SLM Corp (SLM) 2017 Q4 法說會逐字稿

Good morning. My name is April, and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter Sallie Mae earnings call. (Operator Instructions)

I will now turn the call over to Brian Cronin, Vice President of Investor Relations. Sir, you may begin.

Thank you, April. Good morning, and welcome to Sallie Mae's Fourth 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 discussions will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-Q and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation of GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2017. 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.

Good morning all, and thank you, Brian. Today, what I'll do is run through some of the performance indicators for the year, talk a little bit about the outcome and then focus on some of the trade-offs that we've made as we look at 2018, especially in regard to investments.

So as we start the income statement, when we think about volume first, the volume came in at $4.8 billion of newly dispersed private student loans, on target to our guidance, which had been adjusted back after the end of the third quarter. We did gain market share. Our acceptance rate by customers has remained steady. So if we approved them, they take our product at about the 81% level. We look at that as an indicator for both our pricing efficiency in regard to pricing elasticity as well as a competitive indicator.

Particularly gratifying is as we have moved through the year -- through the years, I should say, and thought about moving from one product to multiple products, the first step that we took, as you all know, was about 1.5 years ago we introduced Parent Loan. Parent Loan got off to a reasonable start on particularly high volume last year, about $31 million of disbursement. This year, it more than doubled to $77 million of disbursement, a delta increase of $46 million, which was fully 1/3 of our total increase in a market that did not have good growth characteristics this year. And so gratified that we are able to introduce new product, get it into the hands of the right people, good coordination between sales and marketing and the over 100% increase shows that maturation has occurred and is still in progress.

This gives us some confidence as we look to the next busy season and the introduction of the 6 graduate products that we've talked about. And so we're thinking that there's an opportunity and white space on all of these, the question is can we get those into the right hands and handle the distribution in a world where we think that our product is more than competitive with the current government offerings. As we look to next year, as you know, we expect total disbursements to go up from the $4.8 billion to $5 billion, about a 4% increase.

Second, we look at credit quality, which remains high, 747 average FICO. Our approval rates remain in the mid-40s. We are turning down more people than we are accepting. We are not looking for that last piece of volume, and we have kept a high quality both front end as well as portfolio, which we'll talk about through the morning. Our take rate here, as I said, remains at 80%. Always, in credit, one looks to see whether or not you're getting anti-select, we certainly are not.

Next is our NIM. So the pricing and yield of the portfolio for both our customers as well as their shareholders, at 6%, it's extremely attractive, very high level. The balance sheet is more efficient. We have multiple funding sources. We are -- we have a rich source of funding from a portfolio standpoint. We have improved cost of funds, and as Steve will discuss, that 6% looks to us like a fairly sustainable level.

Then when we try to measure the overall efficiency of the company as it's growing, and we'll talk about the growth characteristics, but think about 1/3 in terms of EPS each year, we use the operating efficiency ratio as a guide to make sure that we are within the guard rails and not being misled by growth. As you know, our efficiency ratio has a very attractive track record. Going back to '14 and through '18, we had 51% efficiency ratio in '14; 47% in '15; 40% in '16; 38.4% in '17 and we're guiding to a 37% to 38% number in '18. So over the course of 5 years, we have made continuous improvement on this particular measure, which we think is a key one for us.

In 2017, in particular, operating expenses were up 16.3%, big increase in expenses. Revenues, however, were up 20.2% and obviously the math of a fraction allows us to have an improved efficiency ratio, despite a 16% growth in OpEx, which is clearly warranted given the growth of the portfolio.

In regard to credit performance, we have steady performance. As you know, the delinquency improved from 2.6% at the end of the third quarter, which we discussed at that time, talking about some operating issues that we had over the summer as well as weather disasters that occurred in several areas of the country, but especially Texas and Florida, and so the ratio has gone down as we thought it would. Of course, it is lifted by the fact that the portfolio continues to mature and $2.5 billion of funding -- or $2.5 billion of receivable entered full P&I this year. And so the maturation continues, and as people get into that, we will see the delinquency move along with it. But the delinquency is right on our models.

In regard to both the efficiency ratio, the delinquency as well as the growth in the balance sheet, from '15 to '17, just a matter of perspective, the balance sheet grew from $15.1 billion to $21.6 billion, an absolute increase of $6.5 billion. The private student loan portion, as a subset of that, grew from $10.6 billion to $17.5 billion or an increase over 2 years of $6.9 billion. So the growth in the private student loan was 106% of our balance sheet growth, which continues to show the efficiency that we have over a period of time on a balance sheet, which is also growing from, when we spun, about $10 billion to ending this year very close to $22 billion.

All this comes out through the strainer of EPS. Our EPS story is similar to our efficiency ratio story, a very good and consistent one over time with excellent results. So that over the period from '15 to '16, EPS on an ongoing basis was up 36% from $0.39 a share to $0.53 a share. From '16 to '17, the next year, EPS went from $0.53 to $0.72, another 36% increase. And while our guidance is a range, were we to hit the high 90s even, let's say 98, that also would be a third 36% increase compounding over 100% over 3 years. Consistent, good levels and we expect to realize them going forward.

ROE, as we told you, is consistently in the teens. We had another good year with this. The increase in the efficiency in the balance sheet will allow us to maintain that high level of ROE even while the company is growing and diversifying.

In regard to regulatory relations. We have -- our chief regulators are the FDIC, the Utah Department of Financial Institutions and the CFPB. I'm happy to say we have very good relationships with all and we have shared our forecast for the bank and -- with the horizon over the next 3 years with our key regulators, both the FDIC as well as the UDFI. We're 100% transparent with them. They have been good partners, and on the regulatory front, we regard that partnership as a positive for us, despite the fact that there's lots of [carping] in the industry.

In a market frame, which includes the customer, the competition and evolution, I'm happy to say we're doing quite well. Our customer service continues to improve at dramatic levels, so that the customer calls per serviced account are down 30% in absolute terms from -- well, to say in per account terms, from '15 to '17. The calls that are required in order to bring an application to fruition have actually dropped more dramatically, down 40% per application while our customer satisfaction is going up. We will do 20 million customer transactions in 2017, 92% of them will have no human intervention. We are a highly automated, Internet-driven FinTech in that sense.

So as we look to the outlook then, we will continue. Our storyline over the last 4 years has been, first, separation; two, establishment of the company; three, refinement of that operating piece; four, growth; five, expansion; and now diversification. We ended this year with a strong market position. We have an extremely valuable customer segment, which we'll talk about. We have a very strong balance sheet, which has allowed us to venture into the purchase of personal loans from other originators, and we'll talk about that in a minute. We have proven delivery capabilities. We have [high] controlled growth, and the balance sheet has gone from $10 billion to the end of '18, approximately $25 billion. We have excellent margins and profitability. We have great customer service and improving. We'll be building on these years of success to realize a promising future.

As you know, the guidance is for EPS to increase from $0.97 to $1.01, for the private student loan originations to go to $5 billion and for the efficiency ratio to continue its downward trajectory, dropping from the 38 -- 37% to 38% range for next year.

In regard to this, a major change since the last call has been the tax change. Tax change has hit us very positively and it's a 14% reduction. It has allowed us to look at the growth in earnings as well as the ROE that are consistent with that more efficient income statement and to evaluate a series of investments within the firm. We've chosen to focus on 3. First is approximately $10 million in bringing our operating IT infrastructure to be more geared to the cloud. This is an ongoing migration. It's a new technology, as you all know. We're working closely with both the vendors as well as with our regulators to do this in a controlled way. The $10 million looks as though it has a payback to us of approximately $5 million going forward in perpetuity. And so, it will pay back in 2 years, and after that, if you look at ROE over a long period of time, you would see that the ROE on it is measured in triple digits.

Second, $10 million dollars to continue to expand the personal loan. Our personal loan has been an important feature for our customers. When we meet the customers and when they are 18 to 19 years old, actually 0% of the population has personal loans. But 5 years later, 30% of them have a personal loan. People use this. We are basically in the personal loan business because private student loan is a personal loan. It is particularly geared to a particular environment and a particular audience. Having said that, we have accelerated our thinking on the personal loan by using our balance sheet to invest in others' originations of personal loans. This has given us one year of experience this year, we'll have a second year next year, and by the time we're doing any serious volume in regard to personal loans, we will have had 3 years of market intelligence by virtue of using our balance sheet to give us the lens into the current market. And so as we look at that, we will have good returns over time. We will invest money this year. As you all know, what happens in any of these consumer businesses that are built on the credit side of the ledger is when you have a customer segment P&L in the first year, the acquisition costs cause you to be negative. In the second year, credit losses and maturation cause the profits to be negative. In the third year, we typically break even. By the fourth year, we're getting good returns and the returns usually last for several years thereafter. So these investments are being held to the same level of ROE scrutiny as our other activities.

The third $10 million, in the credit card business. We are not in the credit card business. So when we look at the personal loan business, we have an infrastructure and a customer service and a credit origination engine that can be leveraged. In regard to credit cards, it's a very different business. We will work with a partner there so as not to replicate fixed costs in a business that is already -- an industry, I should say, that is already over capacity. We will work our way through that this year. The same dynamics that I just alluded to apply here as well.

All three of these investments, we think, are very good. They have been made while we maintained our commitments to the shareholders: to continue to increase EPS at a very attractive rate, 36%; continue to originate loans and gain market share; and thirdly, to continue with a high ROE.

Having said all that, in a moment I'll turn this over to Steve, but first, it's a sad day at Sallie Mae. Yesterday, our longtime Head of Sales and Marketing, Charlie Rocha, passed away after a long battle with cancer. And so we're all stunned by his passing, grateful for his friendship and participation and struck with both admiration and inspiration to the courageous and highly -- high-quality life that Charlie led before he was taken away from us too soon.

With that, I'll turn the floor over to Steve.

Thank you very much, Ray. Good morning, everybody. I'm going to fill in a few more details around the quarter before we open it up for Q&A.

So we'll start with some details on net interest margin. Again, it came in very strong at 6% in the fourth quarter compared to 5.85% in Q3 and 5.55% in the prior year quarter. The net interest margin increased 45 basis points year-over-year, driven by the increase in the private education loans -- the percent of private education loans in our core portfolio, and we continue to manage cash reserves on the balance sheet more tightly.

The change in LIBOR rates, which increased the yield on our variable rate private education loan portfolio much more than it increased our cost of funds. These favorable drivers more than offset the 5 basis point reduction in our NIM due to the unsecured debt that we issued, which, of course, is more than offset by a reduction in after-tax preferred dividend expense at nearly 7% coupon on another line item on our income statement. NIM for the full year was 5.93% versus 5.68%, and as Ray alluded to, we think that the NIM can remain at or above the 6% level in 2018, which is a big positive for the company.

Looking at the other income line, we recorded a loss there of $21 million in the quarter compared with income of $4 million in the prior quarter and $13 million in the year-ago quarter. A lot of the noise goes through that line. In this particular quarter, the loss is attributable to the Tax Act as a result of the revaluation of our indemnified tax receivables with our old buddies at Navient. So this mark-to-market was $23 million. And unrelated to the Tax Act, we actually had a lapse of an uncertain tax position which went through that line item as well, in total the $9 million loss.

By the way, both of these items were offset in our tax expense line by a reduction on our tax expense, so they had no impact on EPS. But excluding this noise, other income would have been $11 million in the quarter. Despite the small size of that line, we do get quite a few questions from our analysts. So $11 million, which is pretty consistent with our quarter-in/quarter-out activity.

Fourth quarter operating expenses were $119 million compared with $116 million in the prior quarter and $98 million from a year ago. FDIC fees were up $1.8 million, a 32% increase. Excluding FDIC fees, core operating expenses were up $19 million or 20%. Roughly half of this expense increase was driven by volume. We still see big increases in repayment volume, which were up 19% in the quarter, and of course our portfolio is still growing rapidly. It grew 22% year-over-year. The balance was driven by our continued build-out of our personal loan platform, which Ray just discussed; our new graduate school products, which we think are going to be an important offering as we enter 2018; and investments in our brand and consumer experience to support not only our diversification efforts, but our core business where we'll continue to be the dominant player in the private student loan business and we continue to gain marginal shares in the market despite the competitive nature of that particular industry. So our market share was up to 55% as we measured in the fourth quarter.

The investments we make today are, of course, laying the groundwork for future returns from both our core student loan products and our diversification efforts.

A couple of additional points on credit. Ray mentioned that net delinquencies were very consistent with our expectations at 2.4%, down from 2.6% in the prior quarter. We also saw forbearances tick up to 3.7% from 3.2% in the prior quarter and 3.5% in the year-ago quarter. Delinquency and forbearance rates are very seasonable and they're high this quarter due to the size of the November/December repay wave that we see every year, and this year that repay wave was $2.2 billion.

Net charge-offs, very steady at 1.07%, down from 1.08% in prior quarter and up from 0.95% in the year-ago quarter due entirely to the seasoning of the portfolio, the increase.

Looking at another measure in net charge-offs. As a percentage of loans in full P&I, again very consistent there, they're 2.06% in Q4, down from 2.11% in Q3 and also down from the prior quarter, which came in at 2.08%.

So the credit story, no matter how we measure it, is very steady and performing exactly as we would expect it to.

Ending loans in full P&I are now at 7.1%, up -- 41% of our total loan portfolio. So as the balance continues to grow, our performance remains very steady and we view that favorably.

Provision for private education loans was $49 million in the quarter compared with $43 million in the year-ago quarter. And again, this increase was the result of $2.5 billion of additional loans in repayment in fourth quarter of '17 versus the prior year.

Allowance for loan losses came in at 1.4% of total loans and 2% of loans in repayment.

Allowance coverage ratio, very solid at 1.9x annual Q4 losses.

Looking ahead to 2018. The question always comes up, where's our allowance headed? We think that it'll increase slightly to 1.5% over the course of the year as the portfolio of loans in full P&I continues to grow.

Talk a little bit about our personal loan portfolio. We are purchasing personal loans, as Ray mentioned. And as you can see by the balance sheet, we're targeting roughly $100 million a month. At the end of Q4, we had $394 million net of loans on the balance sheet. These are high-quality loans, average FICO score of 722 and a debt-to-income level excluding mortgages under 20%. So very solid stuff.

Difficult to measure charge-offs and delinquencies because the portfolio is very young, but I'll give you an indicator, taking a look at delinquencies and charge-offs on the loans that we owned as of June 30. So holding that portfolio steady, what was the delinquency rate at the end of Q4? It came in at 1.5%. Cumulative charge-offs on that portfolio were 1%. So it is performing very well and doing exactly what we expect it to do.

We've got a few questions last night on the increase in the allowance for that portfolio. Story there is pretty straightforward. We thought it was a prudent thing to do to increase our loss emergence period from 8 months to 12 months, so that accounted for the vast majority of the increase in the loan loss reserve there.

Let's talk a little bit about consolidation activity, that picked up in the quarter to $209 million from roughly $150 million in the third quarter. Again, this is as expected. As loans go into full P&I, that is when people are incented to consolidate. That is what we saw happen in 2016, repeated again at 2017. The delta is declining, which is a positive, so we continue to watch that. Again, the rate of increase is very consistent with our prepayment forecast. What we're observing is the vast majority of prepayment activity occurs in the first and fourth quarters of P&I and then declines substantially after that.

Looking ahead to 2018, I'm sure I will be asked so I'll get out in front of that, I'm guessing -- I'm not guessing, I'm just forecasting that probably about $900 million of our portfolio will consolidate in 2018, and I will go out on a limb and suggest that, that number could be lower if interest rates continue on their current path. So we will watch that very carefully.

Turning to capital, the bank remains very well capitalized with a total risk-based capital ratio of 13.3% and a common equity Tier 1 to risk-weighted asset level of 12% at the fourth quarter. These ratios significantly exceed the requirements to be considered well capitalized, both now and after Basel III is fully phased in at the end of 2019. In addition, the parent company has excess capital available to the bank, which is an additional source of strength and that's not reflected in these numbers.

While we're on capital, let's talk briefly about CECL, a favorite topic in finance circles these days. The long story short here is we project that after the implementation of CECL, which, as a reminder, requires us to build a life-of-loan allowance, our capital ratios, particularly common equity Tier 1 to risk-weighted, which I think will become a more important measure as the amount of loan loss allowance you can include in capital, so that ratio, we project to be significantly above the fully phased in Basel III capital ratios that banks are required to hold. So very good outcome there.

Wrapping up. Ray mentioned the core ROA and ROE came in at 1.7% and 16.3% in 2017, solid numbers that are, of course, heading higher as we benefit from the Tax Act.

So that completes our prepared remarks, and we are more than happy to take questions now.

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

I guess, my first question's on the roughly $20 million you guys are spending on the incremental loan products. Could you just talk about maybe the specific returns you expect to realize over the next several years? And maybe how much growth we should expect in those asset classes?

Sure. The two are different. As I said, the personal loan is much closer to what we're doing now. The incremental costs are relatively low. We actually have the capability and are piloting loan offers and applications and balance growth while we are talking in a very limited sense. We expect that the returns on the personal loan business over time will be consistent with our other ROE efforts, that is mid-teens or thereabouts. The question as to how they will pay back over time is going to be somewhat determined in '18 because, as I said, it's not the ROE of a particular cohort that matters, the question is how large do you want this effort to be. And as you add on additional vintages, which have high acquisition costs in their first year and losses in their second year, the weighted average of the entire portfolio will be dependent upon the expansion path as well as the terminus point. Suffice to say it, though, that on an account-by-account basis, we expect the returns to be positive by year 3 and we expect them to be consistent with our other ROE, that is mid-teens over a period of time. The growth, I don't want to get ahead of ourselves now. We are appropriately testing and we will be bound by cost-benefit associated with that. And as I indicated and Steve said, we have $400 million of personal loans on the books already. So we have a very good lens into the current pricing elasticity and the current credit market for those so that we won't be quite as na?ve going forward in personal loans as we would have been had we not had that exercise, which is actually accelerating our learning about the industry by 2 years.

Okay. And then maybe a question on the consolidation activities. Steve, thank you for all the color you provided in terms of your expectations for this year. But I guess what is happening still is that the rate of the consolidation seem to be increasing even when you look at the ratio of loans that are in repayment, right, so consolidation and loans in repayment. At what point does that ratio level off? Because it seems like you guys have talked about how there's diminishing returns for your competitors, but it's still happening at quite a brisk pace. Your guidance suggests that we have this tax benefit that could also help the economic equation for your competitors. Can you just talk about that a little bit?

Yes, sure, Sanjay. So obviously, we have a lot of information on what's going on in the world of consolidations. But in terms of the rate of change, so we just had our biggest ever principal and interest repay wave go through. And in the fourth quarter, 60% of our consolidations came from that repay wave and roughly 10% came from the 2015 wave. And our future repay waves are going to be pretty big relative to our total P&I portfolio, but I do think we are at the point where it is going to start to tip over and level off. Now the interesting thing is, and I know I probably said this 3 quarters ago and you can say, well, McGarry, so far, he's been wrong. When is he going to be right? Consolidations is very much an interest rate play. People undercut current market-based interest rates, consolidate the loans and fund them in the wholesale markets and move on. So we have seen a continued increase in base market rates. I think they're up another 20 or 30 basis points since the middle of December. So it is going to start biting, I think, our competitors who have not raised their rates yet. Now what I will share with you is there's probably half a dozen people that consolidate our loans, and they go from FinTechies to real publicly traded companies that have return requirements and so on and so forth. What we are seeing is the pace of consolidation from publicly traded companies that have to answer to shareholders and produce returns is leveling off and declining, as I would expect it to given the funding markets. The FinTechies are still charging forward. We'll see where it all plays out. As the portfolio matures, even if the FinTechs continue to consolidate, they are after a very particular segment of our portfolio and the activity curtails very quickly. So we should see the impact decline over time even if they continue at their current pace.

Okay. And then a final question on originations. When we think about the 4% growth that you guys are estimating, how much of it is growth in the market versus market share gains?

It's about evenly split. Market should grow 1% to 2% and we should pick up market share of 1% to 2%.

Your next question is from John Hecht with Jefferies.

I guess just a little bit of clarifications from one of Sanjay's questions. For the $20 million to $30 million -- well, $20 million of investments in new products, but $10 million of incremental expenses in technology, for this $30 million of incremental expenses this year, do I look at this as a onetime kind of project that will go away the following year and you'll start reaping the benefits of these in the following year? Are there other projects in the following year that replace these? And really asking this just in the context of trying to figure out how we kind of think about the efficiency ratio through 2019.

Sure, John. And we had the opportunity here, and as many of you know because you've been following us for several years, we've often thought that we have an opportunity with our customer base to do more business with them and they certainly do buy lots of products. So that, for instance, in the credit card business, when we meet our customers at the age of 18 -- actually, coincidentally, 18% of them have credit cards at that time, usually a name signer on a household card. By the time they're 27, over 90% of them have credit cards and we're with them during that period and we think that there's a very attractive change in their lives that we are present for and that we have not taken advantage of. Having said that, in regard to your question about the $30 million, what we did was when we looked at the tax change, we said here's an opportunity for us to accelerate our diversification while still having a 36% EPS growth for the third year in a row and maintaining high ROEs while lowering the efficiency ratio. So there's no doubt that the tax return -- the tax change allowed us to move more investments into 2018 than we had previously thought about. And so when we looked at those, we took a full inventory of investments around the company as to which ones would qualify from an ROE standpoint and ended up with these three. The nature of the infrastructure in the cloud is an ongoing efficient operating platform, which will continue. The nature of the other 2 investments is to get started in -- with new opportunities that we think we have every right and legitimacy with our customers to offer them additional products based upon what we think is good customer service and a good product offering to begin with. Having said that, these are not to be followed in queue by 3 or 4 other investments the following year in '19. So in answer to your question, there's not a line outside the door of which we did a cutoff at $30 million and we have another $30 million in mind for something new and interesting in '19. So this is the beginning, middle and end of this type of $10 million investment, we believe. It was accelerated into 2018 by virtue of the tax change. We believe it allowed us to keep a consistent record with the company and the shareholders, while at the same time accelerating diversification, which we think will accelerate the benefit associated with that. In regard to the other 2 investments, credit card and personal loans, there are very small revenue dollars associated with them in '18, and naturally as those portfolios mature, they'll be higher revenue and the cost will move along with it as we go to a 3-year cycle on moving from acquisition to profitability with customers.

That's very helpful, appreciate the color. Second question, your loan -- or excuse me, your deposits to earning assets have been very stable in the 90% to 91% range. Should we think about funding this year with a consistent deposit base? And maybe can you guys give us an update on how you see the deposit beta kind of as we stretch through the year?

Sure. So look, our approach to funding is not going to change. We will continue to grow our deposit base and we will continue to access the asset-backed market as a means of extending the duration of our liability portfolio. You can think about it as sort of an 80% deposit, 20% ABS funding model. We'll be more opportunistic when opportunities do present themselves. In terms of our deposit beta, we like very much what we're seeing in the money market deposit product. We're actually funding at LIBOR less 10 as opposed to LIBOR plus 30 to 50, which we do on some of our other products. In terms of the beta, it has turned out to be better than we expected. We penciled in something along the lines of an 80% beta and I think it's got a 40 handle on it.

Actually, Steve, we started at 1, we dropped to 80 and now we're down to 40.

So the retail deposit market, also known as the Internet deposit market, is performing very well. It's where people with deposits go to shop and we're able to access deposits very efficiently without spending a whole lot of money on marketing, et cetera. So we like what we see there.

Your next question is from Steve Moss with B. Riley FBR.

I was wondering if you can just give us some color around what your expectations are for fixed versus floating rate originations this year? And what are you thinking the potential pricing for fixed rate loans is?

So look, we saw in the peak season, I think, 45% of our borrowers took fixed rate loans. That is up from the high teens, call it, a year ago and that was a pretty consistent level. We will price our fixed rate loan product in the spring. I have no reason to believe at this point in time that based on what I see in terms of cost of funds and spreads that the price is going to increase significantly. We're probably looking at maybe a 30 to 40 basis point increase as we sit here today. I think the average yield on our fixed rate product is 9.5% today, and you compare that to our average spread to LIBOR on the variable rate product is around to 7.25%, 1-month LIBOR at 1.5%, so they're roughly similarly priced products today. They weren't a year ago. So that the yield curve flattening has incented a lot of people to go into the fixed rate. We'll continue to obviously watch that carefully and see how it plays out.

Okay. And then with regard to the personal loans that you're originating and purchasing, what is the structure in terms -- or the term here? Is it typically 3 to 4 years? Or is it longer than 5?

It's about 60%, 3 years; 40%, 5 years. It might be closer to 65%, 35%. The 3-year product is a lot more popular than the 5-year product. We look at it as a weighted average life of under 2 years, 1.8 kind of years. So it's a short-life product.

Okay. And my last question with regard to the $5 billion in originations you expect for 2018, does that include graduate loan originations?

Yes, it does.

Any color on...

We think the graduate loans -- I should say we think graduate -- just to give you flavor for the pathing on that, we think -- we do some business with graduate loans today, but it's relatively minor. We've developed 6 tailored products for graduate, a couple in medical and health along with MBAs, legal and other. And so as we look at these, we think that the current state of play in that market is heavily dominated by the federal government's Grad PLUS loan, which has a 4.1% origination fee associated with it and a 7.1% APR. And so we believe that, that is way off market and we can actually price in lower total cost per loan to this target audience. Having said that, the graduate schools are, as you know, many, many small ones, and the uptake rate on this requires a reasonable amount of education and a financial aid office in the graduate space that is not identical at most schools to the undergraduate space. And so we want to be conservative in our pathing to maturation. We think this has great long-term prospects and we just don't know exactly what the take rate will be in the opening season. As I said, when we introduced Parent Loan, word-of-mouth got around relatively slowly and in the second year we doubled the volume associated with Parent Loan. We expect to have a similar slow uptake rate and then ongoing high rates of compounded growth for the grad products.

Your next question is from Arren Cyganovich with Citi.

I know this was already asked. But the question of the $30 million, how much of that is going to be recurring after this year? I'm still not quite clear on the ongoing spend of that $30 million going forward.

Okay, there are 2 questions inside of this, right? So the previous question, not identical to the one you're asking, Arren, was after these 3 -- at least the way I understood it, after these 3 efforts of $10 million, $10 million and $10 million, is there a queue after that of another 5 efforts that are all $10 million as well? The answer to that was no, as we said. A separate question is within the areas that we're talking about, is the $10 million associated with each one of the 3 investments a repeatable number or will it grow over time? The answer is it varies. So the first $10 million, which is related to infrastructure and IT, will not be repeated next year or -- next year being '19. The other two may well have increase in expense base, but they will be offset by the revenue, which is 0 in '18 for all practical purposes. So we may spend more money on personal loans in '19, but the net contribution of the activity will be muted by the fact that we expect to end 2018 with a portfolio of approximately $300 million.

Okay, that's helpful. And the -- thinking about the diversification efforts, you talked in the past about taking a very measured approach to this and now we're talking about accelerating the investment here. Can you talk about balancing those two? Because obviously people get a little bit more scared off by new personal loan products and credit card products with respect to the loss expectations of your student loan business.

Sure. Okay, Arren, yes, thank you for taking this up. And so as I said, these are two -- let's take the IT and put it on the side, now we'll talk about the personal loans and the credit cards, all right. The personal loan is very different from the credit card for us because, as you know and as I stated earlier, we are in the personal loan business, right? We have a portfolio that is a personal loan. It is unsecured. It has a 6- to 7-year actuarial life and we are in this business to the tune of about $18 billion. We take the specifics associated with the student loan and we turn them into different parameters for the nonstudent personal loan. So it makes it easier for us to have a lower infrastructure cost in the delivery of this. It also fits quite nicely with some of the credit models that we already have. Having said that, we are cautious about this, which is why Steve initiated the purchase program of personal loans in the first quarter of '17. And as he said, we have a reasonable portfolio as of 6/30/17 that will be 2 years old by the time we're talking about adding any volume. And we will work our models both internally as well as in parallel to that external experience in order to mitigate the risk that you're addressing. And so it'll be on a cost-benefit basis. 2018 will be a year of experimentation. We will, as we go into '19, refine from both the marketing acquisition cost standpoint as well as a credit loss expectation standpoint what we're doing in personal loans. Credit card is following more slowly, all right. So that project is not quite where the personal loan business is, where, as I said earlier, the ability to deliver the personal loan that we are talking about to the general market is extant as we speak and we are originating loans. We are doing our first mail drop of 300,000 pieces within the next 10 days and we will start learning about that. Credit cards, we are in the process of working through our relationships with a couple of partners. We will not build an infrastructure in regard to that, and we will probably have our first credit card offer in the field in the first quarter of '19. So then we will take in '19 a year of experimentation and then build that portfolio against the same ROE guidelines that we have for everything else we do as we go forward.

That's very helpful. And just, I guess, lastly, the PROSPER Act, maybe some thoughts on how that might progress through the year, potential for it to get done, that's always a dangerous thing to talk about. And then the thing that, I guess, was surprising to a lot of folks was that the discussion of increasing loan limits on the undergraduate side, if you could just kind of touch on the PROSPER Act?

Sure. So Arren, just for clarity, the PROSPER Act was the Virginia Foxx-proposed legislation to reauthorize HEA, all right. So I'll -- since I started out, I'll continue and then I'll give Ray a chance to add. So we do not believe that as Congress sits here today, that the PROSPER Act has a lot of chance of being -- has a high probable chance of being picked up in the Senate as well and passed. However, in the PROSPER Act, we do like what we see. It curtails Parent PLUS and Grad -- eliminates Grad PLUS. It does increase undergraduate and graduate Stafford loans. But as we measured it, it would expand our addressable market by 30 to -- yes, 30% to 50%, so $3 billion to $5 billion. So it would be a big positive should it be enacted.

Yes, the one thing I would add to that is forecasting in regards to what goes on in D.C. is obviously a fool's errand, and so we don't have anything associated with this opportunity baked into any of our numbers. And having said that, we want to -- when an act occurs, were it to happen all of a sudden as, let's say, the Tax Act occurred in the fourth quarter of this year, we don't want then to start to take advantage of what we think are likely outcomes. So as you may recall, in 2017, we spent an additional $7 million on projects we referred to as [Nike] that anticipates the growth that Steve talked about in such a way that our capacity, while we're sitting here, can accommodate that 30% to 50% increase in volume. We did spend the $7 million, it's done, and we have the benefit of having a stronger platform. It is leverageable in the anticipation of that act. So we believe we have the, in some sense, expense covered and the opportunities in front of us and we'll see what happens with that.

Your next question is from Moshe Orenbuch with Credit Suisse.

So to put that $30 million in perspective, it looks like just over 1/3 of maybe the tax savings. How should we think about that use of the tax savings kind of longer term after that $30 million's been invested?

Well, I think we should think about the tax as part of the woodwork at this juncture. And of course, you're right, if we would just do the simple algebra on what had been, I think, in everybody's model as a previous thought for 2018 for EPS, I think we'd call that some number like $0.85 and then you just lay on the 14% delta in the taxes, you would come, 1, 2, 3, here we are, $1.05. The delta between those is about $85 million pretax. And so it is the case that we invested about $30 million of the $85 million, so your number is approximately correct. Going forward, we will take the Tax Act as given and we will keep ourselves within the same parameters that we have consistently promised to shareholders and delivered upon over these last 4 years, which include healthy EPS growth, and as I said, 36-36-36 for the last 3 years, has been very impressive. We expect that to moderate, but still expect to be way over others so far as that pathing on EPS, have ROEs that are consistent with what our ROEs have been the last couple of years, which, as you know, as Steve said last year, was 16%. We expect that to be at or higher than that as we go forward. And to continue to improve our efficiency ratio so that shareholders can gain some comfort that while we're expanding our operating base, we are doing it confident, in fact better than the growth in our revenue. As I said last year, revenues grew by 20%, expenses grew by 16%. 16% is a big number, but 20%, of course, is its guiding light.

Great. And I guess that -- your expected tax rate for this year of 26%, are there things going on in '18 or uncertainties that have -- that would make that -- it's a touch higher than we might have thought it would come out based upon your kind of state and local tax burdens before. Are there any other things in that number that would change in future years?

Yes, there are some. Steve, why don't you walk through a couple of them?

Well, so Moshe, we're at 21% federal and our state has been running between 4% and 5%, so 26% seemed like a good place to start. Could it come in at 25%? Absolutely, positively. We just began our efforts to build, for example, a low-income housing tax credit portfolio and make other investments that will ultimately bring our tax rate down to the enviable level that JPMorgan talked about, a 18% or 19% tax rate. That is an aspiration. We certainly want to head in that direction. But it takes -- it will take quite a while for us to complete such a journey.

Understood. And then the last question for me is reacting to your $900 million comment and -- more asking about how do you think about that level? Is it at a level where you think that you don't need to kind of do anything from a defensive standpoint? Or is it something -- is that something that you are planning to put in place in '18 or '19?

So thank you for bringing that up. We are basically building the infrastructure, altering our systems to put us in the position in the second quarter to start to offer consolidation opportunities to our borrowers as they call in and talk about such things. And we do get a heads up obviously through our very effective and efficient call centers. On the drawing board, right now as we speak, was to offer a product that extends term and leaves the borrower with the same coupon payment. Given the results of the Tax Act and things that are going on in the market, if we're able to sweeten that by lowering the interest rate...

Depending upon who the borrower is.

And yes, obviously depending upon the circumstance of the borrower, and maintaining a healthy ROE, we will bring that as well. But we will be in a position in the second quarter to start to be much more defensive and proactive on that front.

Moshe, one thing we ought to mention, and Steve alluded to this, that our customer service, as I said a couple of times here, has been upgraded not only in the service that it provides, but in the MIS around it. And we have a facility, which is called Call Miner, and it allows us to search every conversation that has happened in our call center. And so we are in the midst of modeling, right now, anyone who calls and mentions interest rate change, consolidation, getting a different loan, and it's an interesting analytic piece which will allow us to target individual at-risk customers from the standpoint of consolidation in such a way that we don't put our NIM for the entire portfolio at risk or are responding with a meat cleaver when a scalpel is called for. And so that's a work in process. As Steve said, during the second quarter, we expect to execute both on the targeting associated with it as well as on the counteroffer in the product sense.

Just one final point. I'd be remiss if I didn't add, no level of consolidation is acceptable, but obviously we have to balance the ROEs on maintaining versus retaining.

(Operator Instructions) And your next question is from Mark DeVries with Barclays.

In the past, you've talked about an efficiency ratio targeting kind of the mid-30s longer term. But if we take the guidance today of 37% to 38% and back out that $30 million in incremental investment, it would appear you actually would be there in '18, kind of ahead of schedule. Is that a fair statement? And if so, can you just talk about what's driving the kind of better-than-expected operating leverage? Is it your upside to the NIM you've experienced, better expense management or something else?

Thanks for the question, Mark. And it is true that we're continuing on a landing path that has mid-30s in mind. It's also true that without the $30 million in investment, we would be approximately 35% in '18. It is true, however, though that as we think about the net present value associated with the franchise, that the investments are, in one sense, optional, that is our introductory products; in another sense, they're defensive because as the portfolio naturally liquidates, forget about the consolidations for a moment, we are paying a high acquisition cost for these customers and we are bereft of the ability to offer them additional products, which we know they will buy from someone else. And so in order to both capitalize on the portfolio that we have and the position we have with younger people as well as to mitigate any loss in balances and therefore revenue associated with them, we view the $30 million and especially the 2 20s for the product increment as part of the maintenance of the franchise. And so there will be ongoing investment in any business, but you're absolutely right that the pure (inaudible) any significant amount in this business, in 2018, efficiency ratio would have been 35%. So we're capable of delivering that. But we don't think it's in the interest of the shareholders to deliver that because we think it too much compromises the future and then one day may force us to be acting in a reactive mode, which would put too much at risk. We'd much like -- we'd much prefer to be able to invest in a leisurely way in the sense of gathering intelligent information before we bet any significant dollars, and we think this is, in fact, both the warranted path from a defensive standpoint and optimal path from an opportunity standpoint and a prudent path from a trajectory standpoint.

Okay And then, Steve, I was hoping you can give us some of the assumptions behind your NIM guidance in terms of rate increases and also deposit betas and kind of upside to that guidance if, in fact, your betas tend to be lower than what you've been assuming.

So in terms of rate increases, we basically pretty much follow the [euro-dollar] curve and we have 2 additional rate increases baked into 2018. Our beta is -- our expectations on the cost of our $3.5 billion of retail money market deposits is that they will be north of LIBOR as opposed to south of LIBOR, so there is some upside there. The other moving pieces are pretty steady. Well, we will see some improvements in ABS cost of funding if the market remains where it is right now, although we don't plan on issuing until early spring and then again in the fall. And the broker deposit market has been pretty steady. So if there's upside, it comes from -- the component of [our] funding comes from the retail deposit market.

Your next question is from Henry Coffey with Wedbush.

A couple of questions, and I just didn't understand it. The 8 to 12 -- the shift from an 8-month to a 12-month loss emergence, can you just explain that to me?

Sure. So a key component of your loan loss allowance is how many months of losses are you reserving for. In our private student loan, we maintain a loan loss reserve for 1 year of expected losses. In our personal loan, as we started acquiring and [followed that] with introducing them, it's a shorter-lived product and typically losses do emerge much quicker in that product. So we initially went with an 8-month loan loss -- a loss emergence period. So we were reserving for 8 months as opposed to 12. As we assessed our accounting and credit policies, we thought that it would be prudent to extend the 8 months to 12 months. It does not change whatsoever our outlook on losses for that product. If anything, it front loads the credit expense, and once you get through the peak, the peak loss period, you basically are earning more as opposed to less on the product, if that makes sense.

Yes, and then on the consolidation loan, a lot of other people are looking at it as sort of a total customer value so -- and I'm just going to make up some numbers here. If a customer has $8 million worth of loans with Sallie Mae, maybe they have $20 million of total student loans. And the refinance rate is not what you want, but you just theoretically could double the size of your business with that particular customer. Is that how you're thinking about it? Or is it just purely defense, defense, defense?

I think there's an opportunity both ways. And so one is increasing the balances of the current customers, the other is protecting those balances from their being stolen away. And so we have been, as I said throughout this conversation, yes, pretty much a 1-note sort of dispersed to the college. That's the only way we're doing things. And recall that while we are in the personal loan business or the unsecured personal loan business, our product is quite unique, as they say. And so it is for undergraduates. For the most part, it is dispersed to the school, 100% of our balances originated that way. And as we think about the next several quarters, as Steve mentioned, we're looking at change in terms with a focus on cash flow for consolidation and defensive purposes. Clearly introducing the personal loan, which is unfettered from the schools, will give us much more flexibility in being both defensive as well as offensive. And yes, we do look at the total relationship with the customers, which is how we reached personal loans and credit cards as our 2 areas of diversification.

And then, finally, I know you don't want to predict on the political front, but is -- if the PROSPER Act is not the final form, is it logical -- is there something compelling Congress to do something this year? Or is it just they'll do it if they want?

HEA reauthorizations have been kicked down the road 5 and 6 times in the past and I don't see any reason why this year could be any different. And there is nothing urgent in the HEA that needs reauthorization at this point in time. So that can continue to roll.

I think that's true. But the obvious poor performance of the federal portfolio with 40% delinquency rates and tragic losses that are involved in that, which actually can ruin students' lives, will over a period of time cause people to, one, look at that program and therefore make some changes to it both in its original underwriting as well as in the limits that have been mentioned as well as in whether or not the federal government should be subsidizing Parent PLUS and Grad PLUS, which is a position many people disagree with. But I do think it's the constant drumbeat associated with the $1.4 trillion portfolio that will drive them to act, but it will not be a "Gee, we have to do it by midnight on Saturday" type of act. It'll happen over time, it will gain momentum.

Add one more thing to that. If there is, in fact, a budget reconciliation bill at some point in time in 2018, the HEA reauthorization could actually be passed given the current composition of the Senate.

And it has a positive impact on the deficit, so it's helpful from that standpoint.

Your next question is from Michael Tarkan with Compass Bank.

I know it's getting late, so I'll be quick. Just on graduate loans, can you just remind us what percentage of the overall graduate market do you think hits your credit box? And then I know it's going to start off slowly, but just big picture, if Grad PLUS is a $10 billion program per year, is there any reason to think the private market couldn't originate 30% to 40% on an annual basis once you're fully up and running?

No.

Okay. And then in terms of the percentage of sort of underwritable loans, sort of in that sort of 40% to 50% range?

Yes, I think so. We've looked at this not with the amount of detail that would be required to have a credit model, but we have looked at the overall piece and we think, yes, 30% to 40%, consistent with our current approval rate, would be appropriate. The backdrop of your question is do we think it's a big opportunity? Yes, we do think it's a big opportunity.

Okay. And then just competitively, you talked about picking up a couple more points of share, I know Wells is in contraction mode, but how sustainable is that? And are you seeing any recent entrants heating up a bit more and getting more aggressive in the in-school channel?

Yes, sure, Mike. As we look at that, and we have a full listing of who the competitors are -- and as you know, the market is still somewhat oligopolistically structured with their sales in Wells and Discover. Those shares, even though Wells is in contraction mode, it has such a great distribution that their portfolio hasn't suffered as much as it would for the long-distance providers such as ourselves and Discover. So there's more inertia in the nature of their business. Having said that, as we look at the tail, the amount of originations that are done by the last 10 or so competitors remains very much a small percentage. We don't see anyone gaining market share of anything that would be measurable above 0.2% kind of thing, and so I think the industry right now is relatively stable.

Your next question is from Melissa Wedel with JPMorgan.

Melissa for Rick. Again, I'll be quick on this. The pace of the $30 million investments in 2018, do you expect much of that to be front-end loaded or fairly evenly distributed throughout the year?

We think that the $30 million has 3 different dynamics to it and I think it's -- a rough approximation would say about balanced through the quarters.

And your next question is from [Anne Masic] with Rose Grove Capital.

Can you quantify what a continued rise in 1-month LIBOR might mean for your earnings? It went from 1.25% to 1.55% in Q4. And can you just give me a sense for what the impact might be for Sallie Mae earnings if it reached 2% in 2018, which is a pretty conservative market estimate at the moment?

Sure. Steve?

Yes, I think in our interest rate sensitivity disclosures, we showed that our earnings will increase roughly 2% for a 100 basis point shock in interest rates. So it's basically not a material increase, especially the way it's mapped out to happen.

But [Anne], if we had -- we had this bracketed, and so at one end of the bracket was the 100 basis point instantaneous shock, which Steve references, and the other is the increases that Steve mentioned earlier, which are more gradual. And as you heard him say, we're at a 6% NIM and we expect that level to continue through '18. So the gradual piece is answered in that comment at the 6% NIM and the shock piece is positive, as Steve says, but I think that brackets the question.

Okay, perfect. And then I know this is -- I've asked this before, I'll ask it again, whether or not you have any plans to instate a common dividend?

You can keep asking and we will continue to have the same response, which would at least be appropriate, that we think at this juncture, based upon what we see in the business today and for the foreseeable future, and we have forecasted out 7 years when we looked at this, we believe that our shareholders are better served by our reinvesting all of our profits into the company as we have done the last 5 years.

And there are no further questions at this time. I would like to turn the call back over to Ray Quinlan for closing remarks.

Okay, thank you very much. Thanks for all the questions and they've all been helpful in teeing up more precise responses to particular areas. As we end, I want to thank everyone for their attention and obvious work that has been done to know the business so well. And just to remind that this is a wonderful franchise with a strong market position, a highly valued customer segment. Our strong balance sheet continues to have unanticipated benefits for us, of which the personal asset purchases are just one piece of that. We do have proven delinquent -- delivery capabilities at this juncture, having doubled the size of the business in 4 years while maintaining good control and having good relationships with the regulators. Our controlled growth from $10 billion to $25 billion over that period as far as our balance sheet is concerned is a very impressive compounded growth rate. We continue to have excellent margins, profitability and good returns. We continue to improve our customer service. And we expect that over the next 3 to 5 years, we will be building on these last 4 to 5 years of success to realize a promising future. So thank you all for your attention, and look forward to 2018.

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

Thank you for joining today's conference call. You may now disconnect.