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SLM Corp  (NASDAQ:SLM)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for standing by. And welcome to the 2018 Q3 Sallie Mae Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

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

Brian Cronin -- Vice President of Investor Relations

Thanks, Tony. Good morning, and welcome to Sallie Mae's Third 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 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 Form 10-Q for the quarter ended September 30, 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.

Ray Quinlan -- Chief Executive Officer

Thank you, Brian. And thank you all for calling in and for your interest in our company. It's a pleasure to report on the third quarter results. And I'll go through them in -- in some highlights, and then we'll turn back to you all for questions.

So it was a great quarter, and it's great year thus far. We've had terrific results in the market and on our margin and especially in risk, we're late in the credit cycle as everybody knows, but our performance continues to improve.

The sales growth in the private student lending business at 12.4% for the quarter, greatly outpaced any estimate of the growth in the market, which is still typically thought of as 2% to 4%, we'll get the final note -- numbers on that some time during the fourth quarter, but our growth rate is multiples ahead of the market. And given we're headed the industry leader and have over 50% share in private student lending, it's all the more outstanding.

The other item which is improving more rapidly than our expectation is credit performance. Net charge-offs as a percentage of loans in the period were 88 basis points. The absolute number of write-offs are just about equal to last year on a receivable, that is 18% larger, this of course is reflected in our EPS, which is $0.235 for the quarter, up 42% from the prior year, and our ROE 17% in the quarter, 19.6% year-to-date, outstanding numbers.

As I said, the volume in the quarter is a great story for us. And if you recall, we had estimated that we would be 4.8 billion or so last year, we thought that would go up couple of hundred million. We've doubled the rate of increase from our expectations, and it continues to hold. So that year-to-date, we're up 10% over the prior year, and this has grown through the quarters, so that was up 12.4% in the current quarter. This has all been done with stable credit quality and through a series of efforts, that one, segment the market more carefully than it had been done it prior into core, parent, grad, partner channels, along with several others as well as concentrating on the actual click by click experience that our customers' experience as they go through both in application and in customer service.

We now -- over 93% of our interactions with customers are done on the Internet, which is their preferred way of doing things without human interaction, and we've introduced chat as well as getting good results on our online application and mobile app. The customer satisfaction for chat remains at 97%, mobile application outstanding at 85%. And this all shows up in our market share, which is increasing, but done with a series of efficiency efforts on one hand, greater segmentation on the other, expanding our offers with the six grad products and concentrating on multiple variables, no one single silver bullet as it were.

In regard to that credit quality, the approved FICOs are absolutely flat at 747, the cosigned rate is flat at 89% and so the increase in volume was not done, while deprecating the quality of the credit portfolio.

Delinquency and charge-offs, the trends are terrific. And as I said, the receivables up 18%, and gratifyingly, the credit losses are flat to last year in absolute numbers.

The NIM for the quarter at 6%, despite the fact that the third quarter is an area, where from a seasonality standpoint, NIM tends to be a little bit depressed, still up from last year's 5.85%, 2.6%.

Operating expenses at 151. In the quarter, there was 30% growth. Now, this of course, is higher than the ongoing growth and something that is not going to be sustained. It is exactly in line with what we told you all, we would do several quarters ago, as far as detailed investments in cloud migration, credit card setup, personal loan organic initiation, and this is a 100% in keeping with everything we said, there is no new news on the operating expense basis.

We continue to focus on the efficiency ratio, which was over 40% in '16, 39.6% in '17, and in '18, we are guiding to 38% to 39%, continuing our downward trend, despite making investments in the company. And of course, we are not changing that, because as I said, no new information on the OpEx side. And as we look at '19, the efficiency ratio will continue to drift down -- down. So this is part of a five to 10-year story that we will have on an ongoing basis.

The credit performance continues -- last year, we had a 2.6% delinquency rate. This year, we have 2.3%. And as you know, delinquency rate is a forecast model for what the losses will be over the next couple of quarters. And so the outlook is very good for us.

The balance sheet meantime is up 22% and the risk-based capital stays at very healthy 12.8%. The leaky bucket portion of this, which is consolidations, have remained flat, while the receivable and the paid portion of it, has increased significantly.

So if we look at consolidations for us in absolute numbers, in the fourth quarter of '17, they were $243 million in consolidations. And as we went through the three quarters of '18. They were 224 million, 221 million now 228 million, as we said, plateauing there, while the receivables growing. So the consolidations are dropping as a proportion of our balance sheet.

EPS continues as long-term trend. We've had five very good years there, and ROE reflects that. As a backdrop, our relationships in the regulatory environment continue to remain excellent. As with the FDIC, the UDFI as well as the CFPB, we have ongoing conversations with all three. We work very closely with our colleagues there, and they have been nothing but supportive for all of our efforts.

In regard to the market frame of the customer, the competition and the evolution. In regard to that, the customer satisfaction that we had mentioned earlier, continues to play favorably for us. And as we've looked at our organic personal loan pieces, we're seeing that the Sallie Mae brand on a variety of fronts is much more powerful than we would have thought even eight or nine months ago, gives us a competitive advantage in originating personal loans, because the brand is first, well-known. Secondly, heavily associated with funding higher education. And third, well thought of by the people, who have experienced with us or with student loans more generally.

We also remain a stand out in the industry as an industry leader in thought process, by working closely with new initiatives at the margins, remote colleges, online learning, all of those things along with our many partners, who are in many cases at the forefront of the advancement of technology in regard to the market, but also in publishing select pieces such as how America pays for college, and how America values college, both of which have been well received highly circulated with millions of course contact points.

In regards to employees. Our turnover rate remains extremely low at 6.7%, our voluntary turnover, which of course, accrues to a benefit of us less hiring, fewer down times, less training, all of that. And so the evolution of the market to segments is extremely important. The personal loan indicator so far is the receptivity of other products is very good.

And as you all know, the outlook has upped our EPS guidance to $1.02 to $1.03, with 5.2 billion originations, we were up sometime during this third quarter and the efficiency ratio is steady to our expectations at 38 to 39.

So in closing this out, it's right to remind everyone, what a great market the private student lending business is. It's a unique niche that is filled by a very few competitors, it is critical funding for a worthwhile cause by many of America's families, it results in our having a sought after customer base that has both initially very good performance with us, and on an ongoing basis, great promise.

Attractive returns are a commonplace, we're used to them(ph)19, 17, 18 ROEs, which are terrific, and the credit profile has been rock solid. We would -- in that industry, are unique asset. We are the best known name. We have market share over 50%. We have the largest salesforce, which allows us to do the segmentation as I mentioned. We have a modern digital platform, many partners that were diversified across the industry, and we have happily very conservative funding and very reliable funding.

Our core earnings are high and the leverage is still building within the company, which you see in the efficiency ratios five-year decline. As we look out a little bit further, we have a strategic approach that is concentrated on the allocation of capital and high ROEs for all the efforts in which we engage. You've seen us discontinue the purchase of assets non-originated by us, because the performance was not where we wanted it to be, we're ROE-driven, it didn't hit our targets. We have stopped that effort. We will do the same with other efforts. We will also evaluate all opportunities for ROE, and the capital allocation that is derivative from that evaluation as we go forward.

And so in keeping with all the things that I've mentioned, the performance that we have is a pleasure to talk to you about our employees great work that has been done. It is -- we have a franchise that is unique, well managed. And I should say that in regard to these quarterly reports that we intend over years to do exactly what we said we would do. It is our effort to not have surprises in these things to be hitting guidance not to be routinely beating it, because it should be a fair estimate. But to continue to deliver, deliver and deliver in regard to improving this terrific franchise, which we have the privilege of being able to manage.

So thank you for your attention this morning. And we will move on to the next phase here.

Brian Cronin -- Vice President of Investor Relations

Yeah. I think we'll open up the call for Q&A.

Ray Quinlan -- Chief Executive Officer

Yeah, that's fine. Sure.

Questions and Answers:

Operator

(Operator Instructions)

Ray Quinlan -- Chief Executive Officer

Okay. We're ready for our first question.

Operator

And your first question comes from the line of Moshe Orenbuch from Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. So congratulations on the really strong credit quality, and Ray, you talked about that a fair bit. Maybe kind of help us understand how to think about the reserve development, kind of as you go forward, the portfolio is going to continue to grow. It looked like you had a smaller reserve for troubled debt restructurings in this quarter. And maybe you could also kind of just clarify how we should think about the reserving on the personal loans, anyway to separate that from the stuff you've originated versus stuff you purchased?

Ray Quinlan -- Chief Executive Officer

Sure, Marsh. And it's right to say that, we essentially have three loan loss reserves that I'm going to ask Steve to comment on.

One is the basic business, which is the CECL loan loss reserve, which as you can see the delinquency and write-off performance there continues to improve. And then as the purchased personal loans as well as the organic. So Steve, I would ask you to go through this.

Steve McGarry -- Chief Financial Officer

Sure. Yeah. Good morning, Moshe. So as you pointed out, our TDR default rate has declined pretty substantially in both of the last two quarters. I think annualized, this year is 4% down from 6% in the prior year comparable quarter. So a pretty sharp drop there. And overall, defaults were actually lower on a dollar volume basis, despite the fact that, we had $2 billion and $3.25 billion more loans in full P&I. So credit is performing better than our expectations.

I have asked the guys to take a look, the guys and the gals to take a look at our life of loan TDR loss forecast, because that is the basis on which we do our TDR forecast. And the private student loan portfolio is performing very, very well.

I think I've joked a couple of times on the call that we keep targeting on 1.5% reserve for the private student loan, and we never quite get there. And that was the forecast I think I gave last quarter. And thankfully, we are struggling to meet it.

On the personal loan product, the vast majority of the bill this quarter was for our purchased portfolio. As Ray has pointed out, we are not meeting our return targets there. And one of the primary drivers of that is that, losses on that portfolio are exceeding our expectations. If you bifurcate the reserve for the personal loan portfolio, this quarter, it's running about 5% for the purchased portfolio, 2.5% for the organic portfolio.

We believe that our personal loan portfolio should continue to perform better -- I am sorry, our organic portfolio should continue or will perform better than our purchased portfolio for the most part, because we are dealing only with pre-approved credit. So in essence, we underwrite before we offer the product to our clients, which is considerably different than some of the marketplace lenders out there.

As we move forward, the reserve for the purchased portfolio could grow a little bit more, the organic portfolio reserve should approach 5% as that portfolio grows in seasons.

So I think I've covered all the questions, which you had Moshe.

Moshe Orenbuch -- Credit Suisse -- Analyst

Yeah. Perfect. Yeah. Thanks, Steve.

Steve McGarry -- Chief Financial Officer

You're welcome.

Moshe Orenbuch -- Credit Suisse -- Analyst

And maybe just to follow up on the expense front, you talked a little bit about -- could you just maybe describe whether the Q3 expenses are impacted by the level of originations that you had, and which obviously was higher than we were expecting?

And also you've mentioned you spent 19 million of the 40 million that you had earmarked for your kind of ongoing strategic efforts just the rest of it gets spent. How do we think about that?

Steve McGarry -- Chief Financial Officer

Sure. So on the core student loan business, the expenses weren't really driven by the increase in originations, we're still seeing flat to slightly down applications. We continue to invest in our platform there. So the 14% year-over-year growth in OpEx in the core student loan business, a big chunk of that was from growth in units, but there were additional expenses associated with things like CECL, facilities expansion for example, our call center and collection centers are growing as our loans in full P&I grow. And there are a couple of other projects that we continue to spend money. Ray mentioned, chat for instance, which is one of our newer initiatives.

On the expense side, on the $40 million that we've carved out, I think it's important for people to understand there that except the 10 million -- excluding the $10 million that we are investing to migrate our IT infrastructure into the cloud. The remaining $30 million will continue in 2019 and will be driven by the amount of personal loans that we target to originate.

And I think we've talked about keeping our volume flat at $500 million into 2019, and it will also be driven by progress on our credit card initiative, which will begin really in earnest in the -- in 2019, -- later(ph)in the second quarter and second half of the year. So I think I covered your questions.

Moshe Orenbuch -- Credit Suisse -- Analyst

You did. Thanks, Steve.

Steve McGarry -- Chief Financial Officer

You're welcome.

Operator

Your next question comes from the line of Sanjay Sakhrani from KBW. (sic)

Sanjay Sakhrani -- KBW -- Analyst

Thanks, good morning. I'm going to --

Steve McGarry -- Chief Financial Officer

Sanjay, we seem to have lost you. Operator, are you there?

Operator

I am. Give me just one moment.

Steve McGarry -- Chief Financial Officer

Sure.

Ray Quinlan -- Chief Executive Officer

The KWB (inaudible)

Operator

Sanjay (Operator Instructions)

Ray Quinlan -- Chief Executive Officer

Tony, do you want to move to the next one. And we can come back to Sanjay, if we can get him.

Operator

Sanjay, line is open.

Sanjay Sakhrani -- KBW -- Analyst

Hey. Can you hear me guys.

Ray Quinlan -- Chief Executive Officer

Yes.

Sanjay Sakhrani -- KBW -- Analyst

All right. Perfect. Sorry about that. So what do you attribute the faster than industry origination growth. Is it about the strides you've made or has something happened in the competitive environment as well?

Ray Quinlan -- Chief Executive Officer

No. We actually -- addressing your last comment first. We don't think the competitive environment is volatile, -- maybe it's pretty much the same competitors, the offerings we look at very closely. And so in the private student lending market, I would say that has not been a factor.

I do think that we are aggressively pursuing many facets of this, and I believe what we're seeing is the benefit of that. The first is, of course, the ongoing improvement in our operating platform, our customer satisfaction numbers continue to improve, and our over 80% -- over 90% on our online application, which was new about 18 months ago. And within that, we also look at each stage for pull through.

We also look at in much more detail what people are borrowing money for. And so we walked -- in some sense electronically through the process that our customers, the students as well as their families are going through as they think about how they will finance higher education. And we are more involved in that in the application process now than we have ever been.

And that has resulted in one, higher satisfaction, and two, higher volume growth .

In addition to that, and what have been treated largely as margins market is clearly not one. And the grad offerings of which we've introduced 6 are full slate targeted to the various professions. As you might imagine, medical, legal MBA, that sort of thing and we've received good results there. Our grad volume is up about 18% year-on-year.

In addition, we've made a commitment to wrap ourselves around partners in a way that's good for them and good for us. And so our partner business, which is a small portion of things overall, but as I said, if we look at 1% here, 2% there in, it is up over a period of time. Partner business is growing much faster in the market, good for our partners and good for us, and of course, it forestall possibility that any of those partners returning to competitors, if they're seeking to participate here.

And so it is with sort of a scalpel(ph)around segmentation, around customer experience and continuing good results with the colleges that has resulted in the outperformance here, which is across the board.

But as we said, we don't think about this anymore as one lump sum $5 billion. We're working now on about fix or six active segments with varied solutions, which give better satisfaction on both ends of that equation.

So in answer to your question, no big change in the market, but in -- with a series of improvements in product offerings, customer satisfaction, pull-through, and then just working with families is how they expect to finance their children's higher education, we received this year gratifying results and way above our expectations that we would have had in January.

Sanjay Sakhrani -- KBW -- Analyst

No, absolutely. And then on expenses, those were up about 30% in the quarter. If you exclude the investments, more like mid-to-high teens. Is that a better growth rate going forward?

Steve McGarry -- Chief Financial Officer

So look, expenses are largely driven by units and full principal and interest repayment. This quarter, they ticked slightly above that growth rate. And we focus an awful lot on our efficiency ratio, and we are not going to make improvements in that efficiency ratio if that continues to be the case. It just so happened that in this quarter, we did have some unavoidable expenses, such as the CECL investment that I called out, but we will work to get that growth rate in OpEx in the core business back below the growth rate of the units involved in the portfolio.

Sanjay Sakhrani -- KBW -- Analyst

Okay. And one last one, Steve, you mentioned the personal loan portfolio losses coming in ahead of your expectations. Could you just elaborate on that. Like, what -- what was driving that? Is it the third-party -- the loans that you selected from the third-party or how did that work actually?

Steve McGarry -- Chief Financial Officer

Well, so I want to make sure I understand your question. But I'll repeat what I think I said. So in our organic portfolio, we look at performance of loans month on book delinquency rates at this point, because we don't have a whole lot of loans in the portfolio that are approaching the point at which they start to default, but I think we did have something like 7 defaults, but the delinquency rate on that portfolio are trending significantly lower than the delinquency rates at that stage of the season of the portfolio than our purchased portfolio performed.

So I was trying to make a point that we think our organic portfolio will perform significantly better than the business we've just terminated, and we should be able to meet our return hurdles in that product.

Ray Quinlan -- Chief Executive Officer

But I think Sanjay, your other point was, was there something about the purchased assets that introduced a dynamic here, increasing the loan losses associated with them. And I believe the answer to that is no. The quality of assets that we're purchasing has been pretty constant, but the expectations of the originators for their losses in a constant segment quality purchase scenario are actually higher. So it's the performance that deteriorated, not the purchase screens.

Sanjay Sakhrani -- KBW -- Analyst

Okay. And you guys feel comfortable that it won't deteriorate a whole lot more going forward or -- because we're past the seasoning cycle or?

Steve McGarry -- Chief Financial Officer

Yeah. Look, we're going to make by many people standards, a very acceptable return on these assets. We just given the nature of our business and the alternatives hold ourselves to a pretty high hurdle rate. So we will not lose money on this portfolio, we would just not make the returns that we think are appropriate given our cost of capital, et cetera, et cetera.

Sanjay Sakhrani -- KBW -- Analyst

Okay, great. Thank you

Steve McGarry -- Chief Financial Officer

You're welcome.

Operator

Your next question comes from the line of Arren Cyganovich of Citi.

Arren Cyganovich -- Citi -- Analyst

Steve, you had mentioned that the application volumes were kind of roughly the same, you had really strong origination growth. 2%(ph)You talked about the ticket size going higher, are you also approving a higher rate. What's the difference there?

Steve McGarry -- Chief Financial Officer

So there is no change in our credit box, our credit standards have remained absolutely the same. It is the case that we are seeing better pull through overall in the application process. And as Ray, I think explained in some detail, we are targeting more effectively different segments of our portfolio and growing, for example, to the point you made our graduate student loan business grew at a rate of 18% this quarter.

So we rolled out those six new products. So you put it all together, and the business is firing on all cylinders at this point in time.

Arren Cyganovich -- Citi -- Analyst

Okay. And you had mentioned of some partners that you have that you're working with. I don't recall you guys talking about that much in the past, it is just banks that previously were involved in the business and now are referring volume to you. How do those relationships work?

Ray Quinlan -- Chief Executive Officer

Sure. And it's a full range of partner profiles. But in general, you may think of smaller banks, credit unions, people who have a customer base, and they would like to provide the benefits of a private student loan, but they don't have the leverage to develop the platform that we have nor the compliance opportunities or the compliance requirements that are extends for it.

And so it's a long list. I believe the number is over 750 at this particular juncture. Small players that we partner with, it good for them, it's good for their customers and good for us. But largely people who have a financial services platform and don't have as I said, the volume that would warrant they're putting together a separate platform for private student lending and we partner with them.

It's a number that has -- we've been concentrating on it over the last year. And the growth rate in the partner channel is coincidentally 18%, as Steve mentioned for the grad piece

Arren Cyganovich -- Citi -- Analyst

Okay. Thank you.

Operator

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

John Hecht -- Jefferies -- Analyst

Good morning, guys. Thanks. Many of my questions have been asked. I guess just a couple of kind of nuanced questions are, for the originated unsecured loans, couple of kind of characteristics I'm interested in is : number one, for your own originated loans, what is the average size and rate? And then number two, you mentioned some of some of the -- kind of channels to get the customers, but I'm wondering, how much of them are cross-sells from customers that you either have or had private student loans with versus new customers altogether?

Ray Quinlan -- Chief Executive Officer

Sure. And so first things first, this is 2018, we launched the product in January. We're doing a bunch of testing in 2018. And so we're looking at people, who had some association with Sallie Mae one time, no longer do people who are currently customers, people who have had some familiarity with student lending more generally and others, who are credit-worthy.

And so as we look at that, the cross-sell portion of that, our customer base is not overly large, it runs depending on how you calculate between 1 million and 1.5 million. And so the cross-sell opportunities are now well -- much better than of course a random sample or a targeted non-relationship population, will be a small portion of things going forward.

It is a case, so that the general demographic that we're interested in, which is young people and how they sort of get started on life, of which personal loans are a piece, will be a very important part of the originations.

And so right now, we're testing across the board, and I have to say, as I alluded to earlier, that the Sallie Mae brand is both unique as well as powerful in regard to these tests. And the additional pull associated with our brands versus either anonymous or random for people, who have had some association with funding higher education is terrifically in excess of anything we thought and significantly lowers our origination cost for those large populations, which runs in the tens of millions. And so the brand actually allows us to have a proxy for cross-sell that others might have with the pre-existing product, because we are uniquely associated with higher education and in fact dominant within the private student lending piece.

So the average ticket is running about $17,000. The range of APRs is a full range from 5.15 or so. And as I say, we're testing on this, and then as we enter in 2019, we'll be taking the results of those tests north(ph)toward the profile that we'd like to have for this portfolio.

John Hecht -- Jefferies -- Analyst

Okay. That's helpful detail. And then -- and second question just sort of thinking about kind of intermediate term trends. Where -- how much is the P&I portion of total loans in full P&I now, is that going to be balanced with where it is a year from now? And then depending on that change, what does that mean for things like delinquencies and charge-offs, how do we think about the effects of that?

Steve McGarry -- Chief Financial Officer

So John, we're running around 36% full P&I, and what happens and hope it will continue to happen. We continue to originate large volumes of loans. So that number tends to rise and fall as our loan origination volume increases. It is on a very gentle trend higher, but it is the case that we have -- I want to say it's $7.5 billion in full P&I. And for those of you who are with us on this journey, we started out at right around $1 billion. So we feel very good that, having multiplied that by 7.5x, our credit performance is not only meeting, but beating expectations.

It could very well be the case that a big chunk of this portfolio is past its peak default rates, so if the portfolio was stabilize in size, we would see the defaults trend lower not higher. But I think what we're going to see is that they're going to stay remain stable around this 2% level of full P&I going forward.

John Hecht -- Jefferies -- Analyst

Very good, guys. Thanks for the color.

Steve McGarry -- Chief Financial Officer

You're welcome.

Operator

(Operator instructions). And your next question comes from the line of Vincent Caintic from Stephens.

Vincent Caintic -- Stephens -- Analyst

Thanks, good morning. Just wanted to take a maybe a step back and talk about the EPS guidance. So you've had a nice raise to 2018 EPS and it's now -- that's indicating above 40% year-over-year EPS growth. Just kind of wondering, maybe if you could describe what's driving you to increase the 2018 EPS guide? And then as you're thinking about 2019 and the different components of originations name and credit, is that something that you expect trends to continue and maybe not 40% year-over-year, but to get to a double-digit EPS growth?

Steve McGarry -- Chief Financial Officer

So the key contributors toward raising guidance for the final quarter a year here was credit two-thirds, NIM, a third. We do expect the credit performance to continue to be rock solid. I bumped into one of our credit guys yesterday, and I said hey, there is a time to start second guessing or life of loans default rates and he reminded me that we are right smack in the middle of one of the strongest economic environments we've seen in decades.

So he wasn't in a big hurry to do that, but we're a 3.7% unemployment, and as long as those trends remain solid, I think we can expect the portfolio to do very well.

But credit is very much economy-driven. There are no signs that there is any major deterioration on the horizon. So going into '19, if things are looking similar to the way they are today we can expect that, that will definitely be in the plus column as far as EPS in 2019 is concerned.

NIM, look, we -- we are in a situation today, where we now have -- I think it's 32% of our portfolio is fixed rate, that's up substantially from a year ago when it was 22%. 65% of our loan originations are now fixed rate. So that's a much different game that we're playing today than we were a couple of years ago when interest rates were not moving.

Fixed rate loans are somewhat more challenging to fund, but we think we are appropriately positioned to maintain the 6% zip code NIM that we are going to put up this year in subsequent years. We do take a conservative approach to funding and we try to lock that NIM in, not take risks that will potentially increase or decrease it at the margin.

Vincent Caintic -- Stephens -- Analyst

Okay, great. Thank you. And then just one quick one. When you think about the credit card portfolio 2019 roll out. Any sense for how big of an impact that might be? And is there -- when you think about incremental expenses or anything like that your credit and so forth. What does that add to the portfolio? Thanks.

Steve McGarry -- Chief Financial Officer

So in the grand scheme of things, it will be zero credit card receivables on the balance sheet. At the end of 2019, there will be expenses associated with continuing to build the platform out. And credit card is very much a direct-to-consumer marketing game. So to the extent that we are ramping up our marketing machine in 2019, there will be expenses associated with that. I think we're going to have to save that discussion for our January conference call, where we give you the finer points on our diversification efforts. But we are very much committed to not harming the core earnings, the earnings generated by the core business.

Ray has said in public that we would never risk more than 5% of those earnings on any diversification effort that will be the case as we look out to 2019, that the personal loan will no longer be a drag on earnings. I'm not telling you here, we're going to spend $0.05 on credit card, because I think that, that would be way off the mark. But we're committed to continuing to generate strong earnings growth at Sallie Mae here.

Vincent Caintic -- Stephens -- Analyst

Okay, great. Thanks very much.

Operator

Your next question comes from the line of Rick Shane with JPMorgan.

Rick Shane -- JPMorgan -- Analyst

Hey guys. Thanks for taking my question. Steve, I sort of have the same question for you that -- you have your credit guys, which is, a year ago, you talked about the idea that lifetime losses on the portfolio on a cohort would be about 8%. You talked about vintages running toward 6%. What I'm curious about is, when do you see sort of peak losses in a vintage with the idea for an individual cohort you could actually take down that cumulative loss expectation.

Steve McGarry -- Chief Financial Officer

So peak losses are above behind us really by about 30 months into full P&I. And in the future state of CECL, I think analysts are going to love some of the byproducts, we will actually be publishing expected remaining defaults by cohort. But we have in any given year $2 billion, $2.5 billion of loans going into repayment and big chunks of our $7.5 million in full P&I are has that peak default rate.

Ray Quinlan -- Chief Executive Officer

Yeah. There are couple of points here, right? One is, our loss curve follows similar other consumer lending products, right? So typical P&I runs the for -- as you know for a life of loan loss about seven years. And so in the first two years of P&I, we get about 50% of the losses right? So that's 20% of the clock time two out of seven, and it's 50% of losses. So it's a 2x multiple for the first two years.

Then after that, things trend on down. But it's right to say, as Steve has alluded that our credit performance in 2018 has exceeded our expectations significantly. And so as he alluded to with this hallway conversation with our credit manager, it is the case that we have unexpected good news, we look into the future, people say, oh gee, in the cycle to worry about risk embedded in the portfolio. We have all the data that we need from the last recession, we know that our portfolio is less volatile than many of the other consumer portfolios, because of the high quality of the families to whom we lend.

And so what you are hearing is a good business, which has great returns, unexpectedly good credit performance and starting to think, gee, is this unexpectedly good credit performance a new norm in such a way that we could leverage it either with lower pricing or higher approval rates, given that forecast, or should we remain cautious, given where we are in the economic cycle and the newness of this information. So we are at a fork in the road, which says, do you want to continue as you were doing, which is just fine or could you actually improve your full year forecast for the losses as well as the NPV for newly originated accounts, and we're debating that right now. But it's an opportunity quadrant debate, not anything else.

Rick Shane -- JPMorgan -- Analyst

So it's a very interesting way of looking at it, and I share that yield. If we start with the idea that it is not a new normal, but rather that there are certain vintages that have benefited from historically low unemployment and that those vintages will produce lower cumulative loss rates. Which of the vintages do you think at this point are seasoned enough that you could actually make that assumption that due to macroeconomic factors, they are going to experience -- those cohorts will experience lower losses?

Ray Quinlan -- Chief Executive Officer

Well, if we take that and just plot it on a chronology graph, right, we'd say on average, if we made $5.2 billion worth of loans in this calendar year. When would they go into P&I, on average, they will go in about two and half years after that, right? So the ones that are entering full P&I today, third quarter of 2018, are those people, who on average had loans that were in '15 and '16. And so now, plus the unemployment dropping for the macro environment against that, and you would say that, gee, people, who are in full P&I today, in fact, were only benefiting from the beginning of this very favorable employment cycle, because as we all know, it has gotten rapidly better over the last two years, almost none of the originated loans in the last two years are in fact in P&I.

So that improvement that you're anticipating, which is like graduate and get a job at a higher level than the prior cohorts is still in front of us.

Rick Shane -- JPMorgan -- Analyst

Okay. Got it. Thank you.

Operator

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

Michael Tarkan -- Compass Point -- Analyst

Thanks for taking my questions. Just a couple of follow-ups. On the yields question, can you tell us, where yields are on the new originations relative to the -- I think the average yield on the originations you put up this quarter relative to the 9.16(ph)for the overall book?

Steve McGarry -- Chief Financial Officer

Sure. So loans that we were purchasing had an average coupon around 10%. We are a zero fee lender in the personal loan business, and our coupons are going to be approaching 15%. They're not quite there yet, but they will be more yield even what is currently on the books.

Michael Tarkan -- Compass Point -- Analyst

Okay. And then, what about on the student loan side, just wondering, where average yields are for the peak lending season?

Steve McGarry -- Chief Financial Officer

Sure. So on the student loan side, our average yield on the variable portfolio was 7.5% over LIBOR, so basically 10%. And the average yield on the fixed rate portfolio was 9% and 3.25%, very flat yield curve. And as people selecting that fixed rate in our current rising rate environment.

And while I have the microphone, I stated earlier, that we were going to have no credit card receivables on the books at the end of 2019. Apparently, Brian got a few emails on that from the team, I stand by my number, it's going to be less than $50 million. So on the grand scheme of things, as analysts are concerned, it will be no receivables on the books. I'm sorry, Mike, you had another question?

Michael Tarkan -- Compass Point -- Analyst

Yeah. Thank you. Just as -- on the personal loans, the FICOs that you're seeing come through the organic product versus the purchased product. Are those largely comparable?

Steve McGarry -- Chief Financial Officer

They are very similar. But of course, we are using our own custom credit scorecards, so FICO is not the only variable that we will be looking at. And I did mention earlier that these are pre-approved credit. So we do think for a number of reasons, they will perform better than what we currently have on our books.

Michael Tarkan -- Compass Point -- Analyst

And then just one quick one on that one. So are you still sourcing primarily those borrowers from your existing student loan pool? And at what point you broaden that out as you look to build that product a little bit more?

Steve McGarry -- Chief Financial Officer

Yeah. So -- go ahead.

Ray Quinlan -- Chief Executive Officer

Go ahead.

Steve McGarry -- Chief Financial Officer

We've already broaden that out. As Ray mentioned earlier, our current client base is just over 1 million borrowers. So we could not build a personal loan business on our portfolio alone. So we are purchasing lists that consist of people very similar to our current borrower list and it is a little bit more broad as well.

Michael Tarkan -- Compass Point -- Analyst

Thank you.

You're welcome.

Operator

Your next question comes from the line of Dominick Gabriele with Oppenheimer.

Dominick Gabriele -- Oppenheimer -- Analyst

Hey, how you doing? Thanks for taking my questions. Just real quick. The credit did come in better than our expectations as well. And then can you just talk about any adjustments that you guys have made at SLM over the last year that may have contributed to some of this outside of just good economic conditions?

Ray Quinlan -- Chief Executive Officer

As we've reported quarter-by-quarter, we've been quite consistent in our credit approach both in the cut-offs of through the door populations, the co-branding proportions, where they come from so far as the schools, and the improvements that we've tried to implement and we've had success in this is the biggest issue in this type of credit, we've talked a little of that, who is in full P&I and who is not in full P&I. As it turns out from a credit bubble standpoint, the biggest concern that we have at a business such as ours, where there is deferred payments for many customers is the transition from state A to state B, either in minimum payments just paying interest or some token amount, and I go to full P&I or have full deferment, and I go to full P&I.

And that -- well, that mini wave is the most difficult thing to forecast. It is most difficult thing to staff against. And we have done everything we can to mitigate that wave height. And so we are now sending multiple notices to people, gee, in four months, you're going to have to make payment here, in three months, you're going to have to do this. Asking people whether or not they're ready to contact us a priority(ph)if in fact, they do have some difficulties, and we have been quite successful in getting people going from 0 to 1, not to do that. And lowering that initial wave, of course, has a benefit in our staffing, our delinquency and ultimately in our losses, because if people get behind, catch-up is really difficult. And so this is a -- operational type of customer approach, which calls for a partnership between our customer service unit and our collection units, which is greatly enhanced over something which didn't really exist in that form three years ago. So no change on the front-end, and many improvements on the back-end. But as Steve said, the economic environment is also crucial here.

And while our portfolio in the prior at recessions has had a much lower beta than other consumer portfolios, because of the high quality and because of the family lending and the co-branding, it's still the case that we are definitely benefiting as are others from the benign environment

Dominick Gabriele -- Oppenheimer -- Analyst

Great. Excellent. Thank you so much. And then quickly, you guys have done a great job stemming the growth in loan consolidation to third-parties. You've talked about some of the strategy around this in the past, but when you think about reducing the rate on the loan versus extending the term to lower the payment once someone graduates. How does -- what was the thought process around that? And where's the cut-off there, where you say, what this is an economic to us, we're going to let this go as well as not maybe lowering the rate or extending the terms at the point where somebody comes -- the same person may come back for another cut maybe six months later. What's your thought process there? And where do we -- where can we maybe see going forward more based on extending the term or lowering the rates where do you see all these things moving?

Ray Quinlan -- Chief Executive Officer

Yeah. As we've talked about it in prior quarters, we've done relatively little in terms of volume, either in lowering the rate or extending the terms. And the customers, of course, have a focus, if you survey them, they will say, I want to have a lower rate, but if you ask them, how do you think that will show up, it really need a lower payment and so the lower rate is it means doing it.

It's also the case that in customers we've looked at, they -- when they are consolidating, they are not out consolidating Sallie Mae loans alone, they're consolidating their credit card business, other loans they have, the objective is to have better cash flows for the households. And so we're continuing to test in regard to this. But as Steve has said on multiple quarterly calls, the backdrop interest rates that have gone up consistently over the last year and a half, have mitigated some other competitors enthusiasm for this business.

So we are going into this in a small way, we have some test plan for 2019. We will continue to build our capability to engage in this type of fighting. We do think it is -- on its face a margin destroyer. So our enthusiasm for this type of business is relatively low. The volume as you've seen has plateaued almost exactly from the fourth quarter of last year, it's actually lower than the fourth quarter of last year to where we are. And so we're arming ourselves to be ready in the event that this escalates, but we would prefer to keep a low profile in this and if the benign trends that we've experienced over the last four quarters continue, we will operate defensively, but not dramatically.

Dominick Gabriele -- Oppenheimer -- Analyst

Excellent. Thanks so much. I really appreciate it

Operator

And your next question comes from the line of Michael Kaye of Wells Fargo.

Michael Kaye -- Wells Fargo -- Analyst

Good morning. I was hoping you could talk a little bit about your recent investment in Deserve, and how that fits into your credit card strategy

Ray Quinlan -- Chief Executive Officer

Sure. Deserve is a West Coast very modern integrated native app purveyor of credit cards. And when we looked at our entry into the card business, several things guided us. One is that the card business is filled with very capable competitors, many of whom have excess capacity, while we're sitting here.

Two is that, we did not want to build an infrastructure that had high fixed costs associated with it.

Three is that, we wanted to be modern, and we thought that we would have an advantage over existing players, who frequently are bound by their old unintegrated and not very consumer-friendly systems. And so as we surveyed, who would be a potential partner, we looked at multiple potential capabilities. We hit upon the Deserve folks, because they are modern, they are dedicated to us. And but they're relatively new company, and so we made a small investment in them. We have observed the rights on their board.

We are now working closely with them. And as Steve has alluded to, we're expecting to have a friends and family type of walk-through for our product in the -- within about 45 days of today. A second chapter of that in January and we expect to be testing our way into the markets in the second quarter of next year, which we signed the contract with to serve in the second quarter of this year. And if we can go from the contract signing to a product that is working in less than 6 months, I believe that will be a new standard in the industry, where that lead time is typically measured even for the best competitors in 12 -- as 12 to 18 months.

So their responsiveness is good, they're very modern, they do have a native app, which makes for an integrated customer experience. And so far so good with Deserve, but a small investment along the way was called for just because of the fact that they are newish.

Michael Kaye -- Wells Fargo -- Analyst

Okay. My second question was just wanted to get some thoughts on upcoming mid-term elections. Let's look at a couple of scenarios, if the Republicans lose control, Congress, how much of a setback would that be for something positive developing on some private student loan expansion? And if the Democrats do gain control, would that just really perpetuate the status-quo or is there a risk of something negative developing?

Ray Quinlan -- Chief Executive Officer

I know this isn't a political discussion, but when I look at -- think about your first comment, if the Republicans were to lose control of Congress, one might intuit now that you think they do have control of Congress. And I think there will be different opinions on that even within the Republican Party.

But what we've seen over the last -- we're coming up on our fifth -- December 31st, since the spin. And we've spent quite a bit of time on the political front. And there are people with extreme dispersion, everything, from get rid of the federal program, to college should be free for everyone as you know.

And what we've seen thus far over the last four years is basically gridlock. We have -- the Higher Education Act has not been renewed, the initiatives have died almost the day that they are announced, the -- of course the deficit has improved -- has not improved rather has increased. The federal student lending business at $1.6 trillion is a portfolio that no one in Washington seems to want to address at all. The loss is embedded in that and we know -- we're approaching $0.5 trillion. And so I would have to say that if you were just forecasting as coldly opposed to what I might desire or something along those lines, you going into that would have to be more gridlock

Because even on the Democratic side, if you look at the people who would be in the majority in a blue wave house change -- house majority change, they -- the student lending is really just not in their top list.

And so we don't really see any formula plans there. People have said, (inaudible) the government would have to get out of Grad plus or to get out of Parent plus and there are people for that, that would greatly benefit our business, no doubt about it.

On the other hand, raising the limits for the undergraduate federal loans, we heard it. And so we've run all those scenarios, but so far in the course of four years, there's been no change. And so -- as an standpoint, empirical feedback should make us humble. I would have to say going in that, would be no change.

Michael Kaye -- Wells Fargo -- Analyst

Okay. Thank you

Operator

And there are no further questions.

Ray Quinlan -- Chief Executive Officer

Okay. And so, one, thank you all for your time and attention. And as I said earlier, it's a pleasure to report these very good results.

Steve and I were talking about what would happen on this call before the call. And I think if we had a catch phrase for the third quarter of 2018, it would be, as we told you the following, the results are right in line with what we thought with three exceptions.

One is the purchased personal loan business has not performed the way we'd like, and I think discontinuing it, is of course the right decision in my opinion, but I think it's an illustration to our analysts as well as to our shareholders, that we are willing to be bound by ROEs, and when they are not sufficient, as Steve said, they're still positive, but not sufficient, we will act in keeping with capital allocation that is done rationally.

The other two items are the origination volumes is(ph)and my vantage point is from January, it's significantly higher than we thought, seeing a payback for our multiple efforts, which is extremely gratifying.

We will end the year as the industry leader, starting with the market share over 50%, up 10%. So that's five-fold share points in a market that we think is growing to the 4%. We think some of our efforts have actually expanded the market volume, and we can talk more about that in the future.

And as we've talked about significantly on this call, our credit performance is doing much, much better than we thought. And we expect that to continue for the foreseeable.

So in summary, this is a great and unique franchise, it works with an upscale customer base, doing things are very important to them, which result in high customer satisfaction, which we now have an 80% overall, and excellent performance on credit. I should note that the management team strive to do exactly what we told you we would do. We are into no surprises business, we look to hit guidance, we look for the guidance to be a fair estimate not a low ball piece. And we are in the business of deliver, deliver, deliver. We have a great franchise. We will address it as best we can. We will do the capital allocation in a rational basis as we go forward.

And I thank you all for your attention today.

Brian Cronin -- Vice President of Investor Relations

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

Operator

Again, this does conclude today's conference call. You may now disconnect your lines.

Duration: 61 minutes

Call participants:

Brian Cronin -- Vice President of Investor Relations

Ray Quinlan -- Chief Executive Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

Steve McGarry -- Chief Financial Officer

Sanjay Sakhrani -- KBW -- Analyst

Arren Cyganovich -- Citi -- Analyst

John Hecht -- Jefferies -- Analyst

Vincent Caintic -- Stephens -- Analyst

Rick Shane -- JPMorgan -- Analyst

Michael Tarkan -- Compass Point -- Analyst

Dominick Gabriele -- Oppenheimer -- Analyst

Michael Kaye -- Wells Fargo -- Analyst

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