SLM Corporation (SLM) Q2 2013 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 Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I'd now like to hand the call over to your host, Mr. Steven McGarry, Senior Vice President of Corporate Finance. Please go ahead, sir.

Thank you very much, Brent. Good morning, everybody, and thank you for joining us for this earnings call. With me today are Jack Remondi, our President and Chief Executive Officer; and Joe DePaulo, our EVP for Banking and Finance. Before we begin, please let me remind you 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 conference call, we will refer to non-GAAP measures we call our core earnings. Description of core earnings and the full reconciliation to GAAP measures, as well as our GAAP results can be found in the second quarter 2013 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you, and I'll now turn the call over to Joe.

Thank you, Steve. Good morning, everyone. I'll be referencing the earnings call presentation available on our website during my prepared remarks, beginning with Slide 3. In the second quarter, we delivered consistent earnings. We saw improvements in delinquency and charge-offs across the portfolio, dropping to the lowest levels since 2008. We grew our new loan originations by 15% and maintained high credit standards for those loans. We returned capital to shareholders by purchasing nearly 200 million of shares and announcing an additional $400 million authorization per share repurchases. And we were active in the capital markets. On Slide 4, you'll see a high-level summary of our results. For the quarter, core earnings were $462 million or $1.02 per share compared with $243 million or $0.49 per share for the year-ago quarter. These results include $0.37 per share from FFELP trust residual sales gains and $0.08 per share from the sale of our Campus Solutions business. We also had $0.03 per share from debt repurchase gains, which were offset by $0.03, related to restructuring and other corporate reorganization expenses. Operating expenses were $258 million versus $250 million in the first quarter of '13 and $231 million in the second quarter of '12. The increase of $27 million versus the prior year quarter is primarily made up of spending in the consumer and business services segments. We spent $13 million more in consumer over the year-ago quarter, and we saw higher origination volume and better credit quality. In business services, we spent $12 million more and saw corresponding increases in revenue of $27 million in the related businesses. Our operating expenses have come down significantly in the last 3 years, which is highlighted on Slide 5. In 2010, we have seen our yearly operating expenses decline by more than $150 million. Meanwhile, we grew our contingency inventory by more than 1 million accounts or nearly 75%. Also, the number of borrowers who are currently in repayment has grown by 3 million, or roughly 33%. We continue to focus on reducing our operating expenses and increasing operating efficiency. Now let's turn to Slide 6, in our consumer lending metrics. As we grew originations in this segment, we maintained our loan spread within our 4.5% to 4.6% target range, saw improvements in our delinquency rates and forbearance rates over the year-ago quarter, and we experienced a sharp decline in losses, which we expect will continue. As the graph at the bottom of the page shows, both 30-plus and 90-plus day delinquencies are close to half the levels they were just 4 years ago. Delinquencies have continued to decline as forbearances have gone from a peak of near 17% in 2008 to 3.5% at the end of the quarter. As you can see in Slide 7, our student loan portfolio was dominated by high-quality loans. The green bars and green line represent the highest quality and lowest-risk business. These assets now account for more than 70% of our portfolio. The growth in our Smart Option product will continue to grow this segment. The highest risk segment, what we call nontraditional, represented by the red bars and lines, is down to less than 8% of our portfolio. Balances and losses are declining in this segment and we do not originate these loans anymore. The high-quality loans are what we originate, as you can see on Slide 8. We originated $368 million of Smart Option private credit loans in the quarter, an increase of 15% from the second quarter 2012. These loans we originated had an average FICO score of 743, and 78% of the loans had a co-borrower. These loans continue to increase the high-quality loan segment we referenced on the prior page. Smart Option loans also continue to be an attractive product that offers both competitive pricing repayment choice. This year, 57% elect to make a payment in school. We will now turn to Slide 9 to review our business services segment. In this segment, core earnings were $166 million in the quarter, compared to $137 million in the year-ago quarter. The company now services 5.2 million accounts under the Department of Education servicing contract. Servicing revenue from this contract was $26 million in the quarter compared to $22 million in the prior year. Our contingency collections business is performing very well. We saw an increase in revenue of 25% or $22 million over the year ago quarter. During the quarter, we sold our Campus Solutions business for $38 million of gain after-tax. All contributions from this business have been removed from the slide. This sale added $0.08 per share in the second quarter. Now turning to Slide 10. FFELP core earnings were $237 million for the second quarter compared to $44 million for the second quarter of 2012. Other income increased as a result of $164 million asset tax gain from the sale of residual interest in our 4 FFELP loan securitization trusts. These sales added $0.37 per share in the second quarter. The company will continue to service the loans in these trusts. In 2013, the company has removed securitization trust assets of $12.5 billion and related liability for $12.1 billion to the balance sheet as a result of residual interest sales. The FFELP student loan spread increased to 97 basis points from 93 basis points in the prior quarter, but we expect the run rate going forward to be in the mid- to high-90s. Now let's turn to Slide 11 for highlights of our financing activity for the quarter. In the second quarter of 2013, we issued $1.1 billion of private credit ABS and $2.5 billion of FFELP ABS. As I mentioned, this is a reflection of improving capital markets. Our recent private credit transaction continues to be met with increased investor demand. The all-in advance rate in this transaction was 87% versus 84% for our prior transaction, and this transaction has a spread to LIBOR of 121 basis points. We continue to execute on our long-term funding strategy of originating new private loans in our bank and term-funding more seasoned loans in the ABS markets. In June, we closed on a new $6.8 billion credit facility that allowed us to refinance all of the FFELP loans previously funded to the Straight A conduit facility. This was done 6 months in advance of the maturity of the Straight A facility. Yesterday, we closed on a $1.1 billion ABCP borrowing facility, which matures on August 15, 2015. This facility will be used to fund the call and redemption to the TALF bond. Finally, turning to GAAP on Slide 12. We recorded second quarter GAAP net income of $543 million, or $1.20 per share compared with net income of $292 million or $0.59 per share in the year-ago quarter. The primary differences between second quarter 2013 core earnings and GAAP results are the marks related to our derivative position. Finally, our guidance for the full year is $2.80. This includes all of the previously announced residual sales and subsidiary sales. I'll now turn the call over to Jack Remondi.

Thanks, Joe. Good morning, everyone. As Joe summarized, we had very strong results for the first quarter, and I'm particularly pleased with the aggregate financial results of $1.02 in earnings per share that we achieved this quarter. Even excluding items like the gains from the FFELP residual sales and the sale of Campus Solutions, earnings were a solid $0.58 a share, up from similarly adjusted $0.50 in the first quarter of this year and $0.46 from the year-ago quarter. I was particularly pleased with this quarter's consistent net interest margin, the growth and demand for our products and services and the continued strong credit performance in our private loan portfolio. This quarter's results highlight the key strengths of our company, the long duration of our earning assets and the consistent margin they generate. The results build on our history of meeting the needs of our customers, both consumers and businesses, and reflect our ability to generate predictable returns to service our debt and create very attractive returns for our shareholders. During the quarter, we continued to see strong growth and demand for our products and services. As Joe mentioned, we grew our private education loan originations by 15% in our seasonally slowest quarter, and we are well-positioned for our peak season that has just begun. We also saw a continued double-digit growth in our business services segment. For example, our contingency collection book increased 17% from the year-ago quarter. And over the same period, the number of accounts we serviced for the Department of Education increased by 36%. As Joe highlighted, our operating expenses, excluding restructuring and reorganization-related items, totaled $258 million for the quarter. The increase from the year-ago quarter was driven by the increase in loan service and accounts placed for us with collection. These areas also grew revenue faster than expenses, and more importantly, experienced improvement in operating efficiency ratios. Still, the margin we earned on our business services segment is well below that earned in our own federal loan portfolio. So keeping a close eye on operating expense and a focus on improving operating efficiency remains a top priority for us. I'm particularly proud that we continued our stellar track record of helping borrowers avoid default or recover from default through loan rehabilitation. This is a hallmark of our operations and of our employees' commitment to helping our customers succeed. Generally, borrowers whose federal loans are serviced by Sallie Mae default at a rate 30% lower than borrowers who attend the same school, but whose loans are not serviced by us. We also lead the industry in helping borrowers recover from default through the federal loan rehabilitation program. Today, student loan headlines often chronicle borrowers struggling with their student loan debt. In our experience providing service to more than 14 million borrowers, students who graduate are overwhelmingly successful at managing their loan payments. Our extensive outreach initiatives and programs that enroll borrowers and balanced-reducing payment programs help students understand their options and their obligations and to get on the right path. We extend these same principles to our private education loan programs. Over the last 5 years, our volume of private education loans in repayment has roughly doubled to $32 billion. At the same time, we've increased our emphasis on enrolling borrowers in repayment programs that help them reduce their debt as opposed to just postponing it. Today, loans in forbearance are at a low 3.5% of loans in repayment, roughly 1/5 of 17% level we experienced in 2008. Add to that, the 90-day plus delinquency rate of 3.6% and a charge-off rate at 2.7%, and clearly one can see that our repayment initiatives work for our customers and for us. This performance extends beyond just one point in time. At June 30, over 78% of our borrowers in repayment had made more than 12 payments on their loans, up from 73% a year ago. As a reminder, a borrower that has successfully made 12 or more payments on their loans has a lower incidence of default, a significantly lower incidence of default. While the impact of default on an individual is always devastating, the bottom line is that at 3.6% 90-day delinquency rate and a 2.7% charge-off rate are not signs of a private education loan debt level. In fact, quite the opposite, they are signs that when done right, education loans can help borrowers capture the economic benefit of a college education. Next week, we will release our sixth annual "How America Pays for College" study. In it, we see families' unwavering belief in the value of a college education and confirmation of the role that private education loans play in helping families pay for college. Private education loan borrowers were more likely to complete the FAFSA more likely to prefer to borrow than not go to college, more likely to make payments on their loans while in school that reduce the cost of the loan, and more likely to feel very confident that they will achieve the degree they have sent out to earn. To date, we've completed 3 sales of FFELP residuals. In all cases, we have retained the servicing rights on the securitized loans. Our goal in these sales was to demonstrate the high quality of the projected cash flows, the ability to monetize them and to establish a market price for them. Each of these objectives was achieved. We plan to use the proceeds from these sales to pay down the unsecured debt that we have internally allocated to these trusts that otherwise would have been paid down over time and to return what would've been future earnings or capital to shareholders today. Our goal is to maximize the returns from our FFELP portfolio, and we'll continue to explore our financial opportunities based on the merits. Eight weeks ago, we announced our plan to separate into 2 companies, with the goal to enhance value to shareholders and increase the growth potential of the 2 businesses. We're making good progress in the design and staging of the various work streams and regulatory filings we need to make to accomplish the separation. As we saw this quarter, this project will generate additional expense. We currently project that to be in the range of $75 million to $95 million, of which we incurred $10 million this quarter. Our goal remains to complete the separation in the first half of next year, and we expect our initial draft registration statement to be filed with the SEC this fall. After which, we'll likely set up an investor call shortly thereafter to give more detail on our progress and the composition of the 2 companies. Finally, this week, the Board of Directors approved the new $400 million share repurchase authorization. Here, our goal remains consistent. We will return excess capital to shareholders while maintaining our strong debt service coverage. With that, I'd like to open up the call up for questions.

[Operator Instructions] Your first question comes from the line of Michael Tarkan with Compass Point. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: A couple of questions on expenses. The increase in servicing expenses, can you just elaborate a little but more on that? Is that, I guess, related to the Department of Education servicing contract, the function of more borrowers and more students going from may be in-school to in-repayment status, and the need to maybe hire more staff? And then I guess on the contingency side, similar kind of question. Are you hiring more people to work down your inventory of defaulted loans?

This is Joe. In both categories, your summary is accurate. We have more inventory to work, and so it really relates to more staffing. And this -- and there's a similar effect on the consumer side, by the way. Our -- as you could see, our inventory of our delinquent loans are going down. That's probably driven by putting more investment on that side. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: And then I guess as a follow-up. In the past, I think you guys have talked about an annual run rate of expenses below $1 billion. Is that still the expectation?

Yes, that is still the target. And the only caveat with that is we don't want to pass up good opportunities to generate revenue or loan volume or reduce losses because of that goal. But that is still our target. Michael Tarkan - Compass Point Research & Trading, LLC, Research Division: Okay. And then, if I can sneak one more in here. On FFELP M&A activity, I guess, both as a buyer and a seller, are you still looking to sell-off more residual assets at this point? And, on the other side, are you still out there looking for additional portfolio acquisition?

Let's start with -- I'll take your questions in order. So first, the residual sales. We really see that as a financial decision at this point. When -- as Jack's comments -- in Jack comments, you heard us talk about FFELP sales originally to demonstrate that we could access capital to support our valuation. And the sequence of those was to improve the execution through better pricing in each sale. All of which, we have done. And as a reminder, the first time we sold the residual, we were trading at $18 in February. So now, we look at it purely in a financial mode as opposed to more of a strategic decision. And it's really a financial decision as to whether or not the discount adds more value by selling it at -- to sell today versus hold it and collect the cash flows over time. So at this point, we really are going to be opportunistic about it, and we're not going to -- we really will look at it at a one-off basis. In terms of our desire to purchase portfolios, again, we're still active in that area. We would like to see more opportunities to buy them, but we -- but even with the recent uptick in rates, we haven't seen banks, who are the primary holders, be willing to be part with these assets. And again, I think, what we've talked about before is still consistent. It's not -- it's just there's nothing else to do with that cash right now for most banks.

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

First, I have a follow-up on the FFELP residual sales. I understand the pricing has been improving, as you've been selling those, but can you just talk about where that is relative to where you would like to be, kind of the implied discount rate that buyers are putting on that, and kind of at least at current pricing, what the implications are of your interest of selling more residuals there?

Well, we don't disclose price on these transactions. But I think we gave you guidance of high-single digits when you factor in servicing, the servicing fees. And we really -- again, initially, I'd go back to the comment earlier. Initially, a big part of this -- of that -- of the pricing was, as we compared the value of our company and the discount we were trading at, at that time, that differential was far greater. So the sale at the time certainly was very accretive. I think as we improve the valuation of the company, even though we still see it -- obviously, we still see a lot of upside, it's much more of a trade-off, a close call, essentially, in terms of whether or not we sell more.

Okay. And can you talk about what the impact is on your FFELP loan spread of these sales? Are you selling older loans that may have higher spreads on them?

It has to do -- this is Jack. We are selling loans. We are selling some of the older trust that have some lower coupon ABS prices principally because there's very little over-collateralization on those deals. But as you can see from the margin that we reported this quarter, it's very consistent. There's very little impact there to them, to the student loan spread there.

Okay, got it. And then finally, just interested in getting your thoughts on where we could see the provision head over the next couple of years. And then with -- given the trajection, or the trajectory you're seeing on the nontraditional and the fact that you're generally reserved for 2 years forward, is it reasonable to think in the next year or 2 that we will see the provision rate kind of converge on the more normalized 1.5% annualized charge-offs that you're seeing on your new loans?

Well, we do think the trend lines here are very positive. And you can certainly look at the charge-off rate, but that's less of a leading indicator. The better indicator is to look at loans in forbearance and loans that are 90-day-plus delinquent. Both of those numbers have been -- have seen significant improvement year-over-year and are continuing the trend lines downward. When you look at the portfolio mix and the fact that it's being increasingly dominated by high-quality or what we call low-risk loans. You can look at, I believe, at Slide 7 and see how much lower the charge-off rates are in that portfolio, and that would give you a good indicator of where things would head as that mix continues to increase.

Your next question comes from the line of Scott Valentin with FBR Capital. Scott Valentin - FBR Capital Markets & Co., Research Division: Just with regards to originations. I know the second quarter. I think, it's the second seasonally weak quarter of the year, but there's about 15% growth year-over-year and you're still projecting about 20%-plus growth with $4 billion-plus guidance. I wonder if there's any kind of drivers during the quarter, the government proposal or the government discussion regarding rates have any impact?

We didn’t -- we don't think that caused anything, but this is traditionally a light quarter. Our season really begins about the middle of July and goes through the middle of September. So we don't -- we didn't read much into the numbers in the second quarter. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And then just on forbearance, I think it was up a little bit -- it's down year-over-year, but up a little bit at quarter-over-quarter across most of the categories. I think it's Page 19 of the presentation. I just wonder if that's a seasonal item or maybe if you have comments there.

Yes, if you look at this -- if you look at that number -- if you look at that quarter, the same period the prior quarter, I think you're seeing 2.3 -- 2.5 to 2.3 -- hold on one second, sorry.

The segments. And it is -- there's a little bit of repayment peak, the mini peak that takes place this time of the year for people who are graduating in the December, January time frame versus borrowers who graduated traditional time frames. We are also using forbearance more aggressively in helping borrowers as they enroll in payment programs. And so that combination is what's driving that, not a need for the program as much as it is some seasonality in the payment program enrollment issues. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And then one follow-up question. Just with long-term rates having moved up a little bit, can you maybe comment on the impact? Those from a revenue and expense side, does that benefit loan pricing at all on the fixed rate product? And then do you see any impact on the funding side?

We haven't seen any impact yet on rates from either the selection process. We're running at about 14% in our fixed-rate product, which is consistent with last year, so we haven't seen an impact yet.

14% of people taking that...

Take the fixed rate versus the variable rate. We just haven't seen a big change. That was about what it was last year. It was running 15% last year.

Your next question comes from the line of Sanjay Sakhrani with KBW. Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division: Just this question was just to follow-up on the residual sales. Have you guys identified like how much you could actually sell? Understanding that it's a monetary kind of decision, just wondering -- or economic decision, I was just wondering, is there an identifiable amount that you think that you could sell if you wanted to versus -- is it everything or is it a piece of it? And I guess, second, I know you can't really speak to the reorg -- and I think, Jack, you mentioned that you guys will file something in the fall. But I was just wondering if you could just walk us through the steps in terms of what you have to do to get to the reorg and what the likelihood could be that it could happen sooner than a year from now?

So the FFELP portfolio, really, if you look at our trust, you could separate in the trust that have significant over-collateralization versus trust that do not have over-collateralization. And so that is line of demarcation as to how much you could theoretically sell. Again, we -- so if you look at the population of trust that do not have over-collateralization, that -- I would consider that sort of a maximum point. But again, where we -- between where we're valued and where -- the pricing we're getting, that's really the more relevant thought, that's really the more relevant metric. So let me turn it to Jack to take charge.

On the spend-related side of the equation, there's both internal and external items that we need to deal with. There's a regulatory process that takes time for both the SEC and the IRS, which we've estimated to be between 6 to 9 months. And then there's the internal process as we actually split our various operating activity support functions and to be able to stand up to support 2 independent separate companies. Certainly, one can move faster on that second point when one chooses, but increases both the number and scope of the transition service agreements that we need to be put in place. And our goal is to kind of manage the proper balance there. So when you look at what we need to accomplish and the complexity of what's here, we stand behind our original estimate that we'll complete this sometime in the first half of next year.

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

Regarding the $1 billion target for expenses for 2013, to get there implies a pretty significant falloff in OpEx in the second half. I wonder if you could talk about where you see potential areas of savings? Was some of that spending that you mentioned here in the second quarter, was that onetime or are you going to be able to back off of that level of spending in the second half?

Certainly, we are very focused on improving the operating efficiency, continuing to improve the operating efficiency of the company, if you saw on the Slide 5 in the deck. At the same time, as Joe mentioned, if we have revenue-generating opportunities like we did in loan servicing and contingency collections, those are things that we believe we're suppose to go out and get. And you can see that the revenue significantly exceeded the expense increase in both of those areas. One of them is contingent, so we get paid and kind of bear some of the expense based on our actual success rates, so we are looking at those types of items. And to your second point, yes, there are a number of operating expenses that are heavier at the front half of the year as we're investing in things like marketing for our loan programs, but we've also made some significant investments in enhancing our operating in technology this year -- last year and this year, in particular, that will allow us to get to that $1 billion number.

So you think the investing in technology could be backed off somewhat in the second half?

Yes.

Yes.

Okay. And do you look to a target efficiency ratio at all? Is that an operating metric that you strive for?

Well, you really -- it's a little hard to look at it because you have to look at it by business unit because the operating efficiency in FFELP is different than it is in private credit. It's different from contingency collections. But we do have measures in each of those business areas, and we do track and report on them. And I can tell you, across-the-board, they have been improving since 2010.

Okay. And then finally, the $10 million that you took in restructuring charges related to the split this quarter, could you just give us a sense as to how that was spent? And then you mentioned $75 million to $95 million overall restructuring charges. How is that going to be spent over the next several quarters?

Most of the dollars to date have been in professional fees. The dollars that will come will be a combination of both professional fees and projects to separate systems and basically to build out the technology platforms that each entity will need. For example, both will need separate accounting systems, as one example.

And that's true for the expenditures going forward as well?

It's going to be -- going forward, it's going to be more of a mix, both professional and internal building out the operational capabilities of the company.

Do you expect any significant changes in headcount?

No. We don't. We actually expect that we should be able to maintain headcount about where we are. We don't expect operating expenses on a run rate going forward to be materially different. In fact, we may even look for -- we're looking for operating efficiencies here as we split the companies in 2.

Your next question comes from the line of Alan Straus with Schroders.

Jack, is there any time line on the share repurchase program? And secondly, does the breakup puts you in a darkout period when you can't repurchase shares?

We -- the program does not have a maturity date, so you can expect us to use it as we see those opportunities and as we have to balance against opportunities we might have available on the market to supply loan portfolios. The blackout dates will be consistent with other blackout dates that apply in terms of major news announcements, earnings releases, et cetera.

Okay. There's nothing special with the split-up. Okay. And then since you brought it up, what does the pipeline actually look like? We've been pretty quiet on acquisitions for FFELP loans.

Yes. As Joe mentioned, there's a $150 billion of FFELP loans out there that we do not own or service today. And we're very interested in the opportunities that -- to purchase or service those loans. We think the performance that we bring, the improved performance that we think we can get out of those portfolios in terms of lower delinquency and default rates, which generate higher net interest income over the life of the loans, the funding and the servicing cost efficiencies that we bring are significant and it can be very attractive for our shareholders for us to acquire. It's just been a slow process. Yes, the biggest challenge, as Joe mentioned, is the conclusion that, "What do I do with the proceeds?" has been the bigger item for the banks. Perhaps, with this some of the new capital requirements and leverage issues that are being dictated for our banks, typically large banks, that may start to change some of the direction here.

The next question comes from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Jack, one of the things when you did announce the spent, you -- it kind of alluded to the idea that there were going to be plans as to what do with the legacy business. Could you talk a little bit about your plans for how to -- in addition to kind of the things you've been doing already, are there any new steps and additional steps that you can take to enhance value in the legacy company?

Yes. Well, I think it starts clearly with the FFELP opportunity. We think the amount I mentioned, there's $150 billion of FFELP loans out there that we don't own or service, that exceeds what we actually do own and service today. And so that does create the biggest net earnings opportunity for the company and something that we would be aggressive in pursuing. On the operations and processing side of our business, we do also see opportunities to grow in both our contingency work, as well as our Department of Education loan servicing work. In both areas, we have relatively small market shares today. It's 10% or less in terms of the work that we do for the Department of Ed. And when we look at the performance that we bring here, it's helping borrowers avoid default and helping borrowers recover from default, both in where we are have very, very strong performance or lead the industry. We think those are -- present significant opportunities for us to grow. Obviously, one other significant opportunity for us is something that we've talked about is, can you move the owned loan portfolios into some form of past restructure. And if we could get to that area, that also has a dramatic impact on valuation. Moshe Orenbuch - Crédit Suisse AG, Research Division: Got it. And in general, the expansion or growth that you're talking about in those areas, will that be done kind of internally? Acquisitions, some combination, how do you think about that?

Well, I think the operations side of it is organic. And so as we continue to demonstrate our performance in those areas, as examples, our default prevention capabilities, we believe, are much, much stronger than others in the industry. And we're doing it by helping borrowers get into repayment programs that actually help them long-term, rather than just putting them into things like forbearance, which just owns the payment obligation.

[Operator Instructions] Your next question comes from the line of Sameer Gokhale with Janney Capital Markets.

I had a few questions. Number one, the buyback authorization, $400 million, is that a function of terming-out any of the maturities for 2014? It seems like you have kind of a liquidity to kind of do that without reissuing debt or terming-out those maturities. So I just wanted to make sure that, that, in fact, was the case? Can you talk about that a little bit?

Well, clearly, if you look at our unsecured debt maturities, they do not amortize in line with the portfolio itself. And so we would like to continue to -- as we have over the last couple of years, continue to spread those maturities out so that they're more even against the overall portfolio. And I would expect that process to continue. The share repurchase authority was given based on the level of capital that we'll be generating over the next 6 to 9 months, and is something that the board and we feel very comfortable as having the capability of exercising on.

Okay. And then on a separate topic. When you look at the proposed separation of the 2 entities, is it -- are you contemplating some sort of agreement between the bank and NewCo to sell private loans to NewCo if needed, because I would imagine that the goal would be to try to eventually securitize loans originated at the bank, but if that doesn't happen, given origination targets, then the bank can grow pretty rapidly, and the question is whether regulators would take issue with that? So are you envisioning at this point some sort of agreement that will allow the bank to sell loans to NewCo? Or is that something that's not been contemplated at this point in time?

This is Joe. In order to achieve true separation, we really -- we'll have a minimum number of agreements between these companies. As Jack noted earlier, we will have transition services agreement, mostly operational. On a longer-term basis, the separation will be true. As the bank does contemplate selling loans, certainly, what we call NewCo would be a logical buyer. But any such sales would be an arm's length transaction that will evolve -- it would involve a bidding process.

Okay, Joe. And then a question on the FFELP servicing contract. I know the economics of that business, at least initially, weren't that great. I just want to get a sense for how that progressed as you've gain scale and gotten more accounts to service in that business? I mean, is that, Jack, in your view, a business that is going to continue to see improving economics over time? Do you feel you plateaued over there? And by economics, I'm talking about an after-tax profit margin, I mean, is that a good business, and an improving business in terms of margins going forward? Or do you think you've reached whatever economics you're going to generate from that and maxed out on that?

Well, it's clearly a scale business. And as we have grown to about 5 -- over 5 million accounts serviced, we're certainly in that spot today. We do expect margins will continue -- that we would expect in demand that margins improve in that business. We do think the contract can benefit from more of a fee-for-performance basis. It's very expensive work. For example, to enroll a borrower into something like an income-based repayment program, and -- which we are doing, but we don't actually get paid for outperformance in that side of the equation. So it would certainly work to continue to make that contract more performance-based and strictly fee-for-service based. But we like where it is and we certainly like where it's going.

Okay. And this is the last question. There's at least one company about there that's making these private student loans and the idea there is to offer lower rates compared to what borrowers may be paying, particularly on things like PLUS loans and Grad PLUS loans. And the idea for them is to basically use alumni funds to fund these loans, and it seems like they're getting access to securitization funding. So is there a sense, from your standpoint, that this could be a risk to any -- to your private loan portfolio to the extent that such companies don't have a profit motive or to any other loans that could be refinanced out of your portfolio to them? I mean, have you looked at this business, do you think there are issues -- it seems to me there are issues with scaling off of those types of business, but I just want to get your take on it.

We have actually watched this a little bit. The primary limitation is scaling the funding for those businesses. Certainly, at the level they're at in terms of their current size, and so it would hard to project what the larger impact would be to us over a long period of time. But it seems like the #1 issue, we've studied a couple of companies that have a model like that, whether they're in student lending or otherwise, is always scaling the funding. But at this -- and at this point, that seems to be the limitation.

And they're also very much focused. I think as you indicated on refinancing federal loans, our private origination -- our private loan marketplace is very much focused on originating new education loans for students and families. It's a bit slightly different marketplace.

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

I wonder, could you just clarify the remaining $65 million to $85 million of separation expense? Should those be recognized this year or until separation? Or...

Those will be recognized as we pay them through separation.

Okay, so some remaining this year and some in the first part of next year? Is that the right way to think about? And should -- and are those expenses included in your kind of $1 billion -- sub-billion dollar target for this year? Or is that ...

No. They are in the line item, the restructuring in the reorganization expense line item.

Okay. And then can you just talk about reserve releases? I know -- should we expect kind of a similar level of reserve releases over the next few quarters as you continue to see improvements in credit? Or -- I mean, in the past, you kind of talked about operations roughly equaling charge-offs.

Well, on the allowance, one thing to note, we reserved for 2x our charge-off. However, we also reserve for TDR balances for the remaining life of loan losses. So those loans essentially get everything after 2 years and beyond at an additional reserve. And then we also have a reserve that we have applied for our recovery for prior charge-off loan asset. So those are the 2 additions to our reserves that really have been keeping it above the $2 billion mark that you're seeing.

Okay. And what is your expectation for the next couple of quarters?

I think it will not come -- I think it will stay roughly in that zone. Because even though our loan quality is improving in the 2-year loss projection on our core portfolio continues to improve, as we -- every time a loan is more than 4 months into forbearance or has a rate reduction, it goes into the TDR and it stays there for the life of the loan. So that inventory does not run down very easily. And that's really what is the part that keeps the reserve, what I'd call a sticky-high level.

And then could you just tell us what percentage of originations in the last quarter were the fixed rate product? Is that growing as a percentage of originations?

Yes, the fixed-rate product was 14%. We saw 15% last year. So we haven't seen that change dramatically. Again, even though in the last 30 days, rates have risen and maybe consumers have adopted a different viewpoint, we just haven't seen it yet in our application volume.

And is there any change in the competitive environment? Either of your 2 large competitors a little more aggressive? One seems to cut some fees? Is that having any effect?

Yes. The fee reduction was mostly on the punitive fee side. We don't normally see that as a big variable in the selection of -- in consumer selection process, because most consumers get a loan and they do not think they're going to be delinquent on that loan. So that usually doesn't play a role. In general, we see the competitive landscape similar to the way we've seen it over the last few years, when we have 2 very serious competitors. They are -- and they compete fairly aggressively on price and features, and we haven't seen that change this year.

Sir, we have no further questions from the queue at this them. I'd like to turn the call back over to management for closing remarks.

Thank you very much, everybody, for joining us on the call this morning. If you have any follow-up call, please contact myself, Steve McGarry or Joe Fisher. That concludes the call. Thank you.

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