SLM Corporation (SLM) Q2 2019 Earnings Report, Transcript and Summary

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

Thank you, Adrienne and good morning. And welcome to Sallie Mae's Second 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. We will also refer to a new non-GAAP measure we call our adjusted core earnings, which we plan to use as our primary non-GAAP performance metric upon the adoption of the new CECL standard in January of 2020. A description of core earnings and adjusted core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended June 30, 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.

Okay, thank you Brian and thank you all for your attention today. We have a bunch of stuff to talk about. And that will include a good earnings report to the quarter as well as, as Brian has alluded comments about CECL and adjusted core earnings. Turning to the quarter, it was another good quarter for Sallie Mae. Our volumes were up nicely at 9.2%, faster than the market. We think about twice as fast as the core market actually. The new credit quality is stable. As you can see in our numbers, expense management and delivery of same continues to show efficiency both in core leverage of growth of revenue versus growth of expenses, as well as showing up in the efficiency ratio, which is another view of that. EPS growth continues to be strong and our returned at over 19%, again, are very good, I should say excellent. We continue to strengthen the franchise in addition to these results. We are fully in the cloud as we speak. We are fully on agile as a regimen for getting things done. We're doing over 40,000 chats per month with a 91% customer satisfaction. We launched our credit cards during the quarter and we've renewed our brand with an effort that was initiated on May 6 which has been well received. And in addition to that, I will make some comments about customer feedback from research that we have done including customers view of both our product as well as how they're doing in life, which I think are quite gratifying. But just to return to the financial results for the quarter. Volumes of $532 million of new originated private student loans were up 9.2% were up 8.3% year to date, our full year forecast calls for us to be up 7.2%. As you all know, we're in the midst of our busy season. So, every day is exciting for us. And that will continue up to around August 20. And so, when we hit the third quarter, we will be able to give the results of the bulk of our volume for the year. As we go to the credit quality associated with that $532 million of new originations our FIFO scores for the approved accounts are rock solid at 746 this year, also 746 last year, so they haven't moved $1 one FICO score point I should say. Cosigner rate at 86% is also consistent. Our NIM at 588, as Steve and I talked about in the last call, there'll be some geography changes with NIM because we're increasing the liquidity on the balance sheet. And Steve mentioned in the first quarter call if that would happen throughout the year. In fact, illiquidity in the quarter has moved from approximately 5%, which had been the case in previous years to about 13.5%, adding about $2 billion in liquidity. And so that, of course depresses the NIM because it's against a larger set of balances of which many are a wash. As we look at the ETFs impact, it should be minimal, we believe would be minimal for this year, and also going forward. And so, at 13.5% there were a bunch of questions last time we're together. Are we close to having this done? The answer is yes. We should recall, though, not to be lost in the geography that I've mentioned that our net interest income for the quarter at $397 million is up 16% from last year and that does reflect the earnings capability of the company so far as generating revenue. As it turns into efficiency, efficiency ratio with 34.9%, we regard as just terrific down fully from 38.3% last year. So, it is 3.4% in efficiency points down year-on-year, which is a steady improvement. And I will say that we're in our sixth year since the spin. And this has been a storey that has been 100% consistent through these years and very gratifying moving from originally about 51% down to this 34.9. Our credit performance, in the first quarter our loss rate was 89 basis points, I commented at that time that that performance was in excess of – that is exceeded our expectations in the sense of being low. As you all know, we typically have written off per quarter between 1% and 1.5% of our ongoing portfolio. And that's adjusted both by seasonality as well as how vintages come in and go out and weighted average changes in the life the portfolio. And so, when we see the 89, which is now 129 in this particular quarter and we talked in the first quarter that the 89 was lower than anticipation. 129 is more in line with what we're doing and when we see the year-to-date write offs of 109 basis points this year versus 108 basis points last year at the same time. Obviously, the two numbers are right on top of each other. And all of these numbers fit within our general expectations as we model the portfolio. The delinquency which has gone to 2.7% is also within our range of model and that is up from 2.5% in the first quarter fully okay, the vintages as they mature through the season, we're watching each of those carefully, we see no real change in any of the performance. The PSL reserve, the private student loan reserve on our balance sheet, which reflects our anticipation of what we think the write offs in the portfolio are, is a good indicator of sort of our confidence in the model. And if we look at the 2Q '19 PSL reserve it is 1.42%, 142 basis points. Last year at this time, it was 140 basis points. And so, we are on model and the idea that the losses went up in the quarter. And somehow that was unexpected, it's not really what's going on the 89 was low, the 129 is still within range. And so, we are on model not deteriorating any of our forecasts, and the portfolio is still in a maturation rate. So, the weighted average movements have to be taken individually in viewing the model and we are happy with the way those things are going. The balance sheet overall throwing at 22% continues to be strong and continues to reflect the fact that we are buying – we are originating holding and servicing all of our loans. EPS which was $0.306 in the quarter, up from $0.25 a year ago, 22% increase. Of course, we like that, and we will continue that as far into the future as we can. And our ROE at 19.8% are consistent with last year's 19.4%, shows the high quality of both our assets as we originate them, as well as the efficiency with which we service them. Revenue cost growth reflects that as well, including just a graphic point of leverage for the franchise. Revenue is up over the year before 15.3%. Expenses are up just 4%. So, we have a three and a half times ratio of expense growth versus – of revenue growth versus expense growth. Our outlook, the originations at 5.7 billion we're holding. As I said, we are at these early stages of our busy season, we'll know at the end of the third quarter much more accurately what the expectations are for the year, over 9% growth going into the busy season is of course helpful. But as the seasons filled with competitors, we'll see how it goes. The efficiency ratio guideline for 35 to 36 is consistent. EPS, EPS guidance has been dropped. So, let me talk about that for a minute. There's a situation with our total debt restructuring accounting that runs into problems when the interest rates in any environment especially the forwards drop. And so, this is the first time that we've had an interest rate declination of any magnitude since the company was launched in 2014. When a total debt restructuring item – dollar goes into our reserves, what happens is the LIBOR on the day it goes in is frozen and whatever it happens to be. And then we take a look at that – we look at the forecast for the cash flow associated with that item into the future at whatever the APR for the company or for that particular account happens to be. So, the APR is whatever it's doing, whether it's fixed the variable, but that piece of LIBOR is frozen from the day it goes into the reserve. And so, when we have an environment where interest rates are dropping, we have a compression on the future cash flows associated with total debt restructuring within our reserves. And I know it's a little bit arcane, but nonetheless has an impact on us. And it's new because interest rates had not been going down before. We knew this forecast was going to occur, we had in our original expectations, some thoughts about that, but the forwards have dropped faster than we thought at the end of the first quarter. The result of that is there is an after tax $15 million negative hit associated with the TDR evaluations of the future cash flows, which is driven by accounting not by cash flow in real life. And so that $15 million, with our 430 million shares outstanding is a $0.035 negative impact to us this particular quarter or a calculation that as we get to CECL will disappear and so will only be relevant for the remainder of this year. So, it's an oddball one off impact for us, but it is $0.035. So, if we had our original guidance of the 123 to 126 and we lost a $0.035, we would be down to $1.195 to $1.225. In fact, the portfolio and the business is performing better than we thought. And so, we actually – had we not had this TDR accounting flow impact, we would have increased our guidance. And all likelihood as we have done in prior years tightening up the guidance at first half the year that would have been up by a penny and a half or so on the low end about penny on the high end, but in fact that improvement which used to partially offset the $0.035, so when 123 to 126 was down by a couple of pennies to 121 and 123. And so, this is no real impact on the business going forward, no impact in the franchise, it is not a reflection of any deterioration in credit losses, it is an audit counting regiment, that is only experienced for the next six months and only relevant to us as interest rates change and significantly down. So, I'm sorry for the wandering off to that. But that is an important piece of understanding that there's a negative impact, but it's not a franchise impact. So, in summary, we have our credit card launched in the quarter which is very good, the new branding is done. The personal loan is now on track to have an ROE of 15%. Our 9% growth is faster than the market at three to four. I should say also that the customers as I alluded to earlier, value the products quite a bit. We've done research on private student loans. And just note some highlights of it. 91% of the private student loan borrowers have completed their program, over 90% are employed, 79% agree that borrowing gave them a better education that it would have had otherwise, 83% say their education has contributed to their career success, as they said and also over 80% are satisfied with their jobs. 77% feel successful for where they are in life. And as a note, which I think is a little bit unexpected in a political arrangement of which we find ourselves, 43% of private student loan borrowers also had a Pell Grant, so the idea that private student loans are somehow a class of people that are way above normal Americans is in fact not true. We've also done some research on how America pays for college and 90% of customers or 90% of students and their families view college as an investment. Surprisingly given all the publicity that's out there, 71% believe that the price in college is fair, 79%, by the way, under the heading of price shopping have eliminated at least one school as they searched for where to place their students. And they eliminated at least one school because of school was too expensive. And so, we have a bunch of research about the current state of affairs in higher education, which is an industry leading research piece, but has some very surprising results, which we will be sharing with politicians as we go forward. And so, we continue to strengthen our franchise, college is a great investment, the outcomes are very good. And I should note also that 9% that we mentioned as far as volume is increasingly segmented from the original charter that we had of undergraduate higher ed loan or funding. And now with our segments of six new products in graduate, parent, partner, the career training, distance and international, about 20% of our volume comes from what is non-traditional. We remain number one in the market with excellent returns, controlled expenses, rational capital allocation, including $60 million of buyback in the quarter, return of capital is with us and leverage is important. Two items to cover now, which I will touch on and I know Steve will cover. CECL and so CECL has two pieces to it for us. One is the initial impact; which Steve will talk about and which is consistent with our prior disclosure. And the second is CECL has an ongoing DPS distortion in such a way that as I mentioned, we're in the midst of our busy season now, under CECL a year from today, if we haven't a wildly successful third quarter will be forced to fund the life of loan losses in CECL under CECL for the quarter. And so perversely, the better you do in sales, the worst your EPS is liable to be. Therefore, we've chosen to try and take what we think is a more representative core adjustment, which will be our GAAP earnings, minus any impact for the loan loss provisions in that particular period, plus the current losses experienced in that period, plus the tax effects associated with those movements in order to come to core earnings, which in some sense are traditional EPS earnings. We'll forecast these – we'll use these for forecasting guidance, we'll disclose these, but we think it is over a period of time, much more representative of the quality of the franchise, then the CECL distortion. So, with those comments, I will turn the microphone over to Steve.

Sure. Okay. Thanks, Ray. So, yeah, as Ray mentioned, we added a significant amount of disclosure in our 10-Q this year as we prepare for CECL. CECL is all but upon us and we will be adopting it in essentially five short months. So, if you look at the critical accounting policy section of the MD&A, we reported an estimated range of the impact on our loan loss allowance for both our student loan and personal loan portfolio, as if we adopted CECL on June 30 of 2019. As we explained in the document, we publish a range because our loan loss models have not yet been through validation, they certainly will be by the time that we have to adopt the standard. However, the midpoint of the range is the estimated impact from the CECL accounting standard. And it's really actually not much different than what we've been sharing with investors from November of last year. I think we first put this in our disclosures. But to put a finer point on it, for our student loan portfolio, we estimate that to build a life of loan loss allowance, we would need to add $1 billion to our reserve today, bringing the total reserve for the student loan portfolio to a lofty, 1.3 billion or 6% of our ending total loan balance. For the personal loan portfolio, we had to build a life to loan loss allowance today, we've added $75 million to the reserve bringing it to roughly 150 or 13% of our total ending loan balance. So, to build this reserve on day one of CECL adoption, the company will run the tax affected reserve bill through GAAP equity, reducing it by approximately $800 million. And that creates a Deferred Tax Asset Protection Act of roughly $250 million. For purposes of calculating regulatory capital, banks are given the adoption of phasing in the impact on equity over a three year period. We certainly will avail ourselves of this phasing in option. In addition, this is a slight offset. Banks can reduce risk weighted assets by the amounts of the loan loss allowance that doesn't qualify as Tier 2 capital, which slightly offsets the impact for us a significant amount of our loan loss allowance and will not be included in Tier 2 capital. The important thing here is we will continue to be well capitalized after the adoption of CECL. Following the adoption of CECL, we believe our true capital position is going to equal our GAAP equity plus our loan loss reserve. This is a ratio that will be well into the mid-teens and will actually grow during the three year phase and for the regulatory capital on our balance sheet. A couple of other points to adopt CECL, we've built an economic model to forecast expected credit losses. We have to adopt economic forecasts and adopt a baseline reasonable and supportable forecast period. What we're going to do is employee Moody's economic forecast, we'll use a baseline, an economic downturn and economic upturn forecast and blend those for our CECL model. And what we're going to do is use three years of forecasts and then revert to our mean expected losses for the remainder of the life of loans. Adopting CECL is a very complex project and we've been working on it for several years now. And we will certainly be ready when we need to on January 1 of 2020. And as Ray pointed out, once CECL is adopted, there's going to be significant volatility in our earnings. And I think that the pro forma number that we've crafted and disclosed an awful lot about in this quarter's Q is going to really get right to the heart of the company's performance on a go forward basis, so that's really a summary of what we've disclosed in the 10-Q on CECL this quarter. So, with that being said, I think it's time to turn the call over for Q&A.

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

Thanks. Good morning and thank you for the color on CECL Steve. I guess just some clarifying questions on that. So, when we think about this impact that you had with the TDRs and going into the run rate EPS ex your core number, is it fair to add back the $0.035three to your guidance range as a starting point. And then when we think about the impact of CECL to that number, not the non-GAAP number, what exactly is it?

I'm sorry, what was your second part of that question, Sanjay, we didn't quite follow you?

Yeah, what's the CECL impact to the actual number, to the GAAP number?

So, there's no CECL, obviously to this quarter. So, when we adopt CECL the catch up reserve will be run through equity. So, there will not be a hit to the income statement. But on a go forward basis for example, this quarter, when we originate and whatever we're going to originate 2.7 billion, actually we will originate $5 billion of loans, big round numbers this quarter, because there will be the second disbursement. We will have to hold a life of loan loss reserved for that entire origination tranche, which let's not get into the math of discounted cash flow model that we're going to employ. But that's going to end up with call it a 6% reserve that's going to go through the income statement, which is $300 million, which is sizable. So that is why we think it is very important to introduce this core earnings impact. And I see that Mr. Quinlan wants to add further comment here.

I think part of your question is, given the increase in the loan loss reserves this quarter associated with the TDR dynamic that I mentioned, whether or not that has an impact on EPS going forward and in particular as we adjust to the CECL. How was that to be treated? And the answer, I think is quite straightforward that CECL will have its own adjustments for the life of loan and the associated forecast for that. And the increase in reserves associated with the TDR, the $0.035 is in some sense a pre funding of CECL. So, when we look at CECL to the extent that our loan loss reserve is higher this quarter than we had anticipated because of that LIBOR, I think you'll see that is hind into it. We have less when we do this CECL change from our current reserve to the CECL change. So, when Steve mentioned it's a 1.3 billion overall, within that there's an accommodation that says all because you added the $0.035 this quarter, you don't have to add it on January 1, 2020 and so it's part of the mix Sanjay.

Right and that's, that's helpful. And then as we think about future rate reductions, to the extent there are any, hopefully not. Does that mean that that TDR impact goes away after that and all we're looking at is provisions related to originations?

So, we've got a significant amount of interest rate reductions in that TDR number today, I think its 62.5 basis points. To the extent that rates decline more than that between now and the end of the year, there would be an additional impact although it's going to be small. And then of course, once we adopt CECL the TDR impact goes away.

Okay, great. And I guess just one last question on that –

The benefit is we wish the Federal Reserve waited six, four months before they dropped interest rates.

Yeah, I know, I heard you. And then final question on credit quality that obviously is really strong for some time now. Can you just talk about sort of what's driving that is just a healthy economy, which is driving that? Thanks.

Okay. Well, one is thank you very much for framing the question that way because the earnings or the right off rate went from 89 basis points in the first quarter to 129. And I agree that the 108 which is the EBITDA number for us, is an excellent number. We haven't seen much change due to the economic environment associated with our role raise and other items. We think we're still driven by the quality of our underwriting. And over the last three years, the most significant item that has been adjusted as we've done our forecasts of both delivery our delinquency straits, that is people who wind up not paying it all and ultimate right off has been our ability to help our customers adjust from the graduation period to the full payment period. And so, the classic undergraduate graduates in may have to make a full payment for the first time in November. Now 50% of our customers are making either interest only payments or $25, but that also will go up, of course, when they go into full P&L. And we have been able to give them a better understanding of the calendar associated with that, what the dynamic will be, asking them if they're ready to pay, if they haven't gotten a job yet working through any sort of a payment arrangement that would temporarily help them. But that particular piece of better customer communications and more aggressive, upfront contact with our customers as the vintage matures has been the most outstanding item. The environment has been helpful, but the group that we're dealing with, remember has an unemployment rate that is half of what the national rate is. So, the unemployment rate for college graduates is running under 2%, and hasn't been over 3% during this entire period. So that particular demographic has been in a very healthy and economic environment. But that's the same as saying that our underwriting is high quality. So, we think it's quite steady to answer the question a long way around.

Thank you.

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

Good morning, I was hoping to get some updated thoughts on your NIM expectations, just given the change in the rate environment. I thought the last update last quarter was about 5.9% for the year.

Yeah, Michael, we added liquidity a little bit quicker than we expected. And we'll probably go a little bit higher than we originally thought we would. Ray mentioned that we're going to hover on that 13% to 14% of the sanity. That will result in a NIM for the full year of roughly 5.8 as opposed to the 5.9 that we mentioned on the last call.

But interest income as an actual number will be relatively low.

Okay. Okay, that's helpful. And I had a quick question on peek fees, and I know it's still kind of early, but you know, from what you gather, so far, I was hoping you could comment more on a broader pricing environment particularly with some like new upstarts like Navient, SoFi, guys like College Avenue, have you seen more pressure on pricing so far?

The pricing, there's two pieces to this at a minimum, right, one is in general and in general, the pricing has been quite stable. And as mentioned in prior calls, new entrants, who are rational, such as SoFi in this particular environment have a pricing spread and of course there's a spread on variable as well as fixed, have a pricing spread that is on top of ours very similar. We have seen, as we get into busy season, a couple of people will lower the low end of their ranges, so that they can have a 399 and narrower number like that. That's been relatively rare. The people who are newer tend to do it a little more. And so, this is a normal sort of trench warfare associated with the busy season. I would say it's unusual for us versus prior year result.

Okay, okay. That's helpful. Thank you.

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

Great, thanks. I did see that loan consolidations were down slightly from Q1. Could you just talk about whether that's a result of seasonality or a result of your competitors or things that you're doing and what it might look like as the year progresses?

Sure, and the sort of the change in the consolidation went from like 393 to 314. And that was gratifyingly down. And when we look at the individual companies that make that up, every single company was down from the first quarter to second quarter. Very hard for us to gauge what the intent is of companies who are doing this because primarily, what they're doing is consolidating federal loans. And as you know, private student loans only run about 10% of the volume of the federal loans. So, we've always been the tail on that dog. And we do think that several of people who are in that who are not traditional banks in the sense of having a low cost of funds, aren't making money at this. And we think that they are yeah, coming back to a point of view where their P&Ls will dictate that this is not a particularly attractive business. But two things, one is it's nice to see it's down; two is going forward we're watching, of course, everyday carefully, but we don't know what their individual motivations are. Clearly some in the first quarter, we're just looking for volume. But that, as you know, is a short lived type of strategy.

And my follow up question, Steve, you mentioned that you think that GAAP capital, plus some form of the loan loss reserve is going to be the operating capital metric. Just can you talk a little bit about how you've adopted to there, I mean, to the regulators – I mean, how do you think about that from kind of a regulatory standpoint? And are there other things that you are – could do or are going to do if the origination tended to be higher, I guess than your expectations?

So, look, we always discuss our business plans with the regulatory agencies. And when we do that, we show them longer term capital forecasts and discuss things like, share buybacks and obviously, going into CECL, both of those were on the table. And we certainly are returning capitals to shareholders at this point in time. And obviously, we pay a lot of attention to our longer term capital forecasts and we do have a significant excess capital cushion. In the wonderful scenario where our originations increased 20% or 30% more than we are expecting, I don't think that that would put us into a position where we are eating into our capital cushion. So, we're in fine shape, given the outlook for the next couple of years here.

And if I could just add an agenda to that, it is the case that the regulators have not changed their guidelines for well capitalized and other benchmarks that they have. It's also the case that everybody recognizes that is $1.3 or $1 billion, that's moving from the equity accounts or loan loss reserve account is really cushioned, as Steve said. So, when you look at total loss absorbing capability or T lack for the institution, it's appropriate. And if we were buying the institution, they see what's the cushion against these assets not being high quality you would add the loan loss reserve to the equity and you would do that in the first 15 minutes of evaluating a company. So, the regulators get that they haven't changed their guidelines. No one has lived with CECL yet. We certainly are communicating to them that when we add the two numbers together, it's a number as Steve said mid-teens called 15% capital, extremely well capitalized. And we have been straightforward with the regulators that we think that that is a – one might say an extremely healthy number on the one hand, the other might, you might say it is much more than what was viewed to be an adequate cushion in 2018, let's say. And so, we haven't lived in that world yet. But as Steve said, under any circumstances we're well capitalized and we will continue to view capital allocation in a rational way.

Got it, thanks and I do agree with the idea of the cushion.

Alright, if I if you want, I can give you the address of the FDIC, so you can send in your vote of confidence in this.

Yeah, FDIC has some rules about that.

The next question comes from the line of Arren Cyganovich with Citi.

Thanks. Yeah, just supposed curious, and realizing that NCOs are still at a low level but what what's your expected trajectory going forward?

Arren, we're having a hard time hearing you on the – the cell phone connection isn't very good. Could you please repeat that question?

That was my work phone, but it's – the question was, what's the expectation for the trajectory of your net charge offs going forward?

So typically, the second quarter is the peak charge off quarter as new loans go into full principal and interest repayment in November, December. Typically, new borrowers struggle and there's a chunk of zero payment defaults in the second quarter and then things tend to level off. So, if year-to-date defaults are similar to last year. We don't think that '19 should be a whole lot different than '18 by the end of the year.

Okay, and then on the credit card side, I know its still very early days there, can you just share any of the kind of feedback you've had, since the initial rollout of that.

It is early days, and we're still doing a very controlled solicitation. So, the number of customers that we have, we're sitting here measured in the hundreds, right just to point out. We're very happy with the way the launch went, we had originally signed or we signed our contract with our partners Deserve on July 6 of 2018. And we launched the product in June of this year, getting a chest under the full 12 months. So, we're very happy with that. We have the three embodiments for the life stages that are in the product, the reviews by people who do these things has been positive. And so, we're on the map and as you pointed out, early days, more to come in future quarters.

Okay, thank you.

[Operator Instructions] The next question comes from the line of Rick Shane with JP Morgan.

Hey, guys, thanks for taking my questions this morning. Look, I understand in terms of charge offs, there's a high degree of seasonality. And there's always a lot of noise. I am curious, when we sort of look at some of the underlying drivers is there anything you're seeing in terms of well, rates that has changed either positive or negative over the last 12 months?

As we look at each one of the vintages coming in and we have various collection strategies that we vary over time. There were always fluctuations. And so, the questions would be as touched upon a little bit earlier. Is there anything from the environment or the new accounts performing the way we thought the new accounts would be? How are first payment defaults going? How are contact rates doing? And the answer on all those things is everything is stable. And so, as Steve alluded to, the write off rate last year at this time was approximately 108 basis points. We're right on top of that 108 basis points this year. There's always puts and takes in collections and as we commented in the first quarter the 89 basis points that we wrote off was better than our expectations, the 129 that we're doing this quarter is within our expectation. So, I would say bunch of noise around, but that is BAU for collections, and no change in our models, no change in our cut offs, no change in our through the door population. Stability has been our companion and friend for several years and we expect that to be the case going forward.

Got it and you made the comment that the new vintages that are rolling through are performing consistently with historic vintages, I'm curious if you're seeing anything in the more seasoned vintages that changes your trajectory perspective – or your trajectory outlook there. And is performance – you guys are moving into a world where you have to look at lifetime performance. Is there anything that you've seen over the last couple of quarters on your more seasoned vintages that changes your outlook, either positively or negatively? I remember, a couple years ago, we talked about sort of 8% lifetime loss rates and then that actually got damping down a little bit, curious if you're seeing anything as those vintages mature that changes as well.

Yeah, lifetime losses are something that we have built into our evaluation of our front end and underwriting and cut off scores. And so, from the very beginning of this company's life, we have used lifetime losses. Now, CECL will cause us to have to document those and put them on the balance sheet and that sort of thing. But essentially, that's taking preexisting models and putting them into a regulatory regime that is more about model risk management, that sort of thing. The models themselves had a very little change in them. And you would see it in through the door cut offs, either in the approval rate, which is running about 45% or with that 746 FICO. We have not seen any changes. And I will say that, to the extent that the consolidation numbers go down, as you know, very helpful for looking at lifetime losses because typically those are seasoned a year or two. And so, once again, the answer has been steady. Steady has been both our companion and our friend. We are dealing with a demographic that is not as volatile as the economy at large, with the unemployment rate running half of what the national rate is, as I said earlier, and so we directly answer your question. We haven't seen anything either in the new vintages coming in, nor indeed vintages that are past their peak losses. As you know, peak losses occur, but two years you're within the first two years, of whole principal and interest. That tail off curve of losses is on our models. And so that's as I said – had it not been you would see us adjusting the front end.

Okay, great. Thank you very much.

The next question comes from the line of Vincent Caintic with Stephens.

Thanks. Good morning. And thanks for the disclosure on CECL, I think you guys have been kind of the thought leader on providing a framework for CECL. So, my first question is actually on it. You know, as we're looking at the 2020 when we have to look at the CECL EPS number and I appreciate you will be putting a core number or adjusted core number. But any sense for how the CECL affects the GAAP numbers? Or maybe any, because I understand you're growing a lot just kind of when we think about 2020, if there's any help on what the GAAP versus the course spread would be for EPS?

The impact would be bigger than a breadbox. How about that? I mean, the impact is going to be significant. We just talked about a $300 million reserve on an origination cohort of $5 billion plus. So, it's going to be a meaningful number.

We haven't given any guidance, so far as you know, what we think that is, although we do, as Steve said, and clearly having the camp up, not only will it be a highly volatile number, but we don't believe it will be representative of the performance of the franchise. It's extremely unfortunate that that is the case. But if you wanted to ballpark it, you could look at the originations in the quarter, you could think about those life or loan losses and at high 7% to 8%, you would ballpark what's going into CECL versus what had previously been the case. And you would take it right off our adjusted core earnings and look at what we're backing out for the loan loss reserve build because that is the definition of the, in my opinion, inappropriate volatility. That's a side effect of CECL. So, we're not giving guides on it. But it's an easily calculatable range, given the disclosure that we've already provided.

Got you, that's helpful. And may be asking it another way, so your 2019 guidance of 121 to 123, I guess, under the new adjusted core EPS, would that 2019 guidance have been approximately the same. So, there's not really any change going Ford?

Well, we're not changing the guidance for any impact on CECL, for the remainder of this year. And so, is your question had we been under CECL in 2019, what our EPS would have been?

Yeah, your new adjusted core EPS methods just so we can have apples to apples for what you'll be disclosing as your quarter number for next year.

So, look, if you take a look in the 10-Q, we laid out 2018 and '19, under current core and future core and the difference range is between $0.03 and I think $0.06 per quarter, so the impact is not significant. But once we compare that to a CECL number, the impact will certainly be significant. But all we're doing in the new core is rather – when we guidance, we will give guidance for the new core and instead of including provision, it will include expected charge off during the course of the year, which obviously, all things being equal are going to be lower than a provision because the provision is forward looking and it includes growth in the portfolio. So, you can take a look at the numbers and if you want to discuss it further, we can get together with you after the call. We did – we published an awful lot on what the new core impact is going to be.

Okay, got it. That's helpful. Just a follow up separately on the personal loans, just noticed the credit there losses jumps, and I just want to if there's anything particularly to the quarter and what we should be expecting as a run rate, net loss rate going forward? Thank you.

Sure. And as you know, the losses that we are experiencing and the provision change that you noted, one starts at zero on the end of November 1 of 2017. And we built up the portfolio through '18 with a range of testing both on the marketing side as well as on the credit side. And so that's reflected in the provision, we've made adjustments appropriate to both marketing as well as credit starting in the middle of last year. And so, going forward, we will have a provision that sort of models the experience of the personal loans in the current period. But we are not giving guidance for that individually. But it is the case that our portfolio is going forward does have an expected ROE of 15%.

Okay, got you. Thanks very much.

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

Yeah, thanks. So, given your comfort level with your capital cushion, even kind of post full CECL implementation, can you just talk about the capacity you think you have to continue to buy back your stock here, which presumably view is pretty attractive at these levels.

One is, I agree, I agree that the stock is attractively priced. For buyback, I wish it's attractively priced, but having said that, we're not giving any guidance on the other side of January 1, 2020 for CECL because there's just so many moving parts that have not been in any way blessed by regulatory bodies, so we don't want to get ahead of ourselves. But as Steve says, going forward to the sense we have loan loss reserve plus the capital piece and that is 15% or so going forward and we are well capitalized. We will continue to view the capital as a series of capabilities that can either be used to reinvest in the business, paying dividends, do buybacks and we would like to continue to do all three going forward. So that would be our objective. But we do think that it's appropriate to let the dust settle a little bit before we would get ahead of ourselves in these projections.

Got it and then on the refi or the refi related repayments. It sounds like you attributed a lot of the drop to competition kind of pulling back. Should we assume that you haven't had to do much as far as some of the defensive measures you've contemplated? And how should we think about that activity over the back half of the year with rates dropping and refi's presumably looking a little bit more attractive for bars?

Well, first up in this case that of course if the level drops, and we attributed to the individual competitors, and they have their names, they will drop in total, so that 393 to 314 team drop. The thing about it that was interesting was it was a drop for every single name on our list and so we don't know what they're going to do going forward. And as I said, it's been into negative margin business by any calculations in the past. We haven't had to do much in a way of defense to take another part of your question. And so, we haven't had to tearing any way the yield on the portfolio or our net interest margin, as we discussed here. Going forward, very hard to say. The drop off is significant. And we have seen over the course of three years that some competitors get in, they stay awhile and they leave. And so, we'll see what happens with them. But it's entirely dependent upon their individual initiatives. But it is gratifying to see that across the board, they all seem to think was better idea to do less of this in the second quarter, then the first quarter.

Okay, got it. Thank you.

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

Yes, good morning, and thanks for taking my questions. Just three quick questions, number one, in the ancient days bank healers [ph] called what you're talking about primary capital and even though it's a bit of a misnomer of cash EPS, you obviously talk to your competitors and other consumer finance companies. Do you think that's sort of where the thought process is going to migrate for the entire industry? Or is this – have you had dialogue around this with other companies or it's just your sort of best thoughts about how to manage around CECL?

In this case and of course all the CECL pieces are projections for everybody. And as you know, from listening to other earnings calls, we are I think, more engaged in the details associated with the CECL and the impact on our particular franchise than most of our companies that are similar to ourselves. We have talked to people informally. And we have asked several advisors for their comments on both of our disclosures on CECLs. So, the impacts associated with it going forward on capital, as well as the possibility of looking at it a particular way or a different way in keeping with the conclusion that we've reached on the adjusted core earnings. And so, I think a whole bunch people have thought about CECL, we think we're relatively closer to the front of that parade in the back of that parade. And so, it's very hard for us to say what the industry standard will be going forward. But a key piece of things will be one, everybody getting over the CECL hump in the first quarter. And then the regulator's recognizing that they were successful in getting more equity into the regulatory regime. And then the question will be how much is too much and what do we count? But I would say that those conversations are barely incipient at this point. And so, I think it would be foolish for me to say what either the industry thinks or any other competitor.

And then, if I've got this right and I hope I have, it looks like your tax rate went down a lot in the quarter. Was that some specific item and I got on the call late, so if you've addressed this already, I apologize.

Okay, yeah, that we've noted your tardiness. And so, this case that the tax changes in the quarter, were idiosyncratic and catch ups on a couple of tax situations that we had and we'll return to our normal rate going forward unless something else were to come on the scene that of which we are unaware.

And then the TDR was that reserve adjustment in the June quarter or does that go on during the course of the year? How does it sort of flow into the numbers?

Yeah, a couple of things, one is sensitive interest rate has started to decline. That phenomenon has been with us. And so, there was $5 million, $10 million in the first quarter, but it was just covered by us. But the drop that we had in the second quarter of the relevant interest rates was more than we had forecast at the end of the first quarter. And so, one is, this has been around; two is, unless there's a change in the equity and our expectations that we tend to use the forwards so that we don't have any crystal ball forecasting on this. So, we want to be right down the middle of the yield lane. So, unless there's a change in the forwards in a decline says we won't have any further adjustment for this type of thing.

Great, thank you very much.

Your final question comes from the line of Ann Maysek with Rose Grove Capital.

Hi, good morning. Thanks for taking the question. Given the feds really public stance on encouraging the markets transition from LIBOR, a lot of US banks have recently redeemed LIBOR based data preferred and then reissued them and either so first the empty form and using arc language when appropriate. Is this something Sallie Mae has considered? And then relatedly how are you addressing the LIBOR issue on the asset side of the balance sheet?

So, thanks for the question Ann. Regarding the transition to LIBOR, we continue to follow the progress that is or is not being made by I guess they quality – the arc group. We do have significant exposure to LIBOR on our balance sheet, on our variable rate loans, on our asset backed bonds, on our derivatives and of course on the preferred that you are asking about. We will – we've continued to change the language in the various securities that we issue as we issue them. And we are actually waiting to see what the group comes up with on the transition to so far before we take additional concrete actions. Regarding that security, we don't intend to redeem it at this point in time.

Okay, great, thanks. Thanks for your help.

I will now turn the call back over for closing remarks.

Okay, well, thank you. And thank you all for your questions and interest in our franchise. And in closing, I would just say that it's a pleasure to be able to talk to you all about this company, which has had terrific – has had a great track record providing excellent returns on equity. We do have controlled expenses as you've seen with the efficiency ratio, rational capital allocation going forward will be consistent with how we've conducted ourselves over the last year. Return of capital live in a bunch of questions on our motivations will be to get that on a transparent and crisp playing field and be able to forecast that going forward once the CECL piece is slightly behind us. There is leveraging the franchise as you can see with cost growing less than one third or growing about one third of revenue and we're fortunate to be able to be providing a service that is highly valued both by our student customers as well as their families. And so, as we continue forward in the tail end here of 2019, I want to thank you for your interest. And we'll talk to you next quarter. Take care.

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