SLM Corporation (SLM) Q1 2011 Earnings Report, Transcript and Summary

Good morning, my name is Celeste, and I will be your conference operator today. At this time, I would like to welcome everyone to Sallie Mae First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn today's call over to Mr. Steve McGarry. Please go ahead, sir.

Thank you, Celeste. Good morning, everybody, and welcome to Sallie Mae's 2011 First Quarter Earnings Call. With me today are Al Lord, our CEO; Jack Remondi our President and COO; and Jon Clark, our CFO. After Al and Jon's prepared remarks, we'll open up the call for questions. Before we begin though, keep in mind that our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors, and listeners should refer to the discussion of those factors on the company's Form 10-K 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 first quarter 2011 earnings release. This is posted on the Investors page at salliemae.com, where you can also find our Q1 earnings review deck, which contains a summary of our earnings release as well as additional information. Thank you, and I'll now turn the call over to Al.

Good morning, everyone. So before I go into my talking points, I just want to mention that, in the event I don't say this, this call today is good news. We reported, as you saw last night, $0.48 of earnings for the quarter, which includes an $0.08 debt buyback. That's -- I believe, is very good performance. As important as the numbers is the fact that the direction in virtually every key area is positive. You'll hear a little later from our CFO, Jon Clark, and Jon will talk to you a little bit about our guidance. Our guidance -- we're going to move our guidance up from about $1.50 to $1.70. There are a couple of reasons for that. Probably, the single largest reason is that we entered into this some floor income transactions in the first quarter that replaced expiring floor contracts from the past. Interest rates dropped significantly in the quarter, much more than we thought at the end of last year. Frankly, what's going on is we got historic indices that used to hurt this company in over the last couple of years that are now helping us. Specifically, narrower CP-LIBOR spreads and wider prime LIBOR spreads. We earned $260 million in the quarter. That represents a 20% return on our GAAP capital. We -- I mentioned, also, operating expenses is a early talking point. OpEx was at $303 million. There's an underlying run rate in that $303 million of $270 million, still higher than the $250 million target for our fourth quarter, which we've told you we would achieve. We still intend to achieve that. Also, you've read that the company has approved for the $0.10 dividend and a $300 million share repurchase. The $0.10 dividend is something less than a 25% payout. It will be paid, I believe, beginning in June. We also have authority to acquire $300 million -- spend $300 million on common shares. At least, at last night's closing price, that was about 20 million shares. Frankly, we like the stock at this price and see this as an opportunity to acquire stock at what, I call, bargain prices. Of course, you well know that, I think, the stock's been a bargain for quite some time. These are 17%, 18%, 19% returns at current prices. The decision for the timing of these actions is, really, I think, is fairly obvious. This company managed to maintain its capital and liquidity through the difficult markets of 2008, 2009. I will tell you, it was a nervous time, but we managed well through those difficult times. We're in a considerably better environment. No one's -- certainly, no one here is saying that it's a great environment, but it's a better environment. The company has, actually, very visible capital growth, visible earnings and very visible cash flows. I'll comment further on these two actions. Annualizing both actions would have us spend, roughly, $500 million, if you -- one were to annualize it or approximately 50% of our earnings. I think, it would be inappropriate to annualize those numbers as -- an aggregate as a payout ratio. The net effect of these payments is that our capital will grow after those payments, about 10%, not 20%. Our risk assets will grow less than 5%. It's our intention to grow assets and capital here at Sallie Mae. We want our shareholders and our bondholders to remember, that our capital, together with our reserves, exceeds 20% of our risk assets. We are looked at as a $200 billion asset company, and that is what we are. But only $40 billion of those assets are risk assets. Thank you. We feel very comfortable at these levels. And anyone who's been through 2008, 2009 and didn't learn these lessons: That capital is the basic strength of all balance sheets, but liquidity is the only true friend one has in a capital crisis; you might not understand why we maintain so much liquidity. Also, a goal of ours is to enhance our credit rating. Our unsecured debt, while less expensive than before, is still too expensive. A couple of comments on the quarter's earnings. All of you understand that FFELP [Federal Family Education Loan Program] net interest and FFELP-related fees will diminish over time. There are no FFELP assets being created. You also know this company wants to buy existing FFELP assets. I am feeling better at the moment about the market for such assets, that we're talking to a number of people. Private volume was a little better than our expectations. It's up 12% against the year ago. I'm not ready yet to call that a trend. But it, certainly, beats the declines we've suffered since the end of 2008 in this business. We've introduced our deferred product in time for this year's lending season. We're experiencing better cost of funds, which give us the opportunity to share some of the savings with -- maybe with our borrowers and our shareholders. Also on the acquisition front, we've seen some interesting private portfolio opportunities. Our most recent ABS deal was heartening among the better events of the last three years, and in fact, came in about 200 basis points above LIBOR. Once again, I'm not prepared to call it a trend, and I'll believe that market after a few more deals. One of the improvements in our earnings for this quarter was a lower provision. Our provision is lower because our charge-offs are lower. Each is approximately $275 million. Our portfolio of quality has improved slowly. The fact is the company's got over 75% of its loans now in repayment, and that number will grow to over 80% by year end. Frankly, borrowers are more predictable. Their behavior is more predictable in the second and third year. Seasoning improves the quality of the portfolio. Everyone of our collection and delinquency metrics have been improved. We're maintaining our reserve at current levels. We've had slight growth in the portfolio, and actually a little less amortization than we planned, but personally, I'm looking for harder evidence that the macro level -- that the economy is actually getting up much better. Fee Income business. The quarter was virtually flat with last year's Q1 and Q4, if you take out FFELP asset sales and the oversized debt repurchase gains we had a year ago. The fact is the company needs fee income -- additional fee income to sustain the long-term return on equity. It is no secret, I suppose, that we're looking to acquire servicing and other fee businesses. Certainly, those that are accretive, where we can, actually, get even better scale economies than we have today. We do expect to improve our scale economies and enhance our direct loan volume in 2011. We've recently achieved some improvement in our score card from the Department of Education on that front. Our Direct Loans servicing business still needs scale to achieve better margins. I mentioned OpEx a few moments ago. Again, we spent $303 million. There were a variety of spending items in there that we expect will go away. And we continue to intend that we will be under $250 million in Q4. I'm going to turn this over to Jon Clark, our new CFO, in a second. I want to mention that -- why you're not hearing from our new President, Jack Remondi. Jack has taken a few minutes from working in the tranche as to keep our computers and our assembly line running to potentially answer some questions. He's -- appears to be chopping a bit. That's something to say. So first, we'll listen to Jon Clark. Thank you.

Thank you, Al. Good morning, everyone. I'm going to review our financial and operating results for the first quarter on both a GAAP and core earnings basis. I will also discuss the performance of our three key business segments, reviewing the performance of our customer lending portfolio and provide you with an update on our funding and liquidity position. Core earnings were $260 million or $0.48 per share, compared to $215 million or $0.40 per share in the year-ago quarter. These results include debt repurchase gains of $64 million, $0.08 per share and restructuring cost of $4 million less than $0.01 per share. FFELP core earnings were $109 million compared to $64 million in the year-ago quarter. This quarter's results include the full impact of $25 billion FFELP portfolio we acquired on December 31. We believe there will be further opportunities to acquire FFELP Student Loan portfolios. That FFELP net interest margin improved to 98 basis points from 83 basis points in the year-ago quarter. The changes in net interest margin from one year ago were primarily due to the sale of lower margin loans, the Department of Education, the acquired FFELP portfolio and additional floor income. FFELP operating expenses, excluding restructuring charges, were $195 million compared to $188 million a year ago. The increase in operating expenses was, primarily, the result of increase in Servicing revenue, which was transferred over to the Business Servicing segment. Earnings from Consumer Lending segment were $44 million compared to $5 million in the year ago quarter. Net interest income increased to $410 million from the quarter, driven primarily by net interest margin, which improved to 4.11% from 3.84% in the year-ago quarter. This improvement was a result of significant decline in other interest earning assets, which are down as a result of a planned decline in cash balances at the bank. Other interest earning assets generate a negative spread and cost a drag on earnings. As for loan performance. The loans that entered repayment in the fourth quarter of 2010, will drive delinquency trends in the first half of 2011 and charge-offs in the second half. This cohort of loans is smaller and of higher quality than previous repayment cohorts. It has an average FICO of -- it has a higher average FICO and is comprised of significantly smaller amounts of higher risk, nontraditional and non-cosign loans. Through the first 3 months, these loans are showing a lower delinquency rate, a lower forbearance rate and making more payments, when compared to loans that entered into repayment in the fourth quarter of 2009. The 31-plus day delinquency rate for these loans is 12.4% compared to 13.5%. The forbearance rate is 7.0%, compared to 7.6%. These are leading indicators of performance, and would suggest lower charge-offs going forward. Looking beyond the loans that entered into repayment in the first quarter. Our overall private credit portfolio characteristics continued to improve. Early-stage delinquencies displayed their typical seasonal patterns, with 31- to 60-day delinquencies decreasing to 3.3% from 3.6% in the prior quarter and 61- to 90-day delinquencies increasing to 2.0% from 1.7%. 90-day delinquencies declined to 5.1%, a significant improvement from the prior quarter and the year ago period. Forbearances were unchanged from prior quarter at 4.6% but down from the prior year. Net charge-offs as a percentage of loans and repayment for our entire portfolio has declined 3 straight quarters to 3.9%. This rate represents our lowest quarterly net charge-off rate since Q1 '09. The continued improvement in our charge-off rate is a direct result of the increase in the quality of loans that are entering repayment. The provision for private credit loan losses at $275 million, down significantly from $325 million in the year-ago quarter, reflects the improved performance of the portfolio. We expect a positive trend in our delinquency and charge-off metrics to continue. Turning to originations. We originated $940 million in private credit loans in the quarter, an increase of 12% from $840 million originated in the year-ago quarter. Loans underwritten in the quarter had an average FICO score of 737, and 87% of these loans had a co-borrower. We are seeing growing demand for Smart Option's student loan at schools across the country. Application volume at our not-for-profit, 4-year schools is up 8% compared to the year-ago quarter. In March, we expanded the repayment options offered to students to include the ability to defer payments until after school. We are well positioned for the upcoming academic year, with the private education loan that offers repayment choice, competitive pricing and companion products that help families cover other education-related financial matters. In the Business Services segment, core earnings were $132 million compared to $141 million in the year-ago quarter. The decline in net income was primarily driven by the loss of guarantor issuance fees under FFELP. The Servicing fees we received from our FFELP portfolio totaled of $189 million in the quarter, compared to $164 million in the year-ago quarter. The increase in fees is primarily a result of the additional FFELP loans acquired on December 31. The company now services 3.2 million accounts under the Department of Education Servicing contract compared to 2 million accounts one year ago. We have improved our overall score in each of the first two quarters of the current year reported by the Department of the Education. In the most recent quarter, we achieved the #1 ranking. If we maintain our current performance, we expect our share of new accounts could increase to 30% from 22% in the prior year. During the quarter, we announced the expansion of our tuition refund processing capabilities to include a No-Fee Student Checking account as part of our campus solution products available to schools and students. This product is the lowest cost option in the market and allows students to access their tuition refunds, surcharge-free with their Sallie Mae Debit MasterCard at 35,000 ATMs nationwide. Since its announcement, we have contracted with 8 new schools to deliver our campus solutions this coming academic year. Total operating expenses for the company, excluding restructuring charges, were $303 million in the quarter compared to $308 million in the fourth quarter 2010 and $287 million in the first quarter of 2010. First quarter operating expenses include a $33 million of charges, consisting of a $10 million reserve for potential litigation, $11 million for an acceleration of stock compensation expense, resulting from a board-approved policy change, and $12 million for higher Servicing expenses on purchase assets, which will be significantly lower once these loans are transferred to our platform. Reducing our operating expenses is a primary focus of this company. By the end of the fourth quarter this year, we expect to achieve a run rate of $250 million. At March 31, 2011, 89% of our managed assets were funded for life, up from 87% a year ago. In the quarter, we repurchased $825 million of our unsecured debt generated gains of $64 million. In 2014, debt maturities are now below $3.1 billion compared to $5.4 billion at the beginning of 2009. In 2011, we have issued both FFELP and private credit ABS transaction. On March 3, we completed an $812 million FFELP consolidation loan ABS transaction at an all-in LIBOR equivalent cost of 1 month LIBOR plus 114 basis points. We saw good demand for this transaction, particularly, for the long tranches. As a result of the increased demand, we sold the subordinate tranche of the bond for the first time in a FFELP deal since 2007. We recently priced a $562 million private credit ABS deal. This is our first broadly marketed private credit ABS deal since Q1 '07. The deal was met with exceptionally strong demand across all three tranches. The transaction price at a weighted average cost of LIBOR plus 199 basis points. Going forward, we intend to be a programmatic issuer of private credit ABS and bring deals in the market on a regular basis. We believe this will create a more durable and liquid market for our securities. While we are very comfortable with our maturity profile, we're pleased with the outcome of these most recent transactions. We will not be fully satisfied until we see our credit rating and our funding cost improve significantly. Total equity at March 31 was $5.2 billion, resulting in a tangible capital ratio of 2.3% of assets, an increase from 1.7% at 3/31/2010. We believe we are currently holding excess levels of capital. We recorded first quarter GAAP net income of $175 million or $0.32 per share compared to net income of $240 million or $0.45 per share -- diluted earnings per share in the year-ago quarter. The primary difference between the core earnings and GAAP earnings is the impact of $133 million unrealized mark-to-market pretax loss on certain derivative contracts, which is recognizing GAAP but not in core earnings. Turning to guidance for 2011. As Al mentioned, we expect to generate core earnings of $1.70 per share, a full year private credit provision of $1 billion, operating expenses of $1.2 billion, private loan volume of $2.5 billion. At this point, I'd like to open the call to your questions. Operator, would you please open the line for any questions?

[Operator Instructions] Your first question comes from the line of Sameer Gokhale with KBW. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Thank you. Just on the operating expenses, Al and Jon, both of you talked about your -- you gave the guidance for the year, which I think, is the same as you had before. But Al, in your comments you kind of talked about the run rate of operating expenses. So I was just trying to reconcile the two comments, because it seems like the run rate is suggesting a lower operating expense for the full year, relative to the $1.2 billion. So could you just talk about that a little bit?

Sameer, I think, there's probably a little bit of rounding in the $1.2 billion. I think, the number's somewhere between $1.150 billion and $1.200 billion. And I understand that it would be a little bit difficult to reconcile. And I'm hopeful that would beat the $1.150 million. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay. Yes, because it does seem like you were coming in to be $90 million or so lower than the $1.2 billion. But that's fine, maybe there's some rounding plus the opportunity to beat that $1.2 billion guidance number. The other question I had was in terms of the dividend and the share buyback. And trying to think of the dollar amount in its entirety, and I think, you alluded to, Al, that maybe it's incorrect to add the two end sales like a $500 million return of capital. But I was just trying to think about the dollar amount of share buyback, going forward. Like how do you think about that? Is this just -- is it like a onetime share buyback, and then the dividend would just remain consistent going forward? Or do you anticipate every year, there are being some incremental share buyback opportunity? How should we think about that?

I think you should -- I should -- I think, you should think about it as a beginning of a dividend program that's paying out roughly 25% of earnings. With respect to the share buyback, we see opportunities. Obviously, it's been painful to watch the stock at lower levels, particularly, substantially below $15, when I believe the stock just on its drop-dead value is $20-plus. I see it as opportunistic if -- it really depends, a great deal, I think, on the pace at which we add assets. We intend to grow capital at a pace that exceeds -- slightly exceeds our asset growth rates. So we, at the moment, have ample liquidity, and we believe that we're very adequately capitalized. We will see as we pursue the pace of which we add assets. That was a long-winded attempt not to answer your question. I've always liked that managing the capital account, recently, aggressively, but we're very sensitive to the capital markets over the last couple of years. And we just felt that, at this time, we could do the stock buyback. And as I said, I don't think it's appropriate for you to think that this $300 million, or whatever the number ever becomes, is necessarily an annualizable number. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, that's helpful. And just my last question is on the private student loan originations. You said it might be a little too early to say that we're seeing this is the beginning of a trend of improving private loan originations. But for the quarter, given the kind of stronger-than-expected origination volume you had, was there a greater mix of the deferred loan product in the mix? And when you alluded to maybe some higher demand, was that really your deferred loan product, or were you seeing some higher demand across the products? So just to get a sense for the mix of what you originate, deferred loan versus like the fixed payment product.

The deferred product was not yet introduced. It's only come about in the last several weeks. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Okay, Al.

The first quarter was perfectly comparable as the year-ago quarter end with the fourth quarter. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: Terrific. Thank you.

Next question comes from the line of Mike Taiano with Sandler O'Neill. Michael Taiano - Sandler O’Neill & Partners: First of all, congrats on the capital return announcement, I know that it's something you guys have been working hard towards. The question, I guess, in terms of the capital return. Obviously, you guys have to balance what your equity holders want and what your debt holders want. I was just curious as to if you've gotten any feedback from your debt investors and/or the rating agencies that you can share with us at this point?

We have ongoing conversations with the rating agencies. We have ongoing conversations with our creditors. You might be surprised -- maybe you wouldn't be surprised to know that a lot of our creditors are our shareholders. And our major shareholders, often -- many of them hold debt. So we're -- I think, we're feeling very much in touch with both sets of constituents. And I would say, look, this is -- what we've just done is really quite modest in terms of the distribution. I'm going to ask Jon Clark to -- who's recently spoken with -- well, he speaks all the time with our creditors, and just spoke recently with our friends at the rating agencies.

Thanks, Al. We discussed, so that the rating agencies would know what was coming. We discussed directly our plans. We shared with them our view of capital, and they were very constructive. I think they were -- it was important to us, all of us, that we not move forward unless we were confident that this did not impair our current ratings nor hinder us on achieving ratings upgrades in the future. Michael Taiano - Sandler O’Neill & Partners: Okay, that's helpful. And then, just secondly, on the private student loan volume. As we think about the margins on the new loans that you're originating versus sort of the average spread that you had at the quarter, which was a little bit north of 4%. Are the spreads on the newer loans higher or lower, or basically, in line with that?

Actually, they're, roughly, the same. We've done -- I think we've been pretty successful at maintaining margins. And frankly, that task gets easier, as we reduce our cost of funds, which goes back to your first question. We are very interested in our debt ratings. Michael Taiano - Sandler O’Neill & Partners: Okay. And then just the last question. Are you guys affected at all -- this new FDIC deposit assessment on, I guess, the way they changed the methodology on debt versus just pure deposits. Do you expect that to have any impact, or any meaningful impact on your expenses at all?

You hit me with the question that I don't know the answer to. But I'm staring at Jack Remondi, who's shaking his head, no. Let me ask him to answer the question, if I might.

Might be. I mean, that issue, principally, affects nondeposit-gathering liabilities, to which the bank has very little. Michael Taiano - Sandler O’Neill & Partners: Okay. So it's just the bank, it's not the total holding company.

That's right. Michael Taiano - Sandler O’Neill & Partners: Okay, got you. Great. Thanks a lot.

Your next question comes from the line of Lee Cooperman with Omega Advisors.

I think, the numbers are very clear. And I think, you shared this philosophy, which we spoke about before about the risk of not making any errors. I noticed that like of all the analysts that recommend -- that have an opinion on the stock, the average price objective is $16.17. I believe, the stock repurchase makes sense under only one circumstance, and that is when buying something back that is significantly undervalued. You're being consistent, as Al made the comment that dead, we're worth 20%. I mean, we're not going to be dead, and hopefully, we're going to grow. But I assume, that you guys understand that the decision to return money -- some of this money by stock repurchase as stated by you that the market is misvaluing our prospects, and these analysts that cover us will wake up and figure out they're making a mistake, and ultimately would be raising their price objective. That's kind of one. I think, I know the answer, but I'd like to hear it. Again, it makes me feel good. And secondly, directionally -- not specifically, but directionally, would you expect to enhance on 2011 earnings in 2012? Thank you for your help.

Lee, let me answer your last question first. I think your last question was do we expect 2012 to improve EPS versus 2011. The answer is yes. With respect to your first point, and in an attempt to achieve the objective of making you feel better, of course, we believe that the share -- I mentioned in my talking points, I believe, the stock's were well over $20 in almost any rational evaluation.

Good, okay. You're being consistent. Thank you. Good luck. And I think it was a very good decision you made.

Your next question comes from the line of Eric Beardsley with Barclays Capital.

Thanks. I was wondering, with the hedging you've done, where the FFELP loans spread goes from here?

The FFELP loan spreads from here won't change much. I think, the right way to look at the hedging strategy here is, in fact, you dampen the volatility, the FFELP strength going forward. So I think, you're going to expect it to be within a few basis points to be pretty stable for the rest of the year.

And as you look out a few years from now, where do you think that goes to?

Well we hedged out a ways. So I expect, it'll continue to be relatively stable. About how the FFELP loans are funded, you've locked in a great deal of the future, if you will.

Okay. And then secondly, I know this is probably hard to look out, but when do you think you can see revenue growth?

Are you speaking about net interest revenue growth? Or are you speaking about fee income growth?

A combination of the two.

I think we're showing net interest revenue growth.

Well, just looking at the runoff portfolio, and what you're filling in with private lending, how those two offset overtime?

As we've looked at the next 3 or 4 years, the net income that we're projecting -- and I recognize, I'm taking you to the bottom line, not to the top line. I'm going to ask Jack Remondi to address the top line question. But the bottom line for the next several years has an upward trend. And in part, that comes as a consequence of reduced provisions and reduced operating expenses. But the amortization of the FFELP portfolio and the slight growth in the private portfolio, actually, are sufficient to show bottom line growth. As I mentioned in my talking points, we are looking for fee income growth, again, accretive fee income growth. And I see, particularly, with secondary market opportunities, the opportunity to -- both on the FFELP side, to delay the deterioration in net interest income. And on the private side, we're seeing very, very nice quality portfolios at reasonable prices, which can enhance the growth in net interest income both from the private side. If you're looking for more specificity, I'm going to ask Jack to take a crack at your question. Jack?

So I think you have to look at -- and you're looking at revenue, top line revenue growth. I think you do have to take into consideration the three segments of the company. We have our FFELP portfolio that's roughly 80% of the balance sheet, and borrowing any acquisitions of portfolio with that revenue line item is going to decline. And so the overall size of that makes it -- makes this a bit of a challenge. When we look at the private credit side of the equation, we expect growth opportunities to continue to be in that space. We expect them to be -- to see top line revenue growth of net interest income after provision to be well into the double digits., Actually, overall in 2011, it will be double digits versus 2010. And the real opportunity for us is as Al pointed out in the aggregate -- is can we buy portfolios in the FFELP space at attractive levels that allow us to slow down the amortization of the FFELP loan. We think the answer to that is yes. The fee income side of the equation also has some of the same characteristics of the FFELP portfolio. A good portion of our revenue is derived from the guarantor servicing and continues to collection work we do in the FFELP segment. The question will be is -- does our superior performance on default prevention and collection at the Department of Education side allow us to capture similar-sized market share in that area. Economically, the answer to that should be yes, but we'll have to see how the Department actually performs in that segment.

Okay, great. Thanks.

[Operator Instructions] Your next question comes from the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG: Great. Jon, I think you had mentioned something about -- in addition to the deferred products, some other characteristics about allowing other kinds of borrowing. Could you kind of flesh that out, maybe kind of related to some other elements like the bank account and other things that make this kind of more competitive. Could you just talk about that little bit?

Well, I think what I was referring to is in addition to introducing a deferred product on loan side, is the -- I'd call it, the more complete integration of our relationship with the student, which comes about through campus payment solutions and some of the products that we have to offer there. In other words, when a student would get a reimbursement of some funds from the school, that would be in excess of what the school gets paid, but they need to have -- as an example, if they live off campus, they would need to have those funds available to pay rent. They get that in the form of a debit card, which we expect we will continue to extend that relationship by having a debit card, providing an opportunity to get a checking account and create -- I'll describe it as a more holistic relationship with the student. So not only will they be borrowing from Sallie Mae, but to the extent that they were receiving funds from the school. That too, would be linked into Sallie Mae. And that we would provide a method where they could access those funds on a very cost-effective basis. Moshe Orenbuch - Crédit Suisse AG: And I guess, kind of somewhat unrelated topic. Just you had mentioned the better scores, prospectively, for the Department of Education servicing contract. Any other kind of flushing out of that, that you can do as to what we should expect and when?

Well, we have to wait for the next quarterly cycle. As you're probably aware, although the quarterly results are announced, the allocations are made once a year, so the important thing is for us to continue to push to excel, and achieve our number one ranking when the new determination is made. Moshe Orenbuch - Crédit Suisse AG: Great. Thank you.

Your next question comes from the line of Brad Ball with Evercore.

Thanks. Jon, could you talk a bit about your outlook for funding private student loans? You had a couple of successful ABS deals, do you see ABS as ultimately funding all of your private loans, or will you continue to use deposits? And what's the implication for your deposit strategy?

Yes, our strategy hasn't changed at all, with regard to deposits and the bank. I look at the bank as being a facility where we temporarily hold loans, in their early days, months, years as they season, and as we accumulate enough to aggregate enough to be able to do a well-structured deal, and then subsequently turned out in the ABS market. I continue to look at the ABS market as a very good alternative for us. The reason it's so good in my mind is because the match funding. And I expect, going forward, that we will -- as I mentioned in my opening comments, I look at our strategy with -- on the private credit side is to be a programmatic issuer. So I think you can expect that we will be in the market regularly, with reasonably sized deals, predictable structures, broadly marketed, so that everybody can see the liquidity that's available. And it makes me -- I think that will away a lot of the uncertainty, if you will, of exactly what you're curve looks like.

And would you characterize that market as opening back up, but certainly, not to the levels that we saw a few years back?

I think that's a good characterization. It is, clearly, getting -- in my mind, getting better month by month. It's been a longer slug than I had expected. But it is making progress. It's not back to where it was before. But I expect it will continue to -- I expect spreads continue to tighten throughout the year.

Okay. And then, still in the bank. You guys have talked about some consumer lending strategies. I think, you had a credit card pilot program. Could you update us on anything new on that front?

I'll let Jack handle that one.

Yes. All right. We were really looking at -- as Jon, who kind of indicated, expanding the relationships we have with customers on multiple fronts. So we look to help students and families save for college plan and pay. And some of the products that we are talking about launching are this No-Fee Checking account for students, to deal with the refunds. We also launched a pilot credit card program. That is out in the marketplace today. We're going to enhance that into some more targeted offerings for our customer, allowing parents to sign up for a credit card, where the cash-back earnings will go to pay down their children's student loan debt. We're going to have similar products for about our 529 plans. And again, it's just trying to broaden that relationship, but staying very close to the reason why the consumers, the customer of ours today. We've talked to come in the past about -- just to sheer numbers of customers that we have. We have over 23 million customers at Sallie Mae, and the demographics of that customers base, those -- both those that are saving, as well as those that have borrowed from us, we think are well above average to the kind of national standards or national averages, and therefore, represent a very strong opportunity for us.

Okay, great. And just one final question, separately. In terms of your guidance for $1 billion of provisions this year. Is that more a function of improving credit in private student loans, or is that also a reserve release?

That's improving credit. Definitely, improving credit.

So should we expect that provisions will match net charge-offs pretty closely on a normalized basis?

Yes.

Great. Thanks very much.

And we have no further questions at this time. I will now turn the call back over to management for closing remarks.

Thank you very much. That concludes our call. If you have any follow-up questions, please contact myself or Joe Fisher. Thanks for joining us this morning.