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SLM (NASDAQ:SLM)

Q3 2013 Earnings Call

October 17, 2013 8:00 am ET

Executives

Steven J. McGarry - Senior Vice President of Corporate Finance

Joseph A. Depaulo - Principal Financial Officer and Executive Vice President of Banking & Finance

John F. Remondi - Chief Executive Officer, President, Chief Operating Officer and Director

Analysts

Mark C. DeVries - Barclays Capital, Research Division

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Alan Straus

Moshe Orenbuch - Crédit Suisse AG, Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Scott Valentin - FBR Capital Markets & Co., Research Division

Robert Smalley

Operator

Good morning, ladies and gentlemen, and welcome to the earnings call for today. I would now like to pass this call over to your host, Mr. Steven McGarry.

Steven J. McGarry

Good morning, and thank you for joining us for our 2013 third quarter earnings call. With me today are Jack Remondi, our Chief Executive Officer; and Joe Depaulo, our Executive Vice President for Banking and Finance.

After their prepared remarks, we'll 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 these -- 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 that we call our core earnings. Description of core earnings and full reconciliation to GAAP measures and our GAAP results can be found in the third 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 A. Depaulo

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 third quarter, we maintained our leadership position by originating $1.5 billion of new student loans while preserving our high credit standards. We saw charge-offs continue to improve across the portfolio as this quarter's loss rates are at the lowest level in 5 years. We remained active in the capital markets and delivered solid earnings.

Slide 4 provides a high-level summary of our results. For the quarter, core earnings were $271 million or $0.60 per share compared with $277 million or $0.58 per share for the year ago quarter. Operating expenses were $257 million versus $244 million in the second quarter of 2013 and $220 million in the year ago quarter. The increase against the year ago quarter is concentrated in 3 areas: First, litigation expense of $11 million; second, consumer segment expenses of $12 million to handle servicing to improve collection and to generate incremental loan demand; and third, business services expenses of $10 million to increase volume in our servicing and contingency product line.

Now let's turn to Slide 5 in our consumer lending metrics. As we grew originations in this segment, our student loan spread came in at 4.6%, the upper end of our targeted range, leading to an increase in net interest income from the prior and year ago quarters. We saw improvement in our delinquency rates from the year ago quarter and we experienced a sharp decline in losses, which we expect to continue.

As of the graph at the bottom of the page shows, 30-plus and 90-plus day delinquencies are down nearly 1/3 from the levels they were just 4 years ago. Total delinquencies have continued to decline year-over-year, and the continued improvement in our credit metrics lead to a decline in our provision for loan losses from a year ago.

The increase in delinquencies since the second quarter resulted from the transition of our private credit portfolio to a new servicing platform. Our collection and servicing staff spent significant time this quarter, addressing customer questions and routing payments. Based on the information we have, we do not believe the increase in delinquencies is indicative of the future credit performance trends of these loans.

On Slide 6, we show our asset quality trends over time. Our student loan portfolio is dominated by high-quality loans. The green bars and the green line represent the highest quality and lowest risk business. These assets now account for more than 71% of our portfolio. The growth in our Smart Option product will continue to grow this segment. The highest risk segment, what we call nontraditional, is represented by the red bars and the red 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 anymore.

The high-quality loans are what we originate as you could see in Slide 7. We originated $1.5 billion of Smart Option private credit loans in the quarter, an increase of 11% from the third quarter of 2012. The loans we originated had an average FICO score of 746 and 93% of the loans had a co-borrower. These loans continued 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. 57% of our customers elect to make a payment while in school.

We will now turn to Slide 8 and review our business services segment. In this segment, core earnings were $124 million in the quarter compared to $133 million in the third quarter of 2012. The company now serves 5.7 million accounts under the Department of Education servicing contract. We earned the first place finish for the recent quarter, with first place scores in default prevention along with improvement in satisfaction scores. Servicing revenue from this contract was $29 million in the quarter compared with $23 million in the prior year.

Our contingency collection performance is also performing very well. We saw an increase in revenue of 22% or $19 million over the year ago quarter. During this quarter, we announced the planned sale of Upromise investment business to Ascensus. This sale is expected at $0.14 per share in the fourth quarter.

Now turning to Slide 9 for our FFELP core earnings, which were $92 million for the third quarter compared to $94 million for the third quarter of 2012. The FFELP loan spread increased to 103 basis points from 97 basis points in the prior quarter.

As we have discussed in our earnings calls in the past, our FFELP student loan spread tends to be stronger in the second half of the year. We expect the run rate going forward to be in the mid- to high-90s.

Let's now turn to Slide 10 for highlights of our financing activities for the quarter. The third quarter of 2013, we issued $624 million of private credit ABS and $1.7 billion of FFELP ABS. Our ABS transactions continue to be met with increased investor demand, and we continue to execute on our long-term funding strategy of originating new private loans in our bank and term funding more secure loans in the ABS market.

On September 20, we issued $1.25 billion of unsecured bonds. While we expect total unsecured debt outstanding to decline over time, we will continue to issue debt to better manage our manage maturity schedule. We closed on a $1.1 billion secured borrowing facility which matures in August of 2015. The facility was used to fund the call and redemption of the TALF Bond.

And finally, turning to GAAP on Slide 11. We recorded third quarter GAAP net income of $260 million or $0.57 per share compared with net income of $188 million or $0.39 per share in the year ago quarter. The primary differences between third quarter 2013 core earnings and GAAP results are the marks related to our derivative position. Our guidance for the full year is $2.94. This includes all of the previously announced residual sales and subsidiary sales, including our UII business, which we anticipate will close in the fourth quarter.

I'll now turn the call over to Jack Remondi.

John F. Remondi

Thanks, Joe. Good morning, everyone, and thanks for your interest in Sallie Mae. Our results this quarter were solid, and I think they continue to demonstrate the value of our business franchise. With the 11% growth and private credit originations, strong and improving credit performance, growing processing businesses and the stability of earnings from our FFELP loan portfolio, we are delivering value to our customers and creating value for our shareholders.

As Joe mentioned, this business has generated $0.60 in earnings per share for the quarter. The third quarter is our busiest of the year as more than 20 million students head back to school. We see the largest share of Private Education Loan applications and disbursements and we onboard a new class of federal loan borrowers for servicing. This year, we saw students and families were increasingly cost conscious and that impacted the growth rates for enrollment and total borrowing. Yet, our loan originations grew by 11% even as the average loan amount remained flat. We achieved this growth without compromising our credit standards, maintaining an average FICO score of 746 and 93% of the loans were made with a co-borrower.

We provide perspective borrowers with clear terms, including payment options that can lower total finance charges and keep debt balances reasonable. This allows students and families to make informed decisions, borrowing not what they need to cover the cost of their college education but borrowing only what they can afford to repay. This disciplined approach shows in our credit performance with year-over-year improvement in both delinquencies and charge-offs.

In our business services segment, account service for the Department of Education grew 39% from the year ago quarter to 5.7 million accounts, and our contingency collection book increased 9.5% to $15.2 billion. Combined, revenue from these business lines increased by $25 million from the year ago quarter to $120 million in the third quarter.

Our FFELP portfolio continued to generate a consistent and predictable earnings and cash flows that are characteristic of this asset. With a stable net interest margin, our FFELP segment generated $92 million in core earnings in the quarter. And our performance and cost efficiency in this segment we believe is unmatched in the industry and we'll continue to pursue loan servicing and acquisition opportunities in this space.

We continue to deliver industry-leading results and helping customers successfully manage their loans. For example, while the 2011 2-year federal cohort default rate increased to 10%, I'm particularly proud that we saw a continued decrease in the cohort default rate of the federal loans we service to roughly half the national average.

Total operating expenses did increase $37 million year -- over the year ago quarter. We remain very focused on our overall expenses and continue to deliver improvements in our operating efficiency. Although the increase is primarily related to increases in loans originated, serviced and collected with revenue that more than profitably covered the increase spend, as Joe described, a portion of the expense increase is the result of increased regulatory compliance efforts and higher litigation expense.

As a result, we have to work even harder to improve our operating efficiency, and we will continue to do so. For example, like our new Private Education Loan servicing platform, we have several projects underway that, although, they're contributing to today's operating expense, they will help us achieve our cost and compliance objectives in the long term.

We continue to make good progress on our separation plans. And although a project of this type is often more complicated and comprehensive in scope than it appears on the surface, we continue to believe we'll complete the separation in the first half of 2014 as planned. More importantly, we continue to see the value in separating our company into 2 distinct businesses. The next update to look for is the Form 10, which we expect to file in December.

Last quarter, we announced plans to repurchase up to $400 million in common shares. We've been considering some significant potential portfolio acquisition opportunities this quarter and pending any -- and pending the decisions there, we did not acquire any shares this period. The $400 million in share repurchase authority, however, remains available and we intend to put it to use.

Finally, we continue to see adverse comments about the state of the student loan market in general, and in some cases, to Sallie Mae specifically. Today, with more than 46 million Americans with student loan debt, even a small percentage experiencing difficultly creates a large number of borrowers who struggle. Still, our customers experiences show that education loans are a powerful tool that help students gain the education and economic benefits of a college degree.

At Sallie Mae, when we extend Private Education Loans, we focus on helping students and families make informed decisions that position them for future success. And for our federal loan customers, our extensive outreach and education help customers understand their options, so they too can successfully manage their loan payments. Our low default rates in both programs are the best illustrations that our efforts ensure our customer's success. These are the facts and they highlight the value that an education loan -- that education loans can and do deliver value to students and families.

So I'll stop there and open the call for your questions.

Steven J. McGarry

Monsara, we're ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mark DeVries with Barclays.

Mark C. DeVries - Barclays Capital, Research Division

Jack, I think you've kind of hinted at this with your comments around the buybacks. But could you give us a little bit more color on what you're seeing out there as far as the opportunity to acquire FFELP portfolios?

John F. Remondi

Well, as we've said in the past, we see that is one of the biggest opportunities for this company. There's about $150 billion of FFELP loans outstanding that we do not own or service today, and we are -- have a very strong interest in participating in acquiring loans in that marketplace. There's also about $50 billion worth of private credit loans outstanding that we do not own today as well and we would be interested in exploring opportunities in that space also.

Mark C. DeVries - Barclays Capital, Research Division

Are you seeing any kind of change in the level of activity there and more willingness on the part of holders of those loans to sell?

John F. Remondi

Well, there was -- there's -- there was a specific opportunity that we've been looking at and continue to pursue that caused us to not buy back shares this quarter. So, yes.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And then on the flip side, can you talk a little about your appetite to sell FFELP residuals here at -- given where the market's kind of clearing on this?

John F. Remondi

Yes, so -- and as we said at the last earnings call, we really had -- we had a couple of very strong strategic objectives in the sale of the FFELP residuals. We wanted to demonstrate a value that could be attained in the marketplace. And once we sold those, I think we got a revaluation of the company's FFELP cash flows as a result of that to the positive. We wanted to demonstrate that they could be liquidated. I mean, and we could raise cash from those sales if we needed to and expand kind of the marketplace overall. I think as we completed those strategic objectives, we then step back and said, "Take a look at what would be more financial objectives, which would be total returns, right?" I mean, if this is -- if it makes sense for us to sell, we would be sellers. If it makes sense for us to buy, we'd be buyers.

Mark C. DeVries - Barclays Capital, Research Division

Got it. And then Joe, I think in your brief comments around the delinquencies and charge-offs, I didn't hear you mention the kind of normal seasonality. Isn't there a normal kind of sequential uptick in delinquencies in the third quarter related to when borrowers are going to repayment? And if so, how did the delinquencies actually track this quarter relative to your expectations?

Joseph A. Depaulo

So we normally see a little bit more of that in the fourth quarter. So this quarter, when we saw the uptick, we do think it's related to our servicing conversion. And normally, if you look over our second to third, we normally don't see that uptick in that quarter. Typically, it's May graduates coming back into repayment in December or November.

Mark C. DeVries - Barclays Capital, Research Division

Got it. Got it. Okay, so it was related to servicing. Okay. And then finally, I think your provision level at these levels is clearly higher than the current charge-off -- I mean, lower than the current charge-off run rate, but also still meaningfully higher than kind of your longer-term expectations for 1.5% annualized charge-offs. Do you still feel pretty good that you're on a glide path to that level of charge-offs on your Private Student Loan book?

Joseph A. Depaulo

Yes, I mean, we recently say that we're gliding to below 2%. The 1.5% is what you see on that segment that we highlight on the chart, which is the low-risk segment. That is -- that's the segment that we're producing at 70% of our loans. But until the other 2 segments pay down or that -- this one continues to grow, that's a matter of time to get to below 2% and eventually to 1.5%.

Operator

Your next question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Two questions. Just as far as your guidance is concerned, do you guys contemplate anymore share buyback?

Joseph A. Depaulo

Well, as Jack indicated, we are evaluating some asset opportunities and we retain the authority. Should those asset opportunities not come to fruition, we would reenter the market and execute on our buyback authority. In addition, even with some acquisition opportunity, we do accumulate capital from our earnings each year, so the capital will be available even if we didn't -- even if we had a different opportunity in the fourth quarter.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. So you guys do anticipate some level of share buyback for the remainder of the year?

Joseph A. Depaulo

Depending on our other opportunities, yes.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then as far as the CFPB document that came out yesterday, I just want to make sure you guys feel pretty comfortable with what your practices are relative to some of the concerns they had.

John F. Remondi

So yes, we're -- we do, absolutely. We think our results actually speak for themselves. I think when we look at some of the issues that get raised here, with our low level of delinquencies in our private loan book and these low level of charge-offs, I think it's fair to say that our customers are not experiencing the problems that are hinted at or implied in that report. They are -- those numbers are also, I will point out, substantially lower than what you would see in the federal loan programs overall as well. I think the payment-related issues here, I think we worked very hard to inform our customers as to how we allocate payments when they come in. The process that we employ, I think, is well disclosed and fair. And we always -- if a customer asked us to do something different, we do it. Frankly, I think one of the issues we get to is our customers will say, "I want my payment allocated to principal." And that's a big source of challenges. And of course, any payment that comes in, in excess of interest, regardless of -- is always allocated to principal and the reduction there which stops the further accrual of interest.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. All right, great. And then, just finally, as far as the separation is concerned, I guess that document is taking a little bit longer than we anticipated early on. I mean, is there something specific that's causing the delay? And I think you guys were a little bit more coy on kind of when this deal would close. I mean, is it going to be a year from when you guys announced or could be a little bit later than that?

John F. Remondi

So we're taking -- I mean, the -- part of this is just making -- is taking our time to making sure that we've got the operational issues fully defined. We did, as you know, change one of our original design concepts. We thought that the bank would be servicing all the private loans and we've decided to move that to where each party, each entity will be serving -- servicing its own private loan book, but we're not encountering any difficulties in completing the information for the Form 10.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And are there any regulatory constraints or anything like that, that you guys are waiting for?

John F. Remondi

No.

Operator

Your next question comes from the line of Michael Tarkan with Compass Point.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Just to get back to Sanjay's question, just so I'm perfectly clear. The $2.94 in EPS guidance for the year, does that assume any buybacks in the fourth quarter or does that reflect the current diluted share count?

John F. Remondi

It assumes there's some -- a modest amount based on this potential transaction we're working on. If we don't close this, then it will be larger.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Okay. On expenses, this is -- I know that you mentioned a few things that we're driving it, but this is -- it looks like the second straight quarter where they were up pretty significantly year-over-year. Have you incorporated at this point most of the IT and other infrastructure build-out, I think, for the 2 entities post-spin? Or is there still more to do on that front? And I guess, maybe is that $1 billion target -- is that still within reach this year or is that what you're shooting for?

Joseph A. Depaulo

Let me break that question down in 2 parts. The first piece is we are -- the IT and other buildout we're doing to separate the organizations, we're reporting that in a separate line in restructuring. If you look at our total expenses year-to-date, we're at $737 million before that number. So we expect, excluding the numbers -- the money we're spending for -- basically for the spin and other restructuring, we will be under $1 billion.

John F. Remondi

I would just add that we are experiencing some better revenue trends in our processing business than forecasted. And so -- and that is driving OpEx. But I don't want people to lose sight that that's a positive development.

Michael Tarkan - Compass Point Research & Trading, LLC, Research Division

Sure. And then one more. On the Ed servicing contract, can you just update us where we are on that renewal? I know you guys are talking with Department of Education, maybe trying to work out more of a fee-for-service type of model. Do you expect any changes to the current structure at this point and maybe when do you think we would see a renewal kind or some kind of movement on that front?

John F. Remondi

There really hasn't been a whole lot of interaction with the department over the last 17 days. So we'll have to wait and see if they reopen, how quickly they plan to move on this. Our point that we raised in the past is that when we look at the satisfaction scores, these are the borrower, school and Department of Ed, all fortes [ph] are really -- are very, very tightly clustered and within the margin of error. So there's really no ability to differentiate service levels on those 3 metrics. On the default side of the equation, there's a massive difference in performance. Our performance is 70% better than the fourth place finisher in terms of default prevention success. And it was certainly been advocating that where it matters, and we think this is where it matters. We'd like to see the default metrics weigh more heavily.

Operator

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

Bradley G. Ball - Evercore Partners Inc., Research Division

Regarding the planned separation, are you still expecting total separation-related charges of $75 million to $95 million? And I think you're -- with this second quarter and this quarter, I think you're up to about $20 million, $22 million extended so far. So is the expectation to do the balance of that in the next quarter or 2 or how does that play out?

Joseph A. Depaulo

Well, first of all, that range is still good. We may be closer to the upper end of that range, but that range is still valid. We will spend that money all the way through spin. So I wouldn't -- the pace is a little bit slower now than what you're going to see next year, obviously, as we get closer to the transaction.

Bradley G. Ball - Evercore Partners Inc., Research Division

9

Okay. Great. And you mentioned the private loan servicing now moving to each party versus the prior plan. Anything else changing in the way you see the division of the company or even the financial attributes? I know you've had some FFELP asset sales. Could talk about how that's impacted the cash flows that you were projecting on the FFELP side?

Joseph A. Depaulo

Well, we haven't made any other significant changes to the construction of the 2 companies. And again, you will see more information when we file the Form 10, but it too will be consistent with what we've told you up to this point at least among the -- how the 2 companies are organized. The FFELP sales, back to Jack's point, were something that -- again, we've often said the initial pursuit of them were strategic, both for valuation and liquidity or improving liquidity. As we -- as NewCo or Jack's company moved into its phase as an independent company, it will look at FFELP sales the same way Sallie Mae looks at them today. It will be a financial decision.

Bradley G. Ball - Evercore Partners Inc., Research Division

And again, the impact on the cash flows that you had reported when you announced your spin, I guess the FFELP-related cash flows will decline commensurate for the sales that occurred subsequent to March 31?

Joseph A. Depaulo

Yes, after the second quarter, we published them statistics, and I'm sure you've probably seen them where we revised our cash forecast for FFELP. The remaining cash flow forecast for that asset is approximately $12.5 billion over the remaining life of the asset; and about 1/3 of that is servicing; and 2/3 of that is interest income. And that -- and we also revised our estimate on floor income, which is not part of that $12.5 billion.

Bradley G. Ball - Evercore Partners Inc., Research Division

Yes, great. And then just finally on the separation. Is there anything that would suggest that the December release will change the look of the bank based on what you're seeing competitively in the marketplace today? Are you seeing -- you mentioned increased marketing expense in the quarter. Are you seeing that it's more a challenge to grow the private loan assets than you had previously thought?

Joseph A. Depaulo

The short answer is no. Our -- we have grown originations by 15%, and you do have to invest some money to get your origination volume to -- year-over-year to grow. And third quarter is where we spend -- where we often spend money on marketing so -- along with the second quarter. So I don't -- I wouldn't read our investments in the marketing of Private Student Loans or in the collecting of Private Student Loans as a trend that would change our outlook. We're pretty bullish on the ability to generate high-quality loans and to use our collections to control losses.

Operator

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

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

The first question, I just was wondering if you could share the dollar amount of Private Student Loans in bank at the end of the quarter.

Joseph A. Depaulo

Number is $6.2 billion or $6.4 billion. I apologize, I'll get that for you.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. That's fine, Joe. The other question I had is if you look at your portfolio of Private Student Loans outside of the bank and I apply some cumulative losses through that portfolio, say, 15% on what I estimate on your traditional book and then something very high, 45% on your nontraditional. Based on the numbers I've seen, it seems like there should be a pretty steep decline in charge-offs from that portfolio. And I was curious from a timing standpoint, I mean, the charge-offs should decline by 50% or so. And it seems to me that the decline occurs kind of in that 20, 15 timeframe. I was wondering, is that reasonable or do you think that we could see a magnitude of the decline? That declined earlier, maybe, say, in the latter part of 2014. How shall we think about that decline in charge-offs from the private loans outside of the bank?

Joseph A. Depaulo

So let me point you back to Slide 6 on our presentation. And the best way to think about this is to look at that slide and relate it to your first question, Sanjay, which is how much is the -- how of the loans are in the bank? So let me break this down for you. The NewCo or the asset management and servicing company will have the majority of the green bar minus the $6 billion that's in the bank today. So in that bar are our highest-quality signature loans, which performed very well, and some of our Smart Option, which we've before for -- securitized over the last 4 years. So that segment we expect to continue to perform well and improve. The other 2 segments, which we do not produce anymore, you could see both in terms of balances and in terms of losses, both are improving significantly. So I wouldn't project forward what those numbers would be, but you could see it just from this, if you just break apart what's going to be NewCo and what's going to be a bank, you can see this performance trend and where they're heading.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Yes, that's fair. I was just wondering if you had the magnitude of the decline and the timing for that. So I can go over that offline as far as my specific calculations as well. But the other question I had was, in terms of the originations in the bank and the fact that you have the -- NewCo also introduced servicing of loans and to the extent that maybe their potential sale of Private Student Loans originated by the bank to NewCo, if we see some sort of arrangement like that on an arm’s length transaction, is that something that you would anticipate that we would find out about by the time the Form 10 is filed or is that something that you will kind of visit after the spend is completed?

Joseph A. Depaulo

You will see that after the spin is completed. And sales between the 2 companies will be arms length and they would be based on, obviously, a bidding process and you will see it after the spin.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Okay. That's helpful. And then just my last question, from a regulatory standpoint, Elizabeth Warren has been quoted in the presses coming -- making comments about Sallie Mae and saying that -- I mean, she's going to be very clean essentially. And I was wondering in your discussions with the Department of Education and other regulatory agencies, how should investors get comfortable with that aspect of risk, if you will, from the standpoint of Elizabeth Warren continuing to make comments -- negative comments. And is there anything you've done or you can say that can give investors some assurance that this is not going to involve -- kind of develop into something that's a high-risk issue. How should we think about that?

John F. Remondi

Well, I think as I said in my opening comments, there certainly is an awful lot of media commentary on this. And unfortunately, because there are a large number of Americans with student loans, even small percentages create large numbers there. And so that I think is -- been a lot of the focus. I think our job and the item that we have been working on both with Senator Warren's office and CFPB and others is the fact. And the facts are that the delinquency rate for our private loan business and our federal loan business have been coming down. The default rates in our programs, particularly in our federal loan programs, our cohort default rate is substantially less than the national average, and this is despite the fact that we've serviced over 30% of the loans that are measured in that calculation. And when we look at those statistics and when we look at the consistency and the success of our customers, those are the facts that will ultimately prevail.

Operator

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

Alan Straus

You guys made any progress on trying to move the FFELP portfolio into a tax advantage structure?

John F. Remondi

Alan, we continue to look at that. But I think the -- that is something that if it occurs, it'll occur post spin.

Alan Straus

Has the path gotten any clearer or is it still very difficult?

John F. Remondi

Well, I think as you know, and we've talked in the past, this is -- one can get it into a pass-through structure. The question is what's the toll of the tax to get it there. And that is a big challenge. So the -- you're not -- to get to an end state where you're in a pass-through structure but you pay all the taxes upfront, we're not really accomplishing anything there, right?

Operator

Your next question comes from the line of Moshe Orenbuch of Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Given that you talked about suspending share repurchase for an asset purchase, I mean, if you are buying FFELP residuals, you really wouldn't need a lot of capital. Should we assume that, that's a private loan transaction?

Joseph A. Depaulo

Yes.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Interesting. Okay. Also, the -- there was no debt buyback. Is that the same sort of thing? I mean, it's just also kind of use of cash or was it just debt opportunities in the marketplace?

Joseph A. Depaulo

No, that's more -- we don't have the same opportunities we've had in the last 2 to 3 years. So that's a different issue.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Okay. And you mentioned on the private loan delinquencies that your belief is that the servicing platform issues were what caused it. What's the timeframe for that to turn around, like what should we be looking for?

Joseph A. Depaulo

Well, you'll see progress this quarter. But what we're really managing is customers who have made payments a certain way for years. And this is just -- a lot of them as you can imagine have bill pay set up, all different arrangements set up. And just over time, we just have to continue to communicate them -- to them so they're used to taking -- separating their payments between FFELP and private.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Got you. And then kind of lastly, you've kind of mentioned the gain you promised. Have you talked about the revenue profit impact as we go forward?

Joseph A. Depaulo

I would look at -- we did 2 sales this year, Campus Solutions and Upromise investments. And one was at a nice margin, one was not profitable. And when you put them together, the revenue and expense is almost washed.

Operator

[Operator Instructions] Your next question comes from the line of David Hochstim with Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

Could you talk for a minute about what's happening with the contingency revenues? Would those be growing again? Is there some seasonality? Kind of explain a little downtick in Q3.

John F. Remondi

So this is a business area that we've been focused on growing. It is definitely dominated by collection-related activities in the education space. And as our market -- the unit of volume that we have available to collect and recover or rehabilitate has been growing in that area. Our receivables that we manage on behalf of third parties, for example, were up 9.5% year-over-year, there is some -- there's more volatility in this payment and this issue because of the way the process works. We earn the revenue when the transaction of the loan is rehabilitated and accepted by the Department of Ed or by the different guarantee agencies. And so there's a transaction date that moved that. But it's been a good business for us and one that we expect to continue to grow.

David S. Hochstim - The Buckingham Research Group Incorporated

So you should continue to benefit as government billing season defaults rise outside your portfolio?

John F. Remondi

Well, what we try to do here, I guess, I'd frame it a little bit differently. I would say that what we are working to do is help borrowers, particularly in the federal loan programs, rehabilitate their defaulted loans. So we get them back on track. The loan is returned to good standing. And as you know, and we've said a number of times, the primary reason borrowers default on their federal loans is that they dropped out of school. A default on a federal loan makes you ineligible to borrow for future education periods. And so if we can get a customer back on track and rehabilitate it, it reopens that door and hopefully allows them to complete their education and earn their degree.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then Joe mentioned that seasonally, FFELP spread is higher in the second half, but that it's going to revert back to the high-90s. Is that happening in the fourth quarter? Are you talking about kind of starting out in 2014?

Joseph A. Depaulo

I look at that more in 2014. Certainly, it declined a little bit in the fourth quarter, but typically, it's the second half of the year that we have higher spreads in the first half.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And then just to be clear again on the possible portfolio acquisition that you're really just talking about a just large or a fee private loan portfolio or is there something happening in the FFELP space that was also may be getting closer?

Joseph A. Depaulo

We do have opportunities in the FFELP space that we continue to look at it. But the opportunity that really caused us to suspend temporarily our buybacks was a private opportunity.

David S. Hochstim - The Buckingham Research Group Incorporated

Okay. And that's still possible you'd say?

Joseph A. Depaulo

Yes.

Operator

Your next question comes from the line of Scott Valentin with FBR.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just with regard to expenses. You mentioned elevated litigation and compliance costs. I'm just wondering how long you see that remaining the case. I guess, how long you see higher litigation and compliance expense?

Joseph A. Depaulo

Well, litigation is part -- sort of in the ordinary course of business, we will incur those. Now we called it out because we had some specific activity this quarter. But the higher litigation costs or the higher compliance costs and the higher general control costs, this will be with us and our industry and it would be with Sallie Mae and NewCo and Banco whether we separate it or not. And this is just the cost of doing business in the environment we're in. So I would separate the 2, but I would say the one is really part of everybody's baseline going forward.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. This is just a follow-up question. I think you guys pointed out you're anticipating or projecting lower recoveries for partially charged-off private loans and I think there's $112 million increase in the allowance. Just curious to what you're seeing that's driving down that recovery expectation.

Joseph A. Depaulo

Well, we still see it in the 2008 to 2012 cohorts. And we don't -- earlier cohorts have performed much better than that. So we're just being conservative in terms of making sure we're reserved fully for the performance we're seeing now.

John F. Remondi

And the charge-offs in those periods were clearly dominated with what was labeled nontraditional loans, so.

Joseph A. Depaulo

They are typically a little harder to collect and recover.

Operator

The next question comes from the line of Robert Smalley with UBS.

Robert Smalley

Just on -- a couple of quick things. Just on the portfolio acquisition side. Where would that portfolio be located presplit? And would there be any issues with moving it afterwards? And is that one of the reasons why you're a little held up in the acquisition here?

Joseph A. Depaulo

So it will be located pre split at the corp, not in the bank, and post spin at NewCo as we call it. And it has no impact on our activities with spin.

Robert Smalley

Okay. Second question, you did a debt issue last month, the 5.5s of '19, 5.5-year deal. What's your calendar for doing more debt issuance this year and what are you looking at for next year? And are there any concerns about continuing to do debt issuance out of the corp given the upcoming spin?

Joseph A. Depaulo

So actually, I think the -- I don't think we -- I mean, I think if you look at the transaction we just did, that reaffirmed that we can execute these transactions even during the course of the spin. We don't anticipate anything this -- the rest of this year, but we will certainly return to the market early next year.

Robert Smalley

Okay. And you would do those out of NewCo, out of Sallie Mae Bank? How would that work?

Joseph A. Depaulo

Well, prespin, it's just -- it's Sallie Mae and it's Sallie Mae issuing debt. Post spin, as we've indicated, the unsecured debt moves with NewCo, with all or substantially all of the assets.

Robert Smalley

Okay. Final question. We're still waiting from some word on S&P with respect to your rating. The market is -- has it as a foregone conclusion that you're going to be downgraded to BB, probably BB+. What's the timing on that? And is there any reason to hold out any hope that they won't move?

Joseph A. Depaulo

Well, look, when we issued -- when we did the issuance, we really played more in a noninvestment grade segment. So we're -- I think we're operating in that zone today and we're operating successfully. I think they will -- they may be waiting for after our Form 10 is filed. Obviously, our view on it is, we would love to improve the ratings both for Sallie Mae and then going forward for NewCo, who will be a debt issuer. But we think we're performing pretty well even with the assumption that we're working on today and what we think our investors worked on.

John F. Remondi

Look, and Robert, the rating agencies are -- the decisions are theirs and their recommendations are theirs. But we run this business today and we'll run it -- we'll run NewCo in the future at an investment-grade type of level, and that's how -- we think that's an important -- important for us to run it that way. I think our investor base on the fixed income side is more inclined to our way of thinking here on our view of the credit quality and performance of the company. We're certainly disappointed. We always hold out hope and we work hard to convey our views to the rating agencies.

Robert Smalley

Is that argument that NewCo would be investment grade getting traction with the rating agencies or you're hitting the usual wall that most people do when talking to them?

John F. Remondi

They have -- there's a very strong view today of monoline wholesale-funded finance companies, right? That -- we're not -- we understand we can't tilt at the windmills here, but it is something that we work hard to make our point and -- and look, at the end of the day, it's demonstrating your performance, right? Each and every quarter, we demonstrate that. We did exactly as we said we would, just as we did to the crisis. And I think that's really where you end up earning your stripes or letters.

Operator

And there are no further questions in queue. I would now like to pass this call back to Mr. Steve McGarry for closing remarks.

Steven J. McGarry

Thank you very much, everybody. That concludes our call. And if you have any follow-up questions, please give me or my colleague, Joe Fisher, a call. Thank you.

Operator

And ladies and gentlemen, with this, we conclude today's presentation. We thank you for joining. You may now disconnect.

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