Good morning. My name is Toni, and I will be your conference operator today. At this time, I would like to welcome everyone to the 2014 Q3 Sallie Mae Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-session. (Operator Instructions) Thank you. I would now like to turn the call over to Mr. Brian Cronin, Senior Director, Investor Relations. Sir, you may begin.

Thank you, Toni. Good morning and welcome to Sallie Mae’s 2014 third quarter earnings call. With me today is Ray Quinlan, our CEO and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussions will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussions of those factors on the company’s Form 10-Q and other filings with the SEC. During this call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation of GAAP measures and our GAAP results can be found in the third quarter 2014 Form 10-Q. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I will now turn the call over to Ray.

Okay. Thank you, Brian. Good morning and I thank all on the phone for joining us. This is our second quarter report as a standalone company. And I’m fortunate and glad to report on significant progress in all major areas on which we’re focused. And I will recall that when we first did our split, which was back on May 1 or legal day 1, prior to that we had a series of meetings with investors and since that time we’ve continued to do the same. And even in the last quarter’s meeting, we outlined five goals and we will keep those goals and so let me briefly summarize both the goals as well as our progress in regard to them. The first was to prudently grow the private loan assets and revenues, and we are doing very well against that goal. We originated $1.6 billion of new loans in the quarter, an increase of 8% from the prior year. We are on track for the previously stated goal of $4 billion in originations for 2014. We have grown our portfolio on the books even after the asset sale by 26% to $7.8 billion. We are at $3.5 billion year to-date, also plus 8% from the prior year. And against that goal, it’s steady progress in line with what we had communicated in the prior periods and we continue to be confident that the full year number is obtainable and in fact, recent events have made us more comfortable with that. The second goal was to maintain a strong capital position. Our capital ratios are all significantly above what a well-capitalized institution would have as sort of promulgated by our regulators. Our Tier 1 to total average assets is 12.3% against the guideline for well capitalized of 5%. Our Tier…

Thank you, Ray. Good morning, everyone. We will take a closer look at the financials now, I will be referencing the earnings call presentation available on our website, and we'll be starting out with Slide 4. Outstanding private education loans at September 30, 2014 was $7.8 billion, up 26% from the prior year and 5% from the prior quarter. Net interest income for the second quarter was $144 million, which was flat to Q2 and $27 million, or 23% higher than the prior year quarter, primarily due to the increase in our portfolio of loans. The Bank's net interest margin on interest earning assets was 5.25% compared to 5.33% in the prior quarter and 5.14% in the prior year. The average yield on the education loan portfolio was 8.20% compared to 8.23% in the prior quarter and 8.22% in the year-ago quarter, so pretty steady there. Our cost of funds was 1.07% compared to 94 basis points in the prior quarter and 1.11% in the year-ago quarter. : This had the impact of increasing our reported cost of funds by 16 basis points from Q2 to Q3. This was offset somewhat by the new funding that we raised in the quarter which was significantly cheaper than the maturing funding if replaced, which reduced the overall increase in cost of funds to up 13 basis points for the quarter. Other income totaled $96 million in the quarter, an increase of $43 million from the prior year, the increase was driven primarily by a gain on loan sales of $1.2 billion. We recorded a gain of $85 million, $42 million higher than the previous year. But let’s drill down into that number a little bit further. In August, we sold $1.12 billion of loans through the whole loan sales and the securitization…

Okay, Toni. We are ready for questions.

(Operator Instructions) Your first question comes from the line of Mark DeVries with Barclays. Mark DeVries – Barclays Capital: Hey, thanks. I know, it may be early and hard to answer, Steve, but any thoughts on whether kind of the weakness we see in the credit markets may impact how robust that demand is for the private student loan sales?

: Mark DeVries – Barclays Capital: : :

: : : Mark DeVries – Barclays Capital: Okay, got it. And just one last question, what if any implications can you think of for your loan sell efforts could there be from the recent finalization of the risk retention roles?

So the risk retention roles have been kicking around for many years as you know. I guess they were finalized this week. I don’t think that it really changes our ability to sell loans versus via the securitization transaction will be requiring the whole 5% of each slice of the structure of the bonds. And that should not change our ability to deconsolidate these loans and it shouldn’t change the pricing or demand dynamic for product yield. Mark DeVries – Barclays Capital: Okay, great. Thank you.

Your next question comes from the line of Brad Ball with Evercore. Brad Ball – Evercore Partners: Thanks. I appreciate your comments about OpEx and your targeted – longer-term targeted efficiency ratio. But if you look at your fourth quarter implied OpEx based on guidance it’s about $80 million. Is that an appropriate run rate as we look out into 2015?

: Brad Ball – Evercore Partners: :

: Brad Ball – Evercore Partners: : :

: And so that’s very good. Our audience is a group that, those of other options available, if you’re indicating, but thus far as I said, with the combination of our sales effort on campuses, our attractiveness as a product offering and our throughput, we’ve been able to not only maintain the credit quality, but we’ve also in our early indications that our market share is if anything up from an already high level. So we’re quite happy with the way things have gone. And rationality is a little bit in the eye of the beholder, but that’s a point I would say stability in the market dynamics is closer to accurate than any other word. Brad Ball – Evercore Partners: Great, thanks. And then, last quick one, Steve. Could you reconcile in the gain on sale, I think in the queue you had indicated $1.2 billion of sales versus the $1.1 billion that you mentioned in August and $85 million of gains versus the $86 million that you mentioned relative to the August sales. What – were there other small transactions in there that drove the difference?

Yes, I can Brad, and I apologize for any confusion that that may have created. What also ran through that line in the third quarter was the sale of some non-performing loans that occurred at a discounted price so that lessened the gain and increased the sales volume. Brad Ball – Evercore Partners: And those NPLs made up the difference again between the $1.1 billion and the $1.2 billion as reported?

That’s correct. Brad Ball – Evercore Partners: Okay, that’s perfect. Thank you.

Your next question comes from the line of Michael Tarkan with Compass Point. Michael Tarkan – Compass Point: Thank you. So, back on credit for a second, I know you’re being conservative at this point. But I did hear that you will have experience established within the next six months. Is it possible that you’ll revisit how you’re provisioning at that point?

: So we’ve now got 10 months of roll rates in the early pockets under the 210 day charge-off approach when – just the point I want to make is under that approach not a lot of collection activity took place between day zero and 120, so they tend to be very conservative and lead to a higher estimate. Our new role rates under the zero to 120 day charge-off policy are lower than we experienced under the prior policy. Does that make sense, you’re able to follow-on on the point I made here. Michael Tarkan – Compass Point: It does, it does actually, but…

So what’s going to happen with the passing of every quarter, we have three new and we dropout three old. And we will revisit the models at the end of year and determine if it makes sense to continue with that or if there any enhancements that we need to make based on what we learned over the course of the first seven months of operating the company under the new charge-off policy. Michael Tarkan – Compass Point: And I understand that it’s still early days there, but would you say that the, your ability to sort of cure or – rehabilitate loans, modify loans within the earlier buckets, is that sort of trending ahead of your expectations?

Yes, yes, all the credit metrics are running positively. We've got a very strong team and it’s a group with – it has a lot of leaders from the previous company that are working our private credit default conversion strategies and they're definitely not unhappy with the success we are having so far. Michael Tarkan – Compass Point: Okay. And then last on the credit side, should we think about sort of provisions for 2015 more in line with the $50 million back-half of the year run rate, or is that $35 million in the fourth quarter a better sort of estimate on a quarterly basis, another some seasonality for loans coming into repayment, but just trying to get a sense for, maybe 2015 at this point?

Michael, I'm going to respectfully hunt the answer to that question. And so we get together again in three months when we sit down and talk about where our 2015 guidance are going to shake out. Michael Tarkan – Compass Point: Understood. Last one, on the expense side, I believe you are still using them into origination platform. So I guess, as you build out capability there in the first-half of 2015, are you expecting any kind of meaningful uptick in expense associated with that?

No, we're not. The PSA that we had with Navient restructured such that, I think, it reflected pretty accurately across that we expect to incur now that we're up and running under our own servicing platform. So there should not be an uptick related to higher servicing costs, obviously operating expenses are going to grow as the volume increases, because there will be variable components of that. But over the long run, we look forward to the day that our servicing platform is established that we can begin to see the benefit of scaling the operation in the out years. Michael Tarkan – Compass Point: Got it. Thank you very much.

Your next question comes from the line of Sameer Gokhale with Janney Capital Markets. Sameer Gokhale – Janney Montgomery Scott LLC: Good morning. I had a question firstly about operating expenses, and Steve, you talked about perhaps half of your expense base being fixed cost and the other half variable cost. And I'm trying to think about the interplay between the two that there are several moving parts here, but you have given a sense for where your efficiency ratio could go over the next three years. But within the three-year period, I'm trying to get a sense for how that ratio should trend from the standpoint of post-default collections to the extent that your portfolio seasons and then you have more upward pressure from not a pre-default servicing standpoint, but a post-default collection standpoint. It seems like, there is probably some disproportionately higher upward pressure over the next, say, 12 to 24 months, and after you get through maybe that seasoning bulge if you will then you see more of an improvement in the year three. Is that the right way to think about it from a timing standpoint, or do you think that, we should see more of a straight line decrease in your efficiency ratio over time?

Now, I think, you're pretty spot on Sameer. I mean, we'll finish the year at 43%. It is not concluded, out of the question and in fact it could tick-up before it begins to tick back down in 2016 and 2017. I mean, we really start to hit our stride post-2015 and into 2016 and 2017 when we look at our longer-term projections. Sameer Gokhale – Janney Montgomery Scott LLC: Okay. And then on a different note, as we think about origination volumes looking out the next 12 months or couple of years, I'm sure you are having discussions with schools on an ongoing basis and have a sense for tuition increases based on what they've either spoken with you about or more generally what they are talking about? And can you share with us, sense for where those tuition costs increases are headed, at least, from what you are sharing, should we expect stabilization relative to where we are at now or continued growth in kind of the 2% to 5% range, how should we think about that, because clearly, I think that has an impact on your origination volumes?

Yes, clearly that is true. And as we've tried to catch – capture that dynamic, there is a couple of pieces to start off with so far is that the definition of tuition. And so there is the post-tuition and then there is the realized expense for the household, and so as has been well publicized in many journals. Through the last two years, colleges have, one, try to create a better cost curve for the top line increase, which as you are indicating a 3% to 5% and in an inflationary world, we could estimate 3% currently, 1% to 2% will be 2x the rate of inflation. : So our general thinking on this is that by the time we get to what's available for us to offer families on a financing standpoint, we're probably about some rate of inflation, and so that’s a 1% 2% rate that seems to be about the best indicator for what we will see the increase in our market value today. Sameer Gokhale – Janney Montgomery Scott LLC: Okay. So then would that suggest, I mean, clearly, there is a loss of large numbers as you continue to originate, but the expectation will be some moderation the growth rate of your originations as we look at the next year or two relative to what you are expecting for fiscal year, correct?

Well, for this full-year if we look at what we originated when we go back to the slide presentation, we are forecasting a 5% increase for the full-year from 3.8% last year to 4% this year. We are running slightly ahead of that as we end the third quarter. And so a 5% increase going forward is a number that reasonable people could think is a good barometer in a world that has reasonable amount of noise in it. But I would say, that’s about as good a number as they need to start with. Sameer Gokhale – Janney Montgomery Scott LLC: Okay, perfect. Thank you.

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

Hi, thanks. This is actually Steven filling in for Sanjay. Most of our questions have been answered. But just want to touch base around the servicing aspect given that now you have the platform up, how should we think about the benefits of it going forward?

The benefits of the servicing platform going forward, Steve? I mean, first and foremost we are now a standalone independent company. It helps us on loan sales and asset-backed runs, and it’s very important and as a lender, you service your own loans. Since the inception, we have controlled the collections of it, so we certainly want to be running our own default version programs. And going forward, we think that we're going to be able to take advantage of scale and lower our operating costs as we move forward.

Got it. And then is there any potential to service other assets as well?

That’s certainly not a strategy that we are considering at this point in time. And servicing student loans is much different than servicing other consumer asset classes. And I think we will stick to the business that we know the best for the foreseeable kind of longer-term future. We might at some point look to originate other consumer loan products, but that’s going to be a 2016 or 2017 event as I refers to 2015 event.

So it’s right to say that in keeping with the conversation that we've had since pre-spin and those FICOs I mentioned before, we are looking for consistency and our focus in consistency and our performance deliverables. And so as we look at the near-term future, Steve is indicating, we think that proposition that we basically have in front of us, with the market share that we have, the quality of portfolio that we have, the significant resources that we have that allow us to maintain that market share and increasingly our tailored service platform as you talked about is just fine. So we will stick to the core plan for the foreseeable future and we think the results associated with that will be very attractive.

Got it, great. Thanks for taking my question.

(Operator Instructions) Your next question comes from the line of David Hochstim with Buckingham Research. David Hochstim – Buckingham Research: All right. Thanks. I’m wondering – could you talk about any difference in the credit profile of borrowers who choose interest-only or fixed pay loans rather than fully deferred loans? Are you still doing over – little over 50% to borrowers who choose to make payments. It’s obviously good in terms of credit performance subsequently. But I just wondered, if you see anything at origination there would – just as a difference in the borrower characteristics.

No, there is no meaningful difference between loans – between borrowers that select the deferred product as opposed to fixed pay with a full interest-only pay. And we don’t really see any difference between. I think you also talked about fixed versus variable. Our – the customer profile is pretty steady across the different product selections.

Yeah. David Hochstim – Buckingham Research: Okay.

And I try to say that (inaudible) add up the raw numbers and say to you. Let’s look at the entire population and often to make one of the in-school payment fees, the fixed or the interest-only, which as you’re indicating. Yes, it was running about 57% of our new applicants as they’re new loan originations. We would say (inaudible) mildly better, but let’s remember that the area that we’re in which is the 750 FICO on average and so it’s a very good neighborhood to begin with. And the differences are quite slight. So we’re not reading anything into that. David Hochstim – Buckingham Research: Okay. And then, if you end up originating more than the 5% you’ve targeted the…?

We’ll return it. David Hochstim – Buckingham Research: Okay. So…

No. David Hochstim – Buckingham Research: We’d be able to put those loans in here, or do you have cut off – you have to cut off originations in the first quarter?

No. And… David Hochstim – Buckingham Research: What happens?

So this is on the point of our 20% growth target. And so the 20% is for the balance sheet and one of the reasons that we’re anxious to get the asset sale done, one is to show our execution ability, two is to show the attractive pricing that’s associated with it. But three is to start to create a market that gives us additional flexibility. And so it is our goal to in no way restrict our position in the marketplace or any of our efforts in regard to originating loans. And so we’ve calibrated the rest of the balance sheet and the business model to, one, maximize our services, and then two, to no way have any inhibition on our position in the marketplace. So any loans or disbursements over the 5% will be greatly welcomed. David Hochstim – Buckingham Research: Okay. Great. Thank you.

Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch – Credit Suisse: Great. Thanks. I guess, first of all, in terms of the gain on sale, the two pieces that you sold, obviously, it would seem that the gain to – on the piece to Navient given that they – that you weren’t able to sell those with the servicing would be lower and seem from their numbers that that was substantially lower than the average that you talked about. And then mathematically it would mean that a gain on the rest of the sale was actually substantially larger, probably above the range that you had previously said. Does that math make sense?

I don’t know how you arrived at that conclusion, Moshe, but the answer is absolutely not. The prices on both tranches were very similar. Moshe Orenbuch – Credit Suisse: Got it. So…

And you know… Moshe Orenbuch – Credit Suisse: Yes, yes, I’m sorry. Go ahead.

The servicing issue was not a major component of the price for the piece that we sold into third-party market. And those loans had to be serviced one way or another; so couldn’t end up being a major determinant. But I’d be curious for you to walk me through, because the math not necessarily right now as that would be wise at the conclusion that there was a big disparity between the pricing on the two loan sets. Moshe Orenbuch – Credit Suisse: Okay. We could take that off-line. Separately on – just on the idea of kind of the inflation in tuition. I mean, isn’t it fair to say that some of the federal programs and loan programs don’t have their limits increasing and so for any given percentage increase if you will and the parents obligation it kind of gets, grows a little bit faster than in terms of what they might need to find from other sources.

Certainly that’s true and if we were to look at how America pays for college as you would know it’s about $400 billion a month each year and the federal government provides about 25% of that, right. And we will be expecting the full part to be growing at 2% or thereabout. And one of the players is at 0% – the one– it will increase the burden on household so far as their funding, so far as out of savings that sort of thing, and should provide some upward lift to the basic private student loan market. And so mathematically that would be true. Predicting politics has been a difficult sport in the past and I suspect it’ll be difficult in the future. Moshe Orenbuch – Credit Suisse: Right. And then just lastly in the – just to kind of not to beat the roll rate discussion any further. But I mean it sounded like the premise that you’re operating under is that the roll rates that you’re seeing from your new kind of shorter earlier collections are as good or better than what you had previously expected. I mean is that fair statement?

Yeah. That’s absolutely a fair statement, but don’t forget Moshe when you’re putting together financial statements you have to be able to document the models that you’re using to arrive at the entry, so you do put things such as the loan loss allowance and the provision, and because we did not have a – we didn’t really have any history of collecting under the 0 to 120 policy we had no other option but to go back use the history of what occurred between 0 and 120 days under the old 210 day collection policy. Moshe Orenbuch – Credit Suisse: Right. I got that. It’s just – I’m trying to say like as we’re progressing, we have every reason to believe that the – that your earlier expectations will be realized and so…

Yeah. And look, absolutely. And it’s based on a reasonably substantial history of Smart Option Student Loan performance. We started originating this product in 2009 and as you know the characteristics of each cohort has been spot on. It’s basically been 90% cosigned and 746 FICO each and every year. So there’s been a lot of – the loan cohorts has been very homogenous so from the work that we do, tracking the performance of those loans, we’re very confident that our current portfolio is going to perform in a very similar fashion. Moshe Orenbuch – Credit Suisse: Great. And just the very last thing from me is did you mention how much the loss on the NPL sale kind of hit the gain on sale, dollars at all?

No, but I mean, between 86 and 85 and it’s basically loan. Moshe Orenbuch – Credit Suisse: Got it. Okay. Thanks very much.

Your next question comes from the line of Eric Beardsley with Goldman Sachs. Eric Beardsley – Goldman Sachs: Hi, thank you. Just another question on the expenses, if we’re to look at the progression over the last, I guess, couple of quarters and then your guidance for the fourth quarter, as you’ve seen a relatively steady ramp up in OpEx excluding the restructuring, and just on the commentary of potentially annualizing the fourth quarter run rate, I guess, that will be, I don’t know, on my math, it’s somewhere between 14% and 15% year-over-year growth rate. And your OpEx if you’re to do that, I guess, that sounds either quite conservative relative to the asset growth or I guess is there something else going on and how – everything about the seasonality of those expenses going forward?

So I mean, the seasonality of the expenses is going to be very similar what it’s been in the past. I mean, our peak season is third quarter and we also passed a heck of a lot of loans in the first quarter. So those would be certainly your peaks, but I think your growth rate that you’re talking about is pretty much what we’re expecting and certainly not going to be disappointed if our OpEx growth rate is substantially lower than our portfolio and top line growth. I mean… Eric Beardsley – Goldman Sachs: What’s driving the OpEx higher in the fourth quarter relative to the third given that third is the peak for origination?

Yes. And I mentioned earlier when I was answering the initial question that there are some gives and takes. And I did point out that typically the fourth quarter is one of our lower OpEx run rate quarters because we’re not spending much on direct to consumer. We’re not processing huge amounts of loan disbursements. The fact to the matter is, there are a couple of one-time or type of things that are going to occur in the fourth quarter. So it’s more happenstance than the fact that it’s a pretty good quarter to annualize for a run rate. Eric Beardsley – Goldman Sachs: Okay. But otherwise excluding those, you would have expected to be less than the third quarter?

Yes, we are still trending a little bit for the extra money on IT expenditure related to the separation of restructuring program and we are ramping up some of the expenses in our collection center that’s causing Q4 to be a little bit higher than it would otherwise be from a seasonal standpoint. Eric Beardsley – Goldman Sachs: Okay. And on the MPL sales, is that something you'd expected continue to do moving forward?

I would not expect to see additional nonperforming loan sales running through that line. Eric Beardsley – Goldman Sachs: Okay. And then as you guys look out as an industrial loan corporation today, how you think about the potential to do a chartered change and what the incremental costs for compliance might be to do that?

As we look at our business model and match it up to our legal vehicle, which is the ILC. Right now there is nothing that would be inconsistent in our goals for the business that would somehow be restricted by the ILC. So we have at this juncture no plans to change the ILC. Changing to a different charter given the compliance and restrictions that we currently have would probably be a relatively small change. And, in fact that TIC, obviously, yeah, we did change from an ILC to a state chartered non-member bank and the transition was quite smooth and did not incur any additional incremental expenses of any significance. Eric Beardsley – Goldman Sachs: Okay. In terms of dealing with the fed and the OCC that’s not more onerous in terms of staffing or anything you need from a head count perspective?

Well, first, let me reinforce that, we are (inaudible) today and we are not envisioning changing. Second is, when we look at that, we will look at the trade-off associated with that. Thirdly, the expectation would be that there would be no large increment in expenses. Eric Beardsley – Goldman Sachs: Okay. And then just on your plans to diversify your funding, can you just update us on that, potential outlook for ABS issuance?

Sure. So that was a very key component of getting our ABS program up and running, establishing our ability to service the loans on our own. We have taken care of that in the current quarter. We'll give the servicing platform a couple of months to season for lack of a better turn, we will then have interested parties come in and view the servicing center and platform you are comfortable with it by those, I mean, interrupted stakeholders such as the rating agencies. And once that process is completed, we would expect that we would be in the market issuing asset-backed securities probably late in the first or early in the second quarter. Eric Beardsley – Goldman Sachs: Okay.

As we sit here today, there is not urgent need to hit that market, but it is a key component of our long-term strategy to term out a considerable amount on the balance sheet. But yes, so late in first quarter or early second quarter, we expect to see the shortcoming to the market. Eric Beardsley – Goldman Sachs: Got it. And can you just remind us in terms of what percent of your funding you would ideally like to have being ABS and how it might take to reach that?

There are no hard and fast targets. The market can certainly bear $2.5 billion to $4 billion a year, and I think that that’s kind of the phase we'll probably target at $2.5 billion issuing for year one and maybe ramp that up as the program develops. Eric Beardsley – Goldman Sachs: All right. Great. Thank you.

There seem to be no further questions at this time. I would like to turn the conference back over to Mr. Quinlan for any closing remarks.

All right. Thank you for joining today. This will conclude the call. Thank you.