SLM
#So at the end of 2018 when I look at our longer term plans, we are probably still in just the high teens approaching 20%.
Look <UNK>, we will do $1.5 billion to $2 billion of ABS a year if it's offered at very attractive prices like it is here today.
The fact of the matter is if you take a look at, say, retail money market deposits where we are paying just about 100 basis points, when you fully load the cost of that for things such as servicing operations and the reserve that we have to hold against short-term deposits, the cost of that funding isn't all that much cheaper than the ABS market.
So we are going to approach this to try and maximize the profitability of the operation here.
And I think getting to that sort of a level makes sense, particularly when you have an asset that has an average life out of the chute of six years.
We think it makes sense to lay in some conservative longer term funding.
But first and foremost we are a bank and we have access to very broad and deep deposit funding market.
And we will continue to take advantage of that as well.
I mean, there's almost none if you look at the disclosure that we publish in our 10-Q.
So if we have 100 basis point shock to interest rates our net income will go up 2.3% over the course of the next two years, which we view as very de minus.
So look, given the massive growth that we expect in this portfolio, and we're going to continue to have something like $3 billion of loans entering repayment every year for the next two years, we do expect the reserve as a percentage of both loans in repayment or total loans to continue to grow.
So looking out a year, if our loan loss allowance today is 117 basis points, maybe that gets to 125, 140-ish basis points a year from now.
If you want to take heart in something, every time I look at a forecast for the allowance for loan losses, we don't achieve it because credit continues to perform somewhat better than we expect.
And that's what we are seeing now, is our cure rates and [loan] rates that exceed our migration model continued to perform very well.
But the long and the short of it is we do expect that loan loss allowance to continue to grow, given the use of our portfolio.
As we've looked at that trend over a period of time, the schools continue to have total cost increases.
And this is tuition plus room and board and other ancillary expenses, some of which are not so ancillary like textbooks, in a range that has been running 3.7% or so.
And we don't see any change in that trajectory.
It's also the case that American families are buying more education, more years of college per student than they had previously.
So as we have tried to compile that, taking into account the demographic flows associated with graduates from high schools, we are in the ballpark.
A 5% number going forward looks like a reasonable estimate.
We have no reason to think ---+ if there's another 20, 25 basis point raise in the December meeting, the post-election meetings, we would expected it to follow the same pattern that the prior one had.
So looking at where the ABS market and the residual market might be, it's recovered quite a bit, somewhere between 8% to 9% premiums.
We talk about 8% being the breakeven.
I think we've also said that in order to move us off of the hold to sell position we'd have to see a premium somewhere probably north of 10%.
I continue to believe that everybody is best served if we stick to one business model, which is the originate and hold, rather than ---+ changing that business model brings an awful lot of uncertainties with it.
We get back to the, how much you can sell, when are you going to sell.
It creates difficulty for models and shareholder expectations and so on and so forth.
So long story short, unless we see a significant improvement in the underlying margin premium, we are going to greedily hold onto all of our student loan assets.
So the product that we've talked about introducing first would be a personal loan.
We have looked at various partnerships with [Syntax] and other providers in the marketplace.
We haven't had any success to date of partnering up with anybody.
We are in the process of developing our own personal loan product.
That probably won't be rolled out until early 2018.
But we will look for opportunities to maybe acquire some assets between now and then in a very modest way.
It's the case that as we've looked at this over the last couple of years, and the metric that we tend to focus on is return on equity.
So we view this as a competition among opportunity costs for various techniques.
And so as long as we continue our growth trajectory, as long as we continue the margins that we are having, and in fact improving, and as long as our return to our shareholders on the balance sheet is a very attractive number, which as you know it is, we will continue to believe that the best use of our shareholders' money is to invest it in this high return and high growth business.
We don't have a foreseeable when that curve is different from our expectations.
Yes.
(Laughter).
You said it better than I could, <UNK>.
So <UNK>, here's why this uncertain tax position had no impact on our earnings per share.
We put up a receivable of income taxes payable.
Offsetting that is an indemnification asset.
This whole situation has to do with a pre-split situation, and it's a 1048 position for uncertain taxes.
Every company has them.
Very few companies discuss the details with the public.
What we would expect would happen is at some point in time this uncertain tax position would be settled either favorably or unfavorably, as in no taxes payable or taxes payable.
And at that point in time we would look to our indemnifier, and if taxes were payable by SLM as a taxpayer we would look to the indemnification and there would be no impact on earnings.
So simply put, this is related to pre-spin activities.
SLM Corp is the taxpayer for pre-spin activities.
If this had to do with anything that took place at the bank prior to the spin, we would be the taxpayer.
Dare I say it, if it's related to companies that were spun off with the Navient businesses, they are ---+ they would be the taxpayer.
And this is all spelled out in public documents.
There is a tax-sharing agreement, a separation and distribution agreement.
And if you have some spare time you can take a look at a Navient 10-K where they spend a significant amount of time talking about indemnifications for pre-spin business activities.
But the basic dynamic here is when we did the spin we thought it was a good idea for the Sallie Mae name to be carried forward.
And when we made that decision, we also took the legal vehicle associated with that, which is also the tax filer for IRS purposes.
We had an agreement at the time that activities that occurred prior to the spin would be on Navient's ticket.
Bank-related activities post-spin would be on Sallie Mae's.
Having said that, we filed the return for 100% of the activities that were existent before the spin and for the bank activities post-spin.
So [anything] that were to occur prior to the spin, as <UNK> says, one is we would have to paid it.
So we have to set it up as a payable on our tax reconciliation.
And secondarily to the extent it was not associated with bank activities but associated with other activities which were related to Navient, Navient that would be the indemnifier for that, which closes the loop.
At this point we can safely say that you have the picture.
If you want to have a follow-up question of the same content, we will take it.
(Laughter).
Thank you, <UNK>.
Okay.
One, thank you all very much for your time and attention this morning.
And secondarily in closing remark, I do want to summarize, it has been a great quarter for us.
It's also a great quarter that occurred during our busy season.
And it's the third straight busy season during which we've experienced wonderful success.
It is the case that service quality is one of the major stories for us in this quarter, which as I noted, we're now in a virtuous cycle in which better service, a friendlier, more efficient interface for our customers yields higher satisfaction with our service and results in a lower cost trajectory as we head into the future.
In summary, our prospects are very good for 2016 and beyond.
These results have all been brought to you by a talented team with whom I have the privilege to work.
And it's a pleasure to report on these accomplishments delivered by that talented, focused team.
So thank you very much, and we will talk to you soon.
