SLM's CEO Discusses Q1 2014 Results - Earnings Call Transcript

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SLM Corporation (NYSE:SLM) Q1 2014 Earnings Conference Call April 17, 2014 8:00 AM ET

Executives

Steven McGarry - Senior Vice President, Corporate Finance

Jack Remondi - Chief Executive Officer

Joe DePaulo - Executive Vice President, Banking and Finance

Ray Quinlan - Chief Executive Officer, Sallie Mae Bank

Analysts

Moshe Orenbuch - Credit Suisse

Eric Beardsley - Goldman Sachs

Scott Valentin - FBR

Michael Tarkan - Compass Point

Sanjay Sakhrani - KBW

Mark DeVries - Barclays

David Hochstim - Buckingham Research

Sameer Gokhale - Janney Capital

Alan Straus - Schroders

Operator

Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae First Quarter Earnings Conference Call. (Operator Instructions) Thank you. And Mr. McGarry, you may begin your conference.

Steven McGarry - Senior Vice President, Corporate Finance

Thank you, Jennifer. Good morning, everybody and welcome to Sallie Mae’s 2014 first quarter earnings call. With me today are Jack Remondi, our CEO; Joe DePaulo, Executive Vice President for Banking and Finance; and Ray Quinlan, who will be the CEO of Sallie Mae Bank. After our prepared remarks, we will open up the call to questions.

But before we begin, please keep in mind that our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future maybe materially different from those discussed here. This could be due to a variety of factors and listeners should refer to the discussion of those factors on the company’s Form 10-K and other filings with the SEC.

During the conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings and a full reconciliation to GAAP measures as well as our GAAP results can be found in the first quarter 2014 supplemental earnings disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com.

Thank you. And I will now turn the call over to Joe.

Joe DePaulo - Executive Vice President, Banking and Finance

Thank you, Steve. Good morning, everyone. I will be referencing the earnings call presentation available on our website during my prepared remarks, beginning with Slide 3.

In the first quarter, we maintained our leadership position in the education finance market by originating $1.5 billion of new student loans, up 8%. We continue to maintain our credit, high credit standards. We saw 90-day delinquency rates dropped lowest levels since 2008 and annualized charge-offs in that 2.8%. We delivered solid earnings and we remained active in the capital markets while returning $264 million to shareholders through share repurchases and dividends. Lastly, we announced that the plan separation date for Navient will be April 30.

Turning to Slide 4, we provide a summary of our core earnings. For the quarter, core earnings were $227 million or $0.61 per share compared with $283 million or $0.61 per share for the year ago quarter. This quarter’s earnings per share includes an expense of $0.04 per share for restructuring and reorganizational activities and a decrease in late and forbearance fees of $0.02 per share that Jack will discuss later.

Our first quarter operating expenses totaled $263 million. During the fourth quarter of 2013, we recognized a $70 million compliance remediation reserve. Adjusting for this item, our expenses increased by $28 million versus the fourth quarter and this is attributable to the timing of stock compensation in the first quarter and additional spend on business services and consumer products. Compared to the first quarter of 2013, expenses also increased $28 million. This is made up of spend in the consumer and business services segment, where we saw improved economic and staffing related to ramp up the two independent companies.

Now, let’s turn to Slide 5 and our consumer lending metrics. This segment’s profitability continues to improve as we maintain our spreads and losses continued to decline. Our first quarter student loan spread came in at 4.63% leading to an increase in net interest income. First quarter charge-offs were 2.8% which is a reduction from the previous quarter and a year ago quarter. We saw improvement across our delinquency levels and saw significant improvement in our 90 plus delinquency rates which is the lowest point since 2008. The graph at the bottom of this page highlights the continued improvement in both 30 plus and 90 plus day delinquency rates. The continued improvement in our credit metrics led to decline in our provision for loan losses.

On Slide 6, we show our asset quality trends over time. Our student loan portfolio was dominated by high quality loans. The green bars and green line represent the highest quality and lowest risk business. These assets now account for nearly 72% of our portfolio. The highest risk segment, what we call non-traditional, represented by the red bars and the red line, is down to 7% of our portfolio. Balances and losses are declining in this segment and we do not originate these loans anymore.

The high quality loans are what we originate today as you can see turning to Slide 7. We originated $1.5 billion of Smart Option private credit loans in the quarter, up 8% from the prior year quarter. For the full year, we still expect to originate $4 billion of new loans representing a 5% annual growth rate. The loans we originated had average FICO score of 746 and 86% of the loans had a co-borrower. These assets continue to increase the high quality loan segment we referenced on the prior page. As many of you know, our private loan product is the only one in the industry that encourages borrowers to make in-school payment. 56% of our customers elected to make payments in-school, demonstrating that borrowers continued to respond to our business responsible product feature.

We will now turn to Slide 8 to review our business services segment. In this segment, core earnings were $130 million in the quarter, compared to $126 million in the first quarter of 2013. The company now services 5.8 million accounts under the Department of Education servicing contract. Servicing revenue from this contract was $31 million in the quarter compared to $23 million in the prior year. In our asset recovery business, we saw an increase in revenue of 12% or $12 million over the year ago quarter.

Now let’s turn to Slide 9 to discuss our FFELP segment. FFELP core earnings were $66 million for the fourth quarter compared to $104 million for the first quarter of 2013. The first quarter of 2013 included a $55 million gain from residual interest sales. The FFELP student loans spread is two basis points over the first quarter of 2013. These assets continued to demonstrate high quality predictable returns. Keep in mind that the spread is typically higher in the second half of the year than the first half of the year as we expect FFELP student loan spread to remain in the mid to high 90s throughout the year.

Let’s now turn to Slide 10 for highlights of our financing activities for the quarter. In the first quarter we issued $676 million of private credit ABS and $2 billion of FFELP ABS. Last month we issued $850 million of 10-year unsecured bonds. While we expect total unsecured debt outstanding to decline over time, we will continue to issue debt to better manage our maturity schedule. We closed on an $8 billion secured borrowing facility, which matures in January 2016. This facility will be available for FFELP loan acquisition or refinancing.

Finally, turning to GAAP on Slide 11, we recorded first quarter GAAP net income of $284 million or $0.64 per share, compared with net income of $346 million or $0.74 per share in the first quarter of ’13. The primary differences between the first quarter 2014 core earnings and GAAP results are the marks related to our derivative position.

I will now turn the call over the Jack.

Jack Remondi - Chief Executive Officer

Thanks Joe. Just under 12 months ago we announced our plan to separate into two companies. Today we are on the verge of completing our objective. On May 1, Sallie Mae will begin trading as a standalone consumer lender and banking franchise with an industry leading position and Navient will begin trading as the leading loan management servicing and asset recovery company. Preparing for this event required a lot of effort significant effort. It was not without some added expense.

As Joe outlined first quarter results included both one-time separation expenses of $26 million as well as some of the additional expense associated with running two separate companies. Though these expenses were not unexpected, we worked hard to keep them to a minimum. Our results for the quarter were strong in a number of fronts. As Joe summarized our consumer lending segment generated strong results this quarter and we originated $1.5 billion in private loans, an increase of 8% over the year ago quarter leading to a 2% increase in our total private loan holdings to $38.2 billion.

We saw 90-day delinquencies fall to 3.4% from 4.1% at year end and 3.9% a year ago. And as Joe said charge-offs fell to an annualized rate of 2.8%. As a result we are able to lower our provision for future loan losses to $175 million down from $225 million in the year ago quarter. In our FFELP segment, we produced results in line with our expectations.

As Joe explained, the performance in this segment is very stable when accounting with the typical seasonal pattern that impact the first quarter each year. In our business services segment, we saw positive momentum leading to growing revenues in our non-FFELP services. This includes revenue from both our loan servicing and asset recovery businesses. This quarter we also improved our overall ranking on the Department Ed loan servicing contract with particularly strong results in helping borrowers avoid the fall. Once again, we will add all servicers in this important category. These strong results were partially offset by the increase in separation related operating expense and the reduction in fee income from the temporary halting of late fees while we revised our monthly billing statements. And although this process was fully completed in March, it did impact the quarter.

Earlier this quarter, we released information highlighting how our efforts help our customers successfully manage their loans. The data shows that our federal loan customers default at a 30% lower rate than the national average, that we help more customers enroll in income-based repayment programs, 22% higher than the national average. And that our customers are 18% less likely to rely on interest capitalizing forbearance.

Our efforts produced similar success with our private education loan customers, where defaults and delinquency rates are even lower. We also lead the industry in offering affordable repayment options for our private loan customers that help them successfully repay their loans. This month we released our study how America saves for college. This year’s report highlighted that savings for college remains a top priority for families, second only to retirement. And the report helps provide insight into products that can help families achieve their savings goals and complementary products to help them responsibly finance the gap between savings and the cost of higher education.

I want to spend a few minutes here on where we are in the various regulatory proceedings was reported on in the last few quarters. While we hope we will be able to resolve these matters in the near-term, we will work hard with our regulators to make sure that we accomplished that goal. In addition, the environment is such that in both number scope and overlap of regulatory views of the education loan industry, it’s such that we expect us to continue. We remain engaged in discussions with various regulators and are always open to making improvements in our practices when both the implementation and implications of recommendations are clear. Often however, they are not. For example, we recently adjusted our monthly billing statement format in response to questions about its clarity given our practice of providing a grace period before a late fee is assessed. We temporarily suspended late fee assessments while we are making the changes. And as I said, the changes were fully implemented prior to quarter end.

Also, we are 100% committed to providing the full benefits and responsive service to those who serve our country in the armed forces. For example, we have a dedicated team of experts who assist military members and their families with their education loans. The Service Member Civil Relief Act, or SCRA is an important benefit that maybe available to our customers while on active military duty. Both the Department of Education and the Consumer Finance Protection Bureau have provided similar clear instructions to service members to apply to this benefit. However, what on its face is a simple statute is in practice very, very complex to apply.

As the largest servicer of federal education loans, we follow the Department of Education’s clear guidance. Importantly, the SCRA benefit does not distinguish between federal and private education loans and so we apply the guidance uniformly. As the federal government either supports or owns most of the education loans outstanding today, borrowers, investors, the government and services would all benefit from clear and uniform guidance. We continue to work to develop that guidance as part of the resolution of these matters.

We will continue to pursue right solution of these regulatory matters as soon as possible, but it’s also possible for the various pending matters to be managed by Sallie Mae and Navient as separate entity. If these matters continue post separation each company will assume control at resolving and the remaining outstanding issues related to that. With the separation scheduled for May 1, we’ll be providing separate investor presentations for Sallie Mae Corporation and Navient after the market closes today. Also it would be available on our website and will be filed with the SEC. These presentations highlight the financial aspects, franchise strengths and business opportunities of both companies.

They also present the leadership teams of both organizations. And in the room with us today are Somsak Chivavibul and Steve McGarry who will assume the roles of CFO for Navient and Sallie Mae respectively on May 1, congratulations guys. Actually I think there are now four CFOs in the room today, so that’s quite an accomplishment. These presentations will be used in a series of investor meetings over the next week and I recommend you take the time to review these materials.

The process of separating into two companies is hard work, very hard work and I’d like to thank our team or their efforts and their diligent approach that they used to get here today. You cannot see it or perhaps feel it over the phone but there is a tangible level of excitement in employees. We’ve created two entities with difference at very exciting prospects and we’re ready and eager to get started and to show you what we’ve created.

And with that let’s open the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch - Credit Suisse

Jack, I was hoping you could kind of go over the fees on the forbearance and the impact there and kind of just give us a sense as now that might look going forward?

Jack Remondi

Sure. So during last year there were some questions raised about the clarity of our disclosures on our statements regarding these fees. So we temporarily suspended them while we made the appropriate changes to improve disclosure to our customers that was fully implemented. And so beginning before the end of the quarter we reinstituted the process, the exact time process that we’ve been following beforehand. So we would expect those numbers to be back in line with historical levels and practices in Q2.

Moshe Orenbuch - Credit Suisse

Got it. And could you talk a little bit about then the opportunity to acquire portfolios I mean if you went back three months I think there were a couple of major players that had signified their desire to sell both FFELP and private. And we’ve seen one of those FFELP deals haven’t seen the other player kind of get there. Is there something holding this up or how do you look at that as we go forward?

Jack Remondi

Well I think there is roughly $150 billion of FFELP loans out there that we don’t own or service today and we would certainly be very interested in acquiring those loans. We are approaching this opportunity in a disciplined way and we’re buying in effect finite income generating portfolios. And so the returns that we have a very disciplined approach to the return levels that we would like to see on those portfolios and that would hold fast to that. We certainly don’t need to acquire loans or portfolios to maintain our economies of scale and our servicing operations as an alternative for example.

I think the decisions that holders of these portfolios both FFELP and private has to make a really individual to each of those institutions and we’re staying close contact with them and try to accelerate the process, but each of those will be made on their own. I do think its loan – if you look at bank loan growth that has been accelerating over the last couple of quarters, if you look at some of the capital, increased capital levels that banks need to hold and the increase in regulatory oversight that they have to deploy over third-party vendors. All of those things should contribute to the decision can sell in our view, but you have to see it I agree.

Moshe Orenbuch - Credit Suisse

And then last thing from me is as you kind of look at the – your Slide 6 and the breakdown of charge-offs within the private portfolio by segment, a little bit of an uptick in the highest risk segment. Is that just because as it shrinks and gets smaller is there something else going on there and how should we kind of think about that as you go through the rest of ‘14?

Jack Remondi

It’s a combination of things. Certainly, the denominator is shrinking. So, that causes the percentage to go up as the dollar amount did not, but it is a little bit of seasonal aspects here generally speaking. It takes about a year for customers to default after they enter repayments. We have been much better at getting customers and connecting with customers. That’s the key to any kind of resolution, positive resolution here. And so you do see spikes in our seasonal high in charge-offs do tend to take place in the first quarter of each year.

Moshe Orenbuch - Credit Suisse

Great, thank you.

Operator

And your next question comes from the line of Eric Beardsley with Goldman Sachs.

Eric Beardsley - Goldman Sachs

Wonder if you could comment on any progress you made in lining up counterparties to sell private loans from the bank to? And as we look out over the next year, what percentage of the bank’s loans would you expect to sell to Navient?

Joe DePaulo

Hi, Eric, this is Joe. We are in the midst of embarking on our option right now. We don’t have in process. We expect that there will be multiple potential players in that process. We certainly this is pre-spend and so the market, the opportunities with buyers that other than Navient. Going forward, as you probably recall, approximately half of our loan production will be sold. We expect Navient to be not only a significant buyer, but a natural buyer, because a) they are experienced with the asset, b) their capital structure and c) their servicing. So I wouldn’t put a number on what it is, but I expect Jack to stay very low for those assets.

Eric Beardsley - Goldman Sachs

Great, thanks. And then this is a follow-up with federal student loan, interest rates expected to increase roughly 100 basis points this summer, they will presumably be able to compete more effectively against the federal plus loans. Is that baked into your forecast for $4 billion of originations?

Joe DePaulo

Well, we expect – we certainly expect that we might pickup a little bit on the Grad Plus. Remember last year when we came in at 3.8, a little bit of that softness was the lower pricing on that Grad Plus. We don’t kind of see much, Eric, on the Stafford piece, even if it goes from 380 basis points, it goes up what we think is a 100 basis points. That’s still pretty low pricing and a third of it is subsidized and we encourage people to go there first. So I think there is a little bit of opportunity in the Grad Plus segment. And I certainly think that will help us with our $4 billion.

Eric Beardsley - Goldman Sachs

Okay, great. Thank you.

Joe DePaulo

You’re welcome.

Operator

And your next question comes from the line of Scott Valentin with FBR.

Scott Valentin - FBR

Good morning and thanks for taking my question. Just you mentioned the credit improvement, but I did notice forbearance increased a little bit during the quarter from the fourth quarter. Is that just a seasonal item or was there anything any particular program that took place during the quarter?

Jack Remondi

Well, first of all, just as a point of reference, remember as we have made these changes over the years to forbearance coming down into the 3s in the last since 2010, in order to qualify for forbearance, you have to think and project that it will improve these positions. So some people going into forbearance is not necessarily negative, but it improves our prediction of their ability to pay. That said, there is a little bit of noise from the fact that we have traditionally taking people out of forbearance mid-cycle. And as we transitioned to our new platform, all people in forbearance stay in until the end of the cycle. So it is likely to be a little bit more just more customers in the status, not changing their picture of where the risk profile, just the fact that they have the benefit through the end of their cycle.

Scott Valentin - FBR

Okay. And then just Joe, you mentioned that the FFELP core spread was going to be stable going forward that kind of mid, high 90s I assume the same is true for the private student loans, the portfolio?

Joe DePaulo

Well, overall, if you look at the total portfolio of private student loans, you would see as we show that one chart with the green bar, with the green and the blue and the red. As the Smart Option business grows, which is now about $11 billion of the $38 billion, as it grows and the older assets pay off we expect that NIM to improve because the Smart Option assets have the best NIM in our portfolio, so we would expect gradually for that to improve over the life of this asset.

Scott Valentin - FBR

Okay. Thanks very much.

Jack Remondi

You’re welcome.

Operator

And your next question is from the line of Michael Tarkan with Compass Point.

Michael Tarkan - Compass Point

Thanks for taking my questions. As a follow-up to Moshe’s question on the FFELP M&A environment, I think the deal that was announced last night seems like pricing was pretty favorable for the seller. I am just wondering if that continues could we see you turnaround and look to potentially sell some of your FFELP assets or how should we think about that?

Jack Remondi

Well, I think we certainly look at what we own here in the FFELP portfolio and the opportunities to buy FFELP assets as financial transactions. So to the extent that market prices make it appropriate for us to be sellers that would be something we would certainly take a look at. We believe that given conditions here that ultimately we should be buyers of these assets given the portfolio characteristics, the funding capabilities and the performance that we can produce for our customers that particular portfolio that was sold was our third party service portfolio and so we had fewer opportunities to bring some of those things to bear. And as I said we would be extremely disciplined in terms of the prices that we pay and the yields that we can derive.

Michael Tarkan - Compass Point

Okay and then separately I know Department of Education is in the process of revisiting I guess the fee and the volume structure for the direct loan servicing contract. I know you guys have historically been pushing for more of a fee for service type model. I am just wondering if you have any color as to what potential changes we could see, any kind of timing of those announcements anything like that? Thanks.

Jack Remondi

I think the department said that they were – recently made a statement that they hope to have this out sometime in the next couple of months. So we will wait and see what they have to do. I think anytime you have a contract of this size and this duration I think most people would take a look at it as they go through the extension side to tweak it and make sure the focus of services is on the right thing. We certainly focus very, very strongly on default prevention success. Again as I quoted in some of the statistics at the beginning we do a better job than any of the other servicers in this area. And more importantly what we are doing is helping customers successfully repay their loans or it’s not just putting accounts into forbearance, it’s getting them enrolled in payment programs that help their loans amortize.

Michael Tarkan - Compass Point

Do you have any sense if they change their structure around if there is a possibility for fees to actually go up if you are more incentivized to put students into repayment as opposed to putting them into forbearance or anything like that or is it just too early to tell?

Jack Remondi

We really don’t have any insight into that decision at this point. We will have to wait and see what they say.

Michael Tarkan - Compass Point

Great, thanks.

Operator

And your next question is from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - KBW

Good morning. I guess my quarter specific questions had been answered, maybe just a broader question as we head into the spin Jack and maybe Ray maybe you guys could talk about each of the two segments that will be spun out and kind of how the positioning is going forward because Jack when we think about Navient one of the questions I get a lot is just how we think about the store – earnings story going forward, most people think it’s kind of a run off story maybe you could just talk about how you look at it and I guess you guys put out your dividend expectations but maybe just about capital return and how the servicing business will grow out. And then maybe Ray you could just talk about how you are thinking about the bank as well as Joe? Thank you.

Jack Remondi

Well, as I said later today close of business will be posted on our website, the investor presentations for the two entities that will layout a lot of these data points. In next week both Ray and I and the teams would be on the road meeting with investors to talk specifically about some of these items. Just at a high level when I look at Navient here there is two components of the business, is an asset management and a servicing fee business activity. On the asset management side of the equation I think the story is relatively straight forward. Yes, we have got a large portfolio of high quality assets that are going to generate a substantial and very predictable stream of earnings over a long period of time and the opportunity is for us to add to that by buying portfolios at attractive yields both in the FFELP segment as well as the private segment. You heard us discuss FFELP opportunities earlier and opportunity is to buy loans, Navient’s opportunity is to buy loans from the bank probably not at higher prices as Joe would like but we’ll work on that, that side of it. And I do go to buy all of those too, so not just a good portion of them.

On the fee side of the equation, if you look at the strength of this company is our history is that we’re able to handle large volumes of highly complex activities, we do in a very efficient, cost efficient manner and with high performance and a strong compliance infrastructure. And those skill-sets I think serve us, those three key skill-sets will serve us very well as we work to expand our business whether we’re doing it for the department who’ve had treasury or state and municipal entities. Those are the three things that we deliver and I think there are few competitors in our states that do all three of those things extremely well, right.

Ray Quinlan

Just to echo what Jack said we’ll be doing these- both presentations next week and I expect this one will have most of the discussions regarding to proposition and businesses. But just to summarize at a high level the bank is in an excellent position to originate high quality private loans as a track record of doing that has the opportunity to hold those to our portfolios as well as (indiscernible) attractive prices we equate and if there is a tide to be broken between Jack’s point of view on what those prices can show, I’ll show my (indiscernible) with Joe. But it’s a case that banks there will be a growth story, banks very much with relatively small $11 billion portfolio with overall assets that has been mentioned to you previously, we’re in a range of about $1 billion origination. And so the growth on the basis is quite high but we’ll be detailing that we Jack said over the next week or so.

Sanjay Sakhrani - KBW

One follow-question on the ban, there is a FFELP portfolio within the bank I believe. Is that – are you guys expecting to recycle that to private student loans or is there a reason that FFELP portfolio is in there?

Joe DePaulo

First of all this is Joe. It got there because that’s what we’re buying some of our rehab loans over the last three years. We lasted in really primarily for two reasons, one, little bit of diversification in the balance sheet which of course is direct assets and direct is private and cash and security. And second of all if at some point we can – we struggle to sell loans you can consider that a RIP code that we can essentially sell those pretty easily, sell it pretty easily and make RIM in the balance sheet to grow private.

Sanjay Sakhrani - KBW

Okay, great. Thank you very much.

Joe DePaulo

You’re welcome.

Operator

(Operator Instructions) And our next question comes from the line of Mark DeVries with Barclays.

Mark DeVries - Barclays

Thanks. I was wondering if you had a sense for the discount rate or imply discount rate in which that CIT portfolio sold and if so what implications that may have for the value of your FFELP portfolio?

Jack Remondi

I guess that the prices were very competitive in that station and as I said we were interested in buying that portfolio. We did not – I’ll just leave it that the prices were higher than we thought appropriate.

Mark DeVries - Barclays

Okay. But any kind of color on what implications that may have for what your portfolio is worth and where the equity markets may be valuing at right now?

Jack Remondi

Well certainly I think the implied discount rates are lower than people – than the sell side I would say is probably discounting our cash flows that’s probably appropriate.

Mark DeVries - Barclays

Okay. That’s helpful. And then turning back to the auctions of the private student loans, will you be looking to do that servicing retained or will you be offering or entertaining bids both retained and servicing the lease on that?

Jack Remondi

We certainly were positioned as servicing retained, obviously some buyers will have a different preference.

Mark DeVries - Barclays

Got it. And then finally Joe is there anything to call out in the core NIM, both FFELP and private, both were a little bit stronger than we thought. There seems to be less seasonality, particularly in the FFELP margin than we were anticipating?

Joe DePaulo

No, I think the FFELP margin primarily unhedged flow income formed a little bit better this quarter than if you look at it the year ago quarter, which we were up from 93 to 95 on our spread. If you look at private part of the story, it is below the spread line. And as spread is up 6 basis points over the last quarter, part of that is how much cash we are holding. So typically, if you look there at the NIM line, you will see that, that varied quarter-over-quarter in the private. That’s really a function normally of how much cash we are holding. So at the bank we hold a lot of cash in the fourth quarter, because we are waiting for disbursements. So of course, drag of that cash in the NIM line will cause our NIM to be lower in the fourth quarter than in first quarter. Occasionally, we allocate all of our cash across the business. So occasionally, holding higher levels of cash for our unsecured debt gets allocated to. So a lot of NIM movement is a little bit about how – what we are holding cash for, whether it’s disbursements for paying down debt.

Mark DeVries - Barclays

Okay, great. Thanks.

Joe DePaulo

You’re welcome.

Operator

And your next question comes from the line of David Hochstim with Buckingham Research.

David Hochstim - Buckingham Research

Good morning. I am wondering could you give us an update on what’s happening with the guarantor related revenues that you talked about last quarter, is there any update in terms of market share gains that would offset some of that decline?

Jack Remondi

Sure. Last in the federal budget, I think you are right talking about the reallocation fee structure. In the federal budget that was passed, there was a reduction in the fee paid to guarantors of FFELP loans for rehabilitation. We are a provider of those services to guarantors and we have got the largest market share in that space. And as you would expect, we are also the best performer in that space. And that fee was caught. So that is effective July 1, there has been no changes in that. I think there has been a flurry of activity attempting to mitigate some of that in Washington, because it was a steep cut that will have an impact on guarantors, in particular, but no changes to what happened and what we reported on.

David Hochstim - Buckingham Research

Okay. And then could you just talk about the mix of new private loans? Is there any change in the borrowers that have opted for repayment variations or the types of schools or undergrads?

Joe DePaulo

David, this is Joe. If I heard your question correctly, the distribution of new loans in terms of payment type is very stable. So about 44% choose to defer, 56% are in-school payments with maybe 60% 40% between fixed pay and interest only. Perhaps the other question was I didn’t hear maybe it was fixed versus variable, is that your other question?

David Hochstim - Buckingham Research

No, I was asking about grad students versus undergrads and for-profit, non-profit, fixed – variable would be good too.

Joe DePaulo

Well, fixed is 18%. That’s probably a little bit higher than it was prior. We were running at about 16% in prior quarters. Certainly, our mix by year in school is a little bit favoring the undergrad to the grad-only, because we thought we would get a little bit more of the undergrad segment, I am sorry the graduate segment last year. And our for-profit still runs in the 7%, 7% or 8% range. I mean, keep in mind, the performance of that is very good. We have – we are now at schools where graduation rates and placement rates look very much like the not-for-profit schools. And we like the performance of those schools.

David Hochstim - Buckingham Research

Okay. And what about an average yield on the $1.5 billion that was originated in the quarter?

Joe DePaulo

Average yield runs about – on the variable it runs at LIBOR plus 750. If you look overall, it’s closer to 780 because of the impact of the fixed loans in the portfolio.

David Hochstim - Buckingham Research

Okay. And then finally, is it appropriate to think about the $70 million provision you took last quarter and divide that between Navient and the bank? Is there a way we could think about how those risks are allocated?

Jack Remondi

We will – from an accounting basis each company will get a proportion of that. So we won’t know what each company is going to pay and so it’s settled. So really speculating on how that will play out much less with the final that number will be is not something that we’re doing right now.

David Hochstim - Buckingham Research

Would you be willing to talking about allocating the $70 million or not that?

Jack Remondi

No, I think it’s for continuity. You have to leave the companies with some piece in that liability. And we estimated but it really is for accounting purposes not for settlement purposes.

David Hochstim - Buckingham Research

Okay, alright. Thanks. Good luck.

Jack Remondi

You’re welcome.

David Hochstim - Buckingham Research

Bye.

Operator

And your next question is from the line of Sameer Gokhale with Janney Capital.

Sameer Gokhale - Janney Capital

Thanks. I just had a question maybe I missed it but in terms of your net interest margin or your core spread on private student loans and the sequential increase. Can you just talk about that sequential increase and what drove that specifically?

Jack Remondi

Well on the private student loan if you’re looking at the spread it’s up six basis points and 476 basis points. We don’t consider that very significant, each remember every quarter the pay downs are in the older portfolio and the new assets come from the Smart Option. So there will be gradual upward movement on that. If you look at the NIM line that’s probably more significant, that moves around because of the amount of cash we hold depending on what the student want.

Sameer Gokhale - Janney Capital

Okay. So I was trying to make sure that that increase in the spread I mean there’s nothing unusual – it’s just or over time you’ll see that mix of Smart Option loans increasing, driving up the overall spread. But it just seemed like in the quarter there was some variability but it sounded there wasn’t anything unusual going on there?

Jack Remondi

Yes, I mean remember in the land five or six basis points you can make progress depending on how you are financing, you could have some setbacks as we replace, at the corporate level as we replace, all that that was very inexpensive to move that. So I think there’s movement that could be up and down but the general trend should be that the asset, beyond asset with 7.5% yield and 1.5% cost of funds in general is replacing assets where that NIM is about 4%, 4.5%. So that should put long-term upward pressure on that portfolio, NIM.

Sameer Gokhale - Janney Capital

Okay, and that’s helpful. I mean specifically I was also asking because from a comparative standpoint, are you seeing your competitors putting downward pressure. From what you’re saying clearly there is a mix shift benefit but if you look within the Smart Option product itself and some of those margins I mean are you seeing some competitive pressure downward on the margins or given that there are only really three at this point competitors you’re not seeing as much of it?

Jack Remondi

We don’t see the competitors in this area behaving radically different. I think each of our major competitors has now larger pools, has a lot of data. They probably see what we see and they certainly understand both from a credit perspective and a funding perspective what their risks look like and what their economics are going to be like. So I don’t – we don’t see a player coming in and playing – right now we don’t have any players in the market and any scale playing aggressively and taking aggressive risks to credit or with funding.

Sameer Gokhale - Janney Capital

Okay. And then on that point about the competition, I was just wondering if you could remind me again the non-compete between the bank and Navient? Has that been set, that period of time or is that something we can get later today?

Jack Remondi

Well the – you don’t get more about it, when the two companies around their road shows, but the cliff note version of it is non-compete expense basically through the end of 2018. Navient is not about the bank’s business and so the bank’s business is a private student loan business. The bank has not allowed to be in Navient businesses and you can – those are federal loans, those are federal servicing business in the private loan or I am sorry in the student loan category. That’s a general separation between the two businesses.

Sameer Gokhale - Janney Capital

Okay. That’s helpful. And then I know we’ll get more details later today, but for those of us who aren’t on your roadshow for Ray Quinlan I just had a question. Given your experience at your private – your previous employer and ramping up online deposits there and kind of managing the bank, as you move to Sallie Mae and running the bank, what do you see as maybe some similarities, differences, some learnings from your experience at your previous employers as you see it today and things that you could change sort of low hanging fruit over the next 12, 24 months or so?

Ray Quinlan

Well, there is certain natural similarity between the CAP bank experience and Sallie Mae in regards to the internet arena. The market as you know is highly liquid, extremely deep and excellent source of funding and has a place for the entire profile that both of those institutions happen to be. Sallie Mae Bank has more options on funding its assets, because of the attractive sale characteristics that has been mentioned here. And so the internet piece will fit into the puzzle, but with more moving parts on the balance sheet for this institution and what is the case in the previous one.

Sameer Gokhale - Janney Capital

Okay, that’s all I had. Thank you.

Operator

And your next question is from the line of Alan Straus with Schroders.

Alan Straus - Schroders

Jack, did you comment on the capital return plans for Sallie Mae – for Navient?

Jack Remondi

Sure. So I would expect and again there will be more on this in the materials at the end of the day, but the capital return strategies and philosophies between what is old Sallie Mae and Navient will be very similar. We expect the earnings and cash flows that are generated by the amortizing portfolios will be distributed to shareholders through both dividends and share repurchases. We expect to maintain a stable dividend rate. We have indicated that for this quarter. It will be that our intention for it to be the same as what Sallie Mae was paying or $0.02 a share. And the balance will be through share repurchases.

Alan Straus - Schroders

So would we expect, with permission from your board sometime in May as an independent company share repurchase to resume?

Jack Remondi

Yes, that’s right. May timeframe would be when the new board will be approving all of these practices.

Alan Straus - Schroders

Okay, great. Congrats on getting this all done.

Jack Remondi

Great, thank you. I appreciate it.

Operator

And at this time, we have no further questions. And I would like to turn the call back over to our presenters for closing remarks.

Steven McGarry - Senior Vice President, Corporate Finance

Thank you very much, Jennifer. That concludes our call this morning. Thank you for joining us. And if you have any follow-up questions, please call me or my colleague, Joe Fisher. Thank you.

Operator

Thank you. This does conclude today’s conference call and you may now disconnect.

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