SLM Corporation (SLM) Q4 2016 Earnings Report, Transcript and Summary

Good morning. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae fourth quarter 2016 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 period. [Operator Instructions] Thank you. I’d now like to turn the call over to Brian Cronin, Senior Director of Investor Relations. Please go ahead sir.

How are you doing? Good morning. And welcome to Sallie Mae’s fourth quarter 2016 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 from 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 earnings supplement for the quarter ended December 31, 2016. This was posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I'll now turn the call over to Ray.

Okay. Thanks, Brian. And good morning to everyone, and thank you for attending our session. The fourth quarter results are part of a full trajectory for our company, and they are on that trajectory which is quite satisfying. So let me just pick out a few numbers as we go through this. Steve also has some review for the quarter as well as for the year. We’ll talk about the outlook and then we’ll entertain questions. As we click down the profile of the franchise, our volume is strong; it’s up 8%. We did hit our goal of $4.7 billion in new originations for the year. Secondarily, volume is always an indicator that needs to be appended with quality indicators and our credit quality was 90% cosigner rate, and average FICO of 7.48 is consistent and consistently high. On the NIM, which comes up the yield minus our cost of funds naturally is 5.55%, up 7 basis points from the fourth quarter of ’15 and at 5.68% for all of ’16 is of course a very attractive number and also in line with our guidance. Our yields on the portfolio at over 8% continue to be both steady as well as gratifying. In regard to our operating efficiency and expense management, as I said on the trajectory, were 51% efficiency ratio in ’14, 47% in ’15, 40% in ’16 and as you can see from the guidance we will go under 40% in ‘17. Credit performance also continues to be on model, with our net charge-off rate for 2016 under 1% at 0.95 or 95% basis points. As these assets which are high quality accumulate on the balance sheet, it has an ongoing both revenue stream as well as the servicing stream for us. As you all know we had no asset sales in ’16, although we had started ’16 with the announcement that we would start that, it has in fact worked out fabulously well. And our private student loan portfolio at $14.3 billion on the books is up 35%. And as balance sheet grows for the year, it’s also very good. It is at 21.8%. So the revenue producing assets within the balance sheet continue to be a higher proportion and the balance sheet continues to be on the trajectory of being ever more efficient. As we net all these out to EPS, the $0.53 that we had in 2016 is also gratifying number. Compared to 2015, the 2015 EPS number at $0.59 of course had in it $0.20 of EPS associated with asset sales during that period. Stripping those out and taking the $.53 in ’16 in comparison to the ongoing EPS associated with the business in ’15 at $0.39, we have a 36% increase in ongoing EPS. Our ROE also remains high at over 14%. A backdrop to these results are our relationships with our key regulators, the CFPB, FDIC, and the Utah Department of Financial Institutions and in all three cases we have excellent relationships with our regulators who are getting good reports, they know our continuous improvement and we're gratified by that. It has also allowed us to have these results which I'm articulating. Our guidance going forward reflects that same trajectory. EPS guidance at $0.67 to $0.69. If we were to hit $0.68 the EPS for the year ’17 versus ’16 would be up over 28%. The originations are continuing to grow at approximately 5%. We're targeting $4.9 billion. The efficiency ratio as I said from that 51% in ’14, down through the 40s in ’15 and ’16, will be in the high 30s, 38%, 39% in ‘17. Some backdrop comments. One is the focus of our franchise is entirely on our customer satisfaction and customer experience. We've had great strides in improving those and it shows up in our customer satisfaction results as well as the lowering of our operating costs associated with fixing things that were mistakes. So we continue to improve in that, that will be a journey that never ends. And it is our focus and it is the rock on which this franchise is built. There is a case that we continue to improve them both in service as well as in functionality. So the launching of the new Sallie Mae website, the improvement of our mobile app and the ability to actually make your payments on Apple Watch if any of you are interested, are all signs of as continuing to modernize the company, to view the competition as the best in the industry and to have as an objective to better them. In regard to politics, there are bunch of stories. Of course, we have a new administration being inaugurated tomorrow. Lots of talk out there, we’re watching things carefully. We'll see what happens. As you all saw, there were some lawsuits filed yesterday in regard to Navient and some servicing issues. We are as you all know from many of our disclosures over the course of the last two and three quarters here [ph] years, not involved in that. And so as we move on to next year and we look in trying to evaluate and learn from what has happened in 2016, we're gratified to know we had a good quarter, the results are right on our model, so these are not one time events but continuous. We have balanced good results in all areas. Our marketplace performance continues to be very good. We continue to be growing faster than the market. Our risk management is consistent and is at very good level as I said with a yield on the portfolio of 8% and a write-off rate of under 1%. We’re obviously doing a risk reward trade off that's quite helpful. The customer experience is good as well as continuing to improve. The mix of our funding and yield as you saw with the 5.68% NIM continues to be the best or among the best in the industry I should say. Expense management, I’ve noted and we have as an ongoing mantra continuous improvement. We’re blessed with a strong team, good franchise, terrific customers and as we said before, thank you all for listening to us for a little bit and I’ll turn things over to Steve.

Thank you very much, Ray. Good morning everybody. As Ray commented I will drill down into a little bit of additional detail on the quarter to help you with the remodeling and understanding of what's going on here at the company. And please bear with me if I repeat some of the numbers that Ray has already reported to. So net interest income for the fourth quarter was $245 million, $22 million or 10% higher than Q3 and $58 million or 31% higher than the prior year quarter. The increase from the prior year was driven by growth in our private education loan portfolios, so they increased [ph] both the quarter and the prior year growth from our portfolio. Talk about NIM. The bank’s net interest margin on interest earning assets was 5.55% in the fourth quarter, compared with 5.58% in the prior quarter and 5.48% in the year ago quarter. For the full year, our NIM came in at 5.68%, up from 5.49% in 2015. The improvement year over year was due to increase in our private student loans as a percentage of the total portfolio. In 2017 we expect the bank's NIM to be very similar to 2016 and demonstrate the same seasonal patterns as well as being very close to the numbers that we saw in 2016. The average yield on our private student loan portfolio in the fourth quarter came in at 8.08% compared with 8% in Q3 and 7.84% in the year ago quarter. The increase in both periods was driven primarily by changes in one month LIBOR. The story with our cost of funds is very similar. Cost of funds is 1.4%, flat to the prior quarter and up 22 basis points from the year ago quarter which was almost entirely driven by changes in LIBOR over the course of the year. In 2017 we’ll continue to execute our funding strategy where we rely on the bank deposit market for the majority of our funding and access to ABS market opportunistically to diversify our liabilities and extend the duration of our funding book. Right now as we sit here today the deposit market and the ABS market are currently showing very favorable conditions from a cost of funds perspective and we hope that that remains the case over the course of 2017. Non-interest income for the quarter totaled $13 million compared with $22 million in the prior quarter and $72 million in the year ago quarter. Quite a bit of noise in these numbers. The fourth quarter number is more representative of the fee income this company will continue to generate. As a reminder, the Q3 fee income increase included a $9 million increase in other operating income which was related to indemnification for uncertain tax position and the prior year quarter included our final loan sale. Speaking of taxes. Looking at our effective tax rate in the fourth quarter, it came in at 38%, relatively unchanged from 37.9% in the year ago quarter. The full year tax rate came in at 39.6% compared to 37.5%. The increase was a result of an increase in providing for uncertain tax positions. Looking to 2017, barring any major changes, we expect our tax rate for the full year to come in around 39%. Let’s talk about operating expenses. They came in at $98 million for the quarter compared with $100 million in the prior quarter and $85 million in the year ago quarter. We expect Q4 expenses to decline from Q3 as we decrease our marketing expenses at the end of our peak selling season. The change from the prior year was up 15%. This was driven by a number of factors, starting with a 19% increase in customer accounts and 25% increase in accounts and repayments. But there’s little bit more going on here, nearly 2% of the 15% increase is attributable to an increase in FDIC fees. This is a line that we recently separated our income statements, give you a little bit more color on what's going on here. FDIC fees grew 34% in 2016 and they're expected to actually grow more than 50% in 2017. This is a good thing. Obviously it reflects the growth in the company and the portfolio. Another 2% of the 15% increase is driven by what I would classify as non run rate accounting and legal related professional fees primarily associated with the situation that we had in the prior quarter with growth [ph] of our uncertain tax positions. Finally, an additional 2% is attributable to the year-end incentive payments, basically reflecting the fact that the company exceeded its corporate goals. Still with this 15% increase fourth quarter non-GAAP operating efficiency ratio declined to 38.6% from 42.5% in the prior year. Total OpEx for 2016 was $386 million compared with $356 million in 2015. The 2015 year included $5 million in reorganization expenses. If you exclude that, our OpEx was up 10% over the prior year which we think is a very solid result given the significant increase in the portfolio and accounts being serviced. The non-GAAP -- Ray talked about this already but worth repeating. Our efficiency ratio declined to 40.2% from 46.8%, a nice 14% improvement. Ray did give guidance for continued declines in our efficiency ratio over the course of ’17, they will slow down a bit but we will continue to benefit from the operating leverage that we have at the company. We are nearly -- well actually in excess of 60% of our expenses are coming in at six basis. Wrapping up the discussion here, talk about capital. The bank remains very well capitalized at the end of the year at a 13.8% total risk based capital ratio, well in excess of the 10% required to be considered well capitalized. We will be taking down our target total risk based capital ratio to 12% from the 13% that we've been talking about. Our DFAS exercise has demonstrated that this is a sufficient capital level for our high quality asset even in periods as significant economic stress. We still have ample capital to handle the expected growth over the next couple of years. In fact, despite the fact that we are now targeting 12% we will probably end the year of 2017 closer to 13% total risk based capital and 12% and that does not even include capital that we have at the holding company, which is an additional source of strength for the bank. Ray talked about originations. The quarter was very solid at $608 million, originations at 6% and of course the full year came in at 8%. Little bit more detail on credit performance. Loans delinquent 30 plus days were 2.1%, relatively flat to Q3 and 2.2% in the year ago quarter. Loans in forbearance as anticipated increased to 3.5% from 3% as our November, December repay wave took place and the 3.5% is relatively unchanged from the 3.4% in the prior year. These statistics remain strong and reflect the high quality of our portfolio as do are default stats. So Ray mentioned already but worth repeating that net charge-offs for 2016 came in at 9.95%, up from 0.91 Q3 -- I am sorry, Q4 number 0.95, up from 0.9 Q3 but down from 1.1% in the year ago quarter. And we do like to share with you charge-offs measured as a percentage of loans in full P&I. They came in at 2.08% in the quarter, compared with 2.07% in Q3 but considered as big improvement from Q4 2015 when defaults were 2.43% of loans in full P&I. Ending loans in full P&I totaled $5.1 billion. And this includes the $1.6 billion of loans that entered full P&I in the quarter, and associated with this increase in loans going into full P&I, some analysts have noted as did we that -- excuse me, we saw a pot of loans being consolidated to third parties. This is something that obviously we watch very closely here at the company and we certainly are not alarmed in the pattern, we do see a typical pop in the fourth quarter. And I would note that consolidation is very much an interest rate game and using the three year swap rate as an example, we've seen that increase from 1% in Q3 on average to 1.50% in Q4 on average and it's up around 1.70% now as we restore [ph] 2017. So I think that that should curtail some of the consolidation activity that we've been seeing but we will certainly continue to pay close attention to that. But again it is anticipated behavior and it is that kind of actually certainly models in our 2017 numbers. So wrapping up the discussion here, provision for private education loans was $43 million in the quarter compared with $29 million in the year ago quarter. For the full year we came in at $160 million compared with $87 million in 2015, obviously supporting a much larger portfolio. We ended the year with a very solid allowance of 1.28% of total loans and 1.88% of loans in repayment. Our coverage is a very significant 2.3 times charge-offs and I'll just point out as our portfolio grows and seasons, we will see a little bit of additional growth in our allowance measured in all the different ways that I just reported. So finally, ROA for the quarter was 1.6% compared with 1.3% in Q3 and 2.5% in the year ago quarter. Return on common equity came in at 15.4% compared to 12.2% in the prior quarter and 22.5% in year ago quarter. We expect ROA and ROE to continue to increase in 2017 as we grow earnings and continue to use capital more efficiently. Okay. So that concludes my prepared remarks and we look forward to taking your questions.

[Operator Instructions] Your first question comes from the line of Michael Tarkan with Compass Point.

Thank you for taking my questions. Just a question on the competitive landscape a bit. I know it's a sort of seasonally low quarter but I did notice your largest competitor had a pretty substantial decline in origination volume, you guys obviously grew. I am just wondering if you're seeing any disruption out there from competitive landscape.

In regard to the competitive frame, as you know over the last three years we have improved our position in the marketplace across the whole country and during that period of time we've had some new entrants into the business, we've had some other competitors who were not quite as aggressive as they were. The competitor you’re mentioning is a large capable organization, we have a tremendous respect for them both in the power of their distribution systems as well as in their capability as competitor and we have seen, yes, some evidence that the information associated with that situation is that, yeah, in many people's minds who are customers in schools but we don't see any major disruption.

Thanks. And then just a follow up on that one. So the $4.9 billion, I'm just wondering if you think there's any kind of conservatism in there, if I am looking at where the tenure is today looks like federal student loan rates are going to go up substantially next year. I'm just wondering if you think there will be some pickup from that or is there anything else you are seeing out there?

We think that there's a reasonable amount of uncertainty in the business. There is also reasonable amount of momentum and o balance we are very comfortable with the $4.9 billion.

Fair enough. And then lastly, we're hearing a lot around federal government potentially curtailing some graduate school funding. I'm just wondering any kind of sense for what percentage of your existing volume currently comes from grad students and then maybe an estimate for how much -- what percentage of current federal graduate school funding you think would be credit worthy that would meet your credit standards? Thanks.

In this case that the federal program that is exiting today is a very attractive program for the borrowers. And so as a result, for all the student lenders who are private, graduate lending is not a high proportion of the overall franchises. Whether the rule is changed in that arena, we certainly would evaluate that both carefully as well as quickly. And at that time there may be an opening for more volume but because of the unlimited nature of the funding available in that sector, very few of the privates have been able to be competitive with the federal offer.

Is there a certain percentage that you can sort of frame for us that would sort of meet your underwriting standards? Just curious if we do see some curtailment, how to frame that potential opportunity?

As we’ve looked at a bunch of the conversations that are taking place, mostly casually or in the press in D.C., I think that you can say that if their words would be some sort of limit placed on a couple of the plus programs in such a way that the government was still there to provide access and to help economically disadvantaged people, the approximately 50% of whatever would come out of that would be a reasonable target for private.

Your next question comes from the line of Arren Cyganovich with D.A. Davidson.

Thanks. I was wondering if you could talk a little bit about the net interest margin expectations for next year. I think you said roughly flat and whether or not there should be any benefit from additional rate hikes and how many rate hikes you have assumed in your model for next year?

Sure, Arren. So when we modeled out the cost of funds for future periods we basically operate on the assumption that we're going to have a beta on our retail deposits, so 85% to the extent that the increasing of our cost of funds lags the market, there is certainly some room for improvement. The rest of our book of business is for the most part pretty much tied to LIBOR and should basically match any increases in market rates but we have a significant -- actually we modeled our expected LIBOR increases based on the spot curve. So whatever you see in the market is what we have in our 2017 plan.

And then in terms of credit quality, could you remind us what your expectations are for the net charge-offs over the next year and how the provision growth may move with that, I suppose having, I don’t know, if you made out the amount of loans that will be entering full P&I and the timing of that for 2017?

Sure, you know what, I don't want to give you any specific provision guidance, but I’ll give you a couple of guideposts here. So the good news on credit is that she is steady as she goes, so we saw 1% and 2% net charge-offs this year of loans in full -- in repayment and in full P&I, we pretty much expect to match those numbers in 2017. The provision grew -- I'm sorry -- the loan loss allowance grew from, I think it was 1.1% to 1.28%, 1.3% from 2016 to 2017, we would expect to see growth in that loan loss allowance. So if you get up to maybe 1.4% of our total balances over the course of 2017 we do not expect any major increases in charge-offs or the provision over the course of the year. We will pretty much track growth in that book of business.

And you have the timing of the loans entering full P&I?

Yeah, you know what, I do have that handy, we would expect -- we would expect P&I to increase to basically -- that’d be pretty steady over the first three quarters, get up to about 5.2% by Q3 but then jump to 6.5% in the fourth quarter. So repay wave of 750 in May-June and then a repay wave of basically 1.7 in the fourth quarter.

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

Great, thanks and thanks for taking my question. So first of all, Ray, could you maybe give us an update on the parent loan, your plans for that in ’17?

Sure. The parent loan as you know, we launched in April of 2016, we did it after an extensive consultation with many of our customers at schools. It turned out to be very successful, it's on a recommended list that all the schools I believe that ever recommended list for parent, which I think is a number around 300 or so. It worked out to be about 2.5% of our incoming applications, the profiles resulted in a little bit higher ticket. So it’s a successful launch creating some excitement in the marketplace, giving us a reason for having helpful conversations with our targeted audiences and customers, it was very good we expect to build on that as we go into 2017 and it becomes part of the dashboard.

And just on the efficiency ratio guidance, given that you did 38.6% in the fourth quarter, I mean that's basically where your guidance is for the full year ‘17 and I mean you're probably going to have near if not 20% revenue growth. So I guess, and then coupling that with the fact that your guidance for this past year was kind of a couple 3 percentage points higher than we actually said [ph], how should we think about that guidance? Is there something else going on that we should, that we need to be aware of?

Yes. So there's seasonality, Moshe, in our efficiency ratio, so it’s going to increase and then decrease again. So you know, the Q3, third quarter is a lot higher than it is in the fourth quarter, for example. So there is seasonality and we do tend to look at it for the full year and it came in at 40.2%, we expect it down to 38.5%. But we saw some big improvements in operating efficiency in 2016 associated with the investments that we made in 2015, so things like call volumes and call handle times declined substantially. We don't expect that to happen again in 2017 and basically we have achieved a lot of our obviously scale, efficiencies but there is some room to continue to improve and we think here that a 5% improvement in our efficiency ratio is pretty darn good, all things being equal as we continue to grow our account service in the 20 percentage plus range.

And then just lastly, maybe just a little bit more on kind of a little bit more detail on the funding plan over the course of the next year. I mean I think you’ve done a really good job kind of diversifying the funding. You talked a little bit about the ABS. I mean, how does that compare now in terms of attractiveness?

So our overall spreads on ABS transactions have dropped substantially from call it 1.5% to 1.1%. We are planning to do a billion and a half of term ABS in 2017. We will be teeing up a deal very shortly because spreads are pretty attractive, they’re on the one-tenth level we will do more. And the market is cooperating but we also will grow our retail deposits base by in excess of a billion dollars and we will continue to source additional core and broker deposits, we talk a lot about the fact that we've been tapping 529 providers and health service account providers which we consider to be core like deposits and we will continue to access those. I mean over the course of the year obviously we do a lot of term funding. I think our funding needs are in $4.5 million to $5 million just for 2017

Your next question comes from the line of Sanjay Sakhrani with KBW.

I guess maybe just some follow ups to previous question. The first one is, when I look at your growth for last year in originations versus the industry, how did you track relative to the industry?

So Sanjay, we think that in 2016 we picked -- we grew a little bit of hair faster than the overall industry, so we picked up a very modest amount of market share. Maybe a fraction of a percent.

So I guess maybe to a previous question, when we think about that 2% growth in origination that you guys are anticipating, you’re anticipating the industry growth to slow a bit.

Well, just to be clear, 4.9 from 4.66 is 5% growth. So we you know we look at enrollment and tuition, inflation trends and they continue to be fairly low and stable. So we think we will grow up with a slightly higher than the overall marketplace and certainly we are turning over every rock and looking in every corner to continue to grow our presence in that private market.

Okay, fair enough. And then I guess I've got a couple questions just on the opportunity either competitively or politically as those present themselves. When we think about expenses -- associated expenses to the extent that opportunities present themselves, have you kind of incorporated that in your efficiency ratio targets? And then secondly, when we think about capital, I know, Steve, you talked about diluting that ratio with the risk based capital ratio over time. And do you feel like you have the capacity in terms of your capital to grow into that number or would you need to supplement it with other sources?

Sure. So taking the OpEx first, our OpEx and efficiency ratio does not take into account any new programs that might come along over the course of the year as the political situation unfolds. We certainly have been having meetings and discussions internally and figuring out what we would need to do in the event that something did come along the expenses that I have discussed with my IT department and the marketing people are not extraordinary if something did happen, our efficiency ratio in 2017 would be hurt but I think we all would agree on this call if that would be an investments well worth making. Did something happen that would all of a sudden increase the market that we play in from $9 billion to $14 billion as an example and our market share was close to being retained, I think that we would probably be in a position where we would need additional capital and I think that our investors would be more than happy to provide it should that outcome or opportunities present themselves.

And as far as like your existing capital base, is there any estimation as to how much incremental you could do? Or maybe at a target range that you might be able to take that capital ratio to in a scenario where that were to present itself without raising capital.

So look, I mean you could do a math as usually as I could, I don't want to speculate on the call as to how much additional volume we could do in 2017 or 2018. We certainly have ample capital to continue to grow our business, 5% to 10% a year for the next three years. In fact, when we look at our capital plan, all things being equal, we actually start to generate additional excess capital, call it 2.5% to full years [ph] from that. So we're in great shape from a current business perspective.

And then a final question, step parent loan product. Do we know how large it is today as a percentage of your total loans?

It's quite small. And so I would say it’s in that 1% range right now.

[Operator Instructions] Your next question comes from the line of Mark DeVries with Barclays Capital.

Yes thanks. Just had another follow up question on efficiency ratio. As we think out longer term, can you just help us understand the dynamics in terms of like the incremental fixed versus variable cost as you grow your portfolio? Just grow your portfolio size as the same market share and then alternatively if you actually in the scenario just discussed the market grew in size by 50% and you were having to originate lot more on an annual basis?

So in terms of the efficiency ratio and fixed or variable cost we basically model out our base operating expenses to run in the low 60s, high 30s fixed, variable and that's true for the next couple of years. We believe that we can continue to make efficiency ratio gains and that it could get down into the mid 30s going lower than that, we don't want to make any big promises but I think we can all agree that a 35% efficiency ratio is pretty darn good for a financial services company. I'm sorry, Mark, I was looking at my statistics, on OpEx when you asked the second part of that question, could you please repeat it?

Yes, sure, just how might that calculus change in a scenario where you're now -- in the market is larger and you're having to originate substantially more on an annual basis.

As you look at that there's quite a bit of discussion on I'd say all aspects of our industry going on in D.C. So it's very hard to say oh this is the likely scenario and then to do financial modeling from that. It’s right to say that if the basic parameters of a loan structure, would it be consistent with the private student lending which is a closed end installment loan with forbearance and several other characteristics, this first year in the school in such a way that if incremental volume work has been related to a change in the federal program that would be highly leverageable. However simplicity and items coming out of D.C. frequently don't go together in the same sense. And so things were to be more complex and/or just different. It would be hard to realize that straight forward leverage. So we're looking at what we think are all the reasonable possibilities, as Steve said, we're doing some internal analytical work under the heading of what's just volume versus what's different. And so the closer any change would be that would increase volume but keep the parameters the same you should be able to assume that that is highly leverageable as would be 10% or 15% increase in homogenous volume in the basic product.

And just one more question, you guys are obviously a pretty full tax payer. Are there any nuances we should be aware about in your taxes that would prevent you from fully benefiting from lower taxes as proposed under either kind of the health plan or the Trump administration's plan?

Now, Mark, we would get the full benefit, if the federal corporate tax rate was to drop from say 35% to 20%, our earnings for 2017 would go from, call it, $0.68 which I think is midpoint of our guidance to, as we calculated like $0.90. So we will see a significant model. Yes, for the full year.

Your next question comes from the line of Michael Kaye with Citigroup.

Do you have any thoughts on the possible reauthorization of the Higher Education Act and do you think -- what do you view as the chances that the Stafford limits could be increased?

As we’ve looked at that higher education as you know it’s a couple years overdue for its re-upping and as has been said here several times, there is lots of conversations in DC about changing the federal program, of course the ramifications for the colleges and their funding and for private student loan providers. And so we think that the way Congress is currently situated from a calendar standpoint that they will address new and different first and the HEA will follow on once those parameters are set.

And what you think about the Stafford limits, could that be increased?

We haven't seen or heard of any initiative in regard to that.

And I just had one quick question for Steve, it's quite small but I was looking at the average balance sheet, looks like there's a new category other loan, so wasn't sure what that was, I don’t know if maybe you bought some personal loans this quarter, kind of test to market, can you just tell me what that is?

So the other loan category pretty much captures CRA investments that we have on the balance sheet, very small portfolio.

Your next question comes from the line of Rick Shane with J.P. Morgan.

I just want to delve in one last little bit on the efficiency ratio and the fixed expenses. Steve, when loans move into full P&I, when you think about them on a per account basis, what sort of increase percentage wise would you expect in terms of servicing costs?

You know what, Rick, that's a great question and I have asked my FP&A department to give me a breakdown of what it costs to service a loan in school versus in repayment versus delinquent. So there is obviously a vast increase in cost of servicing when it goes from in school where it’s pretty much just sending out a statement to in repayment where you are processing payments and potentially dealing with people on the loan to dealing with the delinquent account. So the overall cost of servicing an account is somewhere in that $8 level plus to service a loan that is in delinquencies you're talking many many multiples of that $8. If I had to ballpark it, I'm going to say it costs maybe a buck to service a loan as it’s not in repayment then I don't know, obviously north of $8 to service a loan, that is in repayment. When my FP&A department completes their assignment I will report out to you.

Hey, Steve, one follow up to that. When you talk about the 60% of expenses being fixed, roughly, is the grown in originations -- when we think about the 40% that is variable, is there a sort of one to one correlation in terms of growth in originations and then the remainder of variable costs, are the increase in servicing is the portfolio growth?

No, I mean it's not going to go up in lockstep. I mean obviously sort of the fixed costs are equipment facilities or our overhead departments and the core of the management team of the servicing business or sales force et cetera, there's going to be obviously marginal hurdles when we increase our accounts and payment from 1 million to 1.2 million. We have to add jobs at a certain point in time but most of our variable costs are in servicing centers and they are basically people costs and there are fees that we pay our processors per account that are also variable costs.

Your next question comes from the line of Paul Miller with FBR.

Thank you very much. Can you talk a little bit about -- I mean your asset -- your deposit growth, your deposit growth were about $500 million in the quarter. I didn't see the breakout, if it is I apologize, between what was brokered and what was retail?

So in the fourth quarter we brought on some big chunky, what we consider to be core deposits, basically health savings account deposits, it’s very good new business that we're doing, it comes in with a very advantageous spread to LIBOR.

So you are saying what, these are health saving deposits?

Yes. So we are the recipient of health savings accounts that obviously the big aggregators kick in, and they look for outlets for the cash, then we are one of the happy recipients of that type of business.

Is that considered a broker deposit or a regular core deposit?

That is considered to be a core deposit.

And so that was the chunk of the deposit growth in the quarter.

Yeah, that's right, Paul. Go on.

Okay. So of the $6.3 billion, how much of it is health savings deposits?

So we have on our books now about $3 billion of HSA and 29 deposits and that is a business that we will continue to focus on growing because the funding is very efficient and to your point it is core and not broker deposits. And it does come in on long term agreements, so these are multi-year deposits that we take in.

And then when you talked about earlier in the call about your core deposits and your retail lagged rate hikes by about, you said, 85%. Is that what this product does too?

No, this deposit is, we agree to either a fixed cost of the swap or we agree to pay the spread to LIBOR in the deposits. The 85 basis point beta is on our true retail/Internet deposits that we raise on SallieMaeBank.com, bankrate.com.

And that's roughly about $3 billion.

That's correct.

[Operator Instructions] Your next question comes from the line of John Hecht with Jefferies.

Thanks guys. Most of my questions have been asked, so maybe ask a couple obscure ones. I know you guys certainly prefer retaining loans and growing the balance sheet and getting all the benefits associated with that. You did mention spreads in the ABS market has tightened considerably. I assume that mean being sale would be also stronger, what threshold would you consider selling and where are we in the context of that right now?

Sure and we've discussed this over the course of the last year and a half or so. And the numbers that I think from a notional standpoint are quite straightforward. That is, if on a pretax basis we’re making roughly 200 basis points on assets for a particular asset that is held on the books. And so someone were to come along and offer you 8% off of pretax premium associated with that, well four years of earning starts to sound like something you might consider, because it takes all the uncertainty out and you maintain servicing stream anyway. Having said that, though, our great preference and our plan is to retain all the accounts that -- all the accounts and dollars that we originate in perpetuity. And so it is the case that we're not thinking about selling assets at this time.

And then second question is there is a couple references to the personal loan product. Maybe could you give us an update on some of the new products?

Sure. We, as you know, have a private label agreement with Barclays which is helpful to the franchise, although not significant from a financial standpoint. And we are in the process of looking at our own personal loan which we will expect to pilot at the very end of 2017.

Your final question comes from the line of Jordan Hymowitz with Philadelphia Financial.

I have a question. I'm just looking at the Wells Fargo balance numbers year-over-year versus yours and they have almost no balance growth year-over-year versus your 35%. So I'm curious how you guys haven't seen more share as a result? Did everybody else make up for that gap and enter sale as the same?

Yes, let’s first get the metrics down, so when people talk about share, what variable they’re discussing. And so when we discuss share and when Wells Fargo thinks about it as well, we're talking about new originations in the field, whether they hold items on the balance sheet or where they had other assets that were mixed in with those that either ran off or sold. That's a function of internal financial management at each of our competitors. We have a very clean relationship between the balance build and disbursements but whatever is on any competitor's balance sheet is not in the discussion of market share. Or think if the market has the $10 billion of new originations let's just measure everybody’s -- every one share of that and then how they handle that. That's up to them.

Okay, do you know what the -- their total originations were in the year? I don't think it was disclosed. So there's no --

We don't know that number yet, it tends to come in at a lag. We were at 4.6, I’d say roughly speaking to your ballpark standpoint, they're approximately 50% share, so you might think between nine and 10.

So my question, I guess if I could phrase this a different way. Were there any other competitors that dramatically increased their presence because, in the absence of that, you would convene, A) the market were smaller and your share was bigger, or they lost share to other competitors?

All right. Let's remember one that -- first off, let me answer your question categorically. There was nothing dramatic that happened in the marketplace in competitive frame in 2016. Secondarily in looking at our largest competitor, that competitor, while, had a 6% drop off in new disbursements in the fourth quarter actually increased disbursements year on year 3% in the third quarter which as you know is a busy season equivalent to the Christmas rush for retail as people get prepared to pay tuition in September. And so it is a case that they increase their originations. The fact that their balances on the balance sheet declined is a function of a series of other variables which we don't necessarily have a clean line of sight on. And so there wasn't any dramatic change. The market we believe did grow at approximately 4% or 5%. We believe that our market share increased marginally as Steve said before and that's pretty much the story.

Jordan, one other thing, so the fourth quarter is obviously a very quirky quarter, it comes right after the peak lending season. And I'll give you a fact that you might be able to make some interpretation of. So in Q4 ’15, right, that was the year that we grew 6%. Our originations in the fourth quarter were up 3%. In 2016 a year in which we grew 8%, our originations were actually up a pretty strong 6%. So I guess what I'm saying is, it’s very difficult to glean at this point if we're taking market share from anybody but there might be a hint that that did, in fact, occur in the fourth quarter and the year. But I think we've covered that one adequately.

Thank you. We have no further questions in the queue at this time. I'd like to turn the call back over to Mr. Quinlan for any closing remarks.

Okay, thank you and thank all the attendees for both their attention as well as for the questions. And just to close things out as we watch the fourth quarter of ’16 fade into history. It was another good quarter. It’s important to note it was not unusual from the standpoint of our financial model, and we are right on our long term trajectory. It is a case that the results are extremely well balanced. We had good performance in the market, great performance on risk management, we continue to enhance customer experience, our funding and yields are at industry leading levels. The expense management as you've seen with the efficiency discussion continues to improve and we are on about the business of ongoing continuous improvement and investing in improving the customer experience for both new as well as existing customers. We do have great customers both in the schools as well as in the students borrowing and their families. We have a great franchise. The EPS continues to grow at extraordinary levels, were up 36% on an ongoing basis in ’16, will be up 28% again on top of that in ’17. The efficiency ratio as a backdrop over the course of two or three years has dropped from 51% to the high 30s and we continue to have high ROEs with the 14% being the posted number in ‘16 which we expect to maintain as we go into ‘17. So it’s a pleasure to report these results, we have a terrific team that's delivering them and we expect to continue that momentum into ‘17. Thanks for your attention.

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

Ladies and gentlemen this concludes today's conference call. You may now disconnect.