SLM Corp (SLM) 2017 Q2 法說會逐字稿

Good morning. My name is Deborah, and I will be your conference operator. At this time, I would like to welcome everyone to the SLM Second Quarter 2017 Earnings Call. (Operator Instructions)

I would now like to turn the conference to your host, Mr. Brian Cronin, Vice President of Investor Relations. You may begin your conference.

Thank you, Deborah. Good morning, and welcome to Sallie Mae's Second Quarter 2017 Earnings Call. With me today is Ray Quinlan, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions.

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

During this 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 June 30, 2017. This is posted along with the earnings press release on the Investor page at salliemae.com.

Thank you. I'll now turn the call over to Ray.

Thanks, Brian, and thank you all for your attention this morning. I'm happy to report that we have had another very good quarter. We continue to be on our plan and on our model.

We also continue to be the nation's premier franchise in providing private student lending to America's aspiring next generation and to their families. We also remain the #1 most recommended brand by colleges in every state.

We're experiencing the highest customer satisfaction rates in the history of the bank, led by our results, on our recently improved online application, which has a 95% customer satisfaction level.

As a result of many improvements that we have made in the operation, servicing calls per customer build are now down 50% over 2 years, from 17 -- from '15 to '17.

We continue to be also recognized as the industry leader in innovation and service by those organizations, which evaluate the sector. We have won many awards this year, including the AVA Digital Award and The Shorty Award for our Sallie Mae mobile watch application. The Hermes Creative Award for our joint effort was also received due to our partnership with Dee-1.

We continue to be the industry standard in research with our recently released report, How America Pays for College, which is extremely well received by many outlets.

With our parent loan, we have created a new financing category for America's families and for the colleges. We lead all competitors far and away by being the most recommended provider of this brand-new financing option. All the while, we have been delivering very good results for our investors with 100% growth in the balance sheet over 3 years and EPS of 270% during those same 3 years.

In regard to the quarter's results, our volume of disbursements is plus 2% year-to-date over last year. We are on track for $4.9 billion in originations. We are just entering our busiest season, so we all have our fingers crossed, but we look okay.

Credit quality at 747 average FICO year-to-date and with 88% cosigned is consistent with the last couple of years and very consistent with our modeling. Our NIM up to 5.91%, Steve will talk about the dynamics associated with that.

In managing operating expenses, we continue our efficiency ratio trend. In '14, we're at 51%. In '15, 47%; at '16, 40%; and '17, as you know, we're guiding to 38%, 39%. That drop in the efficiency ratio has provided over $100 million per year in additional pretax for both returns to investors as well as for investment in the company.

Our credit performance continues to be exactly in the range we're looking for, with losses hovering around 1% and delinquency around 2%. We're on track and on model.

Our balance sheet growth continues to reflect the increasing efficiency that we have talked about several years ago and which we are now realizing. Private student loans were up 28% year-to-year and 99% of the balance sheet growth from December 31, 2013 to December 31, '17, will be 99% private student loans of all the assets we had. This is happening while the balance sheet is doubling from $10 billion 12/31/13 to approximately $20 billion today.

EPS, which is up 35 -- 36% in 2016, we're on track to be up in the mid-30s as well this year with our current guidance.

EPS was $0.26 per share in '14, $0.39 per share in '15, $0.53 per share in '16 and now, we're now at $0.71, $0.72. These are all numbers that have the asset sales removed from them, they are the ongoing EPS numbers.

Our ROE of over 14% this quarter continues to be exactly where we want it to be. And as a backdrop, our regulatory relationships with the Utah Department of Financial Institutions, the FDIC and the CFPB continued to be excellent, and we have very good reviews with all 3, including the fact that the CFPB, after their review of last year, doesn't have us on the calendar for this year.

Our market frame. We get feedback from our customers that says we're improving our service, which has been gratifying over the last couple of years. Our competitors, as we enter the busiest season, remain the traditional competitors in both Wells and Discover. As we watch the evolution of the industry, it is more open, it is a flatter playing field. There are better services. We, by frame of reference, set the FinTechs to be the standard for customer experience, and we are right at where they are as opposed to some of the more traditional competitors.

Our outlook is consistent. Steve will talk about the basis.

One item to note. A couple years back, there's a book that was released called "Don't Blame the Shorts" by Robert Sloan. It was a good book, but it obviously thought it was swimming against the tide. When we think about our critics, we value their input, right? So our critics are very helpful to us. They're out looking for any weakness that we have. We believe we have a terrific franchise with a bright future. We welcome everyone to look at it, to point out what possible weaknesses there may exist. If in fact, they are true weaknesses, the sooner we find them out, the better.

As we have gone through the last couple of years, top concerns have morphed along from the CFPB to the American election, to the FinTechs and undergraduate financing, to today's conversations about prepayments and consolidations. All of these have been dealt with. All are included in our models, but I should say, if anyone has any bright ideas about why we should be worried about something else, we're all ears about it because we think we'll succeed together.

So, so far, so good. Thank you for your attention, and I'll turn the time over to Steve.

Thank you very much, Ray. Good morning, everybody. I'm going to get into a little bit more of the details on the quarter. We'll start off with the loan portfolio totaled $15.5 billion, up 27% from the prior year, and this was obviously the main contributor to our increase of net income of also 27%. It was up to $270 million in the current quarter.

I'll talk a little bit in detail about the bank's NIM. Net interest margin on earning assets was 5.91% in the second quarter, down from 5.96% in the first quarter, but still up quite a bit from 5.84% in the prior year quarter.

Our NIM is coming in stronger than we forecasted, primarily because funding spreads versus LIBOR have been stronger than anticipated. I'll give you an example. Our money market deposit rates currently 130 and this is just 5 basis points under LIBOR. We have talked quite a bit about the beta on our money market deposits, and as we've been in the 0% rate environment for the last several years, it's been difficult to forecast. We are happy to report that our forecast was way off and our beta is turning out to be a lot lower than we have modeled in our numbers.

Retail and brokered CDs are also priced tighter to LIBOR compared to historical levels, and it's also true for the ABS on our book. As a result, we expect NIM to be higher than previously discussed in the prior quarter and come in around the mid 5.80s for the full year if current trends continue. And this, by the way, is despite the fact that we have a 6 basis point drag on our NIM due to the unsecured debt issuance that we did in early April. The cost of this debt is more than offset by eliminating the high dividend that we were paying on our preferred stock that we retired. In fact, before taxes, this unsecured debt transaction improves our bottom line by nearly $10 million on an annual basis, so very positive transaction.

The average yield on our private education loan portfolio in the first quarter was up 7 basis points, 8.33% and up a strong 35 basis points from the year-ago quarter. Our cost of funds was up to 177, 23 basis points higher than the prior quarter and 43 basis points higher than the year-ago quarter.

Quick word about the way our loans reset to LIBOR because we have received a couple of questions on this. Our loans basically reset on the 25th of each month, despite what LIBOR does, so it is not always going to perfectly match the increase in LIBOR. And then, of course, there are all these accounting adjustments that run against the NIM. But this quarter, we lagged a little bit compared to LIBOR. In the prior quarter, I think we did a little bit better than the LIBOR increase. So there will be some gives and some takes as interest rates rise and fall.

Looking at the tax rate, our effective tax rate in the second quarter was 38.8%, very close to our expected run rate and up from the year-ago quarter. We expect that the tax rate will continue to hover around 39% effective -- expected effective tax rate.

A little more detail on OpEx. Operating expenses were $111 million, compared to $103 million in the prior quarter and $95 million in the year-ago quarter. After FDIC fees, which were up $2 million or 55%, our operating expenses were up 15%, and I think this is a pretty favorable outcome, given that total accounts were up 16%, and we have an increase of 20% of borrowers in repayment, which, as you know from prior discussions, that's when cost really start to ramp up for servicing our accounts.

We also made some additional investments in the quarter, $5 million in total, and those investments include a test marketing of student loans on various media outlets, including radio and TV. We've made some infrastructure enhancements to prepare for the potential for expansion of the private loan market in response to legislative changes. It doesn't look like that's on the horizon right now. We can talk about that later. But we absolutely want to be prepared for that in the event that it does come. And we also made some investments in infrastructure for our Sallie Mae personal loan product, which should be -- begin to offer in early '18, test it in late '17. Of course, we've talked about this as well.

So that's operating expenses. Turning to capital, we ended the quarter with a very strong 13.7% total risk-based capital ratio. We're about to grow significantly as we make our disbursements in the peak season. That will take our capital level down to 13% at year-end, still a very strong level of capitalization by any measure.

Let's talk a little bit about credit performance and add a little more detail to raise comments. Credit performance remains very strong. Loans 30-plus days delinquent were 2.2%, that's up from 1.9% in Q1 and 2.1% in the year-ago quarter, really no trend there. We're very happy with what we're seeing in our delinquency buckets and the way our credit shop is collecting and curing those delinquencies, so good performance there. Loans in forbearance were up 3.3% from 3.2% in Q1 and 2.9% in the year-ago quarter, again, steady as she goes. Net charge-offs for average loans in repayment went up to 1.08% from 89% in Q1 and 1.05% in the prior year quarter. I'll give you a different measure of charge-offs, measured as a percentage of loans in full, principal and interest repayment, came in at 2.24% versus 1.73% in Q1 and 2.58% in the year-ago quarter.

Q2 is a seasonally high charge-off rate as those loans that went into full P&I in Q4 start to migrate through the delinquency buckets and charge-off, so these numbers are very low, within our expectations, and we expect them to decline as we go into Q3. Give you a fact, year ending loans in full P&I totaled $5.4 billion or 35% of total loans.

Our provision was $49 million in the quarter, compared to $42 million in the prior year quarter. Our allowance came in at 1.31% of total loans and 1.93% of loans in repayment. I think when we last talked, we talked about an allowance at the end of the year in a 1.40% vicinity, we will certainly be on track for that. Key driver for the increase in this quarter's provision is the fact that we are preparing for next Q2's charge-offs from the next repay wave that hasn't even occurred yet. Anyway, the credit performance is very, very solid.

Call out the personal loan balance at the end of the second quarter was $69 million, up very slightly from the prior quarter. We are pleased with the performance of these loans. Charge-offs and delinquencies are extremely minimal, and we would like to expand our purchases of personal loans, and we are working with our partners on a way to do exactly that.

I now want to talk a little bit about the consolidation activity we're seeing and the changes that we made to our consolidation tables and give you a little bit of color around that.

In response to increased consolidation volume and heightened interest by our investors in this area, we carefully reviewed our methodology for tracking this activity in the quarter. And as a result, we identified a small population of loans that we previously thought were paid in full by individuals, but it turned out that they were consolidated away to third parties.

So as a result, we revised the consolidation activity up and repayment and other activity down by $21 million in the first quarter. And for the 6 months ended June 30, 2016, we also had a similar adjustment where we revised consolidation activity up and repayment and other activity down by $19 million. Important to note that total repayment activity did not change in either period as these payments were just moved from one repayment bucket to another.

To put this activity into perspective, in Q2, 2.6% of our loans in full P&I were consolidated or 0.9% of our total portfolio, and this is up from 1.5% to 0.5%, respectively, in the prior year and that is of course of P&I and total portfolio. We would prefer that these loans did not consolidate and -- but this activity will not have a significant impact on our financial performance.

A little bit more detail on that front, we've updated our life of loan voluntary CPR to 6.0 from 5.1. To put this into perspective, the expected weighted average life of our loan portfolio decreased from 5.7 to 5.5 years, and the expected weighted average life of loans we'll originate in the upcoming peak season changed 1/10 of a year from 6.2 to 6.1 years. So as you can see, this change will have very little impact on our earnings or the value of our loan portfolio.

Our historical experience has demonstrated that consolidation activity is heightened in the period after the loan initially goes into full P&I repayment and then subsides over time. It is also often overlooked that a significant portion of our portfolio is not in full P&I and is generating capitalized interest that offsets the impact of these prepayments.

I will caution my audience that CPR -- life of loan CRPs are very complicated thing and we are oversimplifying it here in this discussion. For example, loans that are in full P&I will have a different prepayment rate than loans that are in school, and our CPR also ignores capitalized interest because that is a scheduled payment. So if you just apply CPR as you ordinarily would to, say, a mortgage portfolio, you will get sort of an incorrect result. And if you want to discuss that further off-line, feel free to give me a buzz.

The average FICO score of these consolidations for the 3 and 6 months period ended June 30 was 722 and 723. In addition, 11% of these loans consolidated away were to borrowers attending for-profit schools. I pointed this out just because it is fully 20 points below our average FICO score, and component from for-profit schools was significantly higher than the mix of loans that we have on our balance sheet. So I think it's not the kind of loans that our investors would expect us to have consolidated away.

So before I wrap up this consolidation discussion, let me just point out that we are exploring defensive strategies to retain this component of our portfolio that we're seeing consolidated away. We believe that, that consolidation phenomenon is driven by cash flow and not necessarily rate, so we will be looking at strategies, such as extending the term of the loan, to give the borrower a better cash flow experience and that, of course, did not impact the ROA -- ROE on our loan portfolio, and we will also be looking to identify those most at risk to consolidated away by identifying loans that are also attached to large federal loan balances.

So probably more time spent on consolidation than necessary, but it has been a topic of interest for our investors, so I thought I would share that information with you all.

So let me wrap up the prepared remarks by reiterating our guidance. We are on a very strong track here. We kept our guidance, where we lower the -- raised the lower end of our guidance and we're now at $0.71 to $0.72. We continue to expect that we will originate $4.9 billion at Smart Option parent loans this year, and we are very definitely on track to have an efficiency ratio between 38% and 39%.

So that concludes our prepared remarks, and we would now be happy to take any questions the audience may have.

(Operator Instructions) And your first question comes from the line of Sanjay Sakhrani with KBW.

I guess, I have a question on these consolidations. And just broadly, and I appreciate all the commentary around it, Steve, why do you -- and Ray, why do you think that your competitors are having more success on refis. This is obviously the case with Navient as well, and this is -- it's a little bit striking that you're seeing -- both of yourself sort of see this impact.

Well, Sanjay, we do not try to refi other's loans, and just let me put it into perspective here. If we did what our competitors are doing and refi-ed loans at 5.2%, we would have serious ROE degradation, and I think my good friend, [Jack Munday] also pointed out on his call yesterday, the economics of the consolidation loans to the company-wide Sallie Mae are not very strong. So that is why we will be looking for strategies, such as extending term and/or identifying loans with large federal balances to bring them and to offset part of the deterioration in economics. But look, if we want to consolidate loans, we certainly could. We are the largest portfolio, so it doesn't suit our interests. And look, we would love to retain that $127 million of loans consolidated this quarter. However, it is part of doing business as a student lender, and it isn't going to have a significant impact on our economics on a go-forward basis.

And then as a follow-up, you mentioned some of the defensive strategies. I guess, do you feel like there's an ability to defend when your competitors are being somewhat irrational in terms of their pricing?

I think that we will be able to come up with strategy. It's kind of like threading the needle. We don't want to consolidate loans that ordinarily would not have, and we want to make sure that we don't, at the end of the day, decrease value as opposed to create value for our shareholders.

Okay. One last question. Obviously, some of your competitors in the private label are priced in loans space have been retrenching some. I mean, are you sort of concocting proactive strategies to take up your share of originations as we move into the third quarter?

As we're in the middle of the busy season, everything that we have done for the third quarter is already in the field. And it is the case that we have tremendous respect for our competitors and even when one of them is having difficulty, the strong distribution system that they have and the movement that they've had over the years keeps the inertia of their franchise still to be a powerful item to be dealt with. Having said that, we're requested and talking to as many students and prospective students as we can, all the schools that have put us on a recommended list, and we are hoping for the best as we go through this season. And since we are right on top of it, it's very tactile to us, then we will find out over the next 40 days. But respected competitors are still there, and even if they're having difficulties, they're still formidable.

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

Steve, was there anything to call out on the expenses? I think the efficiency ratio was, at least for the quarter, a little bit above the high end of your guidance for full year.

Yes, Mark, there's definitely seasonality in efficiency ratio, so it ticks up in the second quarter as we ramp up our direct-to-consumer spending and our marketing campaign for the peak season. And then once we bring those loans on the books and they start generating the income, the efficiency ratio will then drop precipitously.

Okay, great. And just wanted to clarify a point around the consolidation activity. I think, Steve, as you indicated, at the rate that these loans are being consolidated, it's not attractive economics to you. But isn't it fair to say that it's even less attractive to the parties that are doing it? And if they start to be motivated more by profits than trying to show growth for a potential IPO, then eventually a lot of those business just comes back to you guys?

So look, I will not cast down on people that are consolidating these loans away. But when I look at the various economics that are available publicly, I don't see a great deal of profit generation from these loans, but it's part of the business strategy that I can't comment on certain use for.

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

Great. Just maybe get your reaction to a comment. I guess, I mean the risk from a consolidation standpoint are loans that are in repayment, right? The primary risk? I mean, you guys don't have the largest portfolio of loans in repayment in the industry. I mean, you are the largest originator, but you're not actually the largest pool of loans in repayment. I mean...

Well, I think we're probably larger than Wells Fargo. I would say we have the largest high-quality loans portfolio that is in debt repayment, and some of these other portfolios are already past the peak of that period when the consolidations tend to incur -- tend to occur. We do see a burnout in consolidation activity as the loans age.

Got it. Okay. All right. The -- Steve, I was intrigued by your comment about deposit betas, maybe you could expand on that a little bit. Like how you think about kind of the cost of funds over the balance of this year and into next year's? How that -- do you think that will develop?

So we have seen year-to-date, we have increased our money market deposit rates from 90 basis points to 130 basis points. I exclude the first 15 basis points because we were at 90 when the pack was at 105 and we were losing balances. We didn't need balances at that time, so we weren't competitive. So I would submit to you that we've increased our money market deposit rates from 105 to 130, so 25 basis points. At the same time, the federal funds rate went up 75 basis points, so we're tracking to a 35% to 33% beta. In my interest rate risk tables in the Q, we model an 85% beta. I'm beginning to think we're not going to get to 85%. However, the market is pretty competitive at this point in time for money market deposits, so the beta might creep up from there, but I will tell you that in our forecast for the remainder of the year is fairly conservative and has sharp increases in money market rates and other types of funding rates in it for the remainder of the year. So look, Moshe, I mean, we were in an environment where rates did not go up for, I think, literally 10 years, so we're all kind of rebuilding our models on this as the market develops here. But it looks like 85% is definitely off the mark.

Got you. Good to hear. On a kind of separate topic, you had kind of alluded to the fact that Wells had a big slowdown in originations and yours is still growing, although at a slower pace and yet you're still kind of pretty confident that the market can kind of support the growth that gets you to that $4.9 billion of originations. And maybe is there any way you could kind of just expand on the things that you're seeing that kind of give you that confidence?

Sure. And we don't sit down and forecast $4.9 billion, we forecast loans that will be originated by school versus last year, what we see in trends for the first part of the year, the number of people who are coming back in serialization as a base. And so it's a very disaggregated forecast that we have. Wells is very different, very difficult to disentangle what's going on there internally versus their experience in the market if they were ISO qualitative in regard to their competitive frame. And so as we look at it, and we look region by region, school by school, and there are big differences in those regions, we feel that we're on track to be at that $4.9 billion. But as I said, it's -- the next 40 days are crucial to that, and it's akin to, as you know, Christmas in retail where the 40 days from the Thanksgiving to the end of the year are very volatile, difficult to forecast. We'll certainly see, but we have in our disaggregated approach felt the confidence that when that reaggregates to the $4.9 billion, we're on track for it.

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

And I guess, you've touched on this to some degree with the discussion. Recently, Wells Fargo and on the refi, the guys focused in refi-ing. Well, maybe you can just give a more general commentary on the competitive landscape. We've seen some disruptions at some of the new marketplace lenders, as we heard some changes at Wells. Maybe just compared to where we were last quarter in terms of the refi agents and those that are in the new origination market and what you're seeing kind of in the coming months there.

Sure. And the competitive frame has certainly evolved, and while we at one time thought that many of the new entrants might show up to be competitors in the new undergraduate, not-for-profit, 4-year loan origination business, that has not really materialized. And so we think about the competitive frame, one, for new undergraduate, not-for-profit 4-year loans that frame has remained relatively static. On the other hand, as has been discussed already in this call, yes, there are a series of people are reaching for growth than looking to do refinancing. And while we are the largest private student loan provider of funding, remember that, that market is only $10 billion originations each year as a ballpark number, that federal government is putting out about $95 billion in additional balances each year. So when we look at the sheer bulk of student loan funding, it is certainly not with us. Having said that, people have come and gone over the last couple of years in regard to both FinTech efforts as well as the ability for them to put those items on either their balance sheet or capacities assets through to an ultimate investor. So there's been quite a bit of volatility if we look at the list of people who would be our talking points 2 years ago versus today in the refi market. Having said all that, as Steve correctly points out, our refi for us has its most activity when he first graduates from school, had their 6 months of freedom before they had to make a payment, shows up and also they have a bill that's due sort of this month. And so there's a natural tendency to say, boy, how do I get my average cash flow to be a little more positive each month, look around for refinancing and sometimes they find it, sometimes not. If, however, nothing occurs during that first 6 to 18 months of activity, it tends to be the case the portfolio settles down, people just doing what they're doing, the payment becomes automatic and we move along. So the credit frame for the originations hasn't changed much. Competitive frame in regard to refis has changed quite a bit, some players has been some more aggressive. It has been noted. Some of the economics are relatively unfavorable, and our portfolio, as it matures, goes through a period when people consider other payment options and then they move along. And so we're watching it segment by segment. As Steve says, the sum total of all the activity in regard to both the originations as well as the refinancing has caused us to revamp our thinking on the average life of a loan that would be originated this afternoon from 6.2 years to 6.1 years and has not changed at all our ROEs or our cutoff decisions in regard to the amount of risk we can take, given the revenue stream.

Okay, great. And the second question, Steve, you did have a discussion on deposit betas. But I think when you take the deposit beta discussion, your guide is the anticipations for rate hikes, how you model those in as well as the asset-sensitivity nature of your, I guess, your overall balance sheet. Where do you think -- how do you think about the NIM and where that's going to go over the next few quarters?

Sure. So when we model our -- when we forecast the future earnings for future quarters and years, we basically take the euro-dollar future curve as what is going to happen LIBOR and then we spread a beta over that. What I said in my prepared remarks is that we think NIM for the full year is going to come in, in 5.80s. So for the next couple of quarters, you can do the math, and, yes, we'll be in the 5.80s.

(Operator Instructions) And your next question comes from the line of Rick Shane with JPMorgan.

I'm curious, one of the things that has driven your comfort around your efficiency guidance and, frankly, enhance that efficiency guidance throughout the year is that your channels have shifted more towards online channel, and you've also made substantial investments in your technology, and that was highlighted in the initial comment. I'm curious, as we head into the primary funding season in August and September, if you're expecting that we're going to continue to see that channel shift or was that really manifested last year?

No, we see it as a continuing trend, and it is the case, as I noted, that if we were look at the number of people who call us for some sort of service, which would include "I can't get my application done" that, that rate of calling per thousand customers who are either applying for a loan or who are in the servicing of the portfolio is down 50% as a rate over the last 2 years. This reflects the fact that: one, people like to go to online; two, is people like self-service; and three, is we've upgraded all of those interfaces, including mobile and Apple Watch, in such a way that, right now, 92% of all the transactions that come in to us, sale, service, whatever it is would be, are being done by what we referred to as the customer channel of choice, it's a customer ease index used in the industry, and we're running at 92.2%. So what had previously been the case, that number had been approximately 86% 2 years ago, and we've increased the channel self-service, and of course, the higher satisfaction that goes along with that, from a 14% contact rate that we actually talk to the people, and it's now down to 7.8%.

Got it. And not being quite far removed, sadly, from being a millennial, I'd be curious about behavior. What percentage of applications are you expecting to come through mobile apps this year?

Yes, that is also an evolving piece. And we did look at all of the channels in regard to physical equipment, desktops, laptops, iPads and mobile. And it's perfectly clear that even while you are not a millennial, you do have some instincts, which reflect their true choices, and they prefer mobile. And mobile has moved over the years up rapidly. And this year, we expect about 60% of our applications to come from mobile. I should note that in this technology management that we've alluded to here, the characteristics for the interface on mobile are quite different from the characteristics or interface on a desktop or a laptop. They require special tailoring for visual as well as ergonomic interface. We think the FinTechs do this best. We set them as a standard for competition, and we think we're doing very well against them.

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

I think we got a pretty good grasp for 2017. If we jump to 2018, what are the big initiatives that you think will allow you to continue to grow volume? How much is changing at the federal level? And just to pick on the refi issue, would you actually launch a kind of a new product class? Or is this just with the mailer or are you just sort of tweaking and calling?

Sure. In 2018, as we go forward, as Steve mentioned in his remarks, we will be piloting in the fall of this year, in November, a personal installment loan. And so that will be tested through '18, not significant volume, but that will definitely be introduced. As we look at the changing horizon, Washington has been, as you know, as clear as mud in regard to what will happen in our industry. But, nonetheless, it's an important dynamic. Because of much of the discussion that has been around in various programs that may or not be discontinued, especially the plus programs, we have done, as we have talked about in prior quarters, quite a bit of work on strengthening our infrastructure, eliminating bottlenecks with the idea that were the federal programs do change in such a way that our volume would increase significantly that we would be prepared, both in a credit and underwriting sense as well as in a customer service and delivery sense, to be able service the increase in that volume. As we have surveyed the competitive frame for any of those items which would touchdown, we believe that there are opportunities for us to have offerings targeted to specific areas of graduate programs and some specialty lending pieces, which we are now exploring for possible release in the first quarter of next year and in time for the busy season of next year. In addition to that, as Steve points out, what we're seeing in regard to this consolidation is: one, as you've heard several times, the numbers don't particularly change what our cost benefit is in regard to adding new assets, but it's clear that with our 747 FICO through the door this year and if we look at the profile of loans that are consolidated away, as Steve perfectly points out, their average FICO is 720. There's also the cases of higher proportion of the people who have paid down ahead of schedule, with the for-profit schools, which have traditionally been more risky. They're showing up at twice the rate in the consolidation loans versus what we're originating today. And as a result of that, we, in talking to people, have concluded that they really have a cash flow problem. This is not the case of someone who might think, walking down the street, the 77 FICO is mispriced in your portfolio and somebody is going to offer them a couple of hundred basis points and they will reach out. That's not what we're seeing. What we're seeing is my cash flow for the month is $236, and I would like it to be down about $50, how can I go do that? And so when we see that dynamic, we think that we have an opportunity to offer some parameters for better cash flow management for our customers as we believe that is what they're telling us they would like to see. So all around, as you said, changes in this competitive frame, we will be introducing the private student loan -- I'm sorry, the installment loan. We will be looking at targeted products for graduate, in particular, and we are looking at how to offer our customers better cash flow management in order to offset some of this activity around consolidations without, as Steve said, compromising our returns for our investors.

Your next question comes from the line of Arren Cyganovich with D.A. Davidson.

Just in terms of the portfolio, what's the amount of loans that are in full P&I repayment and what's the cadence for loans entering repayment over the next few quarters?

35% are in full P&I. Portfolios $15 billion plus; assets are now between $5 billion and $6 billion. And you can look at our originations over the last couple of years, $4.6 billion last year, $4.3 billion the year before. These are typically made, on average, when people are 2 years through a school. And so roughly speaking, we'll be seeing wave of approximately $4 billion in the next several years entering full P&I.

And, Arren, a little bit more specifically. I could tell you we've got just under $1 billion going into repay in Q2. We've got $2.4 billion going into repay in Q4. So a substantial amount will be coming into the pipeline.

So once the portfolio is up and sort of running along, their originations of 2 years ago become the full P&I for this year and broad really.

Okay. And then, I guess, with those larger amounts that are coming in, I think that the loan consolidations, as you mentioned, tend to be on the front end of those folks entering into repayment. Would you expect just naturally that number to rise just related to those loans entering repayment? Or is it more a function of other things?

No. We manage our ROEs and our expectations cohort by cohort, right? And so the date of origination, as in credit cards, is absolutely crucial. And so we look at the dates of origination, we look at when the payments start. And from when the payments start, for the next -- for 24 months, we experience elevated cost of credit, elevated cost of collections, elevated cost of customer service and elevated prepayment. And so that 24-month period from I started with my first payment to I'm pretty much settled in is averaged in regards to the overall 6-plus years that you heard us talk about. So for all those things, cohort by cohort, there will be an elevation as you enter into full P&I. Having said that, as the portfolio grows, the people who are coming out of that 24 months is also growing. And so there will be relative indexing shift probably up over the next 2 years and then down after that.

Your next question comes from the line of Steve Moss with FBR.

I was wondering -- I may have missed it, I apologize, Steve, but when you're talking about deposit betas, I was just wondering what are you assuming exactly in your model going forward.

So we haven't changed our model going forward, so for our interest rate with disclosures in the 10-Q, I think that we will continue to be conservative and keep 85% as our beta there. For our -- for the remainder of this year, the beta is in the, call it, 40 percentage vicinity.

Okay. And then my second question, the House budget hearing includes some provisions around fair value accounting. I was wondering if you all could comment about the potential impact for next year.

Yes. So look, the information that was released by the house budget was very favorable to our outlook for potential changes in Grad PLUS. However, the background isn't really all that supportive, but it's very positive that they directed the budget creators to use fair value accounting and they also instructed the education committee to save, I think that was $20 billion. And a very easy way to do that would be to alter, for example, the Grad PLUS program. So supports the outlook for changes in the federal loan programs. But no, getting a bill together to attach that to looks certainly less favorable. I don't know, Ray, if you have anything to add?

I would just say that this will become most pertinent when the reconciliation bills come to ahead. Because they're in, we will see the confluence of, one, all the activities that's going on before; two, fair value accounting in regard to education, in particular; and three, some incentive to lower what's obviously an increasing deficit. And so at that particular time, we'll have our best chance to see whether or not a change can be dragged over the goal line. But as a standalone, let's just go to Congress and get this bill signed. I agree with Steve that the low probability -- but the reconciliation bill does require people to add and subtract items that are going to help or hurt the deficit. Fair value accounting helps out quite a bit in Grad PLUS, and those numbers will be those numbers. And so there will be some incentive to cut back on the Grad PLUS.

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

Steve, you mentioned $5 million of additional expenses this quarter. Do you view those as sort of onetime in nature? I'm just kind of curious how you think about those.

So, look, the jury is out on both marketing that we're doing. We want to see what kind of impact that has on loan originations, and it would look like there's going to be positive returns on investment there, we would continue to do that. However, that would not -- you wouldn't see that again until quarter 2 of 2018. In terms of infrastructure enhancements for expanding our pipes to deliver additional graduate student loan, for example, we do have some more expenditures to make there. However, that is very definitely baked into the efficiency ratio guidance that we have provided.

What percentage -- any way to frame the percentage of marketing cost within that $5 million?

Basically half of it. We ran a test case in 3 markets where we monitor our market share by school, by region, and we ran a test case in 3 markets where we were lagging somewhat our competitors. We still have a very substantial market share, of course, but we're always looking to be the leader. And if it looks like that those campaigns were effective, we again will continue in those campaigns in those markets and consider expanding to other regions.

Understood. And then, I guess, I'll ask a question on credit. You reiterated the 1.40% reserve to loans at the end of this year. I'm just kind of curious where that will pop out and maybe when. Not asking for guidance in 2018, but just kind of how do you view the normalized reserve level for this?

So it could continue to -- it will continue to grow for '18 and '19, and it could approach 1.5% easily, and it's going to depend upon the mix of, obviously, loans and flow into current principal and interest repayment.

So all-in, a reserve of 1.5% and then that sort of stabilizes from there?

You know what? Well, I'm looking at the next 2 years, yes, I would expect that to stabilize at that level. You didn't ask me for guidance, but I guess you got some.

Your next question comes from the line of [Josh Federman] with Pyro Capital.

My questions have been answered.

And there are no further questions in queue at this time.

All right, great. We'll turn the call over to Ray for some closing remarks.

Right. One is thank you all for your attention this morning, very much appreciate it. And we do, as I said earlier, we are grateful for people who have come to us with an open mind to say, "Gee, looks pretty good, some questions around the edge." Obviously, the consolidation will be an ongoing topic, but as you've also heard in perspective, it is not a large deal for us. And so as we wrap up this call, I will continue to reiterate, we have a fabulous franchise, it has a great future. Our customer satisfaction is the highest it's ever been. We are now being recognized not only for having a high market share, not only for being the most stable competitor, but also being the most innovative competitor by a series of people who review those things and do those in an unbiased way. Our results that you heard from Steve are very good and on plan. We expect to continue our growth trajectory, we expect to continue our high rate of return, and we have very bright future. Thank you for being part of it.

All right, 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 no further -- any further questions, feel free to contact me directly. This concludes today's call. Thank you.

This does conclude today's conference call. You may now disconnect.