SLM Corporation (SLM) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Diana, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2015 Quarter Three 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-session. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brian Cronin, Senior Director of Investor Relations. Sir, you may begin.

Thank you. Good morning and welcome to Sallie Mae’s third quarter 2015 earnings call. With me today is Ray Quinlan, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-Q and other filings with the SEC. During this 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 Form 10-Q for the quarter ended September 30, 2015. 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.

Thanks, Brian. And thank you all for participating with us this morning. I will walk through several key items that are important to our business model. And they will include originations, NIM, credit profile, credit performance, operating expenses, asset sales, return on equity, earnings per share, and some comments about the industry. After that, Steve will have more detailed review of each one of these items plus several others. And after that we look forward to your questions. So in going to that list, originations, our full year guidance for originations is $4.3 billion, which is a 5% increase from the prior year. As we said, that after three quarters we are 7% over the prior year. We believe the market in which we operate the private student loan business has grown year-on-year between 1% and 2%, 7% growth clearly not only implies but necessitates the fact that we had a gain in market share. Extremely gratifying that we had a gain in market share for the second year in a row, as you all know we’ve been very preoccupied with our spin from the original company, but nonetheless for two years running, we have gained market share. And we believe this is a comment on our product, the effectiveness of our marketing and sales group, as well our improved service which we’ll talk about throughout the morning. So NIM, NIM in the third quarter is 5.36%, 5.36% a very good number by itself; 5.48% year-to-date. And we are forecasting for the rest of the year about that level so we expect the full year 2015 NIM to be 5.50%. It was 5.26% in 2014. As we look forward beyond the remaining quarter of 2015 to 2016 and 2017, we see no reason that the NIM will change from the 5.50% level. So we believe it’s up from last year, 5.26% to 5.50% this year. And we believe it will be steady for as far as our model goes. It’s gratifying that the yield on the new loans originated in this quarter is actually higher than the previous year. And Steve will talk about that. It’s also true that while we gained market share and while our NIM is increasing, our credit profile is identical to what it has been over the last two years. As one index the average FICO score for new loans this year, year-to-date is 749. Last year it was 750, virtually identical numbers. And we maintain our level of 90% cosigned, which as you know is crucial to the credit quality of the portfolio. The performance of that portfolio remains very good. You’ll see in our guidance that the loan-loss provision for 2015 will be guided down by over 12%, from $95 million to $83 million this year, and our full-year forecast for the private student loan loan-loss reserve remains right on top of our model at 1.07%. Operating expenses, operating expenses in the third quarter $94 million, very close to consensus of $93 million. It is the case that we have had several opportunities to improve service and improved sales operations during the busy season. We have taken advantage of those opportunities. And, in fact, it has shown up in our gratifying gain in market share. It’s also true that the base from which we were operating in the pre-existing company has been upgraded both in the quality of service, the level of responsiveness as measured in average answer times and things such as that, as well as in an expansion of our hours of service as well as our hours of sales during busy seasons. We have asked our customers what they think of these service improvements. And over the last five months we’ve seen the customer satisfaction level rising gratifyingly again by 41%. We also have actively solicit feedback from each one of our school partners and feedback has been very good. We are on an improving trajectory here. We do believe there is a direct correlation between improvements in service, of course, the expense attended to them and our revenue. As a result of that the barometer that we use in order to measure how effectively we are expending money is the efficiency ratio. Last year, if we took the fourth quarter, which was post the major conversion items and a good representation for how we entered this year and in deed what our ongoing operating expense level would be. So if we took fourth quarter of 2014 and annualize that, our efficiency ratio, expense divided by revenue, was 48%. This year, including new guidance, it will be 44%. So an improvement of 400 basis points. Our model show, as we have communicated in the past, a continuing improvement in this metric for the next four years, which as far out as we’re modeling and we expect it to decrease from the 48% last year from the 44% this year by roughly 100 basis points per year 43%, 42%, down to a level of about 40%. In regard to asset sales, concerning announcement, we have essentially completed an asset sale of $750 million at a premium of 8%. It should close on October 27. We think that is terrific work by Steve’s team in particular but supported by several other areas, especially legal. And we’re gratified that even in this environment where the credit spreads have widened for this type of assets that we’re still able to get 8%. It was only a short year ago that we were celebrating 7.50%, 7.5% as a premium. So that’s very good. And as you know, we’ve also indicated in the past that when we have a number such seven - 8% rather, it’s approximately equal to our pretax return of 2% on new dollars into the portfolio times four years. And so when four years of earnings a person is willing to give you those and removal of the risk attended to them, while you keep the customer relationship and the opportunity to improve upon that both in revenue as well as in operating expenses, we think that’s a pretty good deal. We’re happy to announce that today. Return on equity, our full-year goal for return on equity is 18.3%, obviously an excellent level and, of course, highly correlated to our return on assets which is 2% is our plan for this year. And the earnings-per-share reflected all these activities. The last year earnings per share were $0.42 –they’re here under $0.42, $0.417 or something like that. This year we’re guiding to $0.58. That will be 39% increase in earnings-per-share year-to-year without doing anything extraordinary in the sense of selling unusual assets or anything like that, 39% increase in EPS, very nice, literally bottom-line. The industry as a whole has had several clouds over it. Of course, fluctuations in the stock market and the nervousness in the credit market has not helped. Presidential candidates have a myriad of plans out there when asked about college cost. The CFPB issued a 151 page report couple of weeks back with many suggestions for the servicers. It is the case that as we do research in regard to this market, it is that - it is a case for Americans, they value college education more than ever. And the major change in our analysis of the market year-to-year is published earlier in how America plans pays and plans to save some pays for college, is that parents are increasing their proportion of funding the entire education bill in the United States. And they did that by 300 basis points from 34% to the full bill to 37%. So the basic product here it is highly valued, it’s supported by entire families, two generations, and we believe it to be still and excellent field in which to operate. So in summary, originations are strong. We’re on our forecast, we’re gaining market share, we’ve gained market share two years in a row. Our NIM is high and steady. Our credit profile is excellent also completely consistent with prior experience and consistent with our models. Credit performance is better than we thought it was going to be for this year and continues to be at or better than model. Our operating expenses already at a good level at 44% for efficiency ratio around and trends get down 40%. Asset sales even in this difficult environment to get an 8% premium is validation of the quality of the product that were offering as well as our service platform which you’ll recall we’ve only had established about one year ago. And with returns on equity over 18%, and earnings per share up 39% for having a terrific year. The industry has clouds, it has always had clouds, we have good relationships with all of our regulators, we’re in compliance with every item that was given to us with the original consent order issued before the spin. And I’ll note issued among others well issued by the FDIC, the DOJ and the CFPB. So CFPB suggestions already reflected in that consent order and indeed in our operating base. And so with that, I’ll turn things over to Steve.

Thanks, Ray. Good morning everyone. I’ll be referencing the earnings call presentation that’s on our website during my remarks, as we drill down a little bit deeper into the details of our financial results for the quarter. Presentation begins I guess on Slide 4, so our private education loan portfolio of September 30, hold $10.8 billion [ph] this was up a strong 38% from the prior year quarter. Our owned and serviced private portfolio, which include loans sold, and we continue to service them was $11.5 million, up 47% from the [indiscernible] quarter. Net interest income for the third quarter was $175 million, which was $7 million or 4% higher than Q2 and $31 million, or 22% higher than the prior year quarter. The increase from the prior quarter is due to the higher average interest earning assets as a result of our successful peak season originations, and the increase from the prior year the result of our 19% increase in average assets. Ray talked about bank’s net interest margin, on interest earning asset, which came in at 5.36% in the second quarter compared to 5.49% in the prior quarter, and 5.25% in the prior year. The 13 basis points peak rates was result of high cash balances, which we held and they are in the negative [indiscernible] as we led up to our peak funding seasons, as well as private student loan yields. Many of you know, we except we build cash in the first and third quarters to prepare for our big origination season. The increase from the prior year due the increase in our private student loans has a percent of total portfolio. Ray mentioned that, we are confident that for the full year, our NIM will be at 5.5% compared to 5.25% in the prior year, the reason why we have a lot of confidence on this numbers that our assets are long-term in nature, they will continue to stay on the book and we take a conservative funding approach. So we do have a lot of the cost of funding locked in as well. So we feel still very good about that 5.5% number, it’s going to fluctuate over it and below it over the course of the coming quarters, but the average should be bang on. The average yield on our private education loan portfolio in the second quarter was 7.87%, 7.96% in the prior quarter and 8.20% in the year-ago quarter. Ray alluded to the fact that the yield on our peak season originations was higher than the prior year, it came in stronger by 25 basis points. So again, Q3 originations have a higher yield, this year than originations in the prior quarter. At a time when investors are focused on the competitive environment for the industry, we feel this demonstrates our strong position on the franchise in our ability to maintain a solid NIM on an ongoing basis. Turning to our cost of funds, it was 1.2%, up 3 basis points from the prior quarter and 13 basis points from the year-ago quarter. We did announce a July ABS funding during our prior earnings release and this contributed to the marginal increase in cost of funds compared to Q2. In this transaction we raised $381 million of floating rate funding at a spread of 139 over LIBOR. And we also raised $242 million of 6.5 year average life, fixed rate funding at an all-in cost of 3.71%. This funding will be used to lock in very strong spread on our fixed rate portfolio loans. Raising fixed rate funding through ABS market is an excellent way for us to fund the fixed rate portfolio of loans that we have on balance sheet. In the quarter, we also accessed our ABCP funding facility, this is a liquidity facility that cost us LIBOR plus 80 basis points. We will pay this facility down once our loan sale closes. On the deposit front, we were active in the quarter, we raised $534 million of funding with an average life of eight months, at a spread of LIBOR plus 37 basis points. So we continue to believe that using term ABS funding to extent the average life of our liability, complement our deposit funding is a proven strategy for the bank. Non-interest income totaled $10 million in the quarter compared to $89 million in the prior quarter and $96 million in the year-ago quarter. The decrease in the quarter was due to the fact that we had no loan sale in the quarter. Ray mentioned our $750 million loan sale, I’ll just repeat that we are very pleased that given the backup in yields in the market for all asset classes, we are very pleased and we are able to get this transaction done and I’ll repeat as we think that this demonstrates the high quality of our smart option student loan program. Turning to operating expenses, third quarter operating expenses excluding restructuring costs were $93 million compared with $90 million in the prior quarter and $73 million in year-ago quarter. The main drivers of the increase from the prior quarter were that a seasonal increase in our DTC spending during peak season, also higher staffing levels in our call centers and in our credit operations of peak origination season. We also had in our third quarter operating expenses $1.3 million related to the write-off of the impairment on a building that we sold in Indiana. The main drivers of the increase from the prior year is due to the significant increase in our loan portfolio, so volume driven and increased service levels. As a standalone company, our goal is to provide industry-leading service to our customers and families. We’ve made significant investments and seen significant improvements in our servicing levels, as measured by things like average speed of answer. And we’ve also seen 41% increase in overall customer satisfaction, which we are very pleased about. We are confident, optimistic that these improvements as we mentioned will add over the coming quarters will add value to bottom line in terms of efficiency of [indiscernible] servicing center and increased loan volumes. Restructuring costs in the quarter were just under $1 million compared to a $1 million in the prior quarter and $14 million in the year-ago quarter. Year-to-date we’ve spent $6.3 million in restructuring expenses. And this point in time activities associated with the spend are essentially completed. The originations platform was the last major system to be converted post spin, we are accomplished that during our busy peak season and we’re now processing all of our new loan originations through this platform. We announced in our earnings press release that we are increasing our operating expense guidance for the full year to $360 million, which includes restructuring costs of $7 million. I’d like to give you a little bit more detail on what drove that increase. So, operating expenses excluding the impact of volume growth have stabilized the run rate of $90 million for the quarter. The operating expense increase of $13 million from our previous guidance basically breaks down as follows. Half of this increase is the result of decisions that we’ve made to improve our customer service. Again, we think over the long run that would be positive for the business, leading to our volume as a result of higher application conversion rates and increased serialization. 15% of the increase was due to higher than anticipated health costs. 10% of the increase is attributable to the write off of the building that I just mentioned in Indiana. And balance of the increase in operating expenses is attributable to several small items that are non-recurring in nature. We will not provide guidance for 2016, operating expense guidance for 2016 until our Q4 earnings call. However, I’ll repeat what Ray said. We do expect operating expense growth to decelerate in 2016. And we expect top-line growth to lead to steady improvement in our efficiency ratio and solid earnings growth going forward. In the third quarter, comment on our tax rate, the tax rate was 28% compared to 40% a year ago. Tax rate decrease is attributable to one-time release of reserves for uncertain tax positions that we’ve build up at the spend and we received favorable outcomes in several of these matters. As a result, going forward we expect our tax rate to be 39%. Looking at capital, the bank remains well-capitalized with risk-based capital ratio, total risk-based capital ratio of 14.1%, well in access of what is required to be a well-capitalized bank by the regulators’ guidelines. Our capital ratio will improve significantly in the fourth quarter as a result of the loan sale that just completed. And in addition, there is excess capital at the parent that provides additional source of strength for the bank. We’ll continue to maintain high levels of CapEx for the projected growth of the company. And I will repeat that we do not anticipate returning capital to shareholders in the medium term as we reinvest in this highly profitable business. So, on Slide 5 you will see summary of our origination volume. Ray covered that. Very strong loan originations growth of up 6% in the quarter, 7% year-to-date and the credit metrics are bang on for the same 90% cosigner rates and 749 FICO scores. Turning to Page 6, we’ll talk a little bit about our credit metrics. Loans delinquent 30-plus days came in at 1.9% compared to 1.7% in Q2 and 1.3% in the year ago quarter. The uptick in delinquencies from Q2 is driven by our May-June repayment rate. And it’s similar - I’m sorry, and loans in forbearance were 3.1% compared to 5% Q2 and 1.6% in the year ago quarter. The decline from Q2 was the result of the disaster forbearance that we provided to borrowers impacted by floods in Texas, one-off. Our current forbearance levels are consistent with our long-term projections. Turning to charge-offs net charge-offs for all loans and repayment were essentially unchanged at 0.83% compared to 0.81% in Q2. Gross charge-offs for all loans in full P&I payments came in at 1.95% in Q3, down slightly from 1.99% in Q2. Again, we’re very pleased with the performance of our portfolio and the continued strong results of our default diversion efforts under our 120 day collection policy. We ended the quarter with 26% of total loans in full P&I. As a result of this solid credit performance our provision for private education loan-losses was $27 million in the quarter. We ended the quarter with an allowance of 92 basis points for all loans and 1.5% of loans in repayment. Our allowance coverage ratio was a solid 1.96%. As Ray mentioned, our portfolio is performing better than we expected in general and due to the fact that we’ve seen no negative impact from the move to 120 day versus 210 collection periods, we’re lowering our full year provision guidance to $83 million from $95 million. Quick comments on core earnings, [indiscernible] we call our core earnings. The only difference between core and GAAP, is core excludes the mark-to-market on unrealized gains and losses on ineffective derivatives from earnings. We use derivatives as we’ve talked about, predominantly interest rate swaps to manage interest rate risk in our portfolio. The difference between core and GAAP has been de minimis because there has not been a big impact from this derivative portfolio in recent quarters. Core earnings for the quarter were $47 million, $0.10 per share, little higher than GAAP metrics that we reported. And this compares to $79 million or $0.17 diluted earnings per share in the year ago quarter. Ray mentioned our ROA was very strong. Year-to-date we’re at 1.9%. And our ROE year-to-date was 16.7%. Those metrics in the quarter were lower than previous quarter principally due to the fact that there was not a loan sale. But we are on track to reduce ROA at basically 2% and ROEs in that 18-plus-percent vicinity. Finally, to wrap up, as you’ve read in our earnings release and as Ray has already mentioned, EPS guidance for the full year, we expect to come in at $0.58 per share. That concludes my prepared remarks and we’d now be happy to open up the call for questions.

Operator, we’re ready to take some questions.

[Operator Instructions] We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Sanjay Sakhrani of KBW.

Thank you. So, Steve, I had a question for you on the NIM. Just looking ahead, I know you gave for us the fourth quarter or full-year guidance, but when we look out to 2016, how should we think about the progression of the NIM? Do we have to worry about any basis-related issues where you’re pricing at prime and some of your liabilities are LIBOR associated?

No, Sanjay, the very nice thing about our book is that virtually all of our private student loans are actually private and so they’re all indexed to one month LIBOR. And all of our funding that we swap and as a result of securitizations, are one month LIBOR. And the balances, we have $3 billion of money market deposits. And our view which I think is always pretty bang on is that if and when interest rates ever go up we can - if the money market deposit rate will track one month LIBOR pretty closely, then we raise our rates in [indiscernible] LIBOR without diminishing our margin. So we feel very good about the way we are funded.

And when we think about the progression of the NIM looking out to next year, probably stable-ish?

So, the impacts that we see in this quarter. So when we hold higher cash balances, it will tend to be suppressed. And when the cash balances are paid down, the run-rate - the spread is going to be somewhat higher. So, we’ll fluctuate around that 5.5%.

Okay.

Within the quarter. And we do have a business that’s been highly skewed from a seasonality standpoint. And so, that won’t be with us forever. But so far as the overall for the year, we expect them this year at 5.50% and we expect next year to be 5.50%.

Okay. Perfect. And then, just one final question on the gain on sale, were you guys surprised by the extent of the decline in the gain on sale or does it make sense given the depreciation of other student loan categories? I’m just trying to figure out how that gain on sale relates to what’s happening in the secondary market.

So, look, I know that I was optimistic that 10.5% could be improved upon. I was very surprised by the extent of deterioration in the [indiscernible]. And basically what drives the gain on sale is competitive assets for the residual of - starting at the front. So as spreads go out on the bonds, in the front-end of the stack that reduces the cash that’s available to residual holders. And residual holders are looking at alternative investments such as high yield bonds, the equity tranches in commercial real estate investments and things of that nature. So as those spreads blew out significantly 100, 200, 300 basis points, it pushed out the yields on our ABS bonds, leading less cash for residual holders. So at the end of the day we’re not that surprised that the premium deteriorated from 10-plus-percent to the 8% ZIP code. But look, the market has been very difficult and there have been a lot of transactions that were pulled and unable to be completed. So we think that that speak volumes about how investors view the quality of the Smart Option Student Loan trust that we’re putting out for bid.

And I assume, just go, looking ahead, I mean, the gain on sale or the decision to sell will be predicated on whatever the market conditions are at that time, right?

Look, we’re certainly not going to sell loans at a fire-sale discount. So we talked in the past about being opportunistic at 8% and above. And I think that that continues to be our position.

Okay. Right.

We would prefer to - we would prefer to hold as many of these student loans as we possibly can. And we have competing issues with our growth cap and capital levels and so on and so forth. But we think going forward we could certainly sell less than a $1.5 billion of our student loans and maintain acceptable growth rates and capital level. So we will toggle back and forth the amount of loans that we sell depending upon where premiums are in the marketplace.

Okay. Thank you very much.

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

Thanks for taking my question. Just back on the loan sales real quick. Do you have any leeway with your regulators to potentially retain more loans temporarily if the market remains unfavorable or gets a little bit worse so that temporarily you could trend above the 20% cap?

So, look, I mean, if temporarily we’re bumping up the 20%, 21%, 22% spot, I don’t think that how a regulator will row a penalty flag. What we want to do is demonstrate that we can execute our business model, demonstrate the high quality of the assets that we have on our balance sheet, get through the upcoming D-Fast [ph] stress test that we have to submit in the summer of 2016. And then have the appropriate capital conversations with our regulators, is 14% right or is 12% right or 25% growth right or is 18% growth right. But we think that the way the business and the assets are performing that we can have meaningful conversations on those topics with our regulators as we move forward.

Okay. Thanks. And then, on the expenses, are the changes you’re making to improve customer service, have those been, I guess, prompted by some of the new guidance we have seen from the CFPB and Department of Education? And, I guess, as a follow-up to that, assuming the Student Loan Bill of Rights and some of the changes they are advocating for, assuming those go through, the changes you are making now, have those been largely consistent with that? And would we see any meaningful step up from here on the servicing expense side? Thanks.

Mike, if you look at the CFPB documents they have issued as far back as two years ago for Rohit Chopra, who has been the ombudsmen for student lending, their documents haven’t changed very much. It is the case that prior to the spin there was a consent order signed by both Navient, as well as ourselves with the DOJ, the FDIC and the CFPB. They said, they haven’t changed very much since 2014. And so, many of the things that are in that document are already in the consent order and we are in compliance with them. In fact, we have a consulting arrangement with PWC to audit our compliance with the consent order and we have received very good marks from them. So as we look at it, we believe we have a good customer service platform, good performance. The CFPB has suggestions. We don’t believe any of them would be significantly deleterious to it. I should point out that every day we deal with more than 1 million customers. And we have an open portal opportunity for any American to complain about us if needs be with the CFPB. And it is the case that over the first 365 days that that portal has been open, we’re dealing with 1 million customers during that period, actually 1.3 million every day. We received 273 complaints. Some were actually inquires at CFPB. So in our first 365 days of working with the CFPB we have received less than one complaint per day. For any notions that there are thousands of people complaining or anything along those lines, just doesn’t match the facts.

Thank you.

Your next question come from the line of Moshe Orenbuch of Credit Suisse.

I guess, maybe kind of pulling up, you talked about the growth in the market kind of being a little bit lackluster. Any thoughts about what we could expect as we go forward like what are the kind of crosscurrents that you’re seeing kind of as you look out into the next year for that given some of the rhetoric about college costs and the like?

Sure, first-off, we’re trying to make this an upbeat call. So I’d appreciate it, if you didn’t introduce vocabulary such as lackluster. Hence, where I’ll…

Well, apologies…

Yes. I think the actual term that I would suggest is consistent. And so when we look at the college growth market or the market in which we operate, which is essentially the undergraduate gap funding business, it’s derivative of the entire expenditure by American for undergraduate education. And, in fact, that’s driven by clearly two items. One if the number of people who are buying that education. And second is, what they’re paying on average for that education. And the growth in that over the last three years has been very consistent at between 1% and 2%. As with that, our growth has consistently been more than double that, so we gained market share. We don’t see any volatility in that growth trajectory, because the demography is pretty well set. And colleges have come under a lot of criticism for managing their costs, but to date they have been more consistent with their past performance. They may have been reacting to anything that’s in the environment.

Okay. The other question that I had is, in the past you’ve talked about using the FFELP portfolio as kind of - not just liquidity, but sort of as a buffer against that 20% cap, is that still in place, something that you might consider using in - if premiums are on the low-end?

Moshe, is it something that we would consider doing. But candidly, I think everybody on this call does follow what’s going on in the FFELP loan sale market. And it would be hard for us to I think receive a premium with that portfolio at this point in time. So it is something that we will certainly consider as another level that we can pull. But we’re optimistic and I remain optimistic that we were able to get the loan sale off at a very nice premium at this time around.

Got it.

I think that we will certainly be able to continue to execute that component of our business model going forward.

Got it. Thanks.

[Operator Instructions] We’ll pause for just a moment to compile the Q&A roster. The next question comes from the line of Mark DeVries of Barclays Capital.

Yes, thanks. It sounds like you have high level of confidence in just the overall level of your yields with the guidance you’re providing on NIM out several years. But can you just talk about what if anything you’re seeing in terms of competition around pricing with some of these marketplace lenders trying to push their way into your business?

So Mark, we made a point of mentioning that we were able to actually increase the yield on this portfolio, because I think it demonstrates a lack of competitive pressures that we are seeing out there, we were also able to put up big numbers on origination front. People talk about the various syntax getting into the student loan, this is quite frankly I don’t think we’re really seeing them. And the…

To the extent we are seeing them it’s in the post origination business really consolidation and all, things of that nature.

Right. And they tend to be focusing one of the big pie of federal loans that they can consolidated as opposed to our, what we think is appropriately priced for just private credit portfolio. So we haven’t seen a very big impact.

Okay. So you’re not seeing any kind of accelerated runoff in your already originated loans as a result?

No. We are not seeing that at all.

Okay. Great. And just one last question on the kind of trajectory of the loan sale, market, I mean presumably it’s firm, I would imagine it wouldn’t have been easy for you to price a deal if it was still kind of declining. Are you pretty comfortable that this could be like a sustainable level as we look out into the first half of next year?

Well. You’re asking the guide I thought 10.5% was sustainable, who thinks 8% is sustainable, as you all know better than I do the market can certainly do funny things, but I do thing that we have reached a level were yields make sense to investors and certainly sells bonds and residuals on a go forward basis. We do a lot of work with our investor base and we do a lot of investor cultivation, we like to keep them informed as how we’re running the business, how the assets are performing and things for that nature. Residual buyers I think are still pricing their residuals with - at cumulative charge-off rates that are substantially higher than what we think what actually going to see. So as time goes buy and portfolios continues to perform as expected that’s in area where we can see some pricing improvement. And if the bond market stays in reasonably good shape, we can certainly continue to execute that aspect of business model that’s a reasonable prices.

And Mark, want to return to your point about runoff. And I just remind you that the way our business model is setup with over 90% of the loans having a cosigner at the point of origination and having FICO scores that are roughly 750 at origination. Many of the loans that people talk about in regards to consolidation of, students in particular get loans and their FICO scores are low, let’s call it under 700. They come back a couple of years later they have improved their FICO scores, they can now command a lower APR and as a window there an integral available for consolidation. Because our loans are granted at 750 level, and because they are variable in the rates, so when the rates go down people aren’t stuck with hype that 85% of our customers so take - we still have that variable rates. We are not a subject to being consolidated away from as many of the other lenders.

Okay, that’s helpful. And just one last question, Steve. How did the demand for this last year, the price at the 8% compared to the prior deal, the one at 10.5%?

Candidly, the demand was somewhat softer this go around, it was a very difficult market. But we do have enough buyers out there that are interested in the smart options student loan product execute both the bond offering and the residual offering. As you know market is in very difficult shape and continues to be. A lot softer than it was just five short months ago.

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Eric Beardsley of Goldman Sachs.

Hi. Thank you. Just a question on the asset growth, I guess if we were to look at what could be coming on the balance sheet next quarter, relatively low originations, probably some cash bill to fund the first quarter. So I guess, as we look at it, you’re probably getting well below 20% year-over-year asset growth. I guess, in that context, why the loan sale now?

So look, when we look out over the next couple of quarters, we also have capital constraints and when you hit the big first quarter peak origination season. We see our loan growth increase substantially, through our capital levels decline below that 14% total risk-based capital level.

Got it. So we should view that 14% as more of a binding constraint and then necessarily the 20% year-over-year asset growth?

Yes. I mean, the two of them are absolutely important constraints that we’re operating on.

Okay. Great.

We never went to cut our time period for execution on the sale. Sure, so that would be the victims of what could be a very draconian market conditions. So we just want to keep this is on a regular basis.

Okay. And then, I guess, in the past you’ve talked a little bit about potential for diversification. I’m just curious if you have any updates there and if any of your comments around the efficiency ratio trends incorporates any expenses for new initiatives?

As we turn to 2016 never we have the spin behind us, we will be thinking about potentially piloting a couple of products. And so we’re finalizing our 2016 plans as we speak, we will talk that of course in next call, and it will be the case that all the expenses associated with anything we will do already incorporated in the efficiency numbers that we talked about.

Okay. Great. Thank you.

Thank you. Eric.

Your next question comes from the line of David Hochstim of Buckingham Research.

Hi, good morning. Are there following up on that, are there other initiatives that you plan to use to improve marketing effectiveness and customer experience? You did some things earlier in the year, I know in terms of sales force and in terms of mobile apps?

It is a case that we expect to have constant improvements in our customer experience that, as far as moving as you know the goalposts that are passively receiving. It is a long-term game. It is our opinion and looking at the audience that we serve and those we would like to serve with even more products, it is the case that telephone is the winning instrument of choice. Mobile apps, mobile servicing are not an option in this business, and so we are both establishing that as well as improving it. And it is the case that there is a myriad of items so far as improved IVR experience, improved experience was that debt top information available to both our service personnel as well as our collections people. And so this will be a film that we are in the middle of and it will continue as long as we’re doing business.

Okay. And whatever you are planning is probably already incorporate in the expense guidance?

Yes.

Okay. And then, the other question I had with just on loans entering repayment. Can you give us an idea of what - how much of the portfolio would be entering repayments next year?

So the next big wave will be the [indiscernible] and that is basically a $1.5 billion loans that we’ll be entering, full principal and interest. And that will have another mini-wave that will probably around $600 million in the May, June timeframe. So basically six months post various graduation rates.

The $1.5 billion would be early in the year?

The $1.5 billion will be November, December - that’s a big post May, June graduation, six months as a grace for P&I [indiscernible].

Okay. And then, in terms of reserving for those waves, how far ahead would you look in anticipating some increase in modest increased ability to charge-offs?

So the expected increase in loans going to fall P&I is constantly being factored into our loans. We’re building it allowance to cover charge-offs for the next expected year.

Okay. All right. And then, I guess another question about the servicing of loans that you have securitized in sold, is it right to assume an average fee of about 75 basis points or could it be little higher?

Our servicing fee is 80 basis points. We’ll have $12 million as of close of this securitization of $12 million in annual run rate servicing fees in the money income state.

Okay. And then, just to be clear, the sale in the fourth quarter, that separate from the securitization you did midyear? And the residual value retained on that? Or is that…

That’s correct. So, 15B that we announced in July was a funding securitization. We still own that residual. 15C is what we announced yesterday that is a securitization with the residual sale.

Okay. So, in theory you could sell that residual from 15B at some point if the market was really…

We could sell the residual from 15B, there is a little bit of care on that transaction because we own 5% of the various trusts, of the various bonds or the risk retention and we own the C bond so, it’s not a cakewalk but it’s certainly something that can be done.

Okay. And selling that residual would then take those securitized loans off the balance sheet for the growth calculation?

Yes, that’s correct.

Okay. All right. So, thanks a lot.

Welcome.

[Operator Instructions] Your next question comes from the line of Sameer Gokhale of Janney Montgomery Scott.

Hi, good morning. I have a couple of questions, firstly when you look at the gain on sale of 8%, I would say that at least based on the investors I have spoken to it seems like we fear was at the gain on sale would actually be lower than that. Given what we have seen in turmoil in the fixed income market. So, it seems like a relatively healthy gain on sale margin or premium all things considered. I remember we discussed this may be a few quarters ago in terms of looking at forward flow agreements, but given some of the uncertainty in the market at this point driven by what’s going on in the credit market, does it make sense for you to know perhaps more seriously try to consider entering forward flow agreements for future loan sales even if they might be slightly lower premiums. Again, I mean, the reason I asked it, is that it’s just not the uncertainty in the credit markets but it’s also from a regulatory standpoint it seems like your balance sheet growth is kind of constraint where regulators demand. So, I just wanted to get your update thoughts and forward flow agreements and locking in perhaps lower premiums relative to maybe what you generate so far?

So, look Sameer, you make a very good point of forward flow agreement would be very helpful particularly as it gets us hedged away from these volatile market times. It will come with a significant discount and that is something as we probably should weigh, and we will have the capital market to look at what is available in terms of forward flow at this point in time, but it is a very difficult transaction to execute. Forward flow for the residual, one piece of the residual as we discussed here in this call and in the past is entirely dependent upon where you price the bonds that are in front of the residual. So it is a difficult transaction to execute, but it’s certainly something that we would look at. The gain on sale is our least favorite part of this business model and it is the fact that if we held these loans or the earnings for shareholders would be higher two years from now than if we did not. So we will look to minimize the amount of loans that we need to sell on a go forward basis. And we’ll take a look at all strategies, but I think number one, we want to wean ourselves of this reliance on gain on sale. And we will look to execute that in the future.

Okay. And then, you keep referencing kind of residuals and securitization funding for these loans, but I mean I think your whole loan sales might also be a possibility, right. I think the [indiscernible] investors seem to prefer investing in the securitization bond and so - I mean, I kind of get that but it may be possible for you to also contemplate doing whole loan sales, correct? Again, bouncing it out with maybe a decline in lower premiums but locking in the forward flows or is there specific other reason why you just would prefer securitization as opposed to whole loan sales?

The reason why we ended up going the securitization route for the loan sales is because as you may recall, we did a lot of work with various different investor groups leading up to our first month sale. We talked to regional banks, we talked to U.S. branches, the foreign banks, we talked to real money, buy-and-hold fixed income investor types and we looked at the residual market. The bid from buy-and-hold funding type banks was substantially lower than what we can realize in terms of economics by securitizing and selling the residual. And in fact, a lot of the real money fixed income investor buyers prefer the residual to the whole loan as well. So, it is something that we constantly revisit, we just haven’t had any whole loan buyers step up for at least part sale, no less for a forward flow agreement. And it is the case that all of the syntax type of operators that we see operating in the consolidation market and so on and so forth are relying on the residual market to offload loans from their balance sheet as well. So it is the main avenue for executing these things, but again the team continues to look at alternatives and we will.

Okay. And so and then, maybe some perspective from both of you, but I was thinking about - I had a question about profitability of private student loans in your portfolio over the lifetime of that private student loan. And what we’re specifically trying to get at is you have a yield that’s quite attractive at origination, but given some of the stuff you hear from marketplace then there is the fact that there is stock of more refinancing, more seasoned loans, it would seem to make sense for you to want to retain those loans yourself. And so as you think of profitability over the loan cycle, I mean have you beaten any expectation of lower margins on those loans as you perhaps had to offer lower rates to retain those loans within your portfolio? Is that baked into your all-in pricing?

When we take a forecast - when we do a forecast for the portfolio, we have a modeled on the prepayments which would be the leading indicator for the phenomenal that you’re mentioning. And it is the case that we have as I said 750 average FICA score through the door and over 80% of our loans of variable rate. And so, for a person who is [indiscernible] who has a 750 and takes our loan, for a consolidator to lower that is very high, very difficult given the length of this asset and the fact that is unsecured. And so, we track prepayments quite carefully haven’t seen any significant movement in that either way up or down. And so, we don’t anticipate that we would have a midstream reduction in pricing in the portfolio, it doesn’t appear to be necessary and we have been [indiscernible] about this several commentators including yourself, but we don’t see it in numbers. And of course we want to maintain a relationship that we have with our customers. So we’re very attuned to this.

Okay. And then, this is the last question on your yields on new originations. I think, you said, you were higher year-over-year but I think so the portfolio, the yield was lower year-over-year. So if you would just remind me kind of what happened between the years that extent the overall decline in the portfolio yield on year-over-year?

So I can sum it up sort of along these lines. Over the last couple of years there was a step down in the yield of roughly 40 basis points and it’s looks like we have recovered some 25 cost compact. So there will be modest pressure on the overall student loan yield, but it is not going to have a significant impact.

But the nature of those re-pricings was as we looked across the band of probably 600, 700 basis points, good price points, that a customer could experience, we wanted that to be as move incurs as possible, and we look at couple of years back and had a couple of step functions, which we thought were unintuitive of today customer. And so as we move that, Steve said, first we had a movement for the yields go down by 40 basis points. Than as we looked at it again, they were back by 25, so net-net we’re down about 15 basis points.

Okay. Thanks for taking my questions.

Thank you.

Thank you.

Your next question comes from the line of [Jordan Haimowitz of Steel Financial] [ph].

Good morning, Jordan.

Sorry. Thanks for taking my questions, guys. You said, the people that were buying the whole loans instead of the securitizations would be much lower. What is much lower? Is much lower half? Is much lower four points? I mean, what type of range are we talking?

A couple of hundred basis points lower, Jordan.

So like 200 or 300 points?

Yes, that’s a fair range.

So what - could we also think that that would be the bottom so to speak if there was no gain on sale more like that the lowest the numbers would be - would be about a 6% gain?

I mean, I don’t really want to speculate on where things will come out. Look, we feel very good about where we sold this most recent residual. And, just below the level that we sold this out, we think that there is substantial demand for this product. And again, as we go forward and the credit metrics prove themselves, we have a more substantial history. We think that there is definitely room to the upside for gain on sale.

But the volatility that we’ve experienced over the course of 14 months. A year ago we were delighted to get 7.5%. And then, in April when we got 10.4%, it’s 50% higher. Now, we see a drop off of 20% to this point. And so we think in some sense the volatility outweighs the targeting that you’re referencing.

And the second question is, is there more and more buyers as you would pursue other whole loan sale markets, in other words, are you expanding the potentials buyers at?

So, look, we do a lot of investor outreach with the buyers of things like subordinated bonds and residuals. So we are constantly looking to expand the investor base. To your question so if we sold at 108 today and we got off our transaction. At 107, 106.5, 107, if there’s substantial demand for these basis.

Got it. That’s exactly the question I was trying to get to. Thank you.

Thank you.

Thank you.

There are no further questions at this time. I will turn the call back over to Mr. Brian Cronin for final remarks.

Thank you, and thank you for your time and questions today. A replay of this call and the presentation will be available through November 4 on our Investor Relations website salliemae.com/investors. If you have any further questions, feel free to contact me directly. This concludes today’s call.

Thank you for participating. You may disconnect at this time.