SLM Corp (SLM) 2015 Q3 法說會逐字稿

Good morning, my name is Hannah and I'll be your conference operator today. At this time I would like to welcome everyone to the 2015 Q3 Sallie Mae earnings conference call.

(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 Forms 10-Q for the quarter ended September 30, 2015. This is posted along with the earnings press release on the investors page at www.salliemae.com. Thank you, I will 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 hey will include origination, 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 sit 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 have 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 as improved service which we'll talk about throughout the morning.

NIM in the third quarter is 5.36%. 5.36% is 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 a 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 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 is also true that while we gained market share and while our NIM is increasing, our credit profile is identical to what has been over the last two years. As one index, the average FICO score for new loans of 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 will 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. 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 improve sales operations during the busy season. We have taken advantage of those opportunities and impact 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 preexisting 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 an expansion of our hours of service, as well as our hours of sales during busy seasons. We've asked our customers what they think of these service improvements. And over the last five months we have seen a 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 attendant to them and our revenue. As a result of that, the barometer we used 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 indeed what our ongoing operating expense level would be, so if we took fourth quarter of 2014 and annualized 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 models show, as we have communicated in the past, a continuing improvement in this metric for the next four years, which is as far out as we are 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, as you heard in the 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. We're gratified that even in this environment where the credit spreads have widened for this type of asset, that we're still able to get 8%. It was only a short year ago that we were celebrating 750, 7.5% as a premium. That is very good, and as you know, we've also indicated in the past that when we have a number such as 7% -- 8% rather, it is approximately equal to a pretax return of 2% on new dollars into the portfolio, times four years. And so in four years of earnings, a person is willing to give you those and remove all the risk attendant 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 is a pretty good deal, we're very 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. The earnings per share reflected all of these activities. Last year our earnings per share were just a hair under $0.42, $0.417 or something like that, this year we're guiding to $0.58, that will be a 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 the fluctuations in the stock market, and the nervousness in the credit markets have not helped, presidential candidates have a myriad of plans out there when asked about college costs. The CFPB issued a 151 page report a couple weeks back with many suggestions for the servicers.

It is the case that as we do research in regard to this market, in this 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, saves and 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% of the full bill to 37%. The basic product here is highly valued, it's supported by entire families, two generations, and we believe it to be still an excellent field in which to operate.

In summary, originations are strong, we're on our forecast, we are gaining market share, we have 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, allowing trends to get down to 40%. Asset sales, even in this difficult environment, to get an 8% premium is a validation of the quality of the product that we are 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%, we're having a terrific year.

The industry has clouds, it has always had clouds, we have good relationships with all of our regulators, we are 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, issued by the FDIC, the DOJ and the CFPB, the CFPB's suggestions are already reflected in that consent order and indeed in our operating base. 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. The presentation begins I guess on slide 4.

So our private education loan portfolio at September 30 totaled $10.8 billion [which is up] 38% from the prior-year quarter. Our owned and service product portfolio, which includes loans sold, and we continue to service them, $11.5 billion, up 47% [from the year ago 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 prior quarter is due to the higher average interest earning assets as a result of our successful peak season originations. The increase from the prior year is the result of a 19% increase in average assets.

Ray talked about the bank's net interest margin on interest earning assets, 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 point decrease was a result of high cash balances which we held (inaudible) as we lead up to our peak funding season, as well as lower private student loan yields. As many of you know, we took [and built] cash in the first and third quarters to prepare for our big origination season.

The increase from the prior-year is due to the increase in our private student loans as a percent of the 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 number is that our assets our 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. We feel 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 the private education loan portfolio in the second quarter was 7.87% as compared to 7.96% in the prior quarter and 8.20% in the year ago quarter. Ray alluded to the fact that the yields on our peak season originations was higher than the prior year, it came in stronger by 25 basis points. So again, Q3 originations had a higher yield this year than originations in the prior quarter. At a time when investors are focused on the competitive environment in the industry, we feel that this demonstrates our strong position of the franchise and 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 a very strong spread on our fixed-rate portfolio of loans. Raising fixed-rate funding through the ABS market is an excellent way for us to fund the fixed rate portfolio of loans that we have on the 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. We continue to believe that using term ABS funding to extend the average life of our liabilities complements our deposit funding, is a proven strategy [for the time].

Noninterest 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're very pleased that given the backup in yields in the market for all asset classes, we're very pleased we were able to get this transaction done and I will repeat that 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 the 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 operation 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 have made significant investments and seen significant improvements in our servicing levels, as measured by things like average speed of answer. We've also seen a 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 the bottom line in terms of efficiency of servicing center and increased loan [values].

Restructuring costs in the quarter were just under $1 million, compared to $1 million in the prior quarter and $14 million in the year ago quarter. Year to date we have spent $6.3 million in restructuring expenses, and at this point time activities associated with the spend are essentially completed. The originations platform was the last major system to be converted post spin, we accomplished that during our busy peak season and we are 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. Operating expenses, excluding the impact of volume growth, have stabilized at a 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 have made to improve our customer service. Again, we think over the long run it will be positive for the business leading to higher 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 I just mentioned in Indiana. The balance of the increase in operating expenses is attributable to several small items that are nonrecurring in nature.

We will not provide guidance for 2016, operating expense guidance for 2016 until our Q4 earnings call, although I will 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 built up at the spin. 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 excess of what is required to be a well capitalized bank by the regulator's guidelines. Our capital ratio will improve significantly in the fourth quarter as a result of the loan sale that just completed. 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 capital to support 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.

On slide 5 you will see a 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 (inaudible), 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 [wave]. And loans in forbearance were 3.1% compared to 5% in Q2 and 1.6% in the year ago quarter. The decline from Q2 is the result of the disaster forbearance that we provided to borrowers who were impacted by floods in Texas [one wall]. Our current forbearance levels are consistent with our long-term projections.

Turning to charge-offs, net charge-offs for all loans in repayment were essentially unchanged, at 0.83% compared to [0.81%] in Q2. Gross charge-offs for all loans in full P&I payment 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's 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 period, we're lowering our full year provision guidance to $83 million from $95 million.

Quick comment on core earnings, (inaudible) the only difference between core and GAAP is core excludes mark to market on unrealized gains and losses on ineffective derivatives from earnings. We use derivatives, as we've talked about, predominantly interest rates 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 [meant out] from this derivative portfolio in recent quarters.

Core earnings for the quarter were $47 million, $0.10 per share, a little higher than [the non-GAAP] metric that we reported. 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 is 16.7%. Those metrics in the quarter were lower than the previous quarter principally due to the fact that there was not a loan sale. We are on track to produce an ROA of basically 2% and ROEs in the 18% -plus vicinity.

Finally to wrap up, as you read in the 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 are happy to open up the call for questions.

(Operator Instructions)

Sanjay Sakhrani, KBW.

Steve I had a question for you on the NIM. Just looking ahead, I know you gave 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, the very nice thing about our book is that virtually all of our private student loans are actually private and so for all index for one month LIBOR. 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 -- the money market deposit rate will track one month LIBOR pretty closely, and we can raise our rates in LIBOR without diminishing our net margins. We feel very good about the way we are funded.

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

The impacts that we see in this quarter, so when we call upon our 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. It will fluctuate around that 5.5% within the quarter.

We do have a business that is highly skewed from a seasonality standpoint and so that will be with us forever, but so far as the overall for the year, we expect to end this year at 5.50% and expect next year to be 5.50%

One final question on the gain on sale, were you surprised by the extent of the decline in the gain on sale or does it makes 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.

I was optimistic that 10.5 could be improved upon. I was very surprised by the extent of the deterioration in the fixed-income markets, and basically what drives the gain on sale is competitive on assets for the residuals of starting at the front, so as spreads go out on the bond in the front end of the stack, that reduces the cash that's available to residual holders. Residual holders are looking at alternative investments such as high yield bonds, retraunches in commercial real estate, investments and things of that nature.

As those spreads move out significantly, 100, 200, 300 basis points, it pushed out the yields on our ABS bonds leaving less cash for residual holders. At the end of the day, we are not that surprised that the premiums deteriorated from 10% plus to the 8% zip code. The market has been very difficult and there have been a lot of transactions that were pulled and unable to be completed. We think that, that speaks volumes about how investors needs the quality of the smart options through loan trust that we're putting out for bid.

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

We're certainly not going to sell loans at a fire sale discount. We talked in the past about being opportunistic at 8% and above. I think that continues to be our position.

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. We think going forward we could certainly sell less than a than 1.5 billion of our student loans and maintain acceptable growth rates and capital levels. We will toggle back and forth on the amount of loans that we sell, dependant upon where premiums are in the marketplace.

Thank you.

Michael Tarkan, Compass Point

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 worse, so that temporarily you could trend above the 20% cap?

If temporarily we're bumping up to 20%, 21%, 22%, I don't think our regulators will penalty flag. What we want to do is demonstrate that we can execute, our business model, demonstrate the high quality of the asset that we have on our balance sheet, get through the upcoming (inaudible) 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, is 25% growth right or is 18% growth right? We think the way the business and the assets are performing that we can have a meaningful conversations on those topics with our regulators as we move forward.

On the expenses, are the changes you're making to improve customer service, have those been prompted by some of the new guidance we have seen from the CFPB and Department of Education? And 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?

If you look at the CFPB documents they have issued, as far back as two years ago, (inaudible) [Chap] who has been the ombudsman for student lending, their documents haven't changed very much. It's 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 this CFPB. As I said they haven't changed very much since 2014.

Many of the things that are in that document are already in a 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. As we look at it, hopefully 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 us.

I should point out that every day we deal with more than one million customers. And we have an open portal opportunity for any American to complain about us if needs be with the CFPB. It's the case that over the first 365 days that portal has been open, we are dealing with one million customers during that period, actually 1.3 million everyday, we've received 273 complaints, some are actually inquiries at the CFPB. So in our first 365 days of working with the CFPB we have received less than one complaint per day. Any notion that there are thousands of people complaining or anything along those lines just doesn't match the facts.

Thank you.

Moshe Orenbuch, Credit Suisse.

You talked about the growth in the market being a little bit lackluster. Any thoughts about what we could expect as we go forward? What are the cross currents that you're seeing as you look out into the next year for that, given some of the rhetoric about college costs and the like?

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. I think the actual term that I would suggest is consistent. When we look at the college growth market, or the market in which we operate, which is essentially the undergraduate cap funding business, it's derivative of the entire expenditure by Americans for undergraduate education.

In fact that's driven by clearly two items, one is the number of people who are buying that education and second is what they are 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%.

Our growth has consistently been more than double that, so we've 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 cash performance than they have been reacting to anything that's in the environment.

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

It's something we would consider doing, but candidly I think everybody on this call does follow what's going on in the FFELP loan sale market. We'd be hard-pressed to, I think, we see the premium with that portfolio at this point in time. It's something that we would certainly consider as another lever that we can pull.

We are optimistic and I remain optimistic that they will be able to get a loan sale off the premium this time around. I think that we will certainly be able to continue to execute that component of our business model going forward.

(Operator Instructions)

Mark DeVries, Barclays.

It sounds like you have a high level of confidence in the overall level of your yields with the guidance you're providing on NIM out several years. Can you talk about what, if anything, you're are seeing in terms of competition around pricing with some of these market (inaudible) trying to push their way into your business?

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're 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 business. Quite frankly I don't think we're really seeing them.

To the extent we are seeing them it's in the post origination business (inaudible) and things of that nature.

They tend to be focusing more on the big pie of federal loans that they can consolidate as opposed to our, what we think is appropriately priced private credit portfolio. So we haven't seen a very big impact.

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

No, we're not seeing that at all.

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

You're asking the guy that 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. I do think that we've reached a level where yields make sense to investors, 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 of 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 we are actually going to see. As time goes by and the players continue to perform as expected, that's an area where we could see some pricing improvement. If the bond market stays in reasonably good shape, we can certainly continue to execute that aspect of the business model at reasonable prices.

I want to return to your point about runoff. Just to remind you that the way our business model is set up 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 are students in particular get loans and their FICO scores are low, let's call it under 700.

They come back a couple 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. Of course, our loans are granted at 750 level and because they are variable in rates so when the rates go down people aren't stuck with high fixed, 85% of our customers -- we still have a variable rate. We're not as 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% compare to the prior deal, the one at 10.5%?

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

Thanks, guys.

Eric Beardsley, Goldman Sachs.

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, as we look at it, you're probably getting well below 20% year-over-year asset growth. In that context, why the loan sale now?

When we look out over the next couple of quarters, we also have capital constraints and when you hit the big third-quarter peak originations season, we see our loan growth increase substantially, throughout the capital levels decline below that 14% [worse case] capital level.

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

The two of them are absolutely important constraints that we're operating on.

We never want to cut our time period for execution on the sale. Sure, (inaudible) we would be the victims of what could be a very [cocordian] market conditions. We want to keep this on a regular basis.

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, now that we have spin behind us, we'll be thinking about potentially piloting a couple of products. We are finalizing our 2016 plans as we speak, we will talk about that of course in the next call. It will be the case that all of the expenses associated with anything we would do, already incorporated in the efficiency numbers that we talked about.

Thank you.

David Hochstim, Buckingham Research.

Following up, 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 the case that we expect to have constant improvements in our customer experience. As far as moving as you know the goalposts we are constantly receiving, is a long-term game. It is our opinion that in looking at the audiences 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. It is the case that there is a myriad of items so far as improved IVR experience, improved experience with desktop information available to both our service personnel as well as our collections people. This will be a film that we are in the middle of and it will continue as long as we're doing business.

Whatever you are planning is probably already incorporated in your expense guidance?

Yes.

Another question I had was just on loans entering repayment. Can you give us an idea how much the portfolio would be entering repayment next year?

The next big wave will be (inaudible) that is basically $1.5 billion of loans [that we will be entering] for principle and interest, and then we'll have another mini wave, it will probably be around $600 million in the May, June time. Basically six months post various graduation rates.

The $1.5 billion would be early in the year, is that what you're saying?

The $1.5 billion be the November, December (inaudible) [pay rate], that's a big post May, June graduation, six month after grace, full P&I (Inaudible).

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

The expected increase in loans going to full P&I is constantly being factored into our allowance. We're building an allowance to cover charge-offs for the next expected year.

Another question about the servicing of loans that you have securitized and sold, is it right to assume an average fee of about 75 basis points, or could that be a little higher?

Our servicing fee is 80 basis points. We'll have $12 million as of the close of this -- securitization of $12 million in annual run rate service and fees (inaudible).

To be clear, the sale in the fourth quarter, that is separate from the securitization that you did midyear? And the residual that you retained on that?

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.

In theory you could sell that residual from15b at some point if the market was really --

We could sell the residual from 15b. There's a little bit of pare on that transaction because we own 5% of the various trusts and the various bonds for a risk retention, and we own the c bond, so it's not a cakewalk but it's certainly something that can be done.

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

Yes, that is correct.

Thanks a lot.

(Operator Instructions)

Sameer Gokhale, Janney Montgomery Scott.

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 the fear was that the gain on sale would actually be lower than that, given what we have seen as turmoil in the fixed income market. It seems like a relatively healthy gain on sale margin, or premium all things considered. I remember we discussed this maybe a few quarters ago in terms of looking at forward flow agreements.

Given some of the uncertainty in the market at this point, driven by what is going on in the credit markets, does it make sense for you to now, perhaps more seriously try to consider entering forward flow agreements for future loan sales, even if they might be at slightly lower premiums? The reason I ask this, 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 constrained, while regulators demand. Just wanted to get your updated thoughts on forward flow agreements and locking in perhaps lower premiums relative to what you generate so far?

You make a very good point. The forward flow agreement would be very helpful, particularly as it gets us hedged away from the volatile market times. It will come with a significant discount. That is something that we probably should weigh and we will have the capital market team take a look at what is available in terms of forward flow at this point in time.

It's a very difficult transaction to execute. Forward flow for the residual, one piece of it that the residual as we've discussed here in this call and in the past, is entirely dependent upon where you priced the bonds that are in front of the residual. It is a difficult transaction to execute. It's certainly something we will look at.

The gain on sale is our least favorite part of this business model and it is a fact that if we held these loans, the earnings for share holders would be higher per unit from now than if we did not. We will look to minimize the amount of loans that we need to sell on a go-forward basis.

We'll take a look at all strategies. I think number one, we want to wean ourselves off this reliance on gain on sale. We'll look to execute that in the future.

People are referencing residuals and securitization funding for these loans. I think your whole loan sales might also be a possibility. I think a lot of investors seem to defer investing in that securitization bonds. It may be possible for you to also contemplate going whole loan sales, correct?

Again, balancing it out with the decline in lower premiums, but locking in the forward flows, or is there a specific other reason why you just would prefer securitizations as opposed to whole loan sales?

The reason why we ended up going the securitization route for loan sales is because, as you may recall, we did a lot of work with various different investor groups leading up to our first loan sale. We talked to regional banks, we talked to US branches of 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 you can realize in terms of economics by securitizing and selling the residual. In fact, a lot of the real money fixed income investor buyers prefer the residual to the whole loan as well.

It's something we constantly revisit, we just haven't had any whole loan buyers step up for the spot sale, no less for a forward flow agreement. It is the case that all of the syntec 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 the balance sheets as well.

So it is the main avenue for executing these things. But again, the team continues to look at alternatives and we will.

Maybe some perspective from both you and Ray, 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. What I'm specifically trying to get at is you have a yield that is quite attractive at origination, but given some of the stuff you hear from market-based lenders and the fact that there's talk of more refinancing of more seasoned loans, it would seem to make sense for you to want to retain those loans yourself.

As you think of profitability over the loan cycle, have you baked in any expectation of lower margins on those loans as you perhaps have to offer lower rates to retain those loans within your portfolio? Is that baked into your all in pricing?

When we do forecast for the portfolio, we have a model on the prepayments which would be the leading indicator for the phenomena that you're mentioning. It is the case that we have as I said, 750 average FICA score through the door and over 80% of our loans are variable rate. And so for a person 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.

We tracked prepayments quite carefully, haven't seen any significant movement in that either way, up or down. We don't anticipate we that would have a mid-stream reduction in pricing in the portfolio, it doesn't appear to be necessary and we have been [warned] now about this by commentators including yourself. We don't see it in numbers and of course we want to maintain the relationships that we have with our customers, so we are very attuned to this.

And then a the last question on your yields, on new originations I think you said they were higher year over year, but I think for the portfolio the yield was lower year over year. If you would just remind me what happened between the years that explain the overall decline in the portfolio yield year over year.

I can sum it up along these lines. Over the last couple of years, there was a step down in yields of roughly 40 basis points. It looks like we have recovered some 25 plus compact. There will be moderate pressure on the overall student loans yield, but it is not going to have a significant impact.

But the nature of those repricings was as we looked across a band of about 600 or 700 basis points, price points that the customer could experience, we wanted that to be as smooth a curve as possible. And when we looked at the curve a couple years back it had a couple of step functions in it, which we thought were unintuitive to a customer. As we smoothed that out as Steve said, first we had a movement for the yields to go down about 40 basis points then as we looked at it again, the were back by 25. So net-net we're down about 15 basis points.

Okay, thanks for taking my questions.

Jordan Haimowitz, Gill Financial.

You said that the people that were buying the whole loans instead of the securitizations would be much lower. What is much lower? Is much lower a half, is much lower 4 points, what type of range are we talking?

A couple hundred basis points lower.

So 200 or 300 points?

That is a fair range.

Could we also think that would be the bottom so to speak, if there was no gain on sale market now that the lowest the numbers would be would be about a 6% gain?

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

The volatility that we 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%, and 50% higher, and then we see a drop off of 20% to this point. We think in some sense the volatility outweighs the targeting that you're referencing.

The second question, is there more and more buyers as you pursue other whole loan sale markets. In other words, are you expanding the potential buyer set?

We do a lot of investor outreach. And buyers of things like subordinated bonds and residuals. We are constantly looking to expand the investor base. To your questions, if we sold [108] today and we got off our transaction, at 107, 106.5, 107, if there is substantial demand for these.

That's exactly the question I was trying to get to, 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 a call and the presentation will be available through November 4 on our investor relations website, www.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.