SLM Corp (SLM) 2018 Q4 法說會逐字稿

Good morning. My name is Sedarius, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae 2018 Fourth Quarter Earnings Call. (Operator Instructions)

Thank you. Mr. Brian Cronin, Vice President of Investor Relations, you may begin your conference.

Thank you, Sedarius. Good morning, and welcome to Sallie Mae's Fourth Quarter 2018 Earnings Call. With me today is Ray Quinlan, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions.

Before we begin, keep in mind, our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future 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 in the company's Form 10-Q and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2018. This is posted along with the earnings press release, on the Investors page at salliemae.com.

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

Okay. Thanks, Brian, and good morning to everyone. It's a pleasure to talk to you today about a great quarter for Sallie Mae. We had great results in the market, we had great results on our margins, we had great results in risk management. Sales growth of 15.6% in the fourth quarter outpaces both our previous experience as well as the market, up 10.7% for the full year, represents our best performance ever in absolute dollar increase and a market-leading growth as well as reflects the fact that we gained market share once again.

We'll talk in some more detail about how that occurred, but the overall results are excellent. Our credit performance continues to be ahead of our expectations as the portfolio matures. I'm sure there will be ups and downs in regard to that, but through 2018, we did better than we would have thought so far as losses. We continued to enhance the franchise. We have increased segmentation, several different market offerings, and the segmentation segments are growing at twice the rate of the existing market, reflecting the fact that by adjusting ourselves from a broad-based single solution for most problems to fitting our solutions around the customer, we're getting better results.

The EPS at $1.07 versus $0.72 normalized last year is a 49% growth rate. Obviously, we think that's terrific. And the ROE at 20.2% reflects the fact that we're getting not just good growth, but also excellent returns. We, this quarter, of course, announced the capital return program initiating, with a dividend of $0.03 a share per quarter, $0.12 for the year, approximately 440 million shares outstanding, $53 million. We start the dividend, and we expect it to continue as far as the eye can see in perpetuity. And so we think this is not a onetime deal in our intentions, and we expect that to just become part of the woodwork.

The buyback of $200 million was announced, we'll talk about that in more detail. And that reflects our overall modeling, both for the core business as well as the impact of CECL, starting on January 1, 2020, as well as excellent relationships with our regulators.

So in summary, welcome to the next chapter of Sallie Mae. For those of you who've been with us since the spin, you know we have had 3 chapters, the first of which was launch and establish, which was 2014 and '15, during which time, we spent most of our time setting up the company, improving regulatory relations, which were horrendous when we split and getting the business to a point of self-sustaining. Then, as you know, we had an undersized balance sheet. So we had extraordinary growth in '16, '17, and '18, compounded 40% increase in EPS, part of which was good performance, part of which was filling up the balance sheet to be of a commensurate size with the originations engine.

Now as we enter the third chapter, we hit a balance. And so the balance will have good growth, high-quality earnings and we will be generating capital. During the first 5 years, we were capital consumers. And as we model things now the ongoing business, even in the face of CECL, we'll be a capital generator, and we will allocate that capital rationally as you can see.

Going through some of the results in a little more detail. The student loan disbursements, in the fourth quarter at $733 million, were $99 million higher than the prior year, 15.6% growth and the increase overall from last year's 4.8 originations to this year's 5.3% at $515 million is a significant number for us all by itself. We continue to improve our customer performance. We continue to expand chat, chat box. Our overall satisfaction for these type of activities at the margin is running 96% and 85% for online application. We have fewer false starts, we have higher customer satisfaction, and we're lowering the cost of servicing.

While we're expanding this volume, it's important to note that credit quality has remained consistent. As you can see in the numbers that we published, the FICO scores are identical to the prior year, the co-signed rates are also identical. Co-sign rates will vary depending upon the segment, so that some schools, distance learning, for-profit schools have lower co-signer rates, because the students are typically older and can stand on their own from a credit standpoint, do not need the support of a second signer. Impressively, our NIM at 6.11% is a number that we continue to be quite proud of. And as you know that from the 2, 3 years ago where the number was 5.7% despite noise, despite increases in receivables and despite increases in interest rates, our NIM has continued to march on up and at 6.11% we're quite happy with it.

Our operating expenses at $146 million in the quarter were up from last prior year's $119 million. You all know that, that was an increase where we decided to make some investment funded in part by the change in the tax law and specific expansions and improvements. I'm happy to say that at this point the cloud migration, in particular, is 99.8% done. So as we enter the year, we have greater capability so far as the expansion of our core capacity as well as flexibility within that.

The efficiency ratio, as you can see in our guidance, continues to march on down despite these investments and enhancements. Credit performance, as I noted earlier, is terrific. We had 1% write-off in the quarter, down from 1.07% the prior year, and we continue to both manage that very closely as well as be happy with the results.

The overall expansion in the balance sheet, which had ended the year at $26,638,000,000 is 22%. You note that we have funded that in a stable and conservative way, still getting good results on NIM with no surprises from anyone either on a capital side or on the funding side. Our risk-based capital rate, despite our high-growth, is excellent at 13.3%, up from last year's 13.1% and reflects the capital generation, which I mentioned.

So the ROE at 20.2% gives us quite a bit of satisfaction in regard to, one, it as a stand-alone point, but, two, is the point of departure in modeling our financial results for the years ahead, which also allow for the capital return.

Of note in passing, our regulatory relationships, which also are reflected in the approval for that capital return are excellent with the FDIC, the UDFI and Utah as well as with the CFPB.

And so as we turn to the market frame, customer, competition and the evolution -- its continuing story. And as we said, our customer satisfaction rate is high, our market share continues to improve, our segmentation is multiplicatively more tailored than it was 3 years ago and we have had good results all through. Competition appears to be both capable, and [folks like discovering wealth] as well as rational, which is a good circumstance for both us as well as for our clients.

The outlook, as you saw in the guidance, for EPS $1.22 to $1.26, originations at $5.7 billion and the efficiency ratio at 35% to 36% represent in some sense no surprises, continued good performance, with an increased emphasis on balance, which as you see the capital return program, which we started today, we expect to continue as far as we can see.

And so in closing, I just want to reinforce certain points. One is that the student loan business is a fine business, satisfying an important need for middle-class families in the United States. It is consistent, it has consistently grown, it is a need that is increasing. There were hundreds of articles about the training required for younger generations to meet the needs and the demands of the next 20 to 50 years of working. And so it's a good business where we satisfy a true need at a fair price. Within that industry, we are a unique asset. We are the most recognized brand. We have the largest sales force. We have the best relationship with the schools. We have great regulatory relationships. We have an advanced digital platform. And we offer the best service in the industry. On top of that, we have conservative funding. So we're there consistently, not in and out depending upon what happens at the Fed.

Our core earnings power, as you can see with the 20.2% ROE, is very good. The third chapter of balance will be our story going forward. We have a strategic returns-based and returns-focused management. And so for the first time, you see that as we enter this next chapter, we will allocate money to the company for improvements, for our service and our product offerings as well as to return it to our shareholders as appropriate given our regulatory requirements. And so with those couple of remarks, I want to thank you all for attending. Welcome to the new chapter of Sallie Mae, and once again, thank you for your attention. And I'll turn this over to questions, I guess.

(Operator Instructions) And your first question comes from Michael Kaye from Wells Fargo.

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

Sure, Michael. So good morning. Good question. We layered in the share repurchase $50 million a quarter across the year at a price of 10.5%.

$10.5.

I'm sorry, price of $10.5. So there is a variable #1. The impact to the guidance on EPS was $0.03 a share. And look, clearly, the impacts that can move us to the top range or the bottom range of that forecast are all the usual -- operating expenses, an important one will be credit performance. Loan originations don't have all that much of an impact because we originate them in big lumps, spread out in the early -- in the latter part of the year. So that won't really be a factor there. But I would say, one of the biggest in 2018 was credit. We did see very favorable credit performance and that was a very big contributor to our $0.07 or $0.08 beat from our initial EPS guidance. As you saw in the numbers, we did see delinquencies and forbearances tick back up. That is incorporated into our guidance. What we think we're seeing here is a normalization in our credit performance and that is baked into the forecast that we provided here.

The cost of funds, the NIM as Ray pointed out in his opening remarks -- so we're an interesting company. We'll grow our balance sheet this year to close to $30 billion. And during -- over the course of the year, we will raise just $7 billion of new funding. So we do think that the spread should be pretty tight there. And while we're on that topic, we are looking for a NIM of just over 6% for the full year. So hopefully, that helps, Mike.

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

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

So look, consolidations did tick up in the fourth quarter. They typically do tick up in the fourth quarter as the consolidators go after loans that are entering full principal and interest repayment in November and December. So we weren't surprised to see the increase. It ticked up 0.3%. Obviously, we don't want to see any loan walk out the door, but it is part of being in the student loan business. When you look at who is consolidating the loans, it's a pretty long list. There's 3 or 4 companies at the top of the list, you mentioned one of them. The banks, Citizens is a consolidator. First Republic doesn't do much at all in our portfolio, but it is spread pretty evenly once you get off of those top 3 or 4 consolidators.

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

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

And your next question comes from Sanjay Sakhrani from KBW.

I guess, when I look at the origination outlook, it seems fairly robust. Could you guys talk about sort of what's driving the optimism there? And how you guys see yourself positioned to the industry?

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

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

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

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

Anything could happen as we move through time. And so what we've done is we've taken a multi-year forecast. We've incorporated to the best of our ability the current status of the CECL rules and the CECL implementation. And so as we look out over the next 3 or 4 years, we feel that, what we've announced for today, is a good start and certainly not the end, but at this juncture, we are not done. We're not publishing any guideline so far as what would be a second slug of buyback or any change in the dividend. And so as Steve said earlier, we have some numbers in our models for how the buyback will go. We actually haven't tested the demand elasticity of our pricing structure. We don't know what happens at tail ends of things. So as we go through, there will be both the efficacy of the buyback itself and then the underlying performance of capital generation. We -- it's right to say that categorically speaking, up till the end of '18, we were capital users in the sense that our balance sheet was growing faster than our ROE. So our balance sheet was growing 27% to 30%, our ROEs were growing at about 20%. So from an [ouch] break standpoint, we had capital consumption. We have now sort of reversed those trends, so that our balance sheet will continue to grow in a 15% to 20% range, our ROE will grow in the 20% range. We expect to be capital generators. We think this is a good start, and we'll see how 2019 goes.

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

Steve, just following up on the NIM guidance. You said it's a little over 6%. Is there some element of conservatism in there? I'm just trying to figure out why? Or what you're suggesting if we ended the year in '18 at 6.1%, what would be the driver of any kind of compression there?

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

Understood. On the credit side, you talked about a little bit of normalization. I'm just curious what that means for reserves on private student loans as we think about '19 -- year-end '19? I know you've talked about a 1.5% level before. Are we sort of migrating to that level next year?

So we have talked about that 1.5% aspiration, and we still haven't gotten there. When I look at the forecast for the reserve at the end of the year, it coincidently does turn out to be 1.5%. So the normalization is when we look basically at our cure rates in our collection buckets, we got well below trend for the last 3 to 6 months. Kudos to our collection shop on that one with a little assist from the economy, we do think that those cure rates might normalize a little bit and that is the basis for our forecast going into 2019.

Understood. And then the last question for me is what tax rate should we assume for '19?

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

And your next question comes from Rick Shane from JPMorgan.

Look, today, I think marks an important point in the evolution of the company in terms of starting the returns on capital. Longer term, we'll have to start thinking about what Sallie Mae will look like on a steady-state basis. When you think about Sallie Mae steady-state a couple of years down the road, what do you think is the ROE target? And I'd love you to sort of describe it on a 10-year horizon what are the normal 6 years, what are the top 2 years, what do the best 2 years look like?

I have to say congratulations on a very ambitious question. And it's really not going to get the answer that you want because we're not going to give a 10-year return on this. As you can see, as we look in these conversations about the individual parts of what makes up a P&L -- the yield on the portfolio, the NIM Steve described, the losses that are associated with it, the normalization -- I think we ask you to put that in a model. We continue to think we will grow faster than the market. We think the margins will hold. We think that despite the fact that when we launched Sallie Mae, everyone was wondering whether or not anyone could survive in the student loan business and we, unfortunately, have overachieved, so that there are several people now who think it's an attractive business who didn't think that when, oh, I don't know a company split, and they decided to get out of the industry, now they'd like to get back just to name -- not name 1 at random. And so I think that you will see a sort of profile of our P&L that is consistent with the one you're currently looking at, and the extrapolation as we go over 10 years shouldn't have dramatic coefficient differences and the market will probably have mid-single-digit growth in absolute dollars.

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

Well, I think if you were to look at the portfolio, which is now a $20 billion portfolio on the balance sheet, if we were to take the recent generation of new loans at $5.7 billion that we have in 2019, and we say, well let's lay those in and then let's do the liquidation. The average life of the loan, as you know, runs between 6 and 7 years. And so that becomes a strictly weighted average rate of change between the liquidation of the loans that are in the inventory plus the growth of the originations. And so if we were to say, oh, all right, whatever originations in proportion to the 6-year weighted average of the pre-existing inventory, you might take 6 years times $5 billion or $30 billion-or-so and then say, oh, within that, we have a number that's somewhere 50% to 70% are paying one form or another. Let's remember that when we say that the liquidation is in the 70% range, that there are 3 aspects to that. One is full P&I, which Steve was referencing earlier; second is a payment of interest only, while you're in school; and the third is the $25 minimum payment that certain people select, about half the portfolio select some form of liquidation in school in the originations. And so it's a series of weighted averages, but I don't think you'll find any surprises in that.

Rick, just a quick technical modeling correction. The full P&I component is just 44% at this time, don't forget every time a big slug goes into repayment, we originate 2x that. So we continued it.

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

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

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

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

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

I think...

So I'd come at this way, Moshe. So our expenses in the core business are now growing below our growth in accounts entering repayments and accounts entering delinquency, which is on the right track. In 2019, the OpEx comparisons are going to be looking pretty fantastic. Because what went on in 2018 and it is a fact that in the personal loan space there is not going to be a lot of growth in volume there. So OpEx should be pretty steady state. In our credit part initiative, ditto there, expenses might be a couple of million dollars more in '19 than they were in '18. And obviously, the cloud investments will start to pay dividends in '19 and beyond. When we look out at our efficiency ratio in '20 and '21, I mean, candidly, drops of 3 points a year are going to be difficult to come by, but I think I've said many times, our goal here is to run our core operating expenses at a clip that is substantially below growth and units that we are adding to the balance sheet. And that should pay dividends in the form of reaping the scale of our operating platform. I don't know if that helps you, but that would be my commentary on the OpEx line.

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

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

Your next question comes from John Hecht from Jefferies.

The first one, I'm calculating kind of a 40% to 50% payout ratio. I'm wondering -- that's just assuming the buyback and the dividend this year. Should we be thinking about that as the pace of payout permanently given the kind of balanced framework now? And what would be Tier 1 kind of goals be within that construct?

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

Steve, let me just clarify that "we" is the entire industry.

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

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

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

Good morning, congratulations on a good finish and on your announced capital action. Just thinking about this a bit, your new common dividend is going to require about $50 million payment to shareholders annually. You already have $17 million preferred dividends and I'll call that an obligation given your commitment to continuing the common. The preferred structurally senior to common has also seen its dividend amount double in the past 3 years due to the floating nature of the coupon. Have you ever considered an exchange of your preferred for common or including it in your new buyback policy? In addition to the fact that the preferred yields over 7% and is priced at about 60 cents on the dollar versus your common yield of, call it, 1 percentish yield, the discount of which should shrink the preferred would actually be capital generative. Can I ask your thoughts on that please?

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

And a different conclusion from the other class of preferreds which we did retire.

Yes.

And your next question comes from Vincent Caintic from Stephens.

Just some follow-ups on some earlier questions on the 2019 guidance, and 2 parts. On the expense guidance, just wondering what's built there into a sense of the investments that you are planning, I know you had $40 million in the past year. What sort of investments do you think would be good for you going forward so on the expenses side. And then, on the components of NIM, so appreciate the 6% guidance when you think about kind of the asset yield side and the cost of funds side. What are your views on interest rates and deposit betas and how aggressive you want to be there?

Sure, let's take both parts to that. First is the expenses associated with initiatives, everything from the cloud to the credit card. And as Steve said, they will mitigate as we go through '19. And those expenses are all fully captured in the efficiency ratio guidance. And so we think the improvement from the 38.3% that we experienced in 2018 to the 35, 36 range, reflects everything as Steve said which is good cost leverage on the existing business, continued investments in the enhancements I was saying, and a very light touch on diversification. And so that's sort of 1 piece of things, but we prefer to leave the guidance with the efficiency ratio because it's good discipline for us on not letting revenue get ahead of our expenses and we do think it incorporates all the information that's necessary there. Let's stop there.

Cost of funds...

Yes, the cost of funds and the beta, we have always assumed that the betas are high. We are an Internet bank, it's a very efficient market, the betas are transparent as well as high and as Steve said, what we have done is to consistently match both the term of our assets as well as the interest throw up of our assets with our funding. And so to the extent that we continue to be just about 100% matched as we have been for the last 5 years, we expect the entire company to float with the extant interest rates and which is why Steve forecasts for a relatively consistent NIM, I am not going to say regardless of the interest rate environment, but regardless of the current forecast for the interest rate environment given its coefficient of vicissitude.

Just one more and hopefully quick, but the government shutdown -- hopefully not for too much longer, but we we'll see -- does that have any impact on your business in terms of maybe actually capturing share or any credit components, just any comments there?

There are at least 3 components to that, right? And so one is the individual families that are our customers who may be experiencing some financial strain. And we have encouraged people to give us a call, let us know what the situation is, and we will help them one by one in regard to that. The second is certain administrative functions on which these schools are dependent for verification of income, specifically the IRS, where there is some concern that the IRS turn-around in service may be deprecated. As we have looked at that for the most part, the families that are interested in that particular avenue for the administration of their loans are for the most part not in our target market. And so we're watching that carefully, we're talking to the schools, we are doing all we can to make sure that there is no impact to the families because this is essentially a customer service work-around. The third aspect of that is the reputation that the government is gathering in regard to education funding. And so as you've heard and as you know, in 2018, we introduced 6 new graduate products and as they were introduced in many schools, they were like, gee, why do we need this? We have Grad PLUS. But all the noise that's around what will happen to Grad PLUS, what will happen to Parent PLUS, will there be limits on it, will they be eliminated in some way, now aggravated by the fact that the government is proving itself to be an unreliable provider of services, helps us in our talk-off with the grad schools, in particular, under the heading of "don't place all your bets with this possibly unreliable partner." And so that's a soft comment, but it has helped us out on the PR front, and made our calls on graduate schools much more welcome.

Perfect, and just -- sorry, just one...

(inaudible)

As we said on a one by one basis people call us up, we do everything we can to work with them whether its forbearance, debt restructuring, whatever it would take.

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

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

And your final question comes from Henry Coffey with Wedbush.

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

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

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

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

And is that likely to expand as that program expands?

Yes. As said, we introduced 6 new products at the beginning of the busy season, in the summer of 2018. We made good progress on that, the growth in our grad area was double the growth of the base portfolio. But we don't have a full distribution across graduate schools because of the individualized tailored selling that is required -- by the way, we can do that, others without a sales force cannot -- and so we expect that to continue to grow at a rate greater than the overall portfolio. If we said, I don't know 1.5x or something like that it wouldn't be a bad approximation.

And then finally, you have introduced some new products, you have a "billion dollars of consumer loans." What are your thoughts in terms of putting new products into your channels, mortgage, refinancing, credit card, which, you obviously are starting to introduce.

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

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

Right. The deposit side that we have has 2 aspects to it. One is the Internet bank, which we have talked about, and the second is the You Promised saving for college. You Promised is a 529 oriented offer that we have and we think that we will continue to enhance that, not a large market share. On the other side, the Internet bank, as we have said over the last 5 years, this is a very efficient funding vehicle for us. We believe that, as I said, it's a very efficient market, it's very hard to either establish or maintain a competitive advantage, we believe it's rate driven, we believe it's best expertise -- the best position for us is to maintain consistent offerings near the top, but not at the top of the rate charge. And we believe that it is in our best interest to not get involved in transaction products associated with deposits because from our point of view, they are, one, capital-intensive in the sense of investing lots of money to make it work; and two, they are the epicenter for 99.8% of all the fraud on the Internet, and we have no interest in entering a market at parity and undertaking the additional expenses and the additional risk associated. We're very happy with the position that we have today.

Can I ask one...

Okay, thank you very much, oh, I am sorry.

Please....

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

That would typically be a five-year agreement.

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

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

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