll have to start thinking about what Sallie Mae look like on a steady state basis when you think about Sallie Mae’s steady state a couple years down the road, what do you think is the ROE target? And I’d love you to sort of describe it on a 10-year horizon, what are the normal six years, what are the top two years, what are the best 2 years look like?

I have to say, congratulations on a very ambitious question, and it’s really not going to get the answer that you want, because we’re not going to give a 10 year return on this as you can see, as we look in these conversations about the individual parts of what makes up a P&L; the yield on the portfolio, the NIM Steve describe, the losses that are associated with it, the normalization. I think we you know, if you put that in a model, we continue to think we will grow faster than the market we think the margins will hold we think that despite the fact that when we launched Sallie Mae, everyone was wondering whether or not anyone could survive in the student loan business and we, unfortunately, have overachieved so that there are several people now who think it’s an attractive business who didn’t think that when, oh, I don’t know a company split and they decided to get out of that industry, and now they’d like to get back, just to not name one at random and so I think that you will see a sort of profile of our P&L that is consistent with the one you are currently looking at any extrapolation, as we go over 10 years, shouldn’t have dramatic coefficient differences and the market will probably have mid-single digit growth in absolute dollars.

Got it, okay. In this job you got to try and all my peers asked all the good questions about the short-term stuff the other thing longer-term I’d love to consider is, at this point you have 74% of the portfolio in repayment as you approach that steady state, what do you think the mix will be?

Well, I think if you were to look at the portfolio, which is now a $20 billion portfolio on the balance sheet and we were to take the recent generation of new loans at $5.7 billion that we have in 2019, and we say, alright well, let’s lay those in and then let’s do the liquidation the average life for loan, as you know, runs between six and seven years and so that becomes a strictly weighted-average rate of change between the liquidation of the loans that are in the inventory, plus the growth of the originations and so, if we were to say, Oh, all right, what are originations in proportion to the six year weighted average of the pre-existing inventory? You might take six years times $5 billion, so $30 billion or so and then say, oh within that, we have a number that’s somewhere 50% to 70% are paying one form or another let’s remember that when we say that the liquidation is in the 70% range that there are three aspects to that one is full P&I which Steve was referencing earlier a second is a payment of interest only while you’re in school, and the third is the $25 minimum payment that certain people select about half of the portfolio selects some form of liquidation in school in the originations, and so it’s a series of weighted averages but I don’t think you’d find any surprises in that.

Rick, just a quick technical modeling correction, the full P&I component is just 44% at this time. Don’t forget, every time a big slug goes into repayment, we originate 2x that so, we continue to.

Yes, so it’s 44% both P&I and then the rest is the minor payments I mentioned.

Got it. Okay, guys. Thank you very much.

And your next question comes from Moshe Orenbuch from Credit Suisse.

Great. So you guys alluded to kind of being in the next phase of the company and talked about the capital return and returns kind of at a different level are there any other elements of that that you would kind of draw your attention to?

Well, as we enter this next chapter, we believe that as we’re just discussing in the prior question exchange that the $20 billion receivable that’s associated with the private student loans on the balance sheet is getting close to equilibrium between the liquidation of those loans, the term life of expected pieces, as well as the increase in originations on the front end so there is filling up of the balance sheet that we’ve talked about if you recall, when we started in ‘14 and ‘15 not only weren’t we filling up not only do we have a deprecated balance sheet at launch but we also sold assets at that time because we were under a growth restriction with the regulators and so, starting in ‘16, we started to in January of ‘16 we started to fill up the balance sheet we think we’re approaching a balance within the loan piece as I said in regard to the originations and the liquidations, and so going forward, we would expect that we; one, will continue to increase our originations and our revenues; two, keep our margins relatively consistent; three, become a capital generator and so with those we’ll have decent returns, we will have good growth and we will have capital return on an ongoing basis.

Okay. Just a couple of quick kind of shorter term questions, I guess that expenses I mean expenses are coming in kind of better and you mentioned being done with some of the projects and maybe seeing some of the returns from that and you’ve given us kind of an efficiency ratio target for ‘19 but maybe just talk about it broadly in terms of kind of how you see this obviously, in this same context, you are not going to be growing as rapidly as in the past, and how do we think about that expense performance longer term?

I think – go ahead.

So, I’d come at it this way Moshe, so our expenses in the core business are now growing below our growth in accounts entering repayment and accounts entering delinquency, which is on the right track. In 2019, the OpEx comparisons are going to be looking pretty fantastic because what went on in 2018 and – it is a fact that in the personal loan space, there’s not going to be a lot of growth in volume there, so OpEx should be pretty steady state. In our credit card initiative, did – there expenses might be a couple of million dollars more in ‘19 than they were in ‘18 and obviously the cloud investments will start to pay dividends in ‘19 and beyond. When we look out at our efficiency ratio in ‘20 and ‘21, I mean, candidly drops of three points a year are going to be difficult to come by. But I think I’ve said many times, our goal here is to run our core operating expenses at a clip that is substantially below growth in units that we’re adding to the balance sheet and that should pay dividends in the form of reaping the scale of our operating platform. I don’t know if that helps you, but that would be my commentary on the OpEx line.

Thanks, Steve, and just last from me. You talked about how attractive the market is and some named competitors kind of getting back in. Any specific strategies towards the new entrants that you would highlight?

No, we think that the best way for us to compete is to focus on our customers and our customers’ experience as well as the full network of higher education in United States. And so as you know, we have the largest sales force in the industry. As you know, we have good relationships with 2,400 colleges. We have very good relationships with a small group of very good for profits. And so – and we have continued to improve our service platform. The mobile app is well received. Our chat efforts are well received. Chatbot is well received. And we continue to examine every single day pain points, making things better, our evolution is consistent and we now have 5 full years of improving the customer service experience, which others do not. And so, we’ll watch the competition. We have a great deal of respect for them. Many of those – many of them are much larger and more capable institutions that we are – than we in general, but in particular, we think we have several significant advantages and we continue – we expect to burnish them over time and we think that heads down, do a good job for the schools, do a good job for the college students, do a good job for the family, concentrate on outcomes that are successful as they realize their ambitions is the best thing we can do.

Great. Thanks very much.

Your next question comes from John Hecht from Jefferies.

Morning, guys. Thanks very much for taking my questions. The first one, I’m calculating a, kind of a 40% to 50% payout ratio. I’m wondering if that’s just assuming the buyback and the dividend this year. Should we be thinking about that as the pace of payout permanently given the kind of balanced framework now, and what would the Tier 1 kind of goals be within that construct?

So, look John. The dividend obviously will continue and grow as earnings grow. The $200 million buyback, which you may have noted has an end date of 2021. We are not going to be buying back $200 million of stock in ‘20 and ‘21, as we approach this set up for CECL. We have talked about CECL as a prohibitor of capital return over the years. We saw some pretty extreme circumstances in basically our stock price. So we took a – we sharpened up our pencils and determined how much capital we could begin to return to shareholders. But talking about our capital ratios, so we did not get capital relief, we were hoping to get it, but in December the regulators said, no dice, the phase-in is all you are going to get.

Steve, just to clarify, that we is the entire industry.

Yes, that we is the entire industry. Our Tier 1 risk-based capital ratios actually continued to decline over the next 3 years and then begin to ramp up subsequent to the full phase-in of the CECL capital hit. What we are now focusing on is a ratio that combines our Tier 1 risk-based capital with our considerably large CECL loan loss allowance. And it is the case that, that continues to grow each and every year. So we are going to have to find a balance between our regulatory capital ratios and our overall capital and sharpen our pencils and find as much capital that we can return, but I think the dividend is steady state and like with all companies, it should grow with earnings, there will be a little bit more pressure on the share buyback.

And there is a series of – in your conversation, there is a series of unknown assumptions including how CECL actually gets implemented. If you talk to the American Bankers Association or the Consumer Bankers Association, there are a lot of unhappy banks out there. And so we all have a thought about what CECL will do and I think it’s prudent on our part to wait till that clarifies, which as we enter ‘19, we will know that answer a year from today.

And your next question comes from Ann Maysek from Rose Grove Capital.

Hi, good morning. Congratulations on a good finish and on your announced capital actions. Just thinking about this a bit, your new common dividend is going to require about $50 million payment to shareholders annually and you already have $17 million preferred dividends, and I’ll call that an obligation given your commitment to continuing the common. The preferred structurally senior to common is also seen its dividend amount double in the past 3 years due to the floating nature of the coupon. Have you ever considered an exchange of your preferred for common or including it in your new buyback policy? I mean in addition to the fact that the preferred yields over 7% and it’s priced at about $0.60 on the dollar versus your common yield of call it 1%-ish yield, the discount at which you’d shrink the preferred would actually be capital generative. Can I have your thoughts on that please?

So, Ann, look, we look at our capital structure continuously. We still like the preferred security that we have in our capital structure and think that there is a place for it. We have plenty of capital and cash flow to service both obviously the preferred and the common. And at this point in time, we have no plans to retire it, but it is something that we look at all the time.

And a different inclusion from the other classes of preferreds, which we did retire.

Yes.

Okay, great. Thank you.

And your next question comes from Vincent Caintic from Stephens.

Hey, thanks. Good morning, guys. Just some follow-ups on some earlier questions on the 2019 guidance, so – and two parts. So on the expense guidance, just wondering, what’s built there in the sense of the investments that you’re planning? I know you had $40 million in the past year. What sort of investments do you think would be good for you going forward, so on the expenses side? And then on the components of NIM, so appreciate the 6% guidance. When you think about kind of the asset yield side and the cost of fund side, what are your views on interest rates and then deposit betas and how aggressive you want to be there? Thank you.

Sure. Let’s take both parts of that. First is the expenses associated with initiatives, everything from the cloud to the credit card. And as Steve said, they will mitigate as we go through ‘19. And there – those expenses are all fully captured in guidance. And so we think the improvement from the 38.3% that we experienced in 2018 to the 35%, 36% range reflects everything as Steve said, which is good cost leverage on the existing business, continued investments, and the enhancement I was saying, and a very light touch on diversification. And so that’s sort of one piece of things, but we prefer to leave the guidance with the efficiency ratio because it’s good discipline for us. I’m not letting revenue get ahead of our expenses and we do think it incorporates all the information that’s necessary there. Let’s stop there.

Cost of funds?

Yes. The cost of funds in a beta, we’ve always assumed that the betas are high, we’re a Internet bank, it’s a very efficient market, the betas are transparent as well as high. And as Steve said, what we have done is to consistently match both the term of our assets, as well as the interest throw-off of our assets with our funding. And so to the extent that we continue to be just about 100% match as we have been for the last 5 years, we expect the entire company to float with the exiting interest rates and which is why Steve forecast for a relatively consistent NIM unlikely to say regardless of the interest rate environment, but regardless of the current forecast for the interest rate environment given its coefficient of vicissitude.

Okay, great. Thank you. Appreciate it. Just one more and hopefully quick, but the government shutdown hopefully not for too much longer, but we’ll see. Does that have any impact on your business in terms of maybe actually capturing share or any credit components, just any comments there? Thank you.

There is at least three components to that, right. And so, one is the individual families that are our customers who may be experiencing some financial strain, and we’ve encouraged people to give us a call, let us know what the situation is and we will help them one by one in regard to that. The second is certain administrative functions on which these schools are dependent for verification of income, specifically in the IRS, where there’s some concern that the IRS turnaround in service may be deprecated. As we have looked at that for the most part, the families that are interested in that particular avenue for administration of their loans are, for the most part not in our target market. And so we’re watching that carefully. We’re talking to the schools. We’re doing all we can to make sure that there’s no impact to the families because this is essentially a customer service workaround. The third aspect of that is the reputation that the government is gathering in regard to education funding. And so, as you’ve heard and as you know in 2018 we introduced six new graduate products. And as they were introduced in many schools, they were – why do we need this, we have Grad PLUS. But all the noise that’s around what will happen to Grad PLUS, what will happen to Parent PLUS, will there be limits on it, will they be eliminated in some way? Now aggravated by the fact that the government is proving itself to be an unreliable provider of services helps us in our talk up with the grad schools in particular under the heading of don’t place all your bets with this possibly unreliable partner. And so that’s a soft comment, but it has helped us out on the PR front and made our calls on graduate schools much more welcome.

Perfect. Thank you. And just actually – sorry, just one –

[indiscernible] just to…

Yes. On a one-by-one basis people call us up. We do everything we can to work with them whether it’s forbearance or debt restructuring and whatever it would take.

And does that, in terms of just the credit metrics, which hopefully are just one-time in nature anyway, but does that take up your delinquencies and then – but then your losses would see figures?

We took a look at the volume that we had last week and if we invited all the people, who called in regards to that into this room in which Steve and I are sitting, they would all fit. And so the number was less than 100.

Perfect. Thanks very much guys.

And your final question comes from Henry Coffey from Wedbush.

Yes, good morning. Two questions; one, when you look at your originations either this year or next year, what portion or proponent of all that is in the Grad PLUS program and how are those programs growing on their own?

Well, the Grad PLUS program, I think what you mean is in competition with Grad PLUS?

Yes, yes, exactly, I’m sorry, the graduate school lending.

Right. And so graduate school lending in total runs about 10% of our originations.

And is that likely to expand as that program expands?

Yes. As I said, we’ve introduced six new products at the beginning of the busy season in the summer of 2018. We’ve made good progress on that. The growth in our grad area was double the growth of the base portfolio. But we don’t have a full distribution across graduate schools because of the individualized tailored selling that is required. By the way, we can do that, others without a sales force cannot. And so we expect that to continue to grow at a rate greater than the overall portfolio. If we said, I don’t know, 1.5x or something like that, it wouldn’t be a bad approximation.

And then finally, you’ve introduced some new products you have a “billion dollars of consumer loans” what are your thoughts in terms of putting new products into your channels of mortgage, refinancing moves that we could – credit card which obviously you are starting to introduce?

Yes. As we have looked at that and we have talked about the personal loan which Steve alluded to lightly a little bit earlier, we originated about $450 million of personal loan in our receivables in 2018. And as we said at the time that we discussed that back in the beginning of 2018, we thought we would hold our originations at approximately $500 billion as we come into ‘19. When we look at the overall P&L for personal loans in 2019, it’s essentially breakeven. And so we are taking a look and we have very good results and response rates in regards to the reception associated with the Sallie Mae brand better than we thought. And so things are coming along nicely there, but we tend to keep it on that backburner as we look at that. And as everybody knows the personal loan business is great on the take upside of it and until people pay off the loan you don’t really know where you stand. So, we will keep that at a low level going forward until we can read the results quantitatively. Secondarily, we think that the credit card is a natural for us. All of our consumers, 5 years after they graduate, all have credit cards in their own names. We meet them at a very early time in their lives. We have tailored a couple of offerings to recent graduates and we will be in the market in the second quarter with our credit card offering. And it’s a long way of reading credit cards and how profitable that is and how big it can get. We do not intend to go into the mortgage business. Many of our customers do get mortgages over time. We believe that the right spot for us is in the knowing our customers sort of aligning ourselves with their goals, doing the best we can to assist in that. And if there is something to do with mortgages in that it will be of a referral nature not of a generation nature. We have no expertise in the difficult processing associated with mortgages nor do we like the ROEs associated with that business as well as the fact that in the United States at the moment, the mortgage processing is overcapacity which is another problem. And so we think that for purposes of ‘19 we will continue to read the personal loan business. We will launch the credit card business and get started and we will explore other services that we think will be evaluated to our customer base.

What about on the deposit side building out I guess what we would call it more of a comprehensive bank for your customer?

Right. The deposit side that we have has two aspects to it. One is the internet bank which we have talked about and the second is the Upromise saving for college. Upromise is a 529 oriented offer that we have and we think that we will continue to enhance that, not a large market share. On the other side, the internet bank, as we have said over the last 5 years, this is a very efficient funding vehicle for us. We believe that as I said it’s a very efficient market. It’s very hard to either establish or maintain a competitive advantage. We believe its rate driven. We believe that the best expertise for – the best position for us is to maintain consistent offerings near the top, but not at the top of the rate charge. And we believe that it’s in our best interest to not get involved in transaction products associated with deposits, because from our point of view they are one, capital intensive in the sense of investing lots of money to make it work and two, they are the epicenter for 99.8% of all the fraud on the internet and we have no interest in entering a market at parity and undertaking the additional expenses and the additional risk associated. We are very happy with the position that we have today.

Can I add one…

Thank you very much. I am sorry...

So, Henry, our approach on the deposit side and the banking side has been to partner with people that have deposits, but no use for them such as HSA providers, 529 providers and now we are looking to partner with FinTechs to process money, have deposits, but no need for them. So that has been our approach there.

That was typically a 5-year agreement.

Yes. And we have a wonderful product called SmartyPig if you want to deposit some funds with us in that product as well, but that has been our approach on the retail banking side.

Great. Thank you very much.

You are welcome.

Okay, that’s the end of the questions. One is I want to thank everyone for their attention today and two, to thank many of you who have been with us through a long journey as we enter this third chapter and thank you for your support as well as interest. We believe that all the questions have been extremely productive as we all go into the future with a high degree of confidence that the franchise that we have constructed over the last 5 years will continue to have benefits for our customers, our employees as well as for our shareholders. And welcome to this new chapter of Sallie Mae. Thank you.

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