SLM Corporation (SLM) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Katie, and I will be your conference operator today. At this time, I would like to welcome everyone to Sallie Mae's Third Quarter 2012 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Steven McGarry, Senior Vice President of Investor Relations. Please go ahead, Mr. McGarry.

Thank you, Katie. Good morning, everybody, and thanks for joining us for the call. With me today are Al Lord, our CEO; Jack Remondi, our President and COO; and Jon Clark, our Chief Financial Officer. 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 projections, 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 a discussion of those factors on the company's Form 10-K 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 and the full reconciliation to GAAP measures, along with our GAAP results, can be found in the Q3 2012 supplemental earnings disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I'll now turn the call over to Jon.

Thank you, Steve. Good morning, everyone. I'll be referencing the earnings call presentation available on our website during my prepared remarks. Starting with Slide 3. In the third quarter, we generated adjusted earnings of $0.52 per share. Our loan originations grew 25% and we exceeded our financing goals, completing multiple FFELP and private credit ABS deals. We also continued to purchase common stock debt and FFELP portfolios. Slide 4. For the quarter, core earnings were $277 million or $0.58 per share, compared with $188 million or $0.36 per share for the year-ago quarter. Third quarter 2012 EPS included a $0.06 gain from debt repurchases. Excluding the debt repurchases, core earnings EPS was $0.52 for the quarter. Operating expenses in the quarter were down significantly from the prior year, primarily as a result of our cost-cutting efforts. We continue to target operating expenses below $1 billion for the year. Slide 5. Net income from our Consumer Lending segment was $63 million for the third quarter, compared to a loss of $27 million in the third quarter of 2011. The increase in earnings was primarily the result of lower provisioning for loan losses. The private education student loan spread declined to 4.44% from 4.57% in the year-ago quarter and was down from 4.55% in the prior quarter. The student loan spread was suppressed by cumulative accounting adjustments in the quarter. We expect a more normalized rate of 4.5% to 4.6% in the fourth quarter. Private credit portfolio performance continues to improve, and we have not altered our long-term constructive view on credit trends. Forbearances declined sharply to 3.2% from 4.5% in the prior year, and early-stage delinquencies declined from prior quarter and year-ago period. Net charge-offs, as a percentage of loans in repayment, decreased to 3.23% from 3.74% in the year-ago quarter, but increased 14 basis points from the prior quarter. Loans delinquent greater than 90 days, as a percentage of loans in repayment, increased to 5.3% from 5.0% in the prior year. The principal driver of the increase in delinquencies was the material improvement we reported in forbearance. Taken together, forbearance plus greater than 90-day delinquencies, as a percentage of loans in repayment and forbearance, declined to 8.3% from 9.2% a year ago. We continuously refine our collection tools to ensure that the borrower is optimizing the management of their debt and the company is improving its long-term performance. In the second quarter, we increased our focus on borrowers in forbearance, encouraging them to enroll in a payment plan. This helped to minimize their total debt levels by avoiding capitalization of interest. Our experience indicates that borrowers that enter payment plans default at a much lower rate than those that do not. Unfortunately, not all borrowers will successfully complete their payment plan. As a result, we will see acceleration of charge-offs, with Q4 being greater than Q3. Separately, we continue to take a conservative view toward our allowance and, as a result, we increased our provision in Q3, as well as our overall allowance. Finally, the Consumer Lending segment was more efficient than a year ago, with operating expenses, as a percentage of average remaining assets, dropping to 71 basis points from 88 basis points in the year-ago quarter. Slide 6. We originated $1.3 billion from private credit loans in the quarter, an increase of 25% from the third quarter of 2011. The loans we originated had an average FICO score of 749, and 93% of the loans had a co-borrower. This compared to 752 and 94% in the third quarter of 2011. We are very pleased with the high quality loans that we continue to originate. Smart Option loans continue to be an attractive product that offers both competitive pricing and repayment choice, with 41% of our borrowers choosing the deferred option, 32% choosing fixed pay and 26% choosing full current interest payments in the quarter. Slide 7. In the Business Services segment, core earnings were $131 million in the quarter, compared with $139 million in third quarter of 2011. The company now services 4.1 million accounts under the Department of Education servicing contract. Servicing revenue from this contract was $23 million in the quarter, compared with $16 million in the prior year. Slide 8. FFELP core earnings were $94 million for the third quarter, compared with $107 million for the third quarter of 2011. The FFELP student loan spread increased to 105 basis points from 95 basis points in the prior quarter after adjusting for the impact of the Special Direct Consolidation Loan Initiative. This quarter's FFELP spread is higher than our expected run rate of the high 90s, principally due to cumulative accounting adjustments we made in the quarter. As we have learned in the last several quarters, there can be volatility in the spread for many reasons. I would encourage you to focus on the run rate. In the quarter, we purchased $300 million of FFELP loans. This brings our FFELP acquisition total for the year to $3.1 billion. We will continue to actively and aggressively seek to acquire additional portfolios. Slide 9. So far this year, we have issued $4.2 billion of private credit ABS in 5 separate transactions. Our most recent transaction completed last week. It was executed at spreads that were nearly 50 basis points tighter than the previous transaction. The ABS market continues to strengthen, enabling us to execute our long-term funding strategy of originating new loans in our bank and term funding more seasoned originations in the ABS market at attractive spreads. We have also completed 6 FFELP ABS deals for $6.9 billion. We will continue to regularly issue FFELP ABS to meet the wind down of the Straight-A FFELP facility. At quarter end, we have under $13 billion of FFELP loans in that facility, down from a high of $24 billion. Slide 10. Turning to GAAP, we recorded third quarter GAAP net income of $188 million or $0.39 per share, compared with a net loss of $47 million or negative $0.10 diluted earnings per share in the year-ago quarter. The primary differences between the third quarter 2012 core earnings and GAAP results are the marks related to our derivative position. I'd now like to turn it over to Al Lord.

Thanks, Jon. Good morning, everyone. Jon's given you a pretty complete financial picture, and I just want to give you a little bit of my take on what's going on. Obviously, quarterly numbers tell us about our recent past. Today also, I think, most of us are looking at quarterly results to try to get a sense of what that means for the future. But look, this was an okay quarter. It's $0.58 with some debt repurchases and a higher provision and a few other moving parts, not a bad quarter. Before I get too far into this, just let me say that we, of course, remain okay with our $2.15 projection for this year and $2.30 for next year, notwithstanding whatever else I may say. I think it's important to know that notwithstanding the variability in our quarter-to-quarter numbers, that the company is growing and it's growing its earnings per share. The largest variable, of course, is the provision and, of course, it's variable because we're in a variable economy, with agonizingly slow employment growth. On the positive side, I'm very happy with our volume. We're up another 25% this year, and we're up with the same, if not better, credit quality. This is the third consecutive year of growth. Maybe, 3 years makes a trend. And I'm going to talk to you about the fourth year, which also, we expect will grow pretty significantly. And so instead of starting with the 3, we expect next year's originations to start with a 4. Let me also just say that, that is actually very good news. Sallie Mae has a modestly growing private credit business that's earning more each quarter. It's got a tall task to do because it's trying to outrun -- wind revenues from our wind down FFELP business. But not so far behind the scenes is a very nice growing private credit business. I'm very satisfied with the productivity gains that I think we sometimes fail to recognize. Our operating expenses are at a 10-year -- roughly at 10-year-ago levels. We're under $1 billion, as you know. But behind the scenes, this company is processing more than double the volume that it processed 10 years ago with its -- under the direct loan contract and a variety of other businesses that we're doing. Our productivity will continue to improve. Otherwise, we'll lose margins. And so we will continue to push on productivity. I can't confess to being particularly happy about the recent or maybe even the near-term credit picture. Our numbers, as you can tell, have shown some backups on the delinquency and charge-off fronts. Jon talked to you about our forbearance policies. We squeezed harder on our forbearance policies, going from -- we're down nearly 30% from a year ago. We think that's appropriate, but it caused us some pain. It's also may be worth looking at a little -- slightly larger picture. We've actually taken -- in the last 4 years, we've taken our forbearance rate in certainly the worse market than any of us can remember. We've taken it down from some 16% to 3.2%. That's quite a move. But there are other reasons for the backup in our delinquencies. And the fact is the economy remains very slow. We hear, whether it's in the debates or elsewhere, that it's a tough job market for graduates. It's a tough economy, and some of the slowdown is real. It's certainly real versus just 6 months ago in the second -- first and second quarters when we were showing very dramatic improvement. While it's a tough market for graduates, it's an intolerable market and much, much tougher for non-college graduates. Our overall credit picture, as Jon said, continues to improve. And we're hoping that the near-term increase in our delinquency and charge-off statistics goes away. And we very much expect that it will. But this quarter and next quarter are going to show larger numbers in charge-off statistics. 2013 will be better than 2012. And let me just reiterate that notwithstanding the current economic trajectory, it does not put our 2013 estimates at risk. I understand and have heard from some of my colleagues that there's been some skepticism, I guess, as we reported our earnings about our commitment to share repurchase. Let me just try to discuss it a little more fully than normal. You should know that management believes its responsibility is to buy the stock when it's trading at significant discounts to its intrinsic value. Now when we talk about intrinsic value around here, and there are any number of ways to do this, but I'll just look at what's pure liquidation value and we're trading at 30% below that number. That doesn't -- and that doesn't allocate any value for our private credit franchise or our fee franchise. Obviously, when one buys stock, you benefit earnings per share. That's the immediate benefit, and it's worth something. In this marketplace, I believe the more significant value is that it increases the intrinsic value per share. I've talked in recent conversations about a low 20s number. I would say that number is now mid-20s. And that's mid-20s after the company has distributed over $3 in cash over the last 18 months. Share repurchases and dividends, I believe, will total something in excess of $1 billion in the year 2012. That actually is either equal to or roughly equal to our earnings for the year. It's also important to understand and I -- and maybe, we didn't make this -- or maybe, I've not made it as clear as I should. The company has committed to distributing its capital in excess of its conservative guidelines, in share repurchase and dividends, so long, again, as they're above our capital guidelines. Sallie Mae, over the last several years, has been building its reserves and its capital. It intends to continue to have strong reserves and capital. Right now, we're managing to something like a 13-plus percentage capital level for our risk assets. We have a strong and strengthening balance sheet. As I say, we intend to maintain that. We sometimes think here that the rating agencies have given up on us, but we've not given up on them. We intend to get our rating back. You'll also notice, if you're to do the calculations, that we ended the third quarter right about on the nose with our capital levels that we -- that -- and we're scraping close to our minimum capital levels. The fact is that I think we've got some $160 million or $170 million of share repurchase authority left. It's likely we'll use that in Q4. And then, we'll look at valuations as we move into the future. This is an exercise that the management and the board are involved in and watch very closely. There's no question that our philosophy is that excess capital -- all capitals to shareholders, but excess capital is the shareholders on a much more immediate basis. With that monologue, I will take questions. Thanks.

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch from Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: A clarification, could you talk a little bit about the 2 kind of adjustments to the margins, both on FFELP and private? Then I've got just kind of another question.

Sure. Hey, Moshe, this is Jon. The real driver there is the adjustments which we need to do as part of our GAAP process. We need to just use our best information we have at the time. And what has happened effectively is prepayments fees have slowed down, not surprisingly given the environment, in both private credit and FFELP. As a result, there are borrower benefits and premiums for the FFELP loans in that they are benefited by the slowdown. And in private credit, there's a bit of a drag because of discounts when you slow down the prepayment rate. So it was really just a GAAP adjustment. Moshe Orenbuch - Crédit Suisse AG, Research Division: Got it, got it. So that's basically a catch-up and then you go back to more normal levels on both. And did you say how much that was on the FFELP side?

In terms of what it was -- what it would have -- Moshe Orenbuch - Crédit Suisse AG, Research Division: The benefits to the margin.

Yes. If you didn't have it, you would have been at 99. Moshe Orenbuch - Crédit Suisse AG, Research Division: 99. Okay, good. And kind of as you think about that, as it affects your business, though, I mean, a slowdown in prepayments particularly is actually helpful on both sides, obviously; helps the growth rate on the private side and, obviously, increases the total value of the cash that you'd receive on the FFELP, right?

Absolutely right. This is -- slowing prepayments, if you're a lender, like us, it's a good thing, right. Your loans outstanding longer, you get more spread. It's all good, but we have to do these GAAP adjustments. Moshe Orenbuch - Crédit Suisse AG, Research Division: And could you just talk a little bit about the yields and the -- on the new private credit and what -- I think you talked about whether they elected payment options. But are there -- are people electing the fixed-rate option or is that not -- whatever [indiscernible] that look?

Yes, we -- they are. It's about the -- our -- in our current -- the current quarter, 13% of the people selected fixed payment, and that totaled roughly $180 million. Moshe Orenbuch - Crédit Suisse AG, Research Division: Got it. Okay. Last question maybe for Al, and that is you talked about the stock trading kind of below your expectation of liquidation value when you -- and kind of strategize. How -- what do you think about the best ways to get the stock to be -- or to get that value to be higher than liquidation value? What things can you be doing? Obviously, buying portfolios would be up there, but how do you kind of prioritize those actions?

Moshe, let me say thank you for your recent exposition on the private credit markets. We found it very useful. I hope others do. On the strategy front, look, this has been a -- there's been a both -- I was going to say a 4-year exercise. The first part of that exercise, obviously, was just getting through the minefields. Obviously, we were selling -- when we were selling for $3 a share, we were selling for a lot less than liquidation value. But actually, there probably were some people that we were liquidating. On a strategic front, I think that this is a long slog. I think there's a very significant discount in our stock. The same as there is for all financial institutions. And without getting into the regulatory and political front on it, I think that's a big piece of it. I also say -- I would also say that we -- that there's been a little widening between our P/E and the rest of the financial institutions, where -- so that the little bit of consolation I took from others' low P/Es has kind of disappeared. But look, I'm a true believer that the market will recognize value. It's clear to us just in day-to-day communications with third parties in the capital markets that the marketplace has turned from a buyers' market to a sellers' market for yield. Sallie Mae is delivering a lot of cash to its shareholders, either through share repurchase and dividends. And I think those cash numbers, as they're delivered, are real and will begin to be discounted differently by the marketplace. I very much expect that -- I'm not in your business and I try not to be when it comes to talking about valuation. I'm really just trying to inform you and others that our arithmetic comes much closer to 25 now than it does 22. And that value is the value that our current shareholders would get because when we buy the stock, they're the beneficiaries. And strategically, the issue that it's a more sellers' market than a buyers' market opens up a variety of opportunities for us as we try to manage our balance sheet down to more meaningful levels. We carry a $175-billion balance sheet, but we're really a $45-billion company. And that hurts us. I think it hurts us mightily on the regulatory front and it hurts us on the -- with the rating agencies. Those number -- those assets that quadruple our balance sheet have already been sold once. So I've wandered into the middle of a conversation. I'm trying to find my way out of it, Moshe, so... Moshe Orenbuch - Crédit Suisse AG, Research Division: Well, let me give you some help because I think you started out with the comment about the private credit market. I think that investors would have a lot more confidence in your ability to sustain cash flows as they see that as a growing source of cash flow. And I think, obviously, higher originations is one, and improving credit is the other. And so I guess as we look into 2013, you said that you expected the losses there to be lower and the originations higher. So I think you've got -- we've got to put that -- you've got to put those numbers on the board to give people that confidence.

Yes. That's -- I mean, I think we probably have done ourselves a little bit of a disservice the way we've -- we try to segment the company more meaningfully than it was in the past, and we did that. But I don't think we've done it in the most meaningful way. We're working on it.

Your next question comes from the line of Mahmood Reza from Omega Advisers.

So I just had a quick question on the FFELP portfolio. I'm just looking at it this year versus last year, and it looked like it sort of decreased 4% versus like 1.5% in last year's quarter 3. Is that trend elevated for some reason? Should we expect that sort of run rate shrinkage from the FFELP portfolio going forward?

You have to remember our recent numbers are distorted by the special consolidation program. So we don't see any -- if anything, as I think as we discussed earlier, we see prepayments fees slowing down for that portfolio.

And the impact of the special consolidation program should be -- in other words, in Q4, we shouldn't see a similar impact?

Correct.

Got it. And then having said that, I mean, you're basically on track to do about $1 billion of net income this year. And just looking at consensus, it'll probably get to about the same next year. And net of the dividends, you have about $770 million, $750 million in net of dividends. How much of that is allocated towards private student loan growth because this quarter, the portfolio grew 25%? It might grow faster next year. How much of that capital is required for private student loan growth?

Look, let me try that. Our student loan growth -- our student loan portfolio in aggregate, at best, will grow $1 billion to $2 billion. We will put $4 billion on the books, but amortization of the some $38 billion portfolio will be slightly less than the assets we put on the books. So you can benchmark something around 12%, 13% additional capital for every -- for increases in the private credit asset base; going round numbers, $130 million per $1 billion.

Right, all right. And given that the current authorization's about, I think, $170 million, you said $160 million, $170 million, can you remind us when that gets reviewed by the board? Is that sort of Q4 or early Q1?

Yes, look, it is a subject that is reviewed pretty much at every board meeting. I think if you were to look, and I don't have the specific answer, but I think in the last 15, 17 months, we've had 3 authorizations for share repurchase and they -- I don't think you could actually predict them. It has to do with how much capital we have, how much cash we have and how much authorization we have left. So it's as -- the board reviews it as it occurs. And as I said earlier, it's a subject that is observed very closely by management and the board.

Your next question comes from the line of Sameer Gokhale from Janney Capital.

Just on that last point about the capital, Al, you obviously talked about the board needing to authorize share buybacks. But in terms of -- let me ask it another way. In terms of your comfort level with buybacks, I mean, should we -- and modeling, should we model in maybe an assumption of $300 million to $400 million for buybacks looking out through 2013? Is that a number you feel pretty comfortable with? Or do you think you -- that number could be significantly higher? Again, not talking about what the board may or may not authorize, but what you would feel comfortable with.

Well, Sameer, I've got a smile on my face because I've got about 10 people in the room, every one's shaking their head, "Don't tell him." So look, I think you can be guided by the behavior of the board and management over the last 15 months on use of capital. I don't -- I mean unless there is a surge in the share price that gets us closer to intrinsic value, this is going to be under consideration. I think this is a -- this year may be a bit of an outlier given that we're -- we probably could spend as much as or maybe slightly more than we earn. One can't do that forever, obviously, and still grow, but -- so there's an element of catch-up in the last 15-months distributions. So -- but send the model down. I'll have Songshak [ph] or Jon take a look at it, and we'll fix it for you.

Okay, absolutely. I'll do that right after the call. I guess the other -- I would feel [ph] the questions. In terms of the gain on debt repurchase, maybe a question for Jon, but the -- I don't know if I'm doing my math right, but it seems like you bought back $230 million in face value of debt and booked a gain of $44 million. It seems like a pretty large gain on debt repurchase. So I mean, was there something unusual there? It certainly does seem like a large gain.

Yes, very insightful. Yes. Yes, there's a transaction that we're contemplating in terms of providing some more liquidity to some of the -- our structured product that's out there. And we're in -- we've been in the midst of acquiring some pre-existing bonds in order to execute that transaction.

Okay, got it. That makes sense. And then this is my last question. In terms of the mix of private loan originations, I think this quarter, the deferred loan product was 41% of originations and last year, in the same quarter, it was 34%. So is there a maximum limit that you're contemplating at this time as far as the mix of that deferred loan product relative to the other loan types? Have you baked that into your underwriting process somehow?

We don't have established limit. I think we feel that a deferred option at, let's call it, a 40% kind of level for the near term is probably a reasonable assumption.

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

Could you give us maybe a better idea of how much delinquencies would have changed if you'd maintained the same level of forbearance in the quarter? How much of the -- you said part of it was related to that, but is it possible to estimate?

David, this is Jack. It's a little hard to say exactly how things would move around because you had a fair amount of loans entering repayment back in -- coming through the delinquency cycles; that really helped drive 90-day buckets up from the January repayment wave. That's where we have seen the largest increases in delinquencies and the lowest -- and the largest decreases in forbearance usage. If you look at our earlier-stage buckets, we're seeing -- the 30- and 60-day buckets, we're seeing lower levels of delinquency than a year ago. So you can't really translate that, I think, into a dollar-to-dollar basis because there are other factors going on here, which, as Al mentioned, the employment outlook and recent grads getting jobs.

Okay. And then another question on just reserve levels and reserve coverage. If we look out a couple of years and more of the nontraditional loans have gone, what would be a reasonable amount of coverage do you think? I mean would you still want to have 2x annual charge-offs? Or could it be down to 1 or less than 1 when you have much higher loan quality in the whole portfolio?

David, this is Al. I -- this is obviously something that is assessed all the time and it's not -- I'm not trying to evade your question. I would say, if I were sitting where you are and trying to sort that out, that we intend to stay conservative here. So I don't see it ever getting down to 1. And if I get my way, it'll be 2 or thereabouts.

Okay. Even when you're rid of the nontraditional loans and…

Well, 2x charge-offs is 2x charge-offs whether they're high charge-offs or low charge-offs. So -- but I don't see -- I -- obviously, I want the provision to come down. I like it coming down at the same pace that charge-offs come down. I don't see the point of -- I just don't see the point of booking reserves and taking them down, booking reserves and taking them down just for the sake of some accounting purity.

Okay, all right. And then finally, could -- is there any update on Campus Solutions business? Anything new happened in the quarter of note?

This is Jack again. No. I think -- I mean, the -- we continue to win clients in this space and take some business. So it's growing. I think our challenges in this area is really focused on maximizing the earnings that we can generate from this business. We haven't quite got there yet and are working hard to get there.

Your next question comes from the line of Michael Tarkan from Compass Point. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Can you provide a little more color on FFELP M&A environment? We've seen $3 billion to date. I'm just wondering if that's loosening up at all or maybe if you think some of these legacy holders are waiting to see who's going to be in the White House before they decide to part with their portfolios?

That's interesting speculation. We -- in general, yes. There's more activity. I should be clear. There's more activity that's actually coming to closure. The activity's been pretty steady, but people were backing away before. People aren't backing away now. I guess pricing, due to the environment, is probably slightly better. But I think people are also coming to grips with the fact that they're going to have to do something sooner or later. And we have seen a couple of folks who we would -- interestingly enough, we would occasionally bump into when we were bidding on portfolios who are now appear to be sellers, not buyers. So yes, I think the climate is slowly changing. Having said that, I don't necessarily see any of the big elephants breaking lose anytime soon, but I would love it if that would happen. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Okay. And then I noticed a pretty decent bump in contingency collection inventory this quarter. Can you just provide a little more color there? Is it safe to assume that there's a just larger pool of federal loans going into default and that's what's driving that higher?

This is Jack. We won a couple of new guarantors, have converted a couple of new guarantors into our client base. And that was the primary driver for that increase.

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

I just had a couple of questions about the margin. First, can you talk about any trends you're seeing in the private student loan margin and your outlook for that going forward?

Well, I think we can -- you're probably in a relatively steady state in this, about the mid-4s that you're -- that we said you could expect for the fourth quarter.

Okay. And then on the FFELP margin, I think you released the FFELP spread. I think you indicated -- you pointed to the high 90s as an indicative run rate. Can you talk about the outlook for that over the next couple of years, where you expect that to trend?

Yes. We -- there will always be some noise, but generally, we see it bringing [ph] pretty steady. As Al likes to point out, it's not as if we're moving the portfolio around a whole lot, right. We've got our financing locked down. There aren't too many moving parts, so pretty steady.

[Operator Instructions] Your next question comes from the line of Scott Valentin from FBR. Scott Valentin - FBR Capital Markets & Co., Research Division: With regard to origination growth, you guys are, I think, $4-plus billion was your comment, at least 25% higher than where we are today. Is that a function of just the market growing? Or I imagine it's a combination of several items, maybe market growth, market share gain and maybe new products like Grad PLUS. Can you provide more clarity?

This is Al. Probably -- I probably can't provide a lot of clarity at this stage. We -- I can tell you that I hope it's market growth, not share growth. We like share growth. But at this stage, given where we are in terms of our market share, we prefer market growth. We do see the market growing, and we expect it to grow. And more than just the market growing by itself, we intend to grow it by more aggressively marketing against the other major competitor and the other major competitor besides Wells and Discover is the U.S. government. So yes, we intend to grow that market. We're just taking baby steps in that regard at the moment, but it is part of why I have the confidence that I do in the $4 billion plus number next year. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. Just a follow=up question. In terms of, I guess, the regulatory environment, the CFPB report came out on student loan -- private student loan servicing. I'm wondering if you have any comments there. And then -- and finally, with regard to SIFI, is there's any update on SIFI?

Let me correct you on SIFI. It's -- we call it SIFI, and there are no updates. With respect to the CFPB, you asked if I have a comment. Actually, I don't. I think it speaks for itself. I'd say this, that we have always been attentive to customer complaints. I think the existence of the CFPB and their assistance now with some of our complaints has made us even more attentive. And I think they've learned in this process the types of issues that borrowers have, and we've learned something in that process. So it's been beneficial. I can't say that -- I think I'll leave it there. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And then just one question on credit, maybe from a different perspective. If the new policy changes hadn't been made, would credit have been better than what was reported, I mean more in line with what you would have expected?

Can you ask that question again? I'm sorry. Scott Valentin - FBR Capital Markets & Co., Research Division: Sure, sure. With the change in the collections, the reduction of forbearance and increased use of payment plans, if that hadn't been done, would charge-offs and delinquencies have been more closer to what you would've projected? I mean did you have that much of a…

Well they'd be closer. They would be close, but I think it's very clear. There are at least 2 things going on here. One is forbearance, and that has a very direct bearing on increased delinquencies and charge-offs and -- but the climate just isn't elevating the way we had hoped it would. We are on the right track. Based on the numbers I looked at a full year ago, I would have had us down into the 1.5% charge-off level, which for us is roughly $600 million. I would have had it certainly a year sooner than I think today. So it's -- we're headed in the right direction. We've just slowed dramatically in the last 1.5 years.

Your next question comes from the line of Alan Strauss from Schroders.

I was curious if there is a way to back into where the provision might have been, if you didn't have the change in the forbearance policy.

Are you asking if there's a way?

Yes.

Not with the information you have.

Excuse me. Your provision matched charge-offs, your reserves staying stronger, credit's getting better.

Yes.

But you changed to the forbearance methodology. So that's affecting everything. So trying to look on an apples -- or a year-over-year basis without the change in the forbearance policy where it might have been.

Alan, I tried to answer the question. Jack tried to answer the question. I think what you're saying is, "Look, if these numbers went up, how do we divide it between forbearance policy change and credit?" I don't know. I don't know. Jack, can you be any more precise than that?

I think, Alan, I would just say I don't think we need -- I think it is difficult to parse because of -- you can't be precise in the moving parts here. But I would just add that when we changed our forbearance policies, our view is that most of what you're seeing is an acceleration of losses that would have taken place in future periods. We've encouraged borrowers to enter into repayment plans. It benefits the borrowers by keeping the loan balances from growing, which they would do otherwise on a forbearance status. And some of those borrowers -- the majority of those borrowers are successful in their payment plans. Some are not. And that really is the acceleration that we're seeing. So long term, it's a neutral item for us. But short term, it has a negative impact.

Your next question comes from the line of Moshe Orenbuch from Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: The first is with respect to the kind of higher charge-offs that you alluded to for the fourth quarter, are those in the reserve? Or is that something that will be provided for in Q4?

Well look, Moshe, we'll -- these are determinations we'll make at the end of the quarter. And you've heard the thrust of the questions relative to credit deterioration and natural credit deterioration, if there is any, and the effect of our changed forbearance policies. I think the next 6 months -- the past 3 months plus the next 6 months will give me a better feel for the direction of charge-offs and the provision. I am saying today, based on everything I know and a really pretty up close and personal look at the details that this is sort of a onetime thing, and we hope it'll be done by December or March. And unlike the latitude to make the provision decision -- let me say that differently -- to help my accounting guys make the decision at the end of the quarter and not try to judge it today. Moshe Orenbuch - Crédit Suisse AG, Research Division: Fair enough. And just a follow-up on the debt repurchase. I assume that, that meant you bought some ABS that were trading cheaply. Is there more of that outstanding? I mean, is that an opportunity that'll continue into the balance of the year?

Now, Moshe, do you think it's -- do you think that opportunity's going to be there if we keep talking about it? Moshe Orenbuch - Crédit Suisse AG, Research Division: Well, you guys brought it up, not me, I mean.

He didn't bring it up.

Look, Jon likes to use the term opportunistic, and so that -- we found that opportunity. We hope there's some more of it, and we'll be looking for others. I really don't think -- as we refinance this balance sheet and stretch out some of those unsecured debt maturities, I don't see debt repurchase gains as quite onetime as they used to be. I mean, it's really part of our ongoing refinancing policy. He finds -- if he finds pockets inside his trust that others don't find or find quite as attractive as we do, we're going to keep doing it.

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

So I think that answered my question because it sounds like in your $2.15 estimate for this year or forecast and your $2.30 for next year, there will likely be some additional debt repurchase gains.

Likely.

And share repurchase.

Okay. Fair enough. Just one more on the credit picture. I mean, you talked about confidence that next year's net charge-offs will be below this year's. Maybe if you could just give us a little bit behind that confidence. I mean, your lower -- your early-stage delinquencies are lower. Your new private credit originations are coming on at better quality. And the nontraditional, I think it's 8% of the book right now and it's still shrinking. So are those the factors that give you confidence about lower net charge-offs next year?

Yes, I'm going to turn this over to Jack. But I -- look, you saw -- we saw the third and fourth quarter bubble early this year. I mean, one -- and one can -- once these things get in their buckets, then the issue is to turn up the heat and try to get the buckets down. And Jack and his guys have invested pretty heavily this year to try to get this thing under control and mitigated. And so that's why I have confidence that we have it -- not only do we have it under control, but we understand it very, very well. Jack?

Sure. So, Brad, I think the items here are in the near term, you can see the improvement coming in the lower amounts of loans in the early buckets. So 30 days are lower than they were a year ago, and that will translate into better performance down the road. Long term, it is exactly what you mentioned. It's the quality of loans entering repayment. And as the mix of loans or a higher percentage of loans with cosigners, a higher percentage of loans that were originated more recently, we will see performance. Historically, you've seen that loans with a cosigner default at a significantly lower rate than the portfolio than loans without, and as I've said, if that mix changes, that'll be the single biggest driver of improvement going forward.

Okay. And then just one quick one for Jon. It looks like your private student loan cost of funds has been trending higher recently. What's the dynamic there? Should we expect that to continue?

The one delta in the cost of funds for the current period, as I spoke before, Brad, was the -- an adjustment to our prepayment speeds, which ended up dragging the spread up. And you also have an ongoing trend that we've discussed in the past about shifting from short-term funding to longer-term funding. So we're moving from financing the bank at a very attractive rate to a slightly more costly, but necessary, from our perspective, from a risk perspective, funding strategy of funding those in the ABS market. And the other dynamic that you've heard us talk about in the past is as we issue in the new environment new unsecured debt, with the structures of the ABS deals from private credit, as that private credit deals attract a fair number of -- a fairly good percentage of that new unsecured debt. So those are the 3 driving factors: 2 longer term; 1 short term.

Okay. And yes, so as you're funding more of the portfolio in the ABS market versus on the bank balance sheet, as you're migrating that, a bigger chunk of the portfolio, that that has a higher weighting in terms of that higher cost of funds?

Correct.

Brad, I think it's important that you and others leave the call, though, understanding that the funding that Jon just described, the funding mix that Jon just described, is incorporated in the pricing that we do. We anticipate a period of time, fund it financed with deposits and a period of time financed with ABS. And I think it's important that we understand that -- I believe, and I'll get my times wrong here, but it was about a year ago, our ABS costs came down very significantly, by some 100 basis points, and we basically gave that to the customer. In other -- we didn't capture much of it ourselves. Those costs continue to come down. And I'm a long way -- after I've been through '08 and '09, I'm a long way from declaring victory with respect to long-term ABS cost, but they've come down very, very dramatically, probably half of what they were 1.5 years ago. So in the last year, it was, what, 140, 135?

122.

122 over LIBOR. I mean, those are -- they're not quite at pre-crisis levels, but I think they demonstrate the world's demand and growing desperation for yield. And maybe, a lifetime of 0 interest rates is beginning to have an effect on the marketplace. So that decline in the cost of funds is very dramatic, and it surely helps us a lot and it will help our customers.

We have no further questions in queue. I turn the call back over to the presenters.

Thank you very much, Katie. That concludes our call. If you have any follow-up questions, please feel free to give myself or my colleague, Joe Fisher, a call. Thanks again.

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