SLM Corp SLM
Q2 2013 Earnings Call Transcript
Transcript Call Date 07/18/2013

Operator: Good morning. My name is Brenson, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Sallie Mae Second Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

Thank you. I'd now like to hand the call over to our host, Mr. Steve McGarry, Senior Vice President of Corporate Finance. Please go ahead, sir.

Steven McGarry - IR: Thank you very much, Bren. 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 of Banking and Finance.

But 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 discussion of those factors on the Company's Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings and a full reconciliation to GAAP measures 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.

Joseph DePaulo - EVP, Banking and Finance: 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 level 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 three 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 and 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. We saw improvements in our delinquency rates and forbearance rates over the year ago quarter and we experienced the 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 four years ago. Delinquencies have continued to decline as forbearance have gone up 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 is dominated by high-quality loans. The green bars and green line represents 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 line is down to less than 8% of our portfolio. Balances and losses are declining in this segment and we do not originate these loans any more.

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 and 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 into the Department of Education servicing contracts. Servicing revenue from this contract was $26 million in the quarter compared to the $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 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 after-tax gain from the sale of residual interest in our for 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 liabilities of $12.1 billion from 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 and 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 had 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 market.

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 six 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 15th, 2015. This facility will be used to fund the call and redemption of 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.

John (Jack) F. Remondi - President and CEO: Thanks, Joe. Good morning, everyone. As Joe summarized, we had very strong results for the first quarter, and I am 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 strength of our Company, the long duration of our earnings 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 on 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 defaulted 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 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 balance 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 program. Over the last five 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 and 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 one-fifth the 17% level experienced in 2008. Add to that the 90-day-plus delinquency rate at 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, significantly lower incidence of default.

While the impact of default on an individual is always devastating, the bottom line is that a 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 set out to earn.

To-date, we have completed three sales of FFELP residuals. In all cases, we've 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're planning 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 have 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 two companies, with the goal to enhance value to shareholders and increase the growth potential of the two 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 two 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.

Transcript Call Date 07/18/2013

Operator: Michael Tarkan, Compass Point.

Michael Tarkan - Compass Point: A couple of questions on expenses. The increase in servicing expenses; can you just elaborate a little bit more on that? Is that I guess related to the Department of Education servicing contract, the function of more borrowers, more students going maybe from in school to in repayment status and the need to maybe hire some more staff? And then I guess on the contingency side similar kind of question. Are you hiring more people to work down your inventory defaulted loans?

Joseph DePaulo - EVP, Banking and Finance: 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 there is a similar effect on the consumer side by the way. As you can see, our inventory of our delinquent loans are going down, that's partly driven by putting more investment on that side.

Michael Tarkan - Compass Point: In the past, I think you guys have talked about an annual run rate of expenses below $1 billion. Is that still the expectation?

Joseph DePaulo - EVP, Banking and Finance: Yeah, that is still the target. And the only caveat we'd add 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: And then if I could sneak one more in here. On self 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 acquisitions?

Joseph DePaulo - EVP, Banking and Finance: 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. As in Jack's comments you heard us talk about self-sales originally to demonstrate that we could access capital to support our valuations 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 is 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 are not going to – we really will look at it on a one-off basis. In terms of our desire to purchase portfolios, again, we are still active in that area. We would like to see more opportunities to buy them, 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.

Operator: Mark DeVries, Barclays.

Mark DeVries - Barclays: First, as 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 it to be, kind of any implied discount rates that buyers are putting on that? And kind of at least at current pricing, what implications are of your interest of selling more residuals there?

Joseph DePaulo - EVP, Banking and Finance: 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 compare with 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 – obviously we still see a lot of upside we're – it's much more of a tradeoff and a close call essentially in terms of whether or not we'd sell more.

Mark DeVries - Barclays: Could 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?

John (Jack) F. Remondi - President and CEO: This is Jack. We are selling loans. We are selling some of the older trusts that have some lower coupon, ABS prices principally because there's very little over-collateralization in those deals. But as you can see from the margin that we reported this quarter, it's very consistent. Very little impact there to them – to the student loan spread there.

Mark DeVries - Barclays: 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 two years forward, is it reasonable to think in the next year or two 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?

John (Jack) F. Remondi - President and CEO: 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, it's (57) 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.

Operator: Scott Valentin, FBR Capital.

Scott Valentin - FBR Capital Markets: Just with regard to originations, I know the second quarter I think is a second seasonally weak quarter of the year. But there is about 15% growth year-over-year and you're still projecting about 20% plus growth with $4 billion plus guidance. I'm wondering if there's any kind of drivers during the quarter to the government proposal – for the government discussion regarding rates have any impact?

Joseph DePaulo - EVP, Banking and Finance: 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 to the Middle of September. So, we didn't read much into the numbers in the second quarter.

Scott Valentin - FBR Capital Markets: And then just on the forbearance, I think it was up a little bit – of course, it's down year-over-year, but up a little bit quarter-over-quarter across most of the categories and I think Page 19 of the presentation. Just wondering if that's a seasonal item or maybe if you have comments there.

Joseph DePaulo - EVP, Banking and Finance: Yeah, if you look at that number – if you look at that the same period the prior quarter, I think you're seeing (2.5 to 2.3) – hold on one second. I'm sorry.

John (Jack) F. Remondi - President and CEO: (It's in the) segments. And there's a little bit of a repayment peak – the mini peak that takes place this time of the year for people who are graduating in the December/January timeframe versus borrowers who graduate at traditional timeframes. 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: One follow-up question, just with long-term rates having moved up a little bit, can you maybe comment on the impact, both 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?

Joseph DePaulo - EVP, Banking and Finance: No, we haven't seen any impact yet on rates from either the selection process. We are running at about 14% on our fixed rate product which is consistent with last year, so we haven't seen an impact yet.

John (Jack) F. Remondi - President and CEO: 14% of people taking that…

Joseph DePaulo - EVP, Banking and Finance: Take the fixed rate versus variable rate. We just haven't seen a big change. That was about what it was last year.

John (Jack) F. Remondi - President and CEO: It was running 15% last year.

Operator: Sanjay Sakhrani, KBW.

Sanjay Sakhrani - KBW: I guess first 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?

Joseph DePaulo - EVP, Banking and Finance: So, the FFELP portfolio, really, if you looked at our trust, you could separate in the trust that have significant over collateralization versus trusts 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.

John (Jack) F. Remondi - President and CEO: On the spend related side of the equation there is 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 six to nine 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 two independent separate companies. Certainly, one can move faster on that second point when 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.

Operator: Brad Ball, Evercore.

Brad Ball - Evercore: Regarding the $1 billion target for expenses for 2013 to get there implies a pretty significant fall off in OpEx in the second half. I wondered 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 one-time or you're going to be able to back off with that level of spending in the second half?

John (Jack) F. Remondi - President and CEO: Certainly, we are very focused on improving the operating efficiency – continuing to improve the operating efficiency of the Company as you saw in 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 supposed go out and get and you can see that the revenue significantly exceeded the expense in both of those areas. One of them is contingent, so we get paid and bear some of the expense based on our actual success rate. 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 and technology last year and this year in particular that will allow us to get to that $1 billion number.

Brad Ball - Evercore: So, you think the investing in technology could be backed off somewhat in the second half?

Joseph DePaulo - EVP, Banking and Finance: Yes.

John (Jack) F. Remondi - President and CEO: Yes.

Brad Ball - Evercore: And do you look to a target efficiency ratio at all? Is that an operating metric that you strive for?

John (Jack) F. Remondi - President and CEO: Well, it's a hard to look at 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 our 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.

Brad Ball - Evercore: 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?

John (Jack) F. Remondi - President and CEO: 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.

Brad Ball - Evercore: And that's true for the expenditures going forward as well?

John (Jack) F. Remondi - President and CEO: 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.

Brad Ball - Evercore: Do you expect any significant changes in headcount?

John (Jack) F. Remondi - President and CEO: 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 might even look for – we are looking for operating efficiencies here as we split the companies in two.

Operator: (Alan Straus, Schroders).

Alan Straus - Schroders: Is there any timeline on the share repurchase program? And secondly, does the breakup puts you in a dark-out period when you can't repurchase shares?

John (Jack) F. Remondi - President and CEO: The program does not have a maturity date, so you can expect for us to use it as we see those opportunities and as we have to balance against opportunities we might have available on the marketplace to buy loan portfolios. The blackout dates will be consistent with what other blackout dates that apply in terms of major news announcements, earnings releases, etcetera.

Alan Straus - Schroders: 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.

John (Jack) F. Remondi - President and CEO: Yeah. 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 and/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 can be very attractive for our shareholders for us to acquire. It's just been a slow process. 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.

Operator: Moshe Orenbuch, Credit Suisse.

Moshe Orenbuch - Credit Suisse: Jack one of the things when you did announce the spin, you 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?

John (Jack) F. Remondi - President and CEO: Yeah. Well, I think it starts clearly with the FFELP opportunity. If you think of 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% of less in terms of the work that we do for the Department of Ed. When we look at the performance that we bring here that's helping borrowers avoid default and helping borrowers recover from defaults, both in where we have very, very strong performance or leading the industry, we think those present significant opportunities for us to grow. Obviously, one other significant opportunity for us is something that we talk about is can you move the owned loan portfolios into some form of pass-through structure. And if we could get to that area, that also has dramatic impact on valuation.

Moshe Orenbuch - Credit Suisse: And in general, the expansion of growth that you're talking about in those areas that would be done kind of internally, acquisitions, or combination, how do you think about that?

John (Jack) F. Remondi - President and CEO: Well, I think the operations side of it is organic. And so, as we continue to demonstrate our performance in those areas – as examples are, 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: Sameer Gokhale, Janney Capital Markets.

Sameer Gokhale - 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 plenty of 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?

John (Jack) F. Remondi - President and CEO: 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 are 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 six to nine months, and is something that the Board and we feel very comfortable as having the capability of exercising on.

Sameer Gokhale - Janney Capital Markets: Then, on a separate topic, when you look at the proposed separation of the two entities, 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 the origination targets 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 would allow the bank to sell loans to NewCo or is that something that's not being contemplated at this point in time?

Joseph DePaulo - EVP, Banking and Finance: 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 transactions and would involve a bidding process.

Sameer Gokhale - Janney Capital Markets: 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 got 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?

John (Jack) F. Remondi - President and CEO: Well, it's clearly a scale business and as we have grown to about 5 – over 5 million account service 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, which we are doing. But we don't actually get paid for outperformance in that side of the equation. So, we'd certainly work to continue to make that contract more performance-based than strictly fee-for-service based. But we like where it is and we certainly like where it's going.

Sameer Gokhale - Janney Capital Markets: And just the last question. There is at least one company you know of out 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 the plus loans and grad plus loans. And the idea for them is to basically use alumni funds to fund these loans and seems like they are 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 with it? It seems to me there are issues with scaling up those types of businesses, but I just want to get your take on it.

Joseph DePaulo - EVP, Banking and Finance: We've actually watched this a little bit. The primary limitation is scaling the funding for those businesses. Certainly, at the level they are at in terms of their current size and so forth it would be hard to project what the larger impact would be to us over a long period of time. But things like the number one issues, we've studied a couple of these companies that have a model like that, whether they are in student lending or otherwise is always scaling the funding. So, at this point, that seems to be the limitation.

John (Jack) F. Remondi - President and CEO: They are also very much focused, I think as you indicated, on refinancing federal loans. Our private loan marketplace is very much focused on originating new education loans for students and families, so a slightly different marketplace.

Operator: David Hochstim, Buckingham Research.

David Hochstim - Buckingham Research: Could you just clarify the remaining $65 million to $85 million of separation expense? Should those be recognized this year or until separation or...?

Joseph DePaulo - EVP, Banking and Finance: Those will be recognized as we pay them through separation.

David Hochstim - Buckingham Research: So, some remaining this year and some in the first part of next year, is that right way to think about? And are those expenses included in your kind of $1 billion, sub $1 billion dollar target for this year or is that...?

Joseph DePaulo - EVP, Banking and Finance: No. They are in the line item, the restructuring and reorganization expense line item.

David Hochstim - Buckingham Research: Then can you just talk about reserve releases? 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've kind of talked about operations roughly equaling charge-offs?

Joseph DePaulo - EVP, Banking and Finance: Well, on the allowance, one thing to note, we reserved for two times our charge-offs. However, we also reserve for TDR balances for the remaining life of loan losses. So, those loans essentially get everything after two years and beyond as an additional reserve. And then we also have a reserve that we have applied for our recovery for prior charged-off loan assets. So, those are the two additions to our reserve that really have been keeping it above the $2 billion mark that you're seeing.

David Hochstim - Buckingham Research: And what is your expectation for the next couple of quarters?

John (Jack) F. Remondi - President and CEO: 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 two year loss projection on our core portfolio continues to improve, as we – every time a loan is more than four months into Forbearance or has a rate reduction it goes into TDR and it stays there for the life of the loan. So that inventory doesn't – does not run down very easily and that's really what is the part that keeps the reserve what I would call a sticky higher level.

David Hochstim - Buckingham Research: 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?

John (Jack) F. Remondi - President and CEO: Yeah, the fixed rate product was 14%. We saw it at 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.

David Hochstim - Buckingham Research: And is there any change in the competitive environment, either of your other two large competitors been a more aggressive, one seems to have cut some fees, is that having any effect?

John (Jack) F. Remondi - President and CEO: Yeah, the fee reduction was mostly on the punitive fee side. We don't normally see that as a big variable in the selection – 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. I mean, we have two very serious competitors and they compete fairly aggressively on price and features. We haven't seen that change this year.

Operator: We have no further questions in the queue at this time. I'd like to turn the call back over to management for closing remarks.

Steven McGarry - IR: Thank you very much everybody for joining us on the call this morning. If you have any follow-up calls, you can contact, myself, Steven McGarry or Joe Fisher. That concludes your call. Thank you.

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