SLM Corporation (SLM) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Brent, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Sallie Mae Fourth Quarter 2012 Earnings Call. [Operator Instructions] Thank you. I'd now like to hand the call over to our host, Mr. Steven McGarry, Senior Vice President, Investor Relations. Sir, you may begin.

Thank you, Brent. Good morning, everybody, and thank you for joining us for our 2012 Fourth Quarter Earnings 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 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 call, we will refer to non-GAAP measures, what we call our core earnings. A description of core earnings and a full reconciliation to GAAP measures, as well as our GAAP results, can be found in the Fourth Quarter 2012 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. And now I will turn the call over to Jon.

Thanks, Steve. Good morning, everyone. I'll be referencing the earnings call presentation available on our website during my prepared remarks, and I'll beginning -- I'll begin on Slide 3. In 2012, we generated earnings of $2.16 per share, grew our loan originations by 22% and exceeded our financing goals, completing multiple FFELP and private credit ABS deals. We returned over $1.1 billion to shareholders through share repurchases and dividends. We also continued to repurchase debt and purchase FFELP portfolios. Slide 4 highlights -- provides a high-level summary of our results. For the quarter, core earnings were $257 million or $0.55 per share compared with $268 million or $0.51 per share for the year-ago quarter. For the full year, core earnings were $1.062 billion or $2.16 per share compared with $977 million or $1.83 per share for 2011. We met our target of reducing 2012 operating expenses to under $1 billion for the year while growing our core business. Operating expenses increased compared to the year-ago quarter as a result of several factors, including higher servicing and collection volumes and system investments. We will continue to focus on operating efficiencies in 2013. Let's now turn to Slide 5, on our consumer lending metrics. Net income from our consumer lending segment was $46 million for the fourth quarter compared to $63 million for the fourth quarter of 2011. The decrease in earnings is primarily a result of higher provisioning for loan losses. The consumer lending segment was more efficient than a year ago, with operating expenses as a percentage of average managed assets dropping to 68 basis points from 72 basis points in the year-ago quarter. The private education student loan spread for the fourth quarter declined to 4.54% from 4.57% in the year-ago quarter. The private education student loan spread for the full year was also 4.54%. The spread for both quarter and full year was within our expected range of 4.5% to 4.6%. Loans delinquent greater than 90 days as a percentage of loans in repayment decreased sharply to 4.6% from 5.3% in the prior quarter, which was elevated as a result of a decline in the use of forbearance. 90-day delinquencies are also down from 4.9% in the fourth quarter of 2011. As the graph shows, both 30-plus and 90-plus-day delinquencies are within 20 basis points of their recent lows. Charge-offs in the quarter spiked to 4.2% from 3.2% in the prior quarter and 3.5% in the year-ago quarter, reflecting an acceleration of future charge-offs. The vast majority of this expected spike in charge-offs was caused by a change in the use of forbearance. On Slide 6, we provide a table that illustrates the recent trends in forbearance usage. As you can see, loans that have used more than 12 months of forbearance have declined nearly $300 million in the last 9 months. In the fourth quarter, nearly $200 million of loans that charged off had already used more than 12 months of forbearance. More than half of the loans remaining that have used more than 12 months of forbearance are on payment plans and should become current in future quarters. Based on the trends we were seeing in our delinquency buckets and our steadily increasing resolution rates, we expect charge-offs to decline significantly from the level we experienced in the fourth quarter, hence be lower in 2013 than in 2012. As you can see in Slide 7, our student loan portfolio is dominated by high-quality loans. The segment of our portfolio that has the highest quality and lowest risk accounts for nearly 7 -- 70% of our portfolio and is growing. This segment has a charge-off rate of less than 2%. The segment of our portfolio that we classify as high risk is less than 10% of our portfolio and is declining. We're not originating these nontraditional loans anymore. In addition, as you can see in the graph, charge-offs are declining in each segment of our portfolio. Charge-offs in our highest-risk segment are down 50% from their base. Now let's turn to new originations, on Slide 8. We originated $514 million in private credit loans in the quarter, an increase of 12% from the fourth quarter of 2011. The loans we originated had an average FICO score of 744, and 88% of the loans had a co-borrower. This compares to 749 and 89% in the fourth quarter of 2011. For the full year, our originations grew 22%. The average FICO score was 748, and 90% of the loans are cosigned. We're very pleased with the high quality of 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, 31% choosing Fixed Pay and 26% choosing full current interest payments in the quarter. Our business services segment is covered on Slide 9. In this segment, core earnings were $134 million in the quarter compared with $158 million in the fourth quarter of 2011. The company now services 4.3 million accounts under the Department of Education servicing contract. Servicing revenue from this contract was $22 million in the quarter compared with $17 million in the prior year. Turning to Slide 10. FFELP core earnings were $89 million for the fourth quarter compared with $109 million for the fourth quarter of 2011. The FFELP student loan spread decreased to 100 basis points from 107 basis points in the prior quarter. This year's FFELP spread is in line with our expected run rate of the high 90s. In 2012, we purchased $3.7 billion of FFELP loans. We will continue to actively and aggressively seek to acquire additional portfolios. Let's now turn to Slide 11 for highlights of our financing activity for the year. In 2012, we issued $4.2 billion of private credit ABS in 5 separate transactions, and 8 FFELP ABS deals for $9.7 billion. The pricing has improved nearly 100 basis points in our private loan ABS deals compared with the beginning of the year, and nearly 40 basis points on our FFELP transactions. The ABS market continues to strengthen, enabling us to execute our long-term strategy of originating new loans in our bank and term-funding more seasoned originations in the ABS market at attractive spreads. We will continue to regularly issue FFELP ABS to meet the wind-down of Straight-A FFELP facility. At quarter end, we have under $10 billion of FFELP loans in that facility, down from a high of $24 billion. Turning to GAAP on Slide 12. We reported fourth quarter GAAP net income of $348 million or $0.74 per share compared with a net income of $511 million or $0.99 diluted earnings per share in the year-ago quarter. The primary differences between the fourth quarter of 2012 core earnings and GAAP results are marks related to our derivative position. I will now turn it over to Al Lord.

Thanks, Jon. Good morning, everyone. I will be brief with a few comments about the quarter and some observations about 2013 and thereafter. Our -- as Jon has gone through the details, I will try to keep this pretty broad based. As you know, our top line net interest income has been holding in pretty well. I'd say, beneath that large number, we have one set of assets that are growing. That is our Smart Option private loans. Their growth is coming from the only product that we've originated for the last 4 years. That growth mitigates the legacy FFELP wind-down and the legacy private credit wind-down. I will remind you that private credit done well is a very good business. Smart Option -- the Smart Option product does private credit very well. On the financial side, it's delivered 4 years of quality growth, quality asset growth in what is proven to be a non-growth economy. As -- also as Jon has described, the fourth quarter, at least to me, was a disappointment on the charge-off side. It's a disappointment to us that we're 4 years into this economy and our charge-offs remain at elevated levels. Our numbers in 2012 were good -- were better. No one would characterize them as good. And while we predicted our third and fourth quarter increases in charge-offs, that's a slight comfort. They remain losses, nonetheless. I'll talk a little bit more about credit in a few minutes. You also saw some debt repurchase gains in the -- our operating results. That's generally comes as part of our debt maturity spreading activities. Our returns on debt repurchase obviously are lower than the returns we get on investments in our own equity. I'll remind you, that's not an apples-to-apples comparison. Debt gains actually create -- they're actually considered income and create more capital, which is of course distributable and, all the while, de-lever our balance sheet. And I would remind you that, notwithstanding share repurchase, we continue to de-lever our balance sheet. Fee income is holding up well, at least in total. I'd also remind you that offsetting some of the erosion in fee income is direct loan servicing income, which comes at a -- at lower margins and has the effect also of pressuring operating expense. We have work to do on the direct loan side both in improving our report card, as we have talked about in the past with our shareholders, but in addition to improving the report card, we'd like to improve our margins in the direct loan business. Operating expenses, you saw some fourth quarter slippage. It's just -- for me, it's just a reminder we need to maintain vigilance in that area. We had $1 billion of OpEx in 2012, and we're targeting the same -- roughly the same number in 2013. Our Chief Operating Officer, Jack Remondi, is -- has found a lot of productivity in our operations. And we continue to, behind the scenes, service more and more assets at the same overall number, but it is a monumental challenge to continue to find productivity quarter after quarter. The capital front. Our capital appears flat year-to-year. It is flat year-to-year numerically. But again, assets and debt are down, and as I said, we are de-levering the company. We maintain capital at 13% of assets that have any credit risk at all. And in fact, our capital, combined with reserves, exceeds 20% of our risk assets. Notwithstanding our continued non-investment grade rating from one of the rating agencies, that's -- that is a very -- very strong statistics. Share count from repurchases, down some 70 million plus over the -- over -- since we've began 2011, 2012 share repurchase program. I will state the obvious that when one buys shares below their intrinsic value, they -- that adds earnings per share. Maybe equally importantly, in this marketplace where financial institutions tend to trade more on asset values than earnings, that share repurchases also grow net assets per share. They also reduce the total cost of our per share dividend so that like per share dividends actually distribute less capital. I'd also remind you that our shareholder distributions, both share repurchase and dividends, come from FFELP free cash flow. That enabled us to actually distribute $1.2 billion -- or -- I think it's 1 -- maybe $1.1 billion last year, something slightly in excess of our earnings. And, again, all the while de-levering the balance sheet and all the while growing equity in our very vital Smart Option business. A few more comments. We will reach our $2.30 earnings per share target that we've talked to you about over the last several quarters. We will grow our Smart Option originations to $4 billion, marking one more year of growth, again in a not-so-enthusiastic economy. We'll do that without changing credit standards, and in fact, we will add those assets with FICO scores near 750 and 80% to 90% cosigned. Those assets will deliver another 2.5% ROA. That's a -- when I talk about ROA, I talk about ROA after tax. So let me get back to credit, not necessarily my favorite subject at the moment. Someday, and I hope not so far away, our charge-offs will be in the 1% to 2% range annually. And for us, that equates to maybe a number in the $600 million range, not $1 billion, as this year showed. The fact is we're actually very close to that right now, except for, and it's a big except for, our nontraditional portfolio. 2013 charge-offs and provision will be down from 2012 of -- at least based on everything that we think we know, but not where we want them to be and, I expect, in the $900 million to $1 billion range. So that's better, again, not good. I believe it's a pretty conservative forecast. And for those of you who are looking for or maybe even seeking reserve recapture, you will not see that unless we see a very clear signal that the economy has taken a turn. Let me finish the credit conversation a little more positively. As I said, the vital part of our business is the Smart Option loan product that we've been growing for now 4 years as it -- it also is not necessarily on everybody's radar screen because it's, in aggregate, only $8 billion on a $170 billion balance sheet. But the fact is, that total -- it's at nearly $8 billion, but it will grow 50% in 2013. Today, it's 20% of our loan portfolio, but the end of the year, it'll be 30% of our portfolio. It has a -- it is -- had a 2/10 of 1% charge-off rate. So out of our $1 billion of charge-offs, it comprised -- the loans that we've made over the last 4 years, it comprised $22 million. It is behaving as we predicted that it would and it's behaving that way in a tough economy. So I -- no conversation for me, I guess at this stage, it would be complete without me reminding you that our shares trade well below their intrinsic value. I will call that intrinsic value $22, although it's the same number I've used, I think, now for 3 years. Today, it's an even more conservative valuation than it was when we first started talking about it. It is largely based on the legacy FFELPs and private credit cash flow. It includes 0 for that $4 billion private credit origination franchise to which I referred earlier. And so as I have also suggested and Sallie Mae has demonstrated that if we don't have the demand for the shares outside the company, we will combine them inside the company. 2013 will -- marks the 40th year of Sallie Mae, and I've been involved with it for 80% of those years. And it's been a very different company at different times over those 40 years, but I think, at this stage, I can simplify for you our Sallie Mae strategy is that we are about today growing and strengthening America's premier private credit franchise, the one again marked by Smart Option lending. And we will provide high current returns to our shareholders by unwinding FFELP value to the shareholders. And with that, I will -- we will begin to take questions. Thank you.

[Operator Instructions] Your first question comes from the line of Brad Ball with Evercore.

For detail on the credit outlook, Al, how much of the increase in net charge-offs in the fourth quarter do you think was attributable to the acceleration related to the forbearance change back in the second quarter? And would you expect right away early in 2013 an improvement back to those levels that we saw in the sort of mid-3% range net charge-offs in the private student loans?

I'm -- I am ultimately the least informed about the contents, but I -- but my answers are generally fairly close to right. I hope all the increase in the fourth quarter was attributable. That -- to the forbearance change. And we will learn that as time passes. I think there'll be some forbearance change defaults in Q1, but by and large, I think the lion's share of the run-up in both Q3 and Q4 was caused by the forbearance change. Did I miss some part of the question?

No, that's helpful. So your comments on the economy, and the relative weakness that you're seeing isn't causing any additional drag on net charge-offs?

Well, I'd be loathe to say that. I think, in an economy that's growing 3% or 4% a year, our charge-offs are down several hundred million dollars. So I -- you may be trying to put too fine a point on this. And I'm not suggesting there's been necessarily a change in the economy, but it's -- other than it just persists.

Okay, fair enough. And then just separately, on the FFELP spread, as you guys have been shifting from the conduit to more ABS financing, it's been pressuring the spread a little bit. Do you expect the trend to continue at about the same rate? Are you still confident in the -- what was it, the 90s core cash student loan spread in FFELP?

Yes. Brad, this is Jon. Yes, we haven't changed our forecast. I would still say for -- looking forward in 2013, you can expect high 90s.

High 90s will continue into next year?

Yes.

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

I wonder if you could put a little more granularity on the $2.30 guidance. This regards 3 areas. What are you assuming for the board's decision regarding stock repurchase in 2013? Is the $2.30 assuming additional repurchase? Second, credit losses. And third, you made a comment that Jack is working very hard towards reducing expense. It's not easy. What are you assuming in terms of operating expenses? And secondly, how do you guys view corporate liquidity for Sallie Mae at the present time? Do you think you're over capitalized, properly capitalized, excess capital, et cetera? Any help on those questions would be appreciated.

Lee, you're -- when you ask about -- in your last question, you talk about liquidity and capital. I look at those kind of separately. Are you asking about both or cap or...

Well, I guess I'm asking whether you view yourself as being -- as carrying excessive amounts of liquidity presently, which kind of would feed into the repurchase or dividend decision. In other words, how do you feel about your capital adequacy, basically? The -- I know Tony is very big on capital. Did you guys think you got more than you need? What's behind the question is...

I think -- let me just say, the -- that I think the capital level is very, very adequate. And will become more adequate as our legacy private, and particularly, the nontraditional piece of our legacy private winds down even further. I mean, for example, the nontraditional part of our portfolio is at around $3 billion or about 8% of all of our private assets, but it provided some 35% of our charge-offs. That has to go away. And in the end, we're going to be needing to provide capital for the Smart Option product which just needs -- in my view, it will need significantly less capital, probably less than the 13% that we provide. The year -- as I said, we distributed over $1 billion of capital in the year 2012, which was a hair more than we earned. And so that demonstrates that -- I think it demonstrates pretty clearly that we intend to keep capital levels at roughly the same amount. And you can -- if you're trying to do the arithmetic yourself, it's just the 13% against the private credit asset, and you're within a couple hundred million dollars of it if you do that. I -- you asked about the relative magnitude, I think, of repurchase in the coming year. We will be deciding that in coming months. And I would say -- I can pretty safely say that there will be share repurchase. And I would suggest that, at this point, it's probably going to be -- the aggregate distribution will probably be less than it was -- than the $1.1 billion it was last year. In the bad debt front, I think I said between $900 million and $1 billion. I'd like to hope that the number is below that, but I'm guessing we'll be $50 million to $75 million below where we were in 2012.

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

I'm wondering, could you give us some color on the prospect of some additional FFELP loan purchases? And then another question or 2.

Sure, David. This is Jon. We -- our MO in this regard hasn't changed at all. We continue to beat the bushes and hit what I'll call singles. We did $3.7 billion in 2012, which was more than twice what we did in 2011. We would like to buy more, but I think we're just going to have to be satisfied with the singles in '13 until we can shake one of these big portfolios loose. And your guess is as good as mine as to when that happens. It will happen at some point, I'm just not sure when.

Okay. And then you had an uptick in contingency collections in Q4. Is that kind of a trend, or is it sustainable at that level? As the government creates more problem loans, does that create more of a collection opportunity for you?

David, this is Jack. We did see more resolution of a rehabilitation in the collections business for federally guaranteed student loans and direct loans, and that caused the increase in revenue in that space. And then the portfolio side that is available to collect has been growing as a result of increased volume coming from the DL portfolio principally. And then we get signs and new guarantors during the year as well.

So is that kind of an, "Oh, we had a new higher run rate," instead of seeing a decline over time? Or is it [indiscernible]?

Well, yes, I mean, the question there is going to really be driven by how much share we get from the department. This week, they announced again that we were the #1 performer in there, collecting on defaulted loans owned by the taxpayer. We continue to do an outstanding job in that area and would love to see our market share increase.

Okay. And then can you give us an update on campus solutions? What's happening there and...

In that business, we continue to make good space in terms of signing up clients. But as -- it is a very, very small portion of our overall business, and we don't expect it to become a material piece either.

Okay, but are revenues growing there somehow?

They are relatively flat right now.

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

Is there any color you can give us on when you expect to converge on that longer-term 1.5% to 2% normalized charge-off rate?

Oh boy. I mean, it's really, to me, it's -- to me, it's a function of 2 things. I mean, one -- the single biggest factor would be the economy, but sure, arithmetic also works into it. We've got $3 billion left in this nontraditional portfolio. And the fact is we stopped making those loans some 5 years ago. We knew they were bad. We knew that they were more than half bad and -- but the current accounting rules do not permit you to reserve them until you are within 2 years of when it charges off. And so they keep -- well, you certainly can't call $300 million to $350 million of charge-offs in a given year dripping through. But we've got a couple of years left with them and so they will continue to be in our charge-off numbers as time passes. But from -- on a more general level, it really does relate to the direction the economy takes.

Mark, that -- this is Jack. I'll just add to that. We're actually there on our low-risk segment, which is loans that we were making pre-Smart Option as well as Smart Option. These are our loans made to students attending traditional schools, with cosigners. And you can see on the chart that we included on Slide 7 that those numbers have been in that 1.5% to 2.5% range over the last several years. That book represents just under 70% of our total managed student loans today, and 100% of our originations over the last couple of years. So as we continue to grow that portfolio, as Al described, you'll see that percentage increase and charge-offs decline as the portfolio mix changes.

Okay, that's helpful. Should we expect any gains from the ITT education segments in 1Q?

Yes. Well, it's a -- we -- well, we recognize, and we'll walk you through it, that -- what's going to happen there. We recognize ITT when we -- or recoveries when we actually collect them. So it will be a Q1 event. The impact will be to, not in terms of a gain, but will be a reduction in our RIFCO [ph], and it will be funds available to place against future charge-offs. So there won't be [indiscernible].

Okay, got it. And [indiscernible] -- should we view this quarter's tax rate as more indicative of what we should expect going forward? Or is -- it's more onetime?

I wish. No, the -- I think you can expect that it will revert, we -- revert to 37%. We had some fourth quarter nonrecurring items related to some successfully resolved audits, so...

Your next question comes from the line of Mike Taiano with Telsey Advisory Group.

So I had a big picture question on the private loan business. So if you think about Sallie Mae historically, 2 of the key drivers of the growth in the business have been higher enrollments and tuition that's increased at a higher level than inflation. And it seems as though enrollments, well, not declining, they -- the high school graduates peaked a couple of years ago, and I think they're expected to decline. And some reports are saying tuitions increases are also starting to subside. So I guess I'm trying to figure out the growth of the business. Is it -- going forward, is it going to come more from market share gains from either potentially the federal government, like PLUS loans, or your competitors? Or do you think that that trend is going to continue where enrollments continue to move higher and tuitions continuing increase at a steady pace?

I'm going to -- it's a high-level question. I'm going to answer it at a high-level. I -- there are a lot of factors that enter into market and market share. I think the biggest remaining question, and it has been the question for the 40 years that the company's been in business and the -- and it's last 20 years we've been in the private credit business -- private credit market will depend on the size of the government-subsidized market. And that really has to do with how much -- whether the federal government will grow the $120 billion a year number that they're originating right now. That's -- it -- we serve the market that is not subsidized. And we serve the market that -- either the market is not subsidized or the marketplace that prefer to do business with the private sector. So I think that balance is the key variable. And your -- you can make that fiscal judgment as well as we can in that -- in really talking about the propensity for the government to either increase or decrease the level of federal student lending.

Okay. And so in terms of the loan book, though, I mean, even though your originations have been very strong, the portfolio itself has kind of been relatively flat the last couple of years. I mean, do you expect at some point to start growing that more like a mid-single-digit sort of level? Or do you have a target for that -- for period-end sort of loan growth?

Yes. Look, again, that -- we -- I think, internally, at least I know internally, we look at our private credit number, which is just a hair below $40 billion, as Smart Option and traditional. And we really track more closely the growth rate in the traditional -- in the -- excuse me, in the -- for the Smart Option. That's a $4 billion origination exercise that's running against the $38 billion portfolio, which amortizes over $1 billion a year and which charges off at about $1 billion a year. So it's -- so the growth will be slow but steady and it will pick up. But it's -- but in aggregate, we're a fair distance from meeting [ph] 10% growth.

Right. So the idea here is it's more of a mix shift in the portfolio towards more profitable loans over time, at least in the near term?

That's right.

Your next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Just one clarification on the guidance. I just want to make sure. You guys are including debt gains in the 2013 guidance. Could you just scope that for me? And then just secondly, I know the noise has subsided, but I was wondering what your focus -- if there were any items you were focused on regulatory-related, whether it's CFPB, legislative or SIFI-related.

Let me just address the regulatory question. We're focused on -- not sure how to answer this. I -- let me just say first, we're not unduly focused on any regulatory question. We have a bank subsidiary where -- which originates all of our private credit, and so we're appropriately focused there on our -- both our loan originations and our safety and soundness and compliance of that institution. We've got various and sundry regulatory matters that come to our attention here at the holding company, and we're paying very close attention to them. I have to say on -- when you mentioned SIFI and CFPB, we -- I don't want to jinx myself by suggesting that we don't see very much going on in the SIFI arena. We don't see ourselves as particularly at risk there. We also don't see that -- it's our view, at least, that a lot of -- we're not going to be where [ph] terminations made in that regard in the near term. And with respect to the CFPB, they have taken an interest in private credit, as you well know. I'm okay with the way that's been playing out. I would prefer that -- from time to time that the language that they use with respect to the way some people do their lending were a little less edgy. But the fact is that I think we came out okay on that, and I think we lead the way in responsible lending. That's about a hair more than I actually know about compliance. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: And just on those debt gains...

Oh, debt gain, I'm sorry. I think that -- I think we had -- we always have debt gains because, as I said, they evolve from our unsecured debt maturity restructuring. They're in our plan. I don't remember how much, but it's a smaller number than you saw in '12.

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

Just a follow-up on Brad's question about the charge-offs and the acceleration. I mean, am I thinking of it incorrectly, if we try to size that -- the amount of the acceleration -- if you look at Slide 6, in the middle of that slide, it shows charged-offs loans that used more than 12 months of forbearance is $196 million for the fourth quarter, $133 million in the third quarter. So the difference between the 2, because that looks like a pick-up in the run rate, is about $63 million or so. So is it reasonable to assume that, that was the magnitude of the acceleration in the charge-offs? And then if you look at Q1 and maybe Q2 that you see some of that come back, if you see a bit of a benefit from lower-than-normalized charge-offs in Q1 and Q2, is that the right way to think about it?

Yes, this is Jon. Yes, I think it's the right way to -- conceptually to think about it. This isn't perfect science, but I think that your approach is absolutely spot on. And I think you can expect that Q1 of '13, that it'll resume the more, what I'd call, normal run rate.

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

I just had a quick question on the FFELP NIM disclosure you guys have on Page 26 of the supplement. If you look, the core NIM was 89 basis points this quarter, then a year -- in the year-ago period, it was 97 basis points. And a lot of that delta is the hedged and unhedged floor income. So I'm curious if you could help me understand why that's changed from -- over the last year. Or is it simply just the increased cash balances in the securitization that's really driving that?

I'm sorry, could you go through that question one more time? I didn't follow.

Yes, so on Page 26, where you guys go to the FFELP net interest margins, the core margin this quarter was 89 basis points. In the year-ago period, it was 97 basis points. If I just did a comparison from this period to the year-ago period, the biggest driver of the 7 basis points is the hedge floor income and the unhedged floor income. It's about 5 basis points of the 7 basis points. So it's lower. And I'm curious, why is it lower? Or is that not the point? Is it the higher cash balances in the securitizations, which is what the text in the release actually says?

I think -- well, I think the reason is because, last year, we had more student loans which had not been hedged. And so we -- since we've hedged it -- so you have less unhedged floor income. The value of the amount that we hedged is somewhere else in that calculation.

Got it. Understood. And so we should expect sort of low 90s in terms of a net interest margin for the FFELP portfolio?

I think -- Jon, what -- Jon gave the numbers, didn't you, Jon?

Yes. In terms of student loan spread, you should expect in the high 90s, continue to see that, all right? Bringing us back into NIM.

Your next question comes from the line of Scott Valentin with FBR Capital Markets. Scott Valentin - FBR Capital Markets & Co., Research Division: Just with regard to the private student lending, the loan yields have been relatively stable. There's been some new entrants, I guess, in the consolidation side, or at least increased talk of potential consolidation lending. Wondering if you're seeing any impact there. And just secondly, and this is big picture thought, but everywhere in financial services, yields are coming down. It seems like the student lending side is holding up pretty well. Just wondering if you think that will attract competition.

Sure, this is Jack. We think the -- there's not a whole lot of refinancing activity in the Private Student Loan space. Principally, what -- and I guess I'd go back to the commentary here about what we see as the opportunity. This is a business that -- we've obviously been growing our originations by solid double digits. We're up 22% this year. We're forecasting a 20-plus growth rate next year. We're seeing good demand. We're making some of the highest-quality loans we've ever made in the history of the company. And the profitability of that book has been very, very stable. I think the more important part for -- from an earnings perspective is the growth of that book is growing faster than the overall book itself. The overall book is relatively flat but the high-quality loans are growing. The margins here are really a function of alternative financing opportunities. And if you think about our products, we're making loans to the parents and students, family education loans. Their alternatives are fairly limited. And our pricing today is very competitive with PLUS and Grad PLUS, 2 of the federal loan programs that are really designed to provide GAAP financing. The thing that we think we do really well in this space, compared to anyone else, is help families make responsible financing decisions by lending the money that they can actually afford to repay. And we do that through solid underwriting and flexible repayment programs. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And just a follow-up question. I know there's seasonality, obviously, in credit and in forbearance. But forbearance as a percent of loans in repayment, on Page 32 of the press release, did show a slight uptick. Just wondered if that's normal seasonality you see in the fourth quarter with forbearance.

It is. And we would continue to expect the forbearance numbers to come down over time and become a smaller and smaller component of our mix. Our goal is to help borrowers actually pay down their loan balances. Forbearance actually grows loan balances.

[Operator Instructions] Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: So just putting together what you said about the yields on the private student lending. I mean, would that imply that your view is that margins there should be stable, improving? Or is the cost of financing kind of changing in any way?

I think they should be -- I mean, we think the growth yields that we can charge are stable. And our cost of funds are actually improving, and the ABS market in particular continues to get a little bit better.

And sir, we have no further questions in the queue at this time. Are there any closing remarks?

Well, thank you, Brent. Thank you, everybody, for joining us for our earnings call. If you have any follow-up questions, as usual, please call myself or Joe Fisher. Thank you.

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