Good morning. My name is Tabitha and I'll be your conference operator today. At this time, I'd like to welcome everyone to the 2019 First Quarter Sallie Mae Earnings Conference Call. [Operator Instructions]. Thank you. I'd now turn the call back over to Brian Cronin, Vice President of Investor Relations. Please go ahead.

Thank you, Tabitha. Good morning, and welcome to Sallie Mae's First Quarter 2019 Earnings Call. With me today is Ray Quinlan, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will be opening up the call for questions. Before we begin, keep in mind, our discussions 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 March 31, 2019. 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.

Thanks, Brian, and thank you all for your attention. It's a pleasure to report our first quarter results to everyone, we're very happy with them and they reflect the continuing strength and improvement of our franchise. Our EPS at $0.35, it's up 25% from a year ago, and with an ROE that is 23.9%, now we have a very efficient operation going, it reflects the character of our target market, our success versus competitors, and our disciplines in managing both, credit as well as expenses. Our NIM at 6.28% is an excellent number, higher than we had originally thought and we've had some good favorability in regard to that, and we will discuss that further later in the meeting. Main purpose of our company is to help American families to realize their hopes and dreams for the next generation and we continue to do that with over 1 million customers and are a valued partner both for schools as well as for young Americans. Our customer experience continues to improve, with automation moving along in chat and chat bot, where we have over 120,000 conversations having been held at a 90% customer satisfaction rate so far this year. Our volume, which reflects, of course, our position in the marketplace was $2.131 million in the first quarter, an increase of 8.1%. As you all know, we'll finally get -- we'll get final numbers as far as market share and things like that at a lag for each one of these quarters but we are certainly growing faster than the market, which reflects both our core position in the undergraduate space as well as our focus in regard to the segments that are growing at the margin and should be differentiated both in product and service in order to meet the needs…

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

Good results. I guess, maybe just drilling down on NII and the NIM trajectory. That was really solid this quarter and exceeded our expectations. I'm just hoping you can help us go through how you think about the trajectory going forward, outside of that impact towards the latter part of this year? And what's really driving the improvement in yields and the NIM? I'm also trying to put that relative to the higher competitive activity in the market.

So Sanjay, we operate in a market that is less to have rational pricing in it. We're also funding a long-term asset with the mix of fairly long-term liabilities. The funding markets have been as stable as the yields on the asset side of the marketplace. So we have pretty good insight into what our NIM is going to look like for the balance of this year and for the next couple of years. And I'm happy to report that the NIM is going to be pretty stable throughout, while the NIM will decline over the course of '19 and for the full year of '20 and beyond be relatively stable. I mean, we're talking about a variance that can be measured in the low double-digit basis point kind of increments. So we've got a $30 billion balance sheet, as Ray pointed out. In any given year, our funding managers are replacing roughly 10% of existing funding balances and funding new growth. And given that spreads in both the broker CD market, the ABS market and the retail deposit banking market is fairly stable. We feel confident that the outlook for the NIM is sound going forward.

Okay. Great. And then on credit quality, obviously that was really strong as well. Could you just talk about any specific trends that are driving that, anything -- any refinements you've made?

We look at credit because of the calendar on which schools operate, our credit entries that is new people who owe a full principal on the interest payment is highly skewed to the fourth quarter. So that the standards of undergraduate rhythm is to graduate in May, have 6 months' worth of grace. And in November, you'll be asked for payments. And we have found over the years that that first payment then dealing with the family in regard to it is crucial to the next 12 months of what happens in delinquency and write-offs. We have expanded quite a bit of effort in trying to share the information with families, both the students as well as the parents, so that there is no surprise when full payments starts. And we've been -- we believe somewhat successful in that. And so we have blunted the sort of sharpness of what some of our folks referred to the point of the spear in regard to that, so that families don't get behind and it's making up 2 or 3 payments, it appears to be very difficult. We try to keep that down to 1 payment. And so we think we've done a good job on that. In addition to that, we are constantly looking at segments that we've underwritten. And for one reason or other, they don't perform as well as we like as well as looking for segments of opportunity. So fine-tuning around underwriting goes on every single month. The improvement in communication and collections tactics has served us well. And so we're extremely happy with the current write-off as well as our current delinquencies in the outlook for the next 4 or 5 months, which are resident in the current delinquency portfolio today.

Your next question comes from the line of Michael Kaye with Wells Fargo.

I had a question on the EPS guidance. I mean, to me, it feels kind of conservative at the top end of the range, it only implies average of less than $0.31 per quarter for the rest of the year. I understand the seasonality can necessarily run rate to $0.34. But can you provide some perspective on what I could be potentially be missing and what that cause the EPS trajectory to trail off for the rest of the year?

So let me say this to you, Michael. So the quarter's beat, if you will, was probably driven for the most part by credit. And as we all know that when we build a loan loss reserve, we are looking out to cover losses that will emerge over the next year. So we do have some favorability built into the provision to the extent that credit performs even better than it has to date. There could be some upside, but with 9 months left to go in the quarter, we think that the guidance that we gave is reasonable, given what we know right now. And we feel good about how the rest of the year looks.

Okay. Second question, and also not very material to earnings, but I just wanted to just touch again on the consolidations that ticked up this quarter. But I just want to see where are you really think that that tick up quarter-on-quarter as you kind of from the SoFi's, the Citizens, the established players or some more from Earnest now that the non-compete is over? And then second related now that the state has signaled at least a rate pause and potential cuts. Is there any update on your defensive consolidation product?

Sure. So look, I'm not going to start commenting on individual names, but I will say this that some of the existing traditional players that have been around, we've seen their volume trail off a little bit, will certainly not grow as our loans in full P&I grew. The new entrant we did see a pop there, but the trend there was for activity to decline from January into February into March. So we're watching that to see how that plays out. We've talked about consolidations continuously. It is a fact that they are driven principally by the most recent repay ways and consolidations now happened even quicker, that it happened while people are in grace. So what we saw this quarter was a big pop from the most recent repay way that went into effect in November and December, and we still see the same trend, which is that consolidation activity declined markedly as the repay cohorts age. So we think that this will play out as we expect. We've talked about the loans that do consolidate. We think that they do have a lower NPV because we think that those loans will have a shorter weighted average life. These are typically people that whether or not they get consolidated by one of the fintech players, these are people that are getting jobs at the accounting firms and the investment bankers that is where they are marketed to. And quite frankly, these people are going to repay in year 2 or 3 if they don't repay in year 1. So defensive strategies have to be built with that in mind. We're not going to spend a whole lot of money to retain assets that are going to run off the balance sheet anyway. We do intend to rollout a more defensive strategy in the second half of the year, particularly in the third quarter. What we would like to do is build a real high-quality and accurate targeting model, and our goal will be to target the people that our competitors are targeting and to bring on their federal balances. And without giving away too much, we will target our competitors and probably build a direction they -- that consolidate and sell model as opposed to retain these balances on our balance sheet and dilute our ROEs. So the target will be to -- take it to our competitors and make a few bucks along the way by consolidating these loans and selling them into the marketplace.

Your next question comes from the line of Mark DeVries with Barclays.

Yes. I was hoping to better understand what's driving the need to hold greater liquidity on the balance sheet that you alluded to is going to be pressuring the NIM? And Steve, is it still appropriate for us to think about full year NIM being in that kind of 6% to 6.05% range you alluded to in last call?

So look, we are a regulated depository institution and we do adhere to best-in-class liquidity practices. So we measure our balance sheet by all the usual measures, which is the most simplest percentage of liquid assets to total assets. But we also look at things like liquidity coverage ratios and contingency funding plans. And we need to be state-of-the-art in that regard. So we will be building our liquidity position as the bank grows here. The NIM, the original guidance was in the low 6%, we will probably, while we're not going to see an impact to EPS, our NIM for the full year will drop below the 6% level and coming around the 5.90%-ish vicinity.

Okay, got it. And then on personal loans, can you just talk about where we should expect kind of the year-over-year increases in charge offs and system moderating and when that may occur?

Sure. And as you know, we launched the personal loan business about a 1.5 years ago. And through last year, we added about $0.5 billion in receivable. And as we talked about it through the quarters, we expect to add about that same amount this year. The first half of last year -- the first 3 quarters of last year actually were dedicated to testing. And so we had a wide range of samples in order to develop our targeting scores, both for direct response models as well as for credit underwriting models. And so as we've looked at that, we have used those tests in order to inform our targeting for the second half of last year as well as through this year. And so we are in an experimental stage, we are tailoring this. We will see the numbers continue to bounce around a little bit because that's the nature of testing. But the numbers are small and we will reach a proposition so far as the next couple of years in regard to the personal loan business probably in the late third quarter of this year. And so I think that we'll see a little noise in those numbers. It will remain small. We are on the path that we talked about over the last 6 months. And so as we go through and we fine-tune our models, we'll get better guidance that is more precise in regard to the performance of the personal loan overall as well as to the impact on our loan loss reserve.

Okay. And then lastly, is there an update you can provide us on timing for the credit card launch?

Sure. The credit card launch as we've -- is consistent with what we said in our prior meetings, which is in the second quarter of this year. And so our partners at Deserve have been absolutely terrific. We're working very closely with them. We are on our original schedule. And I'd tell you before we have our next conversation in July, we will be in the market.

[Operator Instructions]. Your next question comes from the line of Vincent Caintic with Stephens.

First question actually on the deposit side of the business. We noticed you've been tracking the weekly deposit offerings you've had and your cut rate was 5 basis points. I'm just kind of wondering with expectations in the market that rates might decline for this year, how you're thinking about your deposit rate offerings that we could see some -- may be some help to NIM as the result of that?

Yes, I mean, I think what you're referring to is we've lowered the rate on some of our retail CDs, and quite frankly, we raised all the funding that we needed and paired back that particular rate. As you know, we're not trying to benefit from an outlook in interest rates. We are trying to lock-in a long-term spread on our book of loans, so we're not really playing the market, so we're looking to zig or zag with whether if that is easing or tightening interest rates, so we're not really looking to tweak on NIM in that regard.

Okay, got it. And then on the expense ratio, so helpful to have the guidance to 35% to 36%. You were lower than that this quarter. I'm just kind of wondering if you could remind us of the seasonality and how we should expect that the ratio to play out over the rest of the year?

Sure, sure. So excuse me, as we build towards the peak season, you will see our OpEx rise in both the second and the third quarter, balances will remain relatively steady that will have the tendency to push our efficiency ratio higher. And then as we bring a significant amount of loans onto the balance sheet in the fourth quarter, you will see the efficiency ratio plummet from the levels that have reached in the second and third quarter. And all in for the full year, we should be pretty close to the guidance that we have provided.

Okay, perfect. And sorry, just may be one last one for me. Just noticed that the forbearance on the student loans just ticked up a little bit higher, just wondering if there is any trends there maybe to call out?

Yes, no, I don't think there is any cause for concerns in the forbearance tick up to 3.8% from 3.5% in the prior year and quarter it is. We do have significant amount of loans that just went into repayment and forbearance is one of the tools that we use to help recently graduated students manage their debt loans as they get their careers forward. So there is nothing to be of concern with the forbearance statistic.

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

Congrats on a great quarter. In a couple of public presentations, you put out some really good information on the impact of CECL on capital. Couple of questions, maybe you could talk to us about some of the assumptions behind those numbers. And I've been assuming that that reflects a full phase-in on CECL, not a sort of a gradual three year progression. May be you could help me with all that?

Yes, I mean that is absolutely correct. We will take advantage of the phase-in offered by the regulatory agencies. And what's the biggest assumption that goes into the CECL impact is the life-of-loan loss rate for particularly the private student loan portfolio. So we are in the process of -- actually, we're in the -- the models are built. We are in the process of getting them validated. And we anticipate that along with the second quarter release, we will give the -- we will give investors a lot more information as to the impact of CECL on the balance sheet and the income statement on a go-forward basis. But the numbers that you saw in the investor presentation are not expected to change. And we are quite confident that we are going to have significant levels of capital that exceed the well-capitalized level in both '20 and '21 and going forward. And it is also the case that, I think, we're going to start to tend to measure our capital position by adding GAAP equity to our loan loss allowance and you're going to see that ratio increase in '20 from '19, '21 from '20 and '22 to '21. So no matter how you measure it, this bank will be sufficiently capitalized.

So just a question, the numbers you showed in the February slide presentation, was that a full phase-in of CECL or does that show the 3-year? Does that assume a sort of a three year transitional period?

That assumes a three year transitional period. So the first component of the reduction to retain the equities would have been -- retained earnings would have been added back to that ratio.

And then -- and so then we'll get to talk about primary capital, haven't heard that word since the '80s, but I'll explain it to everybody. The loss assumption, are you prepared to talk about that at all? Or we've been using 7% to 8% in our numbers, just based on your cohort data, but have you put out a number yet. Or...

So not only will we be prepared to talk about it, but we will be reporting once CECL is in effect on our expected remaining losses by cohort. So you're going to have more information at your fingertips than you would ever cared to have. I mean, then depending upon -- well, I'll put it this way, in the newly originated cohort expecting a mix of a baseline improvement and deterioration in credit quality over the modeling period, we're going to expect the life-of-loan losses to be right around the 9% level for a newly originated student loan cohort.

And then on the -- how do the new products, the credit card and the personal loans factor into that? Will they be -- will they have any real impact on the CECL numbers.

I mean, look, in the grand scheme of things, the reserve is going to be totally dominated by the student loan portfolio. The personal loans are impacted more than credit cards. But it's going to be rounding error in terms of the total reserve.

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

Most of my questions have been asked and answered, but I was hoping you could kind of go just back through the expense numbers, they were better than what we were looking for. And talk about either how you're funding some of the efforts that you've got? Or is there something in the -- in that rate of accounts going into full repayment that that helped, and how should we think about that as you go forward?

So the bottom line, Moshe, is that, in our core business, OpEx grew basically 7%. And we saw total accounts and new accounts and repayment grow to -- in the vicinity of a 11% to 12%. So we think we are on target to -- we are creating operating efficiencies in the core business. We've spent a little bit of money on the credit card diversification project and personal loan expenditures grew relatively flat from the prior quarter. But all in, a very good performance on the operating expenses front.

I would agree. And just to clarify, you talked about the overall NIM. But I would assume that if you just calculated the NIM on loans that would still be stable, right?

Yes, absolutely. When we look at the added liquidity, we're looking at negative carry of somewhere between 15 to 20 basis points put into perspective.

Right. It's really the assets in the denominator that...

Just to clarify, it's not negative carry, it's an impact on NIM. The carry will be roughly...

Yes, the excess cash that will -- we will be raised will be invested at 15 to 20 basis points below the cost of funds. We will raise relative to these five treasuries.

The next question comes from the line of Rick Shane, JP Morgan.

It's Melissa on for Rick today. Most of our questions have been answered, but I wanted to clarify one thing you said about NIM. I believe you referred that, mentioned that would be in the 5.90%-ish region. Was that for 4Q or is that sort of a full year number?

I'm sorry, can you repeat the question? There was a little fuzzy coming through.

The NIM going down.

Oh, sorry about that. Just wanted to clarify your comments about NIM being in the 5.90%-ish region, was that for 4Q specifically or sort of a full year number accounting for the additional cash drive?

That is for the full year. And actually, I miss spoke earlier, the negative carry will be somewhat large will be in the 20 to 25 basis point percentage making that math right.

And at this time, there are no questions.

Okay, well, thank you all for your attention. And I just would like to close with a couple of remarks that I think are appropriate. We're all experiencing another very strong quarter on our journey of consistently strong quarters as we grow and improve this franchise. And it is across all major line items. Our volume was growing faster than the market. Our credit quality is consistent. The credit performance is very good, unexpectedly good. We continue to monitor expenses. You see that in the efficiency ratio, declining over a 4-year period consistently. With EPS' that's up 25% and in ROE that's 23.9%. Clearly, we are focused on all these activities getting to the bottom line. As Steve alluded to, we're graced with being in a very good industry that serves an important need for American families, and that industry will become more important over time as credentializing across this country continues to expand. Sallie Mae franchise remains the best in the industry, largest sales force, continuous improvement in both service as well as product design and a thought leader. We as management are focused consistently on strategic objectives that balance the short-term results, with medium-term franchise improvements. We are generating capital as we indicated in the first quarter in establishing the dividend and the buyback, we expect to continue to generate excess capital. On the other side of CECL, we will be in very good shape. And I'd like to thank you all for your attention and for your comments.

Great. Thank you 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.

Thank you. Ladies and gentlemen, you may now disconnect.