SLM Corporation (SLM) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Lashana and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae First Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I’d now like to turn the conference over to Mr. Brian Cronin, VP of Investor Relations. You may begin.

Thank you. Good morning and welcome to Sallie Mae’s first quarter 2017 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 Form 10-Q for the quarter ended March 31, 2017. 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 good morning, thank you all for your attention. And as we go through our report today couple of things were notable. One is we’ve had a very good quarter we believe exactly on our plan and we’ll talk about some one-time adjustments as we go through. But as we’ve done in prior calls of this nature, I will go down the profile of our business and talk about the key variables as I do that. Starting with volume, so volume at $1.847 billion is up 2.5% from prior year and that is despite the fact that we continued to de-emphasize core profit schools which are down in the first quarter, we are on track for a $4.9 billion for the full year. As we look at volume, where we’re sensitive to credit quality and so we continue to have terrific stability in regard to the through-the-door population of approved applications with 90% of our new loans having a cosigner and a 748 FICO which has been steady for several years now. NIM has improved quite a bit. Steve will talk about that in detail, but in the quarter it’s 5.96% up from 5.77% a year ago, 19 basis points. And it continues to reflect the efficient treasury work that we’re doing both in liquidity as well as rate, along with the fact that our balance sheet is becoming more focused or more weighted to higher earning assets, I’ll talk about that in a couple of minutes. In regard to the operating expenses, in the absence of – let’s take away the FDIC sort of uncontrollable increase, and if with the absence of that we’re up 8% in operating expenses which of course takes our core efficiency ratio down to 36.8% a new low for us versus 40.2% a year ago. And while there’ll be some seasonality in that, we will continue to be under 40% for the full year. Credit performance was very good in the quarter. Our net charge-offs were 89 basis points down from 95 basis points last year and that of course happened despite the fact that the new business which is inherently more risky as it goes through its normal life cycle, has expanded by $4 billion over that time. And so as we look at the balance sheet, the private education loans are now up to $15.5 billion, they were $12 billion a year ago, 29% increase. The entire balance sheet now at $19.2 billion is up 26%. So I’m looking at the changes from last year to this year, the private student loans $3.5 billion increase is $3.5 billion of a $3.9 billion total increase. So at the margin our balance sheet is 90%, 90% of the balance sheet growth is attributable to the high-yielding, high-quality private student loan portfolio. EPS is $0.20 versus 14% last year is up 43%. And so we have guidance that will reflect the full year, but we will continue that trend. And last year we were up 36% 2016 over 2015, so we’re looking at some very heavy compounding in regard to that. ROE at 20.7% benefited from some of the one-time in the quarter last year at 59%, 30% increase, but continued to be in the range of the teens that we’ve talked about in prior periods. Our regulatory relations, the FDIC, the Utah Department of Financial Institutions and the CFPB continued to be very good. We get good feedback from all three organizations. The consent order as noted in the announcement has been lifted without any caveats. And our balance sheet, as some of you will recall, growing in excess of 20% reflects our continued good relationship with the FDIC. Our guidance on EPS will go to $0.70 to $0.72. At $0.71, that would be a 34% increase from the prior year if we hit the mid-range on that. As I mentioned, the efficiency ratio is now under 40% on an ongoing basis, although some of the quarters will bounce around, originations on track for the $4.9 billion. The market trend continues to be steady. We don’t see any dramatic changes from our competitors and the outlook continues to be consistent with what we’ve told you in prior periods and consistent with our forecast. I should mention a couple of things in regard to our service. We’ve dramatically improved our customer service as well as our technology that interfaces with customers. And so, as we look at satisfaction, it continues to be up across all contact points and the efficiency that’s associated with looking at the end-to-end process is becoming dramatic. So in sales, our calls for new application, how many people have to call us to clarify something about the application process, are down 39%; calls for application from 2015 to the first quarter of 2017. And our calls from borrowers servicing in the portfolio and driven, of course, by when people get into full principal and interest, there’s a bump up of contacts that are people start digesting our information, and our calls from borrower, again, 44% from 2015 to the first quarter of 2017. Obviously, this is very good. It reflects the fact that despite our volume increase, something that we call the Customer Effort Score, which was developed by Forrester I believe, but we have worked it for us in conjunction with them. And what it says is, how does the customer want to interface with you? And they typically would like to do self-service, online servicing, native app, and so we look at how many calls we get for total interactions and take it that the customer would prefer the faster self-service, and we are now up to 92% of our interactions with customers in the first quarter occurred with their doing self-service. And so we took 7.9% of all of our contacts with customers required a human interface, the remainder we’ve done in higher satisfaction channels, more quickly and less expensively, which is part of why our efficiency ratio continues to improve. It’s also worth noting that we take our competition to be those who are interfacing with younger people across all bands of competition, not just in student lending. So we’re looking at other Fintech’s, people like that, and it’s gratifying to say we’ve won a series of rewards over the last 12 months as people become aware of how cutting-edge our new technology is, including the Ava Digital Awards, where we received a Gold award for the Sallie Mae mobile app, a Gold award for the Sallie Mae mobile watch app, and we’ve received Honorable Mention for our website redesign, Internet advertising competitive awards. We won best bank site, best bank mobile application, best online videos, the surety awards, best finance and application, Sallie Mae mobile watch app, and Temeka Easter of our marketing department, won the Movers and Shakers award, which is distributed by The Social Shake-Up Show group. And so this is just a sampling, we got a bunch more, but it does show the outside world is looking at us as a current innovative company, which is also reflected our customer satisfaction being up, our efficiency ratio being down and all of our efforts go across the spectrum of the entire business not concentrated on just one. And so with that, I’ll turn the meeting over to Steve.

Thank you very much, Ray. Good morning, everybody. We’ll drill down a little bit deeper into the details of the quarter before we open it up for Q&A. As Ray mentioned, we reported GAAP earnings of $0.20, but probably more importantly, we reported core earnings of $0.21, which excludes a $5 million mark-to-market loss that we experienced in our GAAP accounting reports. There are a couple of items that I want to call out that contributed to EPS this quarter. First of all, we updated our life of loan loss model for TDRs, and this reduced our provision by $8 million on a pre-tax basis. There are two components to this model change. The first is that, based on updated performance information that we now have on our Smart Option Student Loan portfolio, we pushed out the expected timing of defaults, and this simply reduces their present value. We also reduced our default expectation related to moving from a 210-day collection period to a 120-day collection period. All of you that have followed us probably remembered this, we adopted this app to spin and we closed up our defaults by 15% to account for this factor. Now with a little bit more experience, we’re realizing that this overestimated the impact, so we’ve adopted 11% in our model. It’s important to note that this change was in our original guidance, so it is not a variance from the guidance. The second change that we made was the fact that the March fed increase had the impact of also reducing our required TDR reserved by an additional $4 million. The increased yield amount of the portfolio is a result of the fed rate hike has the impact of generating additional cash flow over the life of that TDR portfolio that offsets future charge-offs. This obviously was not in our guidance as it was driven by the fed rate hike that took place in March. The third item that I’d like to call out is that we had a tax benefit from the change in the way that equity compensation grants are accounted for that provided an additional $6 million benefit after-tax. Because this item was dependent on the market price of our equity, it was also not included in our guidance, and I’ll talk a little bit more about this one in a couple of seconds. Finally, we did see small improvements across the board in net interest income, our credit performance and operating expenses that also contributed to the quarter’s earnings strength and factored into our increased guidance of $0.03 a share – of the range going up by $0.03 a share. Net interest income for the quarter was $268 million, $23 million or 9% higher than Q4, and a strong 28% higher that the prior year quarter. As Ray mentioned, the increase from the prior year is driven by the growth in our Private Education Loan portfolio. We also saw a solid net interest margin in the quarter of 5.96%, which compares to 5.55% in the prior quarter and 5.77% in the prior year quarter. The year-over-year improvement was driven by a couple of factors. Ray called out the continued increase on our private student loans as a percentage of the total portfolio, but we also benefited from tighter management of our cash balances as a percentage of total assets. And finally, we are seeing an improving cost of funds. I want to point out that our NIM will not maintain this level of increase from the prior year for the balance of 2017, but we do think for the full year could very well be several basis points higher than 2016’s NIM of 5.68%. Tempering the gains for the remainder of the year is the fact that we don’t have much more room for further gains in cash management and the unsecured debt issue that we did in the second quarter will offset some of our cost of funds improvement. But I do want to point out that the significant portion of the proceeds of the unsecured debt field will be used to retire our Series A preferred in early May. This security has a coupon or a dividend of 6.97%. While the issue does increase our marginal cost of funds, it is approximately $0.005 accretive for 2017, and it will be $0.01 accretive for future years. The Series A preferred was not a component of our capital, and we felt that this transaction was important from a balance sheet efficiency standpoint. Going forward, unsecured debt won’t be a core component of our funding program, but we will issue from time to time as our balance sheet grows, to demonstrate funding diversification to regulators and rating agencies and also that the holding company is a source of strength for the bank. We believe that we are running an investment grade company here. We hold sufficient capital and liquidity and have a high-quality balance sheet, so we expect over time our ratings to improve and the cost of funds from this component to decline over time. A little bit more about funding. During the first quarter, we were active in all components of our program. We issued retail, broker and core deposits at favorable prices. We’re also active in the capital markets, where we raised $772 million in ABS funding, with market improvements and perspective, this field was done at LIBOR plus 93 basis points. And in 2016, the range of prices on ABS was between 115 and 138 basis points over LIBOR. So the deposit market and the ABS market are continuing to experience favorable conditions from a cost of funds perspective. Other income in the quarter totaled $11 million compared with $13 million in the prior quarter and $21 million in the year-ago quarter. As a reminder, Q1 2016 benefited from a $10 million change in reserve estimates at our Upromise rewards business. Talking about taxes here, the effective tax rate in the first quarter was 35% compared to 37.1% in the year-ago quarter, driven by the $6 million benefit discussed earlier. Basically, simply put for OpEx purposes, we expensed equity grants at the grant price, but for tax purposes, we account for them at the market price at the time of investment. So that’s basically what drove this improvement. The tax rate will continue to move around quarter-to-quarter. However, we expect our effective tax rate for the remainder of the year to come in around 39%, excluding any unusual items that might pop up for the balance of the year. Ray talked about our strong performance on the OpEx front. FDIC fees have been running at a pace of 73% higher than the prior year. And excluding that, our OpEx for the full year increased just 7.4%, despite the fact that total customer accounts were up 17% and accounts in full principal and interest repayment were up 21% year-over-year. The bank remains well capitalized. We have a risk-based capital ratio of 13.3% at the end of Q1, significantly exceeding the 10% total risk-based capital required to be well-capitalized. We do have additional capital up at the parent company that can be used as an additional source of strength, if necessary. Obviously, don’t expect to use that capital, and we do think that the total risk-based capital ratio will drop down into the mid-12% as we grow our balance sheet over the course of the year. As usual, we do not anticipate returning capital to shareholders at the present time. We’re in a medium-term future as we expect to reinvest in our business. Talk about provision for private education loan losses, came in at $25 million in the quarter compared with $33 million in the year-ago quarter. We ended the quarter with an allowance for loan losses of 1.18% of total loans and 1.76% of loans in repayment. We would expect this to gravitate slightly higher over the course of the year as our portfolio grows in seasons. And let’s see – okay. Finally, I would like to call out that we did end the first quarter with $55 million of personal loans on our balance sheet that we acquired in the marketplace. We began purchasing high-quality personal loans in December. We believe that purchasing personal loans, as we prepare for our own personal loan product launch in early 2018, enables us to deploy excess capital and learn about the asset class in a low risk way. The loans we purchased between three years and five years, with an average FICO score of 715, and we expect very moderate losses on this portfolio. Before I wrap up here, I will call out our core earnings metric. The only difference between core earnings and GAAP net income is the core earnings excludes the mark-to-market on unrealized gains and losses on ineffective derivatives. We used derivatives predominantly, interest rate swaps to manage risk in our portfolio. We do believe all of these hedges are sound economic hedges. And we mentioned this, because if rates do continue to rise as expected, we will see a continuing variance between our GAAP and core earnings. Finally, ROA for the quarter was 2.1% versus 1.6% in Q4, and ROE was 20.7% versus 15.4% in Q4. That does conclude the prepared remarks. And we’d be very happy to take any questions now.

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch with Credit Suisse.

Great. Thanks. I guess, Steve, I recognized that given the changes that you made in terms of kind of the TDR reserve, the impact is not as large going forward. But I’m sort of hoping, especially given the fact that the bulk, the vast majority of your TDRs are actually current, how do we think about that development going forward? And the impact on the company and the reserve, and think about, can you just talk through that a little bit?

Sure. I mean, our TDR portfolio, it does performed very well. We expect life-of-loan losses on our TDR portfolio in the low 20% vicinity, the reserve for that due to the discounting the present borrowing loans in the 12% vicinity. It is the case due to GAAP accounting policies that we do need to hold a life of loan loss on our TDR portfolio. So you will continue to see a very large chunk of our allowance allocated to that TDR portfolio. But look, we have seen improvements in our portfolio as the Smart Option Student Loan portfolio seasons, and we gain more historical data with which to model. So it wouldn’t surprise me if in the future we do see some changes in expectation on the TDR portfolio, but we think we have a pretty good handle on it as we sit here today.

Okay. And the other question that I had is, your expectations for origination growth for the full year are slightly faster than they were this quarter. Talk a little bit about maybe what you kind of see coming down the pipe rest of the year?

Sure. And the first quarter, $1.8 billion is relative light in regards to the $4.9 billion for the full year. The first quarter has a different characteristic than other quarters. It’s driven in part by the serialization of people who started in the fall, and have a follow on but pre-committed to loan disbursements in the spring semester. And it’s also because it’s not a heavy season for the traditional four-year non-profits; the core profits are typically higher proportion of the originations in the first quarter. As you know, we’ve been deemphasizing core profits for three years now, and they continued to drop, including the first quarter. As we look forward, and we do a forecast, that is school by school, loan by loan, we are on track for a $4.9 billion, and has been the case in prior periods, prior years, that when we have looked for a correlation between the first quarter, and what we referred to as a busy season, in fact, the correlation is very low. And so we are where we want to be, and the $4.9 billion, looks to be on track.

Thanks very much.

Your next question comes from the line of Mark DeVries with Barclays.

Thanks. I was hoping you could give us an update on anything you’re hearing out of Washington, whether it’s from the administration or anyone out of the Congress, student loan policies kind of what’s being discussed? What’s being advanced? And particularly, what do you see is the outlook for anything to get done, such as like a diamondback for the plus program?

Sure, Mark. Thanks. And it is the case that I think predictions in regard to what we developed in Washington, let’s put it this way, don’t have a great track record, either for us or for other people. And so I think forecasting what will happen, and especially the timing of that, is something one should do at once apparels. And as we have looked at it, there’s certainly enthusiasm for taking a look at the federal program and trying to make it more efficient for both students as well as for the government. We’ve been in touch with most of the people who have direct impact in regard to either the Higher Education Act or any rethinking on the federal program. There’s a series of work being done, both by principals as well as by staff work. And it’s just very hard for us to handicap that. We are not – any way, counting on an increase in volume for hitting any of our guidance numbers for this year. And I do think that we should appropriately wait and see. We believe there are several areas where the federal program could be improved. We’re in conversation about that with others, and we will just have to figure out over a period of time, where in the parade of proposed legislation, the student lending fits as a priority. And I need to lecture you that the Affordable Care Act and the income tax cuts are in front of that particular queue, and lots of other things, including student lending, are in the middle of it. So we think we are in an area where there’s probably more opportunity than risks for us, but very difficult to specify either the amount or the timing.

Okay, got it. And then Steve, I think you indicated on the NIM that your expectation is not to sustain the current level, but the full year, you could end up a few basis points higher. Could you just talk through what that assumes in terms of fed rate increases this year? And, therefore, what upside or downside there maybe if we get more increases than what during dissipating?

Sure. So we’ve got, in our forecast, another 50 basis points of fed rate increases. I’m sorry, so from here, we’ve got the – we had the March, we had another 25 basis points of fed rate increases in our forecast. And one of the assumptions in there is that money market deposits would rise 85% of that fed rate increase immediately. We’ve got $2.5 billion of money market deposits, so whether or not that does happen might impact the NIM on a go-forward basis. Everything else, Mark, is pretty much – well, we have another $1.5 billion of fixed rate CDs that obviously shouldn’t – won’t rise with fed rate increases but otherwise everything else is variable rate, so the impact should be pretty minimal.

Okay. But if we get two increases this year, it could be a little more upside than you’re discussing here?

Yes, absolutely.

Okay, great. Thank you.

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

Thanks, good morning. I guess the charge-off rates did better than our expectations and obviously, improved the year-over-year as a percentage of loans and repayment. Can you just talk about what’s driving that performance?

Sure, Sanjay. Basically, our high-quality credit is performing a little bit better than expected and it could shout out to our collections group. They are doing an excellent job in curing delinquencies and we are seeing low rates in recent months and quarters, outperforming low rates in prior months and quarters. And if that continues, obviously, that will have a beneficial impact on our need to provide allowance for loan losses. So with portfolio, I’m going to knock on the mahogany table here performing very well.

All right, well, that’s good to hear. And I guess you guys talked about entering the personal loan space. Could you just talk about the nature of these loans that you acquired? Was it from a third-party? I mean – and who might that third-party be if you’re at liberty to say? And then, when we think about you guys getting into that business next year what’s the game plan in terms of the origination strategy? Thanks.

Sure, so look, we are purchasing from one of the marketplace lenders. We are not at liberty to disclose that. The purchases are coming in, quite frankly, slower than we would have expected. But that’s okay, it’s not a main line of our business, but we do want to diversify our consumer product offering, and we think that the personal loan makes great sense. Basically, a private student loan is an unsecured personal loan, so we think we have the marketing underwriting, savvy and the ability to collect and service these loans, so I would say natural extension of our core competencies. And we think it levers very well to our current and future client base. So we will roll out a program probably first quarter of 2018. I don’t think it will be ready in Q4 2017, but we will lever our direct marketing skills to originate personal loans.

Just to add to that, as we do that, as Steve said in a very measured way, and we do it late this year as we get the mechanics of them to pilot it next year. There is no positive EPS impact in 2018 in our models. So we’re not counting on this.

Got it. And how large do you guys anticipate it becoming? Like what kind of origination target you have when we look out to next year?

So it would be a rounding error on our balance sheet. We’re going to do this very slowly and methodically. This is not a transformative exercise whatsoever.

Got it. All right. Great, thank you very much.

[Operator Instructions] Your next question comes from the line of Henry Coffey with Wedbush.

Good morning everyone, and thanks for taking my call. Following on some of Sanjay’s questions, with these marketplace loans, are you buying them sort of on a statistical basis or are you re-underwriting each credit as it’s presented to you?

We are – so look, marketplace lenders have credit quality grades. We’ve grown comfortable based on the due diligence that our credit group has done on the underwriting approach of our counter-party. And we do, obviously, set parameters based on FICO scores, expected default rates, expected ROEs, et cetera, so we did set up a very specific buy box. But through our diligence, we’ve grown comfortable with the underwriting approach of our counter-party.

And when you look at the big horizon, several years out, is this going to be part of a product set that you focused in on, you’ve got a customer who – where you were there – one of their key products is the fact that you’ve got them through college? And now is this going to be a part of a product set focused in on that key customer or is it going to be more of a broader consumer lending effort?

As you correctly point out, it is the case that we are doing a very good business with a highly desirable group from a demographic standpoint, but we’re only doing one product with them. Over a period of time, as you know, we’ve spend quite a bit of effort in setting up the business and realizing the efficiencies that we’ve been discussing. As we think about going forward, we believe there is an opportunity, both with our current customers as well as others who are similar to them in the same age and demographic cohorts, for us to do more business with them, building off the good service and high-quality that we have with the private student loan business, both for our own internal expertise as well as interesting offers for others. So to answer your question, yes, the personal loan was developed over several years. Yes, we expect to expand our product set, and it is an opportunity that, as Steve mentioned, we will walk into as opposed to dive into.

And one day, you could be a full-service bank for that consumer?

Full-service is probably an overstatement, we will be a – we hope a high-quality provider of selected products.

So you don’t have to have branches, they’re only good for cookies and coffee. When you look at the –

I won’t have you running down bank distribution on our call.

When you are – when you look at the profitability of the business, it looks like you’re set up for ROEs of 15% to 18%. Is that a proper way to really think about where the business is going?

I think that’s definitely the right ZIP Code. We might have the high-end a little inflated, but, yes, we’re definitely a mid-high teens kind of a ROE here.

Great. Well, thank you very much for taking my question.

Thanks, Henry.

You have a question from the line of Arren Cyganovich with D.A. Davidson.

Thanks. Just following up on the net interest margin conversation. Is the first quarter higher than what you had anticipated or more in line? And I think in the last call, you said that the full year you expected to be kind of roughly flat with 2016. Is that still consistent with your outlook?

So as I said in my prepared remarks, we do now think that we’re going to beat 2016’s NIM of 5.68%, but we’re 20 basis points higher in Q1. We are not going to be coming in at 5.88%. I want you to think we’re going to come in somewhere around 5.70%s, low-70%s.

As you said earlier, 5.68% last year plus half dozen points.

Yes. So, we ratcheted it down cash as a percentage of our total balance sheet significantly from Q1 2016 to Q2 – I’m sorry, Q1 2017. We also just did an ABS, which will have an impact on the full second quarter and remainder of the year. And I also mentioned that we did the unsecured debt, which has the impact of increasing EPS overall because we retired our preferred debt, but it does have the impact of increasing cost of funds at the margin. So all in, stronger 2017, but by 3 or 4 or 5 basis points, not 20 basis points, like we saw in Q1.

Very helpful. Thanks. And in terms of the loan consolidations to third-parties, it was somewhat elevated again this quarter compared – still not very large, but still somewhat higher than it has been in prior quarters. Is there anything else that’s going on from a competitive dynamic that you’re seeing from the portfolio? Where there’s a little more coming out?

I mean, now look we don’t think so. As loans been consolidate until they go into full P&I, and we’ve had some pretty significant growth in loans going into full P&I. In Q4, we had another $1.7 billion, and we are tracking the timing of those consolidations. So it’s something that, obviously, we pay very careful attention to, but to put into perspective, if the 100 becomes 400 over the course of the year, that’s a 2% ROE. We’re talking about $8 million pre-tax. So obviously, it’s earnings that we hate to part with, but to prevent those loans from going away, we would have to take some pretty radical steps in pricing. That being said, we are careful assessing the types of loans that we are seeing consolidating away based on pricing, school type, et cetera, to see if there are some preventive actions that we can take on that front. I’ll also say that consolidation is very much an interest rate game. It was a huge industry in the early 2000s, it went completely away. It’s had a resurgence here. I know that hope is not a strategy, but I do think that interest rates rising will take sort of the edge off of the consolidation business. But while we wait for interest rates to rise, we are carefully scouring our portfolio and taking a close look at those loans that are consolidating in a way to see if we can be proactive and preemptive on that front.

Okay. Thank you.

Your next question comes from the line of Steve Moss with FBR.

Good morning.

Hi, Steve.

I was wondering, with regard to the personal loan mix, if you could – if you have any targeted mix in terms of what’s prime, near-prime and/or sub-prime?

Yes, it’s a good question. That’s a prime. Look, we’re targeting 2017, 720 type of average FICO score, we will not be doing sub-prime lending in the personal loan space as we do not do it in the student loan space.

Okay. And then, my second question, I believe I heard correctly, you expect risk-based capital to head towards 12% or 12.5% by the end of the year given growth. I was wondering at what point would you expect to issue sub-debt or if there any floors around how low you’re willing to let risk-based capital go?

Sure. So let me be perfectly clear on this front. We believe the 12% is the minimum capital that we require to support the Smart Option Student Loan portfolio and the personal loan portfolio. And what we have seen happened here is we have consumed a significant amount of capital, but we are on the tangent here where we go from a capital consumer to a capital generator in the very near-term, so we are not going to have to issue any type of capital instruments to support our business on an ongoing basis anytime soon. That being said, I will say if we did have a major change in the plus loan market, and our originations were to go from $4.5 billion to $6.5 billion or $8 billion, we would probably need to raise capital. But given our current business model, there’s no need to raise capital to support our growing balance sheet.

Okay. Great, thank you very much.

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

Guys, thanks for talking my questions. Two questions this morning. Can you just talk about what is going on in the competitive landscape? Obviously, there’s been some at least brand location from one of your major competitors and also with the potential for significant expansion of the addressable market, just curious if you’re seeing new entrants?

As you know, the market is highly concentrated with our self, wealth and Discover having close to 80% of the market to the best of our ability to estimate that. And the impact that we have seen, the positive and negative, for each of our competitors works out to be fairly trivial in regard to our market expectations. And so we are not seeing any change in entrants. We’re not seeing any change in pricing, nor are we seeing any change in positioning with wells driven by their 5,000 branch distribution system, discovered driven more by advertising. Entrants have been around citizens, are there and continue to be respective competitor, but we have not seen any new entrants. And let’s remember that the schools also maintained a recommended list, and we are on – for a list that is almost 1,000, it’s 970 something, we are on all but seven of those. And so as new entrants come in on, it is the case that the school starts provide some sort of guidance to people as they think about the entire products there, but the volatility in the market thus far is very low.

Got it. Second question, just related to personal loans. I’m assuming that these loans are targeted for college graduates at this point, that these are not loans for students, but it’s really more traditional consumer loan?

Yes, at least two trenches of that, Rick. One is the assets that we are currently purchasing from others who are not primarily in the student loan business, so they were looking at the independent quality assets that are all prime, as Steve has pointed out. And $55 million, relatively a low number thus far and we expect it to grow through the year, but that would be significant to either our balance sheet or income statement this year. As we look forward to our own personal loan, we will target that, and we believe that the cohort of younger Americans, where we will spend the bulk of our activities and targeted to them, many of which would be, of course, our own customers, but it will be a broader exercise than just that as we step into it. And yes, it’s fair to think of 2018 largely as a year of introduction, evaluation and checking out.

Got it. I mean, I think you guys sense the skepticism or concern from the analysts on this call about this potential product given the history?

Yes. And there have been people who have done personal very successfully and some not so. And so we think that you do have to be careful with this. As Steve has pointed out, it’s right to say that we are in the personal loan business at the 100% level, while we were sitting here, because the student loan is a special-purpose closed and personal loan, and so we’re moving to a cousin of our current product set. We intend to do it cautiously. New always carries with it some concern, and we fully respect that, which is why you see us moving so slowly here.

Okay. Thanks guys.

Your next question comes from the line of Ann Maysek with Rose Grove Capital.

If rates continue to rise is there additional earnings contributions to be had with respect to the life-of-loss on the TDRs?

Yes, Ann. If rates do continue to rise, we will see a benefit in our life-of-loan TDR loss model. And you can use the –

If it’s 25 basis – is there any way to gauge it like 25 basis points equals $4 million or is there some metric to use to get a sense for how big that might be?

I think that 25 basis points equals $4 million is a pretty good.

Okay. And is that – is it based on the fed move or is it based on the live market?

So our loans are indexed to one-month LIBOR, and there’s a pretty darn close correlation between the fed effective rate and the one-month LIBOR rate, so I kind of view them as one and the same, but if there is any diversions, obviously, that would have an impact on that calculation.

Okay, perfect. Thanks so much.

Thank you.

You’re welcome.

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

Thanks. And most of my questions have been answered, just a follow-up. I think Steve, on the past, you talked about ending 2017 at 140 basis points and reserve to loans, with I guess charge-off delinquency is kind of tracking below our expectations. Is that 140 is the number that we should probably be thinking about? Thanks.

Look, it’s a very good question, Mike, and I think I’ve joked on this call. We set – we lay out these objectives, and we never quite reached them because credit hasn’t been performing well. But when I look towards the year-end that is exactly where I see our reserve for loans ending as a percent of total loans. So yes, that’s still sort of the target.

Thanks. And then a percentage of total portfolio now [indiscernible] benefit, any thoughts there?

So we have – I want to say, hang on, I have that handy. We’ve got $5.2 billion in full P&I at March 31, so one-third of our portfolio [indiscernible]

Okay. And then last one for me, take down the preferred this quarter I know there’s still some preferreds out there, I know you still have sort of the stuff that help portfolio, any thoughts on cleaning up the rest of the balance sheet or maybe later this year or into 2018? Thank you.

So the 6.97% was a cumulative preferred and very expensive, and we can replace that better with that and we did replace that with cheaper unsecured debt. The Series B is a LIBOR plus 1.70% non-cumulative. That’s a pretty attractive security still today. And I think, and don’t run away from this one if we were ever to be a bank holding company, I think that would qualify as capital. That is not something that we are contemplating now, but that’s a pretty decent security to have on our balance sheet as part of our capital structure. In terms of the sales portfolio, we do on again off again, think about selling that portfolio that if you’re about giving up $0.02 a share, these are the questions that we ask ourselves from time to time, but to – it’s, obviously, high-quality portfolio, but we do consider selling it from time to time.

Very good. Thanks.

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

Hi. Good morning, just wanted to take your views on free tuition and programs, like that Excelsior scholarship that was passed in New York recently. Do you think these types of plans could proliferate across the U.S.?

Yes. The New York plan acquired a bunch of activity around this from people who were supportive of free tuition, but felt that the PR associated with the term free tuition wasn’t in fact what that plan is turning out to be for New York state citizens, and so we do think that careful watching. New York plans will note does have lots of strings attached only addresses tuition, not the full cost of college. It’s, of course restricted to New York state residents and had a call back for anyone who might want to leave the Empire State over the course of four years or five years after graduation. So I think it’s highly caveated. We’ve do think it’s an attractive billboard for politicians, in particular. We do think we’ll see other states to consider that, but it’s right to say that if you’re to look at public colleges, across the United States and the amount of subsidy that they received from their state government, it’s down 16% since 2008. And so I don’t want the headline to miss the overall tide there. There’s much lower support by each of the states for their public colleges than there was five years ago. And that’s what people have to finance occasionally, so they will come up with something like the New York State piece, but as you saw, that was picked apart quite actively. We respect it, we will work around it, it will have some impact on us, we view it to be very small. And from time to time, we will see other schools and other states try to develop innovative programs, many, of which we support.

Okay. Just another follow-up question on the loan consolidation. I know Navient has talked about their desire to refinance private student loans. Just want to see if you could clarify. Could Navient refinance Sallie Mae’s private student loans, given the non-compete or is that prohibited?

Go ahead, Steve.

I think the answer to that question Mike is no, they cannot until the non-compete is…

By the end of 2018.

End of 2018.

Okay. All right, thank you very much.

There are no further questions at this time. Mr. Quinlan, do you have any closing remarks?

Thank you for the opportunity to make closing remarks. Thank you, all for your attention, and thank you for your insightful questions. Hopefully, we’ve answered them. We remain ready, Steve, myself and Brian, to answering questions that were not fully clarified or that might come up after the call, and I want to say that it’s a pleasure for us to conduct this call as we have another milestone meant, consistent with our business proposition, allowing us to have a strong base as we move into 2017 so that we can continue to upgrade the customer experience and the quality of our franchise, while still delivering attractive, both earnings and returns, with relatively low volatility to our shareholders. So thanks very much for your attention. It’s a pleasure to get the year started, and we look forward to the next three quarters.

Great. Thanks, Ray. And thank you for you time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. We have no further – if you have further questions, please contact me directly. This concludes today’s call. Thanks.

Ladies and gentlemen, this does conclude today’s conference. You may now all disconnect.