SLM Corp (SLM) 2015 Q4 法說會逐字稿

Good morning. My name is Jackie, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2015 Q4 Sallie Mae earnings conference call.

(Operator Instructions)

Thank you. Brian Cronin, Senior Director of Investor Relations, you may begin your conference.

Thanks so much, Jackie. Good morning, and welcome to Sallie Mae's fourth-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 discussions 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 these discussions 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, 2015. This is posted, along with earnings press release, on the investors page at SallieMae.com. Thank you. I'll now turn the call over to Ray.

Good morning, and thanks for your attention. Today, we will discuss the quarter that just ended. We'll discuss 2015 as a total, and we will discuss our change, as we move into 2016. I'll talk about 2015 and 2016, and then I'll hand the call over to Steve, who will concentrate on the quarter, and then we will both answer any questions that arise.

2015, in total, was a very good year for us. And, marching down the income statement, our volume was slightly in excess of our guidance at $4.33 billion new originations, plus 6% for the year. It rendered us with a 54% market share, up from last year, which is very good. That is net of several relationships that we had, specifically with for-profit firms, where we discontinued new originations.

The result of this volume is that our private student loan portfolio over the course of the year has increased from $8.2 billion to $10.5 billion, which, of course, is the earnings engine going forward. That's an increase of 28% in the last 12 months, in keeping with our volume goals.

While we were doing this, our credit quality has been both consistent, as well as excellent. For the year, our average FICO was 748, a mild change from last year's 747, essentially the same number. Very high. And our approval rate during 2015 actually went up to 40%, with that same profile. The clear mathematical implication and reality is that we are getting the higher-quality through the door population, by increased serialization, that is more than one loan with us, and a concentration in higher-quality originations from more four-year not for-profit schools, the traditional colleges.

After doing that, we marched down some NIM. Our NIM for the year is 5.48%. We had discussed this in our October call, and both Steve and I said we were at a 5.50% and we would stay at 5.50% until the end of next year, which was just the end of the planning horizon, as opposed to we expected a change thereafter.

At the end of this year, we increased our cash balances, anticipating disbursements during January and February. So, in the fourth quarter, the 5.48% is on an ongoing basis, the same as 5.50%, which is what we are forecasting for the next year.

It is also the case that the 5.48% is versus a 5.01% in the fourth quarter of 2014. So up significantly, at 5.36% in the third quarter of 2015 and the sequential quarters, and up from the full year of 2014, 5.26%. So just not to bury people with rattling off numbers, last year in 2014, 5.26% and 2015, the year just ended, 5.48%. I know there's been some concern that might go down, and in fact, it has gone up.

In regards to our operating expenses during the fourth quarter, slightly better than the consensus. We ended the year at $356 million in total operating expenses. The expectation and what we had communicated was that we would have $353 million in ongoing expenses and $7 million in conversion expenses associated with the separation of Navient.

The expectation was $360 million in total. We in fact had $356 million. We're happy to see that settle down. As you know, there's been a full amount of volatility in that, mostly associated with the spin.

Credit performance, for the year, has been, on balance, steady. It's moved around a little bit as we have gone quarter to quarter. The provision, which we had guided to in the third quarter at $83 million, we wound up at $89 million. Last year, in 2014, 1.5 years ago, we had quite a bit of noise in our delinquency roll rates associated with operating [date point] which occurred in October of 2014.

As we tried to use that history for forecasting 2015, there was some commingling of noise in the system, because of operational variance, as well as seasonality associated with both the fact that students graduating in May will be making their first payments in November. So, there is these waves of graduates that come in, in the fourth quarter, as well as the fourth quarter's own indigenous seasonality.

As we've sorted that through, we are where we were, which is, our credit models are consistent, and we are right on the long-term life cycle of credit losses by segment. So, it's the case that, as I said, with the increase in full P&I, which was $1.3 billion in the fourth quarter, we believe that we are exactly where we expected to be.

All these results, and an EPS for 2015 that was $0.59 versus $0.42 in 2014. That's a clean increase of 40%. So very satisfied that as we approach the bottom line, nothing got lost on the way.

It is also the case from an ROE standpoint the results are stellar, 18.3% ROE. As a last note on 2015, we have had and continue to have, very good relationships with all of our regulators, specifically the FDIC and the UDFI.

In turning to 2016, we've given guidance for EPS to be $0.49 to $0.51 per share, $4.6 billion in originations, and an improvement in the operating efficiency ratio of 8% to 10%. Let's start with the $0.59 going to $0.49 to $0.51. As we have gone through our maturation period, with 2014 being the year of the spin, 2015 being our first full year of operations, and 2016 being our first year of, in some sense, adulthood as a new company, we've been in close contact with our regulators.

It has been the case that, as you all know, over the last 1.5 years, we have sold $2.5 billion worth of assets. We've done that in three separate events. The premium associated with those three events were 7.5, 10.4 and 7.78. The volatility from 7.5 to 10.4 is roughly 40%. We've never liked this volatility, because our franchise, inherently, is a steady franchise, built upon spreads, built upon assets, that have on average, a seven-year life.

We've done this, as people know, in order to meet some guidelines that we had with the regulators. As we have discussed with them, now that we are a fully operating company, now that we have been audited, we have moved the number of employees from the original booking center of 35 employees to roughly 1,300, today, and we didn't care for the volatility that was introduced to our P&L by the asset sales. We have worked through with them what is appropriate, and it will be the case that we will not force ourselves to sell assets for anything that we would regard as an unattractive price.

Now, in prior calls, we have had to define what an unattractive price would be from a range, and we have used 8% premium as a break point. So as we've discussed this internally, 8.5% is probably a better number, because the transaction cost associated with asset sales. So at 8.5%, people have asked about what is the breakeven. As best we can calculate, we're making approximately 2%, a little over 2% on these assets pretax, if held on the books. 8% is somewhere between a three- and four-year breakeven for any particular tranche.

So, for assets that price less than 8.5%, we will not sell any assets in 2016. So we will move forward, as I said, with that $4.6 billion in originations that will be entirely balance sheet by us. We have no plans to sell any assets. We have no plans to cut back on originations. We are, in fact, in full bloom, as a mature company.

So, if it were to be the case that credit markets would return to a period such as April of 2015, during which we did get that 10.5% premium, at that point, we would have an option as to whether to sell or not. We are not on autopilot in regard to this. We are looking at it with judgment. Our great preference is to hold the assets. When somebody starts to talk about premiums over 10%, you have to take that quite seriously.

For 2016, $4.6 billion in originations, all three balance sheets, no asset sales forecast. We're doing it in keeping with conversations with all the relevant audiences.

Talking about the $0.59 to $0.49 to $0.51, the $0.59 in earnings per share, to the best of our ability to calculate this, has two components. One is $0.39 per share, which is the ongoing balance sheet franchise contribution, and then in 2015, $0.20 per share attributable to the $1.5 billion of assets that were sold during that period.

As we move from 2015 to 2016, the $0.39 is exactly comparable to the now-forecast earnings per share of $0.49 to $0.51. $0.39 will turn into $0.49 to $0.51 per share. That is a range of percentage increase from 25% to 31% increase, in keeping with all of the models that we have, and in keeping with our conversations with each of you.

The $0.20, as I said, will drop to $0 and so we will lose $0.20 of EPS, by choice, in 2016, which we believe is a very good thing. It speaks well for our credibility with our regulators. The break even on hold versus buy for the entire portfolio is somewhere between two and three years.

So we think this trade-off is excellent for a seven-year asset, and so we are thinking that $0.39 should be compared to the $0.49 to $0.51, 25% to 30% increase, $0.20 drops out by our choice. The origination, that $4.6 billion, will be a 6.25% increase, faster than the market. We are implying that we expect to continue our market share gains. So, robust front-end, good balance sheet management, third factor that we have talked about is leverage.

We're now measuring our efficiency ratio in keeping with our peers, which is the revenue and expense before credit costs, and we are at 47% today. We are expecting that we will improve that by 8% to 10%, and so that's the number that's roughly 4%. And, it is the case that while we are doing this, the backdrop, as I said, the private student loan portfolio is up 28% this year.

We expect it to be up in the 28% to 30% range next year. So volume-servicing cost, sales cost, maintenance, are all up 30%. Expenses are up materially less than that, resulting in the improvement in the efficiency ratio.

So, it is the case that we had, in 2015, a great year. As we leave 2015, we have a solid foundation, more solid than we have ever had.

We have always talked about the day when we would be free of the volatility of asset sales. We had thought that day would be two years in the future. In fact, through the terrific work done by all the managers here, we have accelerated that date of independence from high volatility to today.

So, it's a great day for us. The balance sheet, going forward, will continue to concentrate on the PSL balances. As we look at them, they have a very high likelihood of doubling over the next three years or so.

As we wrap up, the market share is up. We have a strong national sales force. We have a well-established brand. We have targeted products for our targeted audience. We have the opportunity to introduce adjacent products. We have high-quality, consistent credit. We have leverageability, which is now obvious in the metrics.

We have good regulatory relationships, and we are grateful for that. We have, as a franchise, excellent growth prospects. Now, coming to a theater near you, we have lower volatility. So 2014 launch, 2015 platform, 2016 maturity. We are two years early.

Thank you for your attention. I'll turn this over to Steve.

Thank you very much, Ray. We'll take a close look at a couple of these numbers before we turn the call over for Q&A.

Looking at our student loan asset, the average yield in our private education loan portfolio in the fourth quarter was 7.84%, compared with 7.87% in the prior quarter, and 8.07% in the year-ago quarter. Spreads will remain relatively consistent going forward.

I would like to point out that the recent increase in LIBOR did not impact our portfolio, which was approximately 90% variable rate until the very end of December. So, I think what you'll see is a higher yield in Q1 2016 on our student loan assets, in 2016 and beyond, assuming a steady LIBOR rate.

Looking at our funding, our cost of funds was 1.18%, down 2 basis points from the prior quarter, and up 7 basis points from the year ago quarter. We were active in the deposit market in Q4, where we raised $1.2 billion. The market for retail deposits was not impacted whatsoever by the Fed rate hikes. We saw no increase in our cost of funds, there.

While term ABS remains one of our core funding vehicles, we will only access that market if the pricing is attractive. After all, we are a bank, and we can fund our growing student loan portfolio with deposits. Non-interest income totaled $72 million in the quarter, compared with $10 million in the prior quarter and $12 million in the year-ago quarter. Of course, the increase this quarter was driven primarily by the $58 million of gains, as a result of the loan sale in the quarter.

As Ray mentioned, and I guess it's worth repeating if you tuned in late, we are no longer required to sell assets to meet our capital levels, and restrict our balance sheet growth. This is a big positive for the long-term earnings power of the Company. Our breakeven price of hold versus sell is basically 8.5%.

Selling loans at a premium below that level, which is where we are today, reduces shareholder value. Obviously, by holding these loans, we billed a bigger asset base, and generate significant future earnings. In fact, we don't even have to wait that long to see the contribution to earnings. When we model holds versus sell, the EPS generated by holding loans exceeds the gain on sale model within a short three-year period of time.

Our long-term business model has always been to originate and hold. And the Company and its shareholders are better off when the Company is not dependent on the capital markets to generate earnings.

Fourth-quarter operating expenses, excluding restructuring costs were $85 million, compared with $93 million in the prior quarter, and $78 million in the year-ago quarter. Expenses in the fourth quarter are typically lower than the third quarter, due to the seasonality in our marketing and servicing expenses.

Full-year operating expenses were $351 million, with an additional $5 million in restructuring expenses. Our full-year expenses came in better than our expectations, principally as a result of a heightened focus on our expense base here. It's worth noting that our restructuring expenses were $1 million lower in the quarter, primarily due to the release of a reserve that was established at the time of the spin, that did not materialize.

Going forward, we will no longer report restructuring expenses as a result of the spin. Ray covered operating efficiency ratios. So, I won't comment any further on that.

We'll jump down to our tax rate in the quarter. A quick comment, there. In the fourth quarter, the tax rate was 37.9%, compared with 55.4% a year ago. The tax rate was higher in the fourth quarter of 2014, as a result of the reserve build for uncertain tax positions. The tax rate for the full year was 37.5%, and our expectation is that the ongoing tax rate will continue to be around 39%.

The Bank remains well-capitalized, with a risk-based capital ratio, at the end of 2015, of 15.4%, which significantly exceeds the 10% risk-based capital ratio that's considered to be well-capitalized. Our total risk-based capital ratio will approach 13.6% as the portfolio grows in 2016.

In addition, the parent company has excess capital available to the Bank as an additional source of strength, that is not reflected in this number. As in the past, we still do not anticipate returning capital to shareholders, as we reinvest in our business.

Taking a quick look, a closer look at credit quality, loans delinquent 30-plus days were 2.2%, compared with 1.9% in Q3, and 2% in the year-ago quarter. Loans in forbearance were 3.4%, compared with 3.1% in Q3 and 2.6% in the year-ago quarter.

Net charge-offs for all loans in repayment were 1.08%, which was up from 0.83% in Q3. Net charge-offs for all loans in repayment in 2015 came in at 0.82%.

In our service portfolio, gross charge-offs for loans in full P&I were 2.2% in Q4, up from 1.4% in Q3. The uptick in all of these credit performance statistics from Q3 and the prior year is driven, principally, by the May-June repayment rate and the overall seasoning of the portfolio.

We now have $3.8 billion of loans in full P&I, which is up 35% from Q3 and 65% from a year ago. In fact, 85% of the loans that are in repayment have been in repayment for one year or less, basically. So, given the freshness of the portfolio, it is performing well within our expectations, and within our long-term cumulative default expectations. We ended the quarter with 35% of loans in full P&I.

So, just a quick word on, Ray talked about the provision and what's relevant in the current quarter. Just a quick word on the outlook for 2016, we expect the provision is going to increase, as a result of growth and the seasoning of the portfolio. And in fact, we'll see an additional $2.2 billion of loans enter full P&I over the course of 2016.

A quick word on our core earnings SLM core reports, the metric that we call core earnings. The only difference between core and GAAP is the core excludes the mark-to-market on unrealized gains and losses on unfactored derivatives from earnings. We use derivatives, predominantly interest rate swaps, to manage the interest rate risk in the portfolio, and all of these hedges are good, sound, economic hedges. The fact of the matter is, that core and GAAP earnings were identical for the quarter and the full year, because there has been no major impact from this derivative portfolio.

A quick word on our ROA for the quarter was 2.5%, compared with 1.3% in Q3 and, 6/10% in the year-ago quarter. Full-year ROA came in at a solid 2%, compared with 1.7% in 2014. Return on equity in the quarter was 22.5%, compared with 11.7% in Q3, and 4.7% in the year-ago quarter. And of course, the increase from the prior quarter and the year-ago quarter were due to the big loan sale gain that we reported in the quarter. The full year return on common equity was 18.3%, compared to 15.2% in 2014.

That completes our prepared remarks. And at this time, I'd like to open the lines for Q&A.

(Operator Instructions)

Moshe Orenbuch with Credit Suisse.

First of all, the 4.6% origination target is a pretty good number. Maybe you could just talk a little bit about the competitive environment, what you're seeing, and what could cause that to be better or worse, as we go through 2016?

Sure. Thank you for the question. $4.6 billion, let me go ahead and agree with you, that is a pretty good number. We're very happy with it. We see the market, itself, expanding by about 1%.

We review competitive positions school by school. As you might imagine, it varies quite a bit as you go across the country and across types of schools. We see the market as being relatively stable, with our normal competitors there, being Wells and Discover.

We're watching new development with some of these fin-techs, but we don't find them in market share and. They're typically a little more concentrated on after markets, consolidation loans, things of that nature. So, we don't expect great movement in the markets at this particular point. And it has indicated the market is a relatively stable market as we look back over the last, pick whatever you like, 10, 15 years.

Great. Thanks. Separately, you talked about the core growth pulling out the gains in both 2014 and 2015. As we go into 2016, though, what you'll have is not just pulling out the gains, but you'll actually have more assets, right? All things equal, it's reasonable to believe that would be stronger on a core basis, correct?

That's correct. When we talk about the $0.39, which is the balance sheet income statements, just to use one monitor, and we look at what that equivalent would be, including the fact that we are not selling assets in 2016, that turns into the $0.49 to $0.51 that we've been talking about, and as I said, that is a 26% to 31% increase, and that reflects our holding those assets on the balance sheet.

Thank you.

Sanjay Sakhrani with KBW.

I guess you guys are very clear on your sale intentions. But number one, I was just wondering, I assume you have gauged the market, and at this point in time, the market just isn't robust enough to meet your hurdles. Could you just talk about what might be driving that?

Did this occur even before all the turmoil in the capital markets? Was it driven by some of the stuff that's happening in the FFELP market? And when that gets fixed in some capacity, perhaps, the market will clear better for private student loans?

The second question on that same topic is, as you are retraining more of these loans, how should we think about capital adequacy? Is it, at some point, you get to the point if you are retaining all these loans, that you might need more than just capital that's being generated off the portfolio to support the growth? Thanks.

Sanjay, first of all, on the ABS market, the market is open and functioning very well, since the start of the new year. There have been a number of transactions that have gotten done, particularly in the auto sector, and the spreads in that market have not widened materially since we last transacted in the October/November timeframe. We could certainly do a transaction today, and our premium would probably be in the 7% vicinity.

The market has backed up, as yields across all asset sectors have moved up. The high-yield debt market yields have increased. Yields have increased in the commercial mortgage-backed market, and the residential mortgage-backed market.

The student loan, both federal and private, and the auto and equipment markets has followed along with that fund phenomenon. It's been general credit spread widening in all asset classes.

We do think that the market will recover. We have seen many cycles where spreads widen and tighten, and all the markets are at extremes today. In fact, it's pretty encouraging that the asset-backed market is functioning well, given what we've seen, in terms of volatility in the capital markets.

But the point is, we really would prefer to hold these loans, as opposed to selling them. As Ray pointed out, if the market gets really strong, and premiums rise to 10% again, we might very well consider selling additional assets.

In terms of our capitalization, we have ample capital to grow in 2016 and 2017, in a way that, I think, will generate the kinds of capital levels that will satisfy all of our regulatory agencies. I mentioned earlier that by the end of the year, our total risk-based capital will approach 13.6%.

We do have additional capital at the core, a couple of hundred basis points worth. But, it is a fact that, as we model our Company over the next several years, we do start to become self-sufficient in capital generation, capital turns, and it starts to grow again in 2018 and beyond.

Core percentages, that's absolutely very growing very well.

Yes. So, we feel very good about the way we are positioned today. And it is the case that selling assets over the course of the last 1.5 years, the $2.5 billion that we have sold, has generated significant amounts of capital that has put us in this position, where we can, now, ease back on the loan sales.

Got it. One follow-up question, and it probably will relate to the question asked before, on just the competition and online players. That's a question I get a lot from investors, because the online players are out there, talking about how they are taking share. It doesn't seem to be affecting you on originations but when you think about consolidations away from you, are you seeing anything that is noticeable from a consolidation standpoint?

We track consolidations every month, and we track who we are writing checks to, as well. We have a pretty good idea of what's going on in our portfolio for consolidations.

The number has been, and is, de minimus, from what we can see. When we think about market share, we think of the originations, primarily, but we are protective of the assets that we have, we expect them to go for seven years.

We have shared with you models in regard to that, and as we track this, it has been quite steady, and the models haven't changed at all. We're not forecasting increased liquidations of any material amounts, and I agree with you. We hear quite a bit about startups, fin-techs, people in consolidation loans, and we are looking at all of that because these are very smart fellows who have good franchises, and it is the case that there are things to learn from every competitor.

Having said that, when we look at market share, it's the traditional people, the names you all know, that are who are there, who are aggressive in regard to this market, who are good competition, and we don't see the people who are breaking the headlines.

All right. Thank you very much.

Mark DeVries with Barclays.

Just wanted to clarify a point around the lifting of the growth cap. Has that been lifted without any kind of qualification? Or, might the regulators want to see you sell some loans, potentially, if it gets above -- pricing gets above your breakeven?

It's the case that the regulators are very practical people. We have open discussions with them.

They see what we have been discussing here, which is a market that we -- as I said, the spreads that we have received move from 7.5% to 10.5%, a 40% increase. No one likes that kind of volatility. We don't like it we don't think the shareholders like it, and the regulators certainly don't like it.

Their great preference is that we hold the assets on the balance sheet, assuming that we can have proper coverage of the capital, which they are responsible for. And so, in discussions with them, we are all of the same mind.

One, if we can avoid capital markets altogether, that would be the preferable course. We will not go to capital markets if it is below our breakeven, and above our breakeven we will have optionality, not requirements in regard to this. And we have shared that with them.

Of course, everything is, any regulator, appropriately, is steady as she goes. And if there are adverse developments somewhere, either in the company or in the environment, they have reserved the right, as we all do, to address those as they occur. But for what we know of the markets today and for the foreseeable future, we will have, as I said, optionality not required action.

As we model it out, we're only going very modestly exceed our 20%, 20% growth rate, so we don't think it's an issue.

And only in the fourth quarter.

Got it. That's helpful. Is there any color you can give us on the outlook for the provision this year, and where -- do you still think you are writing new loans in the 100 to 150 basis point annualized charge-off range?

Absolutely. Everything we see, the way the credit is performing, we still think that our 7.5%-ish cumulative life of loan charge-off rates are intact. But as you know, charge-offs are higher in the first, call it, 36 months -- then they are in the subsequent 48 months. So, we do see higher charge-offs early in the lifecycle of private student loans.

We will see growth in our provision, of course, from the 2015 level. I detailed the amount of growth that we are going to be seeing in our loans entering full principal and interest, in my prepared remarks. We ended the year at loan loss -- allowance for loan loss reserves for the full portfolio of, I think it was 1.03%, up from 0.93% in the prior year. You will see that reserve level creep up, as the portfolio grows and seasons over the course of 2016.

(Operator Instructions)

Eric Beardsley with Goldman Sachs.

Could you just talk a little bit about how you plan to fund the incremental growth? Is there going to be a step-up in retailer brokered CDs? Just in light of your commentary, that you'd like to avoid the capital markets, does that also mean that you won't be doing ABS deals to fund?

Sure. Over the course of 2016, I think you will see us use all of our funding tools. Certainly, our deposit base is going to increase. We've had some success with expanding our core deposit base.

Recently, we've started a new relationship with a health savings account, that's going to bring in multiple hundreds of millions of dollars. We will look to expand, certainly, our retail deposit base, both money market and our term CDs. But Eric, we haven't ruled out the capital markets, completely. We do have a securitization in our plans.

If we were to issue today, the market would give us funding at a price that's not significantly higher than what we have in our plan. So, we will be opportunistic, and wait for the spreads in the market to come in a little bit. If that does not happen, we can certainly access both the brokered and the retail deposit base to fund our growth, going forward.

Got it. As we think about that composition of your deposit base, do you think that mix will change significantly from where it is today?

We are pretty comfortable the 60-40 and I think you can see that continue.

All these comments are consistent with the NIM 5.5% that we discussed earlier.

As a follow-up on that NIM, I guess, given you will be retaining more private loans, now, could we see that NIM trend up even higher?

5.5% would probably be more of a base level, and I think we can certainly see expansion in the NIM, particularly with the growing component of private student loans on the balance sheet.

How do you think about your ability to lag on deposit pricing if you are going to get a step-up in loan yields in the first quarter? Should we actually get some asset sensitivity start to roll through then?

Yes. Obviously, it all depends upon what the Fed does, and given the way things are looking, now, I think additional rate hikes are probably less than more likely. We were very heartened by what we saw on the retail deposit market. We were all waiting to see if there was increased competition amongst the Internet banks.

But what we actually saw was that several banks lowered their retail deposit rates. I guess a lot of the anticipated Fed rate hike was priced in.

I don't want to promise a whole lot of asset sensitivity. But, certainly, our asset reset in the last week of December and a big chunk of our deposits did not follow that move. We are in a pretty good position, here.

Got it. Now, with the incremental growth, was there any need to draw down cash, or even sell FFELP loans to accommodate the increase in private loans?

No. That's not on the table at all. We're in very good shape from a funding perspective.

Okay. Great. Thanks so much.

Michael Tarkan with Compass Point.

Most of my questions have been answered. Getting back to the credit question, it looks like provisions did come in a little higher than the implied guidance for the quarter. Just curious if you are seeing any signs of early stress on the portfolio.

Along those lines, is there a targeted reserve level you are hoping to get into in either 2016 or beyond, where you can level off at? Thank you.

The portfolio is performing, as I said earlier, pretty much well within our expectations. Seeing increases in charge-offs of the magnitude that we did, 0.83% to 1.08% and for the full P&I from 1.9% to 2.2%, given the amount of loans that we have now in full P&I, it's up 65% from a year ago, and 35% from the prior quarter. That's significant growth and seasoning.

The provision miss, as Ray explained was principally due to the over discounting of the seasonality and roll aways. If anything, we're factoring in, probably, superior performance than what we are seeing here in the portfolio's performance, as expected.

Okay. Is there a targeted level of reserves that you expect to top out at as a percentage of loans?

No. Again, it grew from 0.93% to 1.03%, it's going to be obviously be higher than that over the course of the year. I don't want to throw out a specific number at this point in time.

Okay. Fair enough. On the origination front, Ray, I think you mentioned in your prepared remarks that you stopped lending to for-profit schools. Did I hear that right? If so, can you just remind us what percentage of your existing portfolio comes from the for-profits?

It is the case that we are constantly looking at the performance by school, and in particular, the for-profits. Over the course of three years, have culled that down significantly. And the schools that we currently have in our portfolio of new sales, are schools where they have big graduation rates, good placement of students after. The percentage of our total volume that is related to for-profits is less than 10%.

Okay. But, nothing where you are turning off the switch at all? You are still lending, but just very, very targeted?

As a category, we are lending to that category. As a school, it is dependent on their proposition with students and their results.

Okay. Thanks, and then last one. I believe you have your formal stress test submission coming in July. Given that you received disapproval to hold more loans on balance sheet, is there anything that we should be contemplating as we head into that, or concerned about, heading into that exam? Thanks.

When we share our forecast with regulators, we have, for the last two years in a row, done simulated stress tests, knowing that the DFAS requirement is not upon us until July of 2016. We have used the assumptions that are the assumptions in DFAS, so far as environmental change, consistent with the Federal Reserve guidelines. We have showed that to our regulators in all cases, for any stress level, for any year, we had very good results.

We continue to make money. We continue to have capital ratios that are well above well-capitalized. So, what we have tried to do, is to make the events of July 16, when they occur, to simply be the next turning page in regard to this type of analysis, which we've been doing for two years, now. We are trying to make that, and we believe it will be, a non-event.

Thank you.

Rick Shane with JPMorgan.

This has been very helpful. I just wanted to walk through provisioning. Again, we are a little bit newer to the story, so it will be helpful for us. If we take a cohort of $1 billion of loans, and we think about it over time, as it moves into full principal and interest rate payment, how front-loaded is the provisioning over the life of those loans?

Rick, you might be well served to look at the default emergence curve that we put out one year ago today, or maybe it was in the second or third quarter earnings call. But, typically, you see, I want to say 60% of the defaults are going to emerge from the portfolio, in really, the first 2.5 years to 3 years. Charge-offs are going to be -- to put a handle on it above 2% in the first year or two, and then decline significantly, and fall below 1% in pretty short order. There is significant front loading of defaults in any repayment cohort.

Got it. We should think about that as you move towards repayment, that you are targeting 12 months of forward reserves against that?

That's correct. We have an allowance for one year of expected reserves.

Thank you, guys.

I would now like to turn the call over to Ray Quinlan, CEO, for closing remarks.

Thank you, and thanks for your attention, and for your questions. This is a very good day for us, as it announces that we are moving to a different level of maturity as a new company. It is the case that we've maintained all of the virtues that got us here, including a very good market share, a terrific group of people who are our national sales force, a great brand that is a core brand for the entire industry, our products fit our audience well.

We have opportunity in adjacencies. Our credit is unchanging, and of very high quality. I'll remind people that 748 through the door of FICO for approvals is an excellent number. We're starting to see, now, in our projections, that the franchise is leverageable, as the improvement that we are forecasting in the efficiency rate, clearly, given the entire tone of this conversation, we had very good and valued relationships with our regulators.

We have, as we model it forward, and already built into our market share and the development thereof, excellent growth prospects for the P&L going forward, with concomitant excellent returns. The lower volatility, that chapter that we're moving into here from the funding standpoint, will take significant noise out of our communications going forward. So, it's a very good day.

Thank you all for your attention. Thanks for your faith and staying with us over these first couple of years, and we look forward to the next chapter. Thank you.

Thank you for your time on your questions, today. A replay of this call and the presentation will be available through February 3 on our Investor Relations website, SallieMae.com/investors. If you have any further questions, feel free to contact me directly. This concludes today's call. Thank you.