SLM Corporation (SLM) Q3 2011 Earnings Report, Transcript and Summary

Good morning. My name is Detania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae 2011 Third Quarter Earnings Call. [Operator Instructions] Mr. Steve McGarry, you may begin your conference.

Thank you, Detania. Good morning, everybody. Welcome to Sallie Mae's 2011 Third Quarter Earnings Call. With me today are Al Lord, our CEO; Jack Remondi, President and COO; and John Clark, our CFO. After their prepared remarks, we will open up the call for questions. But before we begin, please keep in mind that our discussion today 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 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 and a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2011 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you, and now I'll turn the call over to Al.

Okay, thanks, Steve, and good morning, all. I'm here to review our third quarter earnings with you, which, as you're well aware by now, are $0.36. And I'll comment on the quarter and I'll also comment a little bit on our outlook for 2012. As most of you know, Sallie Mae is not a usually seasonal company. Our results are typically pretty ratable, but Q3 is typically different for us. It is the quarter when we have our highest loan activity, our originations peak, we add headcount and operating expense in the quarter. Also in the quarter, recent graduates, most recent graduates enter repayment and so our charge-offs tend to be higher in the quarter and delinquencies are higher in the quarter as compared to other quarters. It's also the quarter when we learn a fair amount about the success of our current year's efforts, and it also gives us some insight into the subsequent year. So with that said, I can tell you that the news is good, and it gives us some major optimism about 2012's outlook as well. Year-to-date, loan growth is 21%. That's a good number. Our $0.36 quarter, while lower than recent quarters, includes $125 million bad debt reserve addition that we made for it, was either in new accounting principle or a change in interpretation of an old accounting principle, but nonetheless, we mentioned it to you at the end of the second quarter. And we also mentioned to you at the end of the second quarter that this reserve addition does not reflect in any way, shape or form a change in the portfolio quality. It is, in fact, a change in accounting. I also don't mind -- suggesting to you that I don't mind having larger reserves. I'll have more to say about credit quality and bad debts in a couple of minutes. I will try to be brief. As I said, we grew in the third quarter and are growing. That feels a lot better than the last 3 years which, in fact, were down years on the credit front. It also feels sustainable. As I said our volume was up 21% year-to-date. It was actually up quarter-to-quarter over the last year, 29%. We don't have a lot of evidence about the facts of the quarter. I will share at least the anecdotal piece of it from our end. It appears more like market share gains than market size gains. We'll let you know when we have all the facts. Perhaps the most positive fact about the asset growth in the quarter is that it came with FICO scores in excess of -- an average in excess of 750 and with more than 90% cosigners. We are lending to very responsible students and families. These are very high numbers. Moving to net interest. Our net interest before provision was down about 2% from 2010 and just about flat with Q2. Our slight private growth largely offset our FFELP balance declines. Our fee income was up slightly from Q3 in 2010 and from the second quarter of 2011, that's without debt gains in the previous quarters. And I guess, the most salient fact here is that our direct loan servicing revenues have benefited both those comparisons. While Sallie Mae's operating expenses are declining generally, they did not decline in Q3, and they were up against Q2. As I mentioned, Q3 is a pretty heavy seasonal quarter. We also had a cleanup adjustment, if you will, for a pension plan that we terminated about a year ago, and that costs us $15 million. Probably the most important factor here is that we are on track for a roughly $250 million fourth quarter and sustaining that into 2012. Let me talk a little bit about asset quality and then I'll pass this on to John. Our declining delinquencies and default levels demonstrate continued asset -- continued improved asset quality. This is, obviously, a tough economy for everybody. It is particularly a tough economy for students graduating into it. But from our end, there is no evidence that the economic performance at this stage has or will change the positive direction of our asset quality. There's no question that the economy has significantly slowed the pace of improvement, but the fact is, we continue to improve and our numbers will reflect that in the future. I think it is worth mentioning, and I -- we mentioned it in the press release, as it's worth mentioning that today's elongated employment, unemployment periods is hampering our collection of accounts that have defaulted. Recovery rates for the company have been less than expected. Obviously, recovery rates factor in to our reserve policy. So lower recovery rates and the fact that we have a fairly dim view of the economy as it moves into 2012 keeps us on the conservative side, and we continue to maintain elevated reserves, even as actual defaults decline. Our future credit costs will decline at roughly the same pace as our charge-offs decline. And we forecast continued reduction in charge-offs. We're projecting reduced loan loss provisions into 2012 and '13, and that gets me into my final comments about how we see, at least, parts of 2012. We will give you much more comprehensive guidance for 2012 in January, but I'd like to break a little of that ground with you now. We see private credit volume next year at some probably very slightly above $3 billion. That's good news. We see our bad debt provision this year, probably for the year, at about $1.2 billion. I would expect that it will fall. All things remaining as they are, it should fall below $1 billion in 2012, and we're going to set an earnings per share target of about $2 for next year. In answer to the many questions we've already received and I expect to receive momentarily, in 2011, we reduced the company share count about 3%. And we will -- we, management and the board, will revisit share repurchase in the first quarter of 2012. With that, I'm going to turn this over to our CFO, John Clark.

Thank you, Al. Good morning, everyone. I'm going to review our financial and operating results for the third quarter on both a GAAP and a Core Earnings basis. I'll also discuss the performance of our 3 key business segments, review the performance of our Consumer Lending portfolio and provide you with an update on our funding activity. Core Earnings were $188 million, or $0.36 per share, compared to $202 million or $0.37 per share in the year-ago quarter. These results included an addition of $124 million, or $0.15 per share, to provision from loan losses attributed to the adoption of recent accounting guidance for troubled debt restructuring or TDRs, as well as $15 million or $0.02 per share related to the termination of our defined benefit plan. Additionally, these results included a $35 million or $0.04 per share gain on the sale of the company's discontinued purchase paper business. FFELP Core Earnings were $107 million compared to $108 million in the year-ago quarter. The FFELP net interest margin improved to 97 basis points from 94 basis points in the year-ago quarter. Earnings from the FFELP loan segment continue to be very predictable due to the high quality and consistent prepayment characteristics of the portfolio. Earnings from the Consumer Lending segment fell to a loss of $27 million compared to a loss of $3 million in the year-ago quarter. This was a result of the increased provision associated with TDR. Excluding the impact of TDR, earnings from the segment would have been $51 million in the quarter. Net interest margin improved to 4.03% from 3.87% in the year-ago quarter. This improvement was a result of a significant decline in other interest earning assets, which generate a negative spread and, therefore, caused a drag on earnings. Private credit portfolio characteristics continue to improve compared to the prior year. 31 to 60-day delinquencies upticked slightly to 3.6% from 3.5% in the prior year, 61 to 90-day delinquencies decreased to 1.7% from 1.9%, and late-stage delinquencies declined to 5.0% from 5.7% from the year-ago period. Late-stage delinquencies did increase from 4.6% in the second quarter to 5.0% as a result of the expected seasonality, and we expect this to come down next quarter. Forbearance has increased slightly from 4.3% in the prior year to 4.5%. The cohort of loans that went into repayment in the fourth quarter of 2010 is performing better than prior repay cohorts. Late-stage delinquencies after 9 months in repayment are at 4.6% for the cohort of loans compared to 5.0% and 5.7% for the 2009 and 2008 fourth quarter repayment cohorts. Net charge-offs as a percentage of loans and repayment for our entire portfolio improved significantly to 3.7% from 5.4% in the year-ago quarter. The continued improvement in our charge-off rate is a direct result of the increase in the quality of loans that are entering repayment. We expect the positive trends in our delinquency and charge-off metrics to continue. Excluding the $124 million impact of TDR, provisions were down significantly from $330 million in the year-ago quarter to $260 million this quarter. The accounting for TDR results in a higher allowance for loan losses since we are now reserving for life of loan losses on this segment of our portfolio rather than our typical 2 years of expected losses. This change is only applied to borrowers who use 4 or more months of forbearance during the time period this new guidance is effective. It is important to note that the increase in provision for losses is a result of new accounting guidance -- as a result of this new accounting guidance does not reflect deterioration in credit quality or an increase in the expected life of loan losses related to this portfolio. All we are doing is accelerating the recognition of the loan loss allowance. Turning to originations. We originated $1.1 billion in private credit loans in the quarter, an increase of 29% from $835 million originated in the year-ago quarter. Loans underwritten in the quarter had an average FICO score of 752 and 94% of loans made had co-borrower. Smart Option loans continue to be an attractive product that offers both competitive pricing and repayment choice, with 36% of our borrowers choosing the deferred option, 35% choosing fixed pay and 29% choosing interest-only option in the quarter. In the Business Services segment, Core Earnings were $139 million compared to $131 million in the year-ago quarter. The servicing fees we received from our FFELP portfolio totaled $183 million in the quarter compared to $164 million in the year-ago quarter. The increase in earnings and fees are primarily a result of the additional FFELP loans acquired on December 31. The company now services 3.4 million accounts under the Department of Education servicing contract. The Department of Education forecasts 4.1 million new borrowers for the current contract year that extends through August 2012. Our ranking in the most recent results of the servicing contract has led to an improved allocation of loans from 22% to 26%, which translates to roughly 1.1 million new accounts. We continue to be the best performer in the category of the FFELP reduction and are determined to improve our rankings in the other aspects of the scorecard. Our Campus Solutions business continues to grow. In the third quarter, we added 9 new refund disbursement clients including Dartmouth College and SMU. Total operating expenses for the company, excluding restructuring charges, were $285 million in the quarter and included $15 million of additional expenses related to the anticipated termination of our pension plan and $8 million related to the third-party servicing costs associated with the STU acquisition. This compares to $268 million in the second quarter and $302 million in the year-ago quarter. Operating expenses are typically higher in the third quarter because it is our peak loan origination season. Reducing our operating expenses is a primary focus of this company, and in the fourth quarter of this year, we expect to achieve a run rate of $250 million. Turning to capital markets, at September 30, 2011, 89% of our assets were funded for life. In the third quarter, we repurchased 9.5 million common shares in the open market at an average price of $15.23. The company has now fully utilized the $300 million share repurchase program announced earlier this year, acquiring a total of 19.1 million shares at an average price of $15.74. This represents 4% of shares outstanding at September 30, 2011. On October 5, we closed on a $3.4 billion asset-backed commercial paper facility which matures in January 2014. This facility provides the financing to call the 2009 B and 2009 C Private Student Loan trust at a lower cost of funds. The securities are first callable in November 2011 and January 2012, respectively. The cost of borrowing under the facility is expected to be commercial paper, plus 110 basis points. So total equity at September 30 was $4.8 billion, resulting in a tangible capital ratio of 2.2% of assets, an increase from 2.0% at September 30, 2010. We are comfortable with our current level of capital. Quickly, turning to GAAP. We recorded a third quarter GAAP net loss of $47 million or $0.10 per share compared to a net loss of $495 million or $1.06 diluted earnings per share in the year-ago quarter. The primary difference between the Core Earnings and GAAP results is the impact of a $371 million unrealized mark-to-market pretax loss on certain derivative contracts, which is recognized in GAAP but not in Core Earnings. Last year's third quarter GAAP loss included mark-to-market losses of $269 million and a $660 million impairment of goodwill and intangibles. In terms of guidance, we expect Core Earnings per share to be $1.80 for the full year of 2011. 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] And your first question comes from the line of Mike Taiano with Sandler O'Neill. Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division: I guess the first question I had was on the $143 million provision for lower expected recoveries. Could you just help me understand how that's flowing through the provision? Obviously, it didn't all come in this quarter. I just want to make sure I understand the accounting there.

Sure. We did -- it was charged -- was added to the provision this -- in the allowance this quarter. I think the way you need to look at it is every quarter, we reassess our next 8 quarters and we did the same this quarter. If you -- and as you roll that forward, what happens is you look at not only the projection of volumes that are entering repayment, but quality and mix as well. And as we look forward, we saw improving performance in our overall portfolio. And then when we looked at the areas where the recovery rates that Al referred to, we noticed that we were coming a bit short in some of the more recent cohorts especially '08 and '09. So we decided that we would take an additional provision to protect ourselves from the potential shortfall, the uncertainty of a shortfall of that those cohorts. Now if you look at the $143 million, I think the right way to look at it is that's really represents 8 quarters of protection. So although it was all brought in at once in this quarter, we're actually protecting ourselves for the next 8 quarters. Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division: Okay. So that's in the actual loan loss provision, that $143 million, was in the $409 million that you had for the full quarter provision?

Right. Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division: Okay, great. And then I just had a question on just the state of the ABS market at this point. Obviously, with all the issues going on in Europe, was just curious as to what you think about -- do you have the ability to do a private loan ABS deal today at reasonable terms? And if that market were to be closed for, say, the next 12 months, are you comfortable sort of meeting your private loan origination targets over the next year?

Sure. We -- there are 2 parts of that. We originate all our private loan product and put it in – it’s originated into the bank, okay? So we have a tremendous amount of flexibility in terms of the second step of that process, which is terming out those private credit loans in the ABS market. So we're not concerned at all about continuing to be able to fund private credit for the foreseeable future. In terms of an ABS execution, we actually, we expect that we will be tapping the ABS market problematically. We certainly do have access at. Although, perhaps not at rates that -- in terms of equivalent to our last deal, still attractive rates for us to term securitized. So I don't see any issues in that regard at all. Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division: Okay. And when you -- just to clarify, when you securitize, do those ones still effectively remain at the bank or do they go back up to the parent company?

They go up to the parent company.

Your next question comes from the line of Mike Tarkan with FDR. Michael Tarkan - FBR Capital Markets & Co., Research Division: Just real quick. I guess given your comments about a month ago regarding excess capital expectations over the next few years outside of debt maturities, I guess I'm just a little surprised that we haven't seen a new buyback announcement yet, given that you were buying back stock in the $15.70 range, obviously, your stock’s a little bit lower now. Is this something that the board is looking to be a little bit more conservative right now or maybe looking at M&A or more debt repurchase at this point? Maybe if you can just touch on that for little bit.

Well, this is Al. What I indicated was that we're going to take a look at it in the first quarter of 2012. And I think we're quite well aware that -- of our shareholders' interest in the subject. And you asked if the board was looking at this in a conservative way. They're looking at it in a conservative way, and I'm looking at it in a conservative way. And so it's very much on the company's plate. And as I said, we'll deal with it in Q1. Michael Tarkan - FBR Capital Markets & Co., Research Division: Okay, great. And then I guess in terms of M&A, maybe if you can talk to the kind of deal appetite now for FFELP transactions, maybe what that space is looking like. And if not FFELP, other ideas that you'd be interested in at this point.

Well, let me just, I mean, just, I think with respect to FFELP, our appetite probably is significantly stronger than available supply. And there's substantial supply, it just doesn't seem available. And I think we talked about this over the last 4 or 6 quarters, but the holders of FFELP have no other use for proceeds. So while they'd like to get it off their balance sheets and they'd like to relieve themselves of the servicing obligation, there really aren't a lot of other alternatives for their use of cash, as you're probably quite well aware. On the other M&A front, I've talked to shareholders in recent quarters and told them that the company is growing its capital, it's growing its capital at a pace that makes capital available, capital return available to shareholders. It also enables us to acquire entities that will help us enhance our fee income businesses where we've got -- as I mentioned, our fee incomes are up, but they're basically flat and will, by definition, recede as our FFELP fees go away. And so the company is looking to replace its fee income, and it's looking reasonably actively in the M&A area. So we'll be using capital both to return to our shareholders and on occasion, in the future M&A area.

Your next question comes from the line of Mark DeVries with Barclays Capital.

Could you explain the increase in delinquencies? I understand that the seasonality on the charge-offs but a little bit less clear on what drives the seasonality in delinquencies.

Well, I mean, look, it's the -- the seasonality that affects charge-offs affects delinquencies as well. I mean a charge-off is only a severely delinquent loan. The delinquencies are affected as well. And it's just that the larger number of borrowers who come into the stage in their loan's life where they can -- where they've got to repay, and if they're not repaying in full, the loans go delinquent. You said you understand the seasonality. I mean it is seasonality. And we’ve had a number of questions because some of our more focused analysts are seeing some numbers that maybe didn't improve or went the other direction in certain buckets. And we're suggesting to you that, that is in fact, seasonal and that as we look at every single segment of the loan portfolio, we don't see any deterioration. So I guess that's another way of saying that it's seasonal.

This is John. If you compare the year-on-year statistics, it supports that perspective, right. Delinquencies are down. Our flow rates are -- have improved. Each repayment, fourth quarter cohort, as I said in my opening remarks, has been better than the previous for the last couple of years. So we actually feel very, very good about credit quality.

Okay. And then on your expense run rate, what are your expectations for where that goes after you get down to the $250 million a quarter? Leaving up a normal seasonality expenses, would you expect that to kind of trend up, down or kind of level off at those levels?

If I had to pick one of those alternatives, I'd say level off.

[Operator Instructions] You have a question from the line of Sameer Gokhale with KBW. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division: Just a follow-up question on that $143 million of provisions that you had. I mean it sounds like essentially you took that provision because of reduced expectations of recoveries. But that was offset maybe by some other decrease in allowance given your -- the improved cohort performance. And so the net of it was $260 million of provisions there and that's kind of how we think of the run rate of provisions, trending lower off of the $260 million, not deducting the $143 million from the $260 million to get to like $117 million going forward. Is that the way to think about roughly?

I think it's right on. I think you should think about kind of a run rate of mid-200s. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Okay, that's helpful, John. And then the other question is on the mix of your portfolio, I'm trying to get a better handle on how to think about your decline in charge-offs looking out the next couple of years. And it seems to me -- firstly, if you could help me understand the mix of your loans and repayment, like what is that comprised of in terms of the '05, '06, and '07 vintages because probably in those years, you had looser underwriting than you had maybe before and after that. And is your outlook on charge-offs basically taking into account the view that the '05, '06, '07 vintages, as a pig kind of moves through the python, you see some upward pressure on charge-offs from those overall to the decline because of the nontraditional loans, charge-offs coming down, but really see the step function decline in 2013 because by then, you've lapped even the '07 vintage of loans coming into repayment. I mean is that the way to think about that whole credit mix shift in your portfolio?

Yes. I would direct you to, and I'm sure you're familiar with this, in our third quarter review, Page 6, which goes through -- I think speaks to your point. I refer to this as the demographics of our loan portfolio. We have tremendous momentum as we move forward here. And you would -- I think, should expect that we will continue to improve. And as we look forward we're seeing it as we roll in a quarter, as I mentioned earlier, roll in a quarter and roll out the quarter just finished. If you look at the mix in the credit quality, there's tremendous momentum here in terms of improvement and you can count on that happening. And I think in terms of our perspective here in the economy and the implications of that, I’d tell you that in a -- to the extent that an economy is less favorable, I think our improvements will be perhaps less dramatic. But I expect we will see improvement, nonetheless. The demographics are just overwhelming. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. The reason I was asking about those vintages is because when you look at some of the historical curves, and you've talked about this in the first couple of years, you kind of experienced 70% of the charge-offs but could it be a situation where the tail is a little bit fatter on some of those vintages that I talked about than compared to older vintages and that puts the upward pressure, hence, the step function downwards more in 2013 than 2012. So recognizing overall, most likely, there'll be a decline in the charge-offs. That's why I was looking for some color there. The other thing is on this ABCP credit, the asset-backed credit facility, CP facility. The loans in there that you're going to be putting in there, if you could remind me in those securitizations that you're basically refinancing, the advanced rate on those securitizations is probably, I would, say around 65% or so roughly, and that's similar to what you have, as I understand it, in the credit facility. But are those loans, the type of loans that when you securitize them, you could get like an 80% advanced rate against those, or are those some of the higher-risk loans? I have seen that some of your securitizations info, I just can't recall it. So would you expect to securitize those and then pull some cash out of the deal with the higher advanced rate?

Yes, we would expect to do that. And just so you understand, when we -- it won't be -- I'll refer to it this, it won't be linear. In other words, we -- this now becomes one of many financing facilities we have for credit or credit student loans. When we do a transaction, we certainly won't limit ourselves to doing a given transaction using only loans from this facility. So when I say it's not going to be linear, it's not as if I can say we will do a deal and you'll be able to compare apples-to-apples. As you might think and I think it's a prudent thing to do, right, when we take a step back and try to put together a pool to do a financing, we're not going to limit ourselves just to -- what's in this particular facility and have deals that are contain loans only from this facility. But yes, at the margin, I would certainly expect that you'll see our deals going forward will get better advance rates.

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

Could you comment a bit further on your Private Student Loan growth in the quarter? We're hearing from other private credit lenders that growth rates have been running sort of similar to where they were a year ago. So that sort of supports the view that you are gaining market share. I wonder if you could talk about why that might be, your product features versus the competition, pricing, anything like that.

I personally, I think we have -- I think we -- one of the advantages that we have, we have a tremendous product suite. And when you look at, as I said in my opening remarks, we are roughly still at a third, a third, a third, round numbers, in terms of the products that the students are collecting. And for those of you who haven't, I'd encourage you to go onto our website and just look at the transparency that borrowers have. And I think they can see the type of loan that they – they select from 1 of 3 loans, they can see the what the rates they're going to pay, the financing charges will have to pay and they can get a very, very complete picture, which I'm not convinced is offered by anyone else. In addition, we continue to have very good relationships with the schools that I think people who get in this business realize how important those relationships are, certainly, have been and continue to be. And that's a huge advantage for us. We have the biggest sales force out there, feet on the ground. And I think that's driving a lot of the volume. It's a combination of product and position.

Any difference in your pricing strategy?

No.

No.

I mean, I think the prices that are out there among the competitors are pretty even. Brad, I did want to thank you for the question.

Okay. And just another quick follow-up. I wonder if you could just comment on where you are with the new products in the bank on both the asset and liability side? Are we rolling out anything that will start to have an impact there in the fourth quarter?

Brad, this is Jack. In the bank, we’ve been -- in addition to the private loans, booking all new private loans in the bank, we have rolled out some credit card products and some pilot initiatives this year to our customers. One of the products where we've had really good success on is offering a credit card to the parents, the co-signers of the private student loans we're originating and the rewards, if you will, on that card go to pay down their son or daughter's student loan, and that's been extremely well received, and I think is a strong connection to our customers. We've also, as part of our Campus Solution suite, launched a student checking account with a debit card that has a very attractive program structure with minimal, really no fees and is really designed to complement the refund process that goes on, on college campuses and provide us with a source of deposits to help finance our growing Private Student Loan business. Those are the principal programs that we have launching right now. I would expect you'll see them to be just, given the relative size of activities there against the $200 billion balance sheet, the contribution is going to be relatively small near-term.

Great. And then just finally, Jack, I wonder if you could give us any update on your conversations with the Fed surrounding Sissy [ph] if anything has changed on that front or if you've heard anything?

I mean, they've been making a little bit of progress in terms of publicizing the way that the process they're going to take. No specific new conversations related to Sallie Mae or how we fit within that. I don't -- I think given what has been published, our outlook still remains the same. We feel strongly that we should not be designated.

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

I wonder if you could talk a little bit more about Campus Solutions and kind of how to -- how we should think about the economic impact of signing those new disbursement clients and kind of what competition is looking like. I think your main competitor has some changes in bank relationships again. How does that help you?

Well certainly, I mean –- so in the Campus Solutions suite, we have a variety of products that include tuition payment plan programs, refund products and payment, what we call a net pay product which allows us to deal with receivables and payments that the school is collecting from their customers. In the competitive landscape, it is a fairly competitive marketplace. We think we do have some unique advantages in this space owning a bank and having use for the liability side of the equation that gets created there is a huge advantage for us, in our view. John mentioned on the Private Student Loan side of the equation, our largest sales force and presence on campus we think gives us a distinct advantage as well. Profitability in this program is not dissimilar from what happens in the Private Student Loan side of the equation. You incur a lot of upfront expenses in booking the asset and your profits come -- or the business and your profits come down the road. And so when you're ramping up, what was a relatively small business for us to a larger one, the profitability is sometimes not a profit as you're converting schools and setting them up. But once you get beyond that timeframe, it turns pretty quickly. We're still excited about this business. I think there's a lot of opportunity here for us to take advantage of the relationships we have at schools and provide an additional service there, something that we think we can do extremely well. It does give us access to a large list of customers that, as we expand our suite of products to include other things like insurance programs, we can cross-sell those products to those customers. And because we are a -- we have a bank and can utilize those deposits in an efficient way, it's a good source for us to capture low-cost deposits to finance our business.

Okay. So basically, as we see more, I guess, school signings that, that should lead to more student customers and over time we’d start to see more of a bottom line benefit?

Yes.

Your next question comes from the line of Farhad Nanji with Highfields Capital.

Two questions for you. First, as guys look over the next couple of years given your outlook today, how much excess cash flow do you think the company will generate?

I'm sorry, excess cash flow?

After -– post-debt repayment.

Post-debt repayment. I'd say over the next several years, we're probably, maybe $1 billion in excess cash flow.

That gives you a significant amount of cash flow to either pursue M&A or repurchase shares. How do you think about one versus the other and the implied cost of capital with the shares at $13.33?

I'm sorry, can you repeat the question?

Well, with that extra $1 billion, you have the opportunity to pursue M&A, as Al talked about, and you have the opportunity to repurchase shares and do other things. And I'm wondering how you think about one versus the other?

Farad, this is Al. Look, there's no question that at today's stock price, there is no better use of our cash and capital. And we made that decision at about $17. So obviously, it's just truer today than it was at the time. There are 2 issues here. You asked John about the cash flow and that's -- our cash flow grows in '12 and it grows again in '13. I think John's number may be a wee bit on the conservative side, but in a lot of ways, it's not just not cash flow. We're talking really much more about capital, and God forbid, one uses the term excess capital. But we feel that we're very adequately capitalized at the moment, and we will continue to grow our capital until we return it or use it another way. So you asked the question how we evaluate it? We evaluate it probably the same way you evaluate it. And that is what is the best use of the capital? And today, to the extent that we don't need it for our current operations, we think that buying shares is a very fruitful use of the capital. But I also -- I think you probably heard, if you heard the entire conversation, suggested that we're going to revisit this issue. Look, we visit use of capital, obviously, at every single board meeting but we're going to specifically look at this again in the first quarter.

Okay. Maybe as a follow-up, you mentioned that excess cash was north of $1 billion. And then Al, you added growing capital or excess capital to that. Is the combination of the 2 things materially higher than $1 billion?

Farad, I hadn't come prepared to answer that question, and would really like to defer it and -- because I don't know the answer to that question.

At this time, I'd like to turn the call over to Mr. Steve McGarry.

Thank you very much, Detania. That concludes our conference call. Thank you, everybody, for joining us.

This concludes today's conference call. You may now disconnect.