Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

SLM Corporation (NASDAQ:SLM)

Q4 2009 Earnings Call

January 21, 2010 8:00 am ET

Executives

Steve McGarry – Investor Relations

Albert L. Lord – Vice Chairman of the Board

John F. Remondi – Vice Chairman & Chief Financial Officer

Analysts

Andrew Wessel – J. P. Morgan

Lee Cooperman – Omega Advisors

David Hochstim – Buckingham Research

Michael Taiano – Sandler O’Neill & Partners

Sameer Gokhale – Keefe, Bruyette & Woods

Matthew J. Snowling – Friedman, Billings & Ramsey

Brad Ball – Ladenburg Thalmann & Co.

Janet Sung – Loomis Sayles & Company

Operator

At this time I would like to welcome everyone to the fourth quarter 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. (Operator Instructions) Mr. McGarry you may begin your conference.

Steve McGarry

With me on the call are Al Lord, our CEO and Jack Remondi, our Chief Financial Officer. After their prepared remarks we will open up the call for a discussion of the quarter but before we begin let me remind you that in our presentation we will discuss predictions and expectations and make forward-looking statements. Actual results in the future may differ from those discussed here, perhaps materially.

This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10K and other filings with the SEC. During the conference call we will refer to non-GAAP measures that we call our core earnings presentation. The description of core earnings, full reconciliation to GAAP measures and our GAAP results can be found in the fourth quarter 2009 supplemental earnings disclosure. This is posted along with the earnings press release on the investor’s page at SallieMae.com.

I’ll now turn the call over to Al.

Albert L. Lord

We appreciate this opportunity to chat with interested parties and we thank you for being here. We’ll be talking about fourth quarter performance and how we see 2010. Obviously the fourth quarter is a better quarter than we have seen recently and we believe it is the beginning to a better 2010. I’ll discuss the quarter momentarily but first I’d like to talk about 2010. Just for your information, any remarks that I make will be with respect to core earnings not GAAP.

So, we’re 21 days in to 2010 and as we have told you before we expect a significant improvement in our earnings in 2010 reporting $0.96 for 2009 and we expect to earn about $1.50 in 2010. 2010 earnings improvement will come considerably more from reduced 2009 costs than it will from revenue growth. Obviously revenue growth is slower in a slow economy and particularly in the credit business.

In 2010 we hope to see a full year of CP LIBOR spread alignment. Obviously, we’re back to CP LIBOR spreads that are close to what the historic norms have been. 2009 and 2008 bore the cost of distressed asset write downs. We would expect that they would be negligible in 2010. Our costs were stable in 2009, they will be stable in 2010. You should be aware that cost control in this company is a very serious focus and we recognize the need to continue to achieve scale economies.

We had a pretty significant cut in our credit costs in the fourth quarter. We expect that that will be the beginning of a gradual decent in our credit costs. Certainly our credit costs like everybody else’s are vulnerable to economic downturn. We don’t expect a downturn, we don’t expect an upturn and in fact our comments are really based on an economy that is pretty much the way that it is today.

We will expect to experience a better cost of funds in 2010. The nightmare that we experienced with our ABC fee facility over the last two years, at least the funding costs nightmare is now passed. You will also see in 2010 private credit revenue growth. We expect better margins in that business as we’re pricing it differently. You’ll see volume increases but slight. Volume will be a challenge with our tightened underwriting standards. Again, another particular focus in 2010 will be asset quality particularly in this economy so our growth will be careful growth.

I’ll talk a little bit about the fourth quarter before I turn it over to Jack. Our fourth quarter was better. I spent the last half hour or so what I would almost call rave reviews of our quarter. I would say I am a little more sanguine than some of the reviewers. It is a better quarter, I don’t think of it as a good or a great quarter by any means. It’s not like we set the world on fire recently.

As I said before the CP LIBOR spread was normal or certainly near normal in the fourth quarter. The fourth quarter also is the beneficiary of the receipt of what I consider our annual compensation for originating loans for the federal government which is done in ’08 and ’09 and we’ll do in ’10. In fact, we’ve actually offered to originate loans for the federal government forever. But, in any event, we received $75 a loan which works out to a little more than a 1% fee for originating those loans. The government will likely earn somewhere in excess of 500 basis points on those assets.

We delivered 3.5 million units and generated about $271 million of revenue. We now service those loans for a fee. Also during the fourth quarter we extinguished $740 million of debt, long term, unsecured debt at about $0.90 on the dollar. Margins improved and continue to improve as the capital markets become more liquid our cost of funds is falling although it is not even close to historic levels and of course we don’t expect that our cost of funds will likely achieve historic levels.

As I told you before, with respect to 2010 our operating expenses are under control. They are running at about $1.2 billion per year. We see 2010 as flat. The provision was down in the fourth quarter although it is still running at an almost $1.3 billion annual run rate which is probably two times what we would like the long term rate to be. We’ll end the year with almost a $2 billion loan loss reserve which is more than we started the year with and we expect charge offs to decline.

One other positive and it relates to the fourth quarter and it also relates to all of 2009 and it is certainly quantitative and qualitative and that is that during 2009 we gathered a number of new funding sources. We were able to extend liabilities and certainly Jack will cover that in more detail but it has massively strengthened our operating position and the strength of our balance sheet.

No Sallie Mae conversation is complete without some comments on the political front, I have two. One is that the issue that we have been talking about now for at least one full year is the issue about SAFRA or direct lending is at this point totally in limbo. As you are aware Sallie Mae along with other players in the private sector have forwarded a proposal to Congress which would guarantee something in excess of an $80 billion savings and in effect have guaranteed that it can be implemented.

That has been forwarded, no action on that, no action on SAFRA, we are totally in neutral. Virtually anything else I would tell you about politics at this point would be my opinion and so I am done talking about politics for the day. I am going to ask Jack Remondi to cover the quarter in more detail.

John F. Remondi

My comments will cover the operating results for the quarter and the year on both a GAAP and core earnings basis. In addition, I’ll review our funding activity and liquidity, provide a update on our lending business and review the performance of our private credit portfolio. At the end, I’ll provide an update on our outlook for 2010.

For the quarter our core earnings including non-recurring items were $249 million or $0.41 a share and that compares to $164 million or $0.26 a share in the third quarter and $65 million or $0.08 a share in the year ago quarter. For the full year, core earnings including non-recurring items were $597 million or $0.96 compared to $526 million or $0.89 per share a year ago.

This quarter’s non-recurring items include a loss on the sale of our GRP subsidiary which is our mortgage purchase paper business of $98 million after tax or $0.19 a share, impairments of $34 million in our remaining portfolio of purchased paper business or $0.07, $3 million in restructuring expense or $0.01 per share and a loss on the conversion or our mandatory preferred stock in to common of $33 million or $0.06 a share. These were offset by debt repurchase gains of $46 million or $0.09 a share. Cumulatively these add up to $0.24.

Net interest income was $686 million for the quarter versus $553 million in the prior year period and the net interest margin increased to 1.4% from 1.15% in the year ago quarter. Net interest income and net interest margin for the full year were $2.3 billion and 1.14% respectively compared to $2.4 billion and 1.3% in 2008. The changes in net interest income and the margin from the prior periods were primarily due to the CP LIBOR spread which was just below the historical norm in the fourth quarter but wider than average for the full year. We believe the factors that broke the historical relationship between CP and LIBOR have abated although we are still pursuing a permanent fix to eliminate this basis going forward.

In addition, we earned $23 million floor income in the quarter or $0.03 a share. For the full year we earned $326 million of floor income or $0.43. Although this source of income is not included in our core operating results it is nonetheless very real cash earnings. The provision for private credit loan losses in the quarter was $327 million, a decrease of 21% from the $413 million in the prior quarter. For the full year, the private credit provision was $1.4 billion compared to $874 million in 2008.

At December 31st our allowance for private credit loan losses was equal to 8.1% of loans in repayment and consistent with prior periods our FELP and private credit allowance is sized to cover eight quarters of expected charge offs. Our private credit loan charge offs declined 33% to $298 million in the fourth quarter from $443 million on the prior quarter. Charge offs for the full year were $1.3 billion and this year’s charge offs were impacted by the economy and changes in our collection practices.

As a result of the changes in our forbearance policies, some charge offs were accelerated in to 2009. Charge offs on an annualized basis within our private credit portfolio varied significantly from 3.2% of traditional loans to 18.6% in the non-traditional portfolio, both significantly improved from the prior quarter of 5.1% and 28.5% respectively. Although only 12% of loans in repayment are non-traditional loans, they represent nearly 50% of charge offs.

In addition, within our traditional portfolio, the charge off rates for loans with a co-borrower, our primary focus of new lending, was just 2.4% this quarter. At December 31st 88% of loans of our managed student loans were traditional loans, 57% of all loans had a co-borrower and the portfolio had an average FICO score of 713. This compares to 85% traditional, 55% with a co-borrower and an average FICO score of 710 a year ago. In addition, 2.2% of loans at yearend were made under our new smart option loan program.

Performance statistics also improved with loans in forbearance at 5.5% of our portfolio compared to 5.8% at September 30th and 7% a year ago. In our traditional portfolio 30 to 60 day delinquencies increased slightly to 3.4% from 3.3% in the third quarter while 60 to 90 day delinquencies decreased to 1.6% from 1.8% and 90 day plus delinquencies were unchanged at 4.6%.

Reserves for traditional loans at December 31st were equal to 4.9% of loans in repayment. We saw similar changes in our non-traditional portfolio where 30 to 60 day delinquencies increased slightly to 8.6% from 8.4% in the third quarter while 60 to 90 day delinquencies decreased to 5.4% from 5.9% and 90 day plus delinquencies declined to 17.5% from 17.8%. Reserves for our non-traditional loans at December 31st were equal to 31% of loans in repayment.

The small uptick in early stage delinquencies was driven by seasonal factors as a new class of graduates entered repayment. The seasonal impact this quarter was smaller than in prior periods. Other income in the quarter totaled $503 million compared to $337 million in the third quarter. Other income for the full year nearly doubled to $1.7 billion from $969 million in 2008.

The fourth quarter included $271 million in gains from the sale of FELP loans and $73 million in gains from debt repurchases. The full year results included $284 million in gains from the sale of FELP loans and $536 million in gains from debt repurchases. These gains were partially offset by an impairment of $54 million in the fourth quarter and $79 million for the year on our remaining portfolio of purchased paper. The book value of this portfolio which is in run off mode now stands at just $285 million.

We completed the sale of our GRP unit in the quarter closing the book on our mortgage purchase paper business. We booked an after tax loss of $98 million as a result of that transaction and with the sale accounting rules now require that we report this entity as a discontinued operation. Similar treatment will apply when the wind down of the remaining purchase paper business is complete.

Operating expenses excluding restructuring charges were $293 million in the quarter compared to $260 million in the fourth quarter of 2008. Operating expenses for the year decreased 4% to $1.2 billion. Total restructuring expenses for 2009 totaled $14 million. As Al mentioned we continued to extend the duration of our liabilities by executing term securitizations to replace short term funding. At year end 85% of our managed assets were funded to life, up from 70% at December 31, 2008.

Term funding activity in the quarter included a private credit ABS deal for just under $600 million which funded a portion of our career training portfolio, the first such transaction, a FELP consolidation loan transaction for $840 million and an additional $350 million funded through the straight A conduit program. In 2009 we completed a total of $6 billion of FELP securitizations, just under $15 billion in funding through the straight A conduit and another $6 billion in private loan securitizations principally through TALF. We expect to do at least one more private credit TALF eligible transaction before the program ends in March.

New private credit loans are originated and funded with deposits through our bank subsidiary Sallie Mae Bank. During the first half of 2009 Sallie Mae Bank raised deposits in excess of loan growth to prefund expected asset growth in the second half of the year. As a result, in the fourth quarter of 2009 Sallie Mae Bank did not need to raise additional deposits. As of September 30th total term bank deposits were $5.6 billion and the bank’s cash and investments totaled $2.4 billion.

Last week we terminated our existing asset backed CP facility and the nightmare analogy is pretty true there and replaced it with a multiyear facility that will allow us to fund federal loans at a much lower costs. The new facility provides funding of up to $10 billion in the first year, $5 billion in the second and $2 billion in the third. The fees and rate associated with this facility were $4 million and an expected cost of funds of CP plus 50, a sharp reduction from the fees and rates associated with the prior facility.

To put that in perspective, in 2009 we paid feeds in excess of $200 million associated with this facility and had a borrowing cost equal to CP plus 130. Also in January we became a member of the Federal Home Loan Bank of Des Moines through our HICA Insurance subsidiary. Through this membership we have the ability to borrow through Home Loan Bank advances up to $12 billion backed by eligible collateral included federal student loans. We drew our first advance at the same time. We’re excited about this new relationship and the additional flexibility it provides.

At quarter end we had $12.5 billion of primary liquidity consisting of cash and investments and committed lines up from $10.7 billion at September 30th. Our loan portfolios and operations continue to generate very strong predictable free cash flow. This cash is principally generated from cash distributions from our securitization trusts, principal payments on our loan portfolios and other cash flows including net earnings.

For example, in the fourth quarter our securitization trusts generated cash flow of just under $600 million and principle payments on unencumbered loans totaled $360 million. This sizeable and predictable source of cash flow along with our term funding activity generated the ability to repurchase $3.4 billion in term unsecured debt in the year generating gains of $536 million. We expect to continue to pursue debt repurchases in 2010 by example, last week we completed a tender for just over $800 million of non-dollar denominated notes with maturities in 2010 and ’11 generating gains of $45 million.

On the lending side we originated $4.5 billion of FELP loans in the quarter and $21.7 billion in the full year, an increase of 14% and 21% respectively. In the fourth quarter we sold $17.6 billion of FELP loans to the department of education under the ECASLA programs generating revenue of $271 million. Today, we’re now servicing over two million of accounts under our Department of Education servicing contract we were awarded in June.

The FELP student loan spread in the quarter was 89 basis points and at yearend 91% of our federal student loans were funded for the life of the loan for long term in the straight A conduit facility. We originated $380 million in private credit loans in the quarter and $3.2 billion for the full year compared with $850 million and $6.3 billion in the fourth quarter and full year of 2008. The decline in originations this quarter and for the year are the result of changes to our underwriting requirements and an increase in the federal student loan limits as well as the company’s withdrawal from the non-traditional marketplace. The loans underwritten in the quarter had an average FICO score of 747 and 88% of loans made had a co-borrower.

Total equity at December 31st was $5.3 billion resulting in a tangible capital ratio of 2% of managed assets compared to 1.7% at September 30th and with 80% of our managed loans carrying an explicit government guarantee and 85% of all managed loans funded for the life of the loan and not subject to any additional collateral posting requirements we believe our capital levels are appropriate.

As I mentioned earlier we converted a portion of our outstanding Series C mandatory convertible bonds ahead of schedule. This was done in response to a reverse inquiry and while accounting rules require us to record a loss of $33 million on the transaction this quarter, the conversion will be both earnings and cash flow positive through December 2010, the mandatory conversion date.

We recorded fourth quarter GAAP net income of $309 million or $0.52 a share compared to a net loss of $216 million also $0.52 per share in the year ago quarter. For the full year 2009, we recorded GAAP net income of $324 million or $0.38 a share compared to a net loss of $213 million or $0.69 a share in 2008. Our GAAP results include unrealized mark-to-market pretax gains and losses on derivative hedging activity. This resulted, and you can see these swings just this quarter and year in a net gain of $167 million in the fourth quarter but a full year loss of $282 million.

The net impact of derivative accounting are recognized in GAAP but not in core earnings results. The GAAP provision for loan losses was $269 million for the quarter and $1.1 billion for the year. GAAP net interest income was $599 million for the fourth quarter and $1.7 billion for the year. Under GAAP the provision for loan losses and net interest income are based only on balance sheet loans plus core earnings figures are based on the total managed portfolio.

2009 ended on a much brighter note than it started. Despite the environment there were a number of significant accomplishments during the year that position the company very well for 2010 and beyond. They include completing $28 billion in term funding for both FELP and private credit loans, extending our asset back CP facility at favorable terms for a multiyear period, winning one of four Department of Ed servicing contracts, launching an improved private credit product and substantially improving our underwriting and collections operations and exiting the mortgage purchase paper business.

For 2010 we see the following new FELP and private credit originations of $20.8 billion and $3.5 billion respectively, a lower private credit provision of $1.2 billion and a student loan spread in the mid 150s. Combined we expect to generate core earnings per share of $1.50 and with that I would now like to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Wessel – J. P. Morgan.

Andrew Wessel – J. P. Morgan

Really it is just on the FELP residual, you’ve spoken in previous conference calls and in previous conference presentations about the opportunity to possibly sell that and change your capitalization level to look more bank like. Any kind of update on that, thoughts on that going forward or any new discussions around that top?

John F. Remondi

We continue to make progress on that front but we don’t really have any more specifics to add at this time.

Andrew Wessel – J. P. Morgan

Then also with the FHLB relationship, what are you envisioning? With being able to borrow up to $12 million is that going to be primarily for private credit? And, can you give an idea of what the advanced rates or haircuts are for that borrowing?

John F. Remondi

Private credit loans are not eligible collateral under that facility. Eligible collateral includes things like mortgages, mortgaged backed securities and federal loans. We expect to use our advanced capacity strictly for federal loans. The advanced rate including the requirements to purchase preferred stock are in the low 80s. It does provide however very low cost of funds

Operator

Your next question comes from Lee Cooperman – Omega Advisors.

Lee Cooperman – Omega Advisors

Two questions, on the securitization of private loans what do you see going on there and at what spread would we be willing to do that business in greater size? Second, if you could help me out, what are you assuming in your $1.50 guidance as regards direct lending? Also, if you go back to Sallie Mae of old, there wasn’t the kind of seasonality that the numbers now imply whereas if you clean up the number in the quarter we earned $0.64 in the quarter. For example in 2004 the spread and quarterly numbers were a low of 51 a high of 58. In 2005 the low was 57 the high was 63, in ’06 the low was 65 the high was 74, with a sequential build. The $0.64 and the $1.50 are very different numbers. $0.64 multiply that by four and $1.50 for the year. So, what is your guidance assuming and why do we have so much seasonality now versus the Sallie Mae of old?

John F. Remondi

Let me take the second question first, as Al pointed out we originate loans for the Department of Education throughout the course of the year but those loans are sold at one point in time and in this case they were sold in the fourth quarter so all the earnings associated with that are booked at the time of sale under accounting rules. That is what causes the change in seasonality in periods past where we were basically a spread lender and earnings came in consistently throughout the course of the year.

In terms of the assumptions for the $1.50, the vast majority of the FELP earnings that will be generated in 2010 come from loans that have already been booked. They were partially disbursed in 2009 and will be fully disbursed in 2010. We do assume that there will be a trail of loans originated in the second half of 2010 but I think it is a conservative assumption. It assumes that SAFRA or something like that is passed and it is just kind of a transition process since we don’t believe schools can all be converted by July 1st. But, I wouldn’t call it material.

On the private credit side of the equation, your first question the last ABS deal that we did in the private credit space actually had some participation from investors who did not take advantage of the TALF program. We clearly want to continue to structure facilities to take advantage of that because we do believe it does help widen the investor base and therefore push down spreads. We think as investors continue to see the performance in our private credit portfolio and better understand this asset class that we would have the ability to access the term ABS market for private credit at least for the AAA bonds in an unsupported manner later in the year.

I will say though we are not constraining our origination of private credit loans due to the term funding marketplace. The demand for private credit loans was down substantially in 2009 because of the increase in federal loan limits directly and indirectly as consumers just in general I think avoided or took down less debt obligations in total. We saw shifts in students attending lower cost institutions for example. You also had a number of schools dramatically increasing the total amount of financial aid that the provided to students and family further decreasing demand.

Lee Cooperman – Omega Advisors

If I could ask just one other questions, not to get you in to a longer term forecast but after the administration has its way and the direct lending is implemented, would you expect given all the moving parts you are looking at your earnings to be lower in 2011 than you’re forecasting in 2010 or higher? Just directionally, no specific number?

Albert L. Lord

You’re asking solely about 2011?

Lee Cooperman – Omega Advisors

Yes. Just directionally, no number.

Albert L. Lord

Look, I think I have said that we expect earnings in 2011 to be higher than 2010. The object here is for us to grow our revenue. As TALF revenues decline at a given pace we’ve got to generate revenues to offset that decline and we are targeting that we’ll have earnings up every year. But, as best we can see 2011 looks better than 2010.

Operator

Your next question comes from David Hochstim – Buckingham Research.

David Hochstim – Buckingham Research

A question about the financial crisis, so called financial crisis responsibility fee and the fact that you didn’t contribute to the crisis I wonder if you can provide a little color on what you think the prospect of Congress even taking this up are and your ability to be exempt? Then related to that just sort of if you can talk about the timeline over the next few weeks in terms of SAFRA and whether the Senate has to do something before the budget comes out or it will automatically likely end up with an extension? You seemed to indicate that?

John F. Remondi

We agree with you on the financial responsibility fee fact, since we weren’t a contributor but actually a victim we were hoping to get some of that money returned to us. The bill itself has not been drafted yet so it is a little hard to know exactly what is going to happen. When talking to people they are more or less saying that we have got to wait and see what the president includes in his budget and we’ll go from there. But, I think we certainly feel and I think there’s some recognition that entities that didn’t receive any benefit from these emergency funding programs like TARP and TLGP shouldn’t be subject to the tax.

David Hochstim – Buckingham Research

Then in terms of SAFRA and what can happen over the next month or couple of weeks?

John F. Remondi

As Al indicated we’re pretty much have been at a stalemate. Part of that is due to Congress being out on recess and just coming back in to town this week. But, the healthcare bill as I think everyone recognizes has basically sucked all the oxygen out of the room leaving little opportunity to discuss other items. We think our proposal, the community proposal works off of the foundation outlined by the President.

It is a program that can be implemented today, it will generate at least 95% of the savings that is estimated by the President’s proposal. We believe it will actually generate more than that because it does not include the savings from lower default rates and can be done an implemented in a bipartisan way. So we continue to push that and advocate for that development. But frankly, there hasn’t been anyone in town to talk to for the last three weeks.

David Hochstim – Buckingham Research

On the private loan provisions and charge offs, you both indicated that charge offs would be likely coming down over the course of 2010 but you’re providing kind of the fourth quarter charge off level it seems like. So you build reserves in Q4 with the expectations of charge offs coming down? Maybe just talk about kind of the reserves relative to charge offs looking forward. You’ve seen the peak clearly in charge offs?

John F. Remondi

Well, I think the economic environment requires us to be conservative here and not change direction too dramatically. Our guidance is for a $200 million decrease in the private provision in 2010 compared to 2009 and we clearly have seen a very significant improvement in charge offs in the fourth quarter versus the third. But, because the economy remains so uncertain I think we need to remain cautious on that front as well.

David Hochstim – Buckingham Research

Then finally, just on the new facility, do you have the same banks involved in the new facility or do you have new banks?

John F. Remondi

It is principally the same banks.

David Hochstim – Buckingham Research

Just a reflection of the improved environment and your better condition?

John F. Remondi

It is a reflection of the environment. This is a very high quality transaction for the banks. This facility is backed by government guaranteed loans so it is highly attractive from that perspective for the bank’s conduit programs they run and yes, it is a reflection of the change in economic environment.

Operator

Your next question comes from Michael Taiano – Sandler O’Neill & Partners.

Michael Taiano – Sandler O’Neill & Partners

Just going back to the private credit charge off number, obviously it was down a lot more than I think most people thought this quarter. Jack could you maybe just give us a sense of trajectory wise through 2010 do you expect charge offs to be relatively chopping? I know 3Q looks like it was the peak but could you see a bump up from the levels in the fourth quarter?

John F. Remondi

Well, I think as we have indicated through the course of 2009 we made some significant changes to our collection practices and one of those by example is a change in forbearance policies which saw a significant reduction in the amount of forbearances that we grant and as a result we pulled forward what we think were future year charge offs in to 2009. In effect, doubling up charge offs for the first nine months of the year.

I think what you are starting to see in the fourth quarter is a little bit of an unwinding of that not because we’re changing practices but just because of the doubling up eventually goes away. So I would look for 2010 to be a little bit steadier in performance than what you saw in 2009.

Michael Taiano – Sandler O’Neill & Partners

Then just switching to politics side of things obviously, it’s difficult to forecast but what do you think the likelihood is that no action gets done the ECASLA is not extended? Is there a potential for the administration just to try and left FELP die on its own by effectively forcing schools to switch over to DLT? If that were to be the case do you think that you could fund FELP loans without a ECASLA at this point?

John F. Remondi

On the political side of the equation, I think the thing that Congress needs to address is making sure that there is no disruption to the student loan marketplace for students and schools for this upcoming academic year. It is pretty clear to us and I think certainly to the schools that requiring 100% conversion to DL by July 1st is at this stage in the game, not going to happen. We would certainly expect that in order to avoid any disruption you would see if a bill is not passed, a community proposal is not passed that they would at least extend ECASLA.

We at Sallie Mae feel that we could fund federal loans without an ECASLA program in today’s marketplace but the size of that requirement would be really a function of how schools moved in and out of DL and how many other lenders participated in that program.

Michael Taiano – Sandler O’Neill & Partners

On that note, like the FHLB facility that you have, it looks like the funding cost on that is even lower than ECASLA so can you potentially use that facility to fund loans that you expect to ultimately put to the government?

Albert L. Lord

You’ve identified very clearly some very serious issues that we’re dealing with and we are working on them and my guess is that the answer to your question will become obvious, we hope we can make it obvious in the coming weeks. But, if you’ll permit us the luxury of leaving the answer there for the moment I would appreciate it.

Operator

Your next question comes from Sameer Gokhale – Keefe, Bruyette & Woods.

Sameer Gokhale – Keefe, Bruyette & Woods

Just a couple of questions Jack, you talked about the private student loan charge offs and how you changed the forbearance practices and accelerated charge offs so just to clarify because it seems on the non-traditional loans you had those vintages, the ’07 ’08 vintages of loans coming in to repayment but because of this acceleration of charge offs that you already had in 2009, if I understand it correctly you’re suggesting that we shouldn’t for example, see another big drop off in Q4 of ’10 relative to Q3 of ’10 just because of some vintage affect for those ’07 ’08 years. Is that correct? We should see a gradual decrease in charge offs as Al mentioned?

Albert L. Lord

Just before Jack answers the question with the answer, are you working on the fourth quarter of 2010?

Sameer Gokhale – Keefe, Bruyette & Woods

Sure. We have to model out the earnings.

Albert L. Lord

I was just making sure that was what you were asking.

John F. Remondi

You will continue to see the sequential declines in 2010 quarter-over-quarter they just won’t be as dramatic as they were from Q3 to Q4 of ’09.

Sameer Gokhale – Keefe, Bruyette & Woods

The other thing is also I’d just like to revisit this issue of your guidance for ’10 and I know you have gotten a couple of questions about it you [inaudible] to answer those but I’ll take another stab at it. I guess what I don’t understand is you look at the run rate of earnings for Q4 after adjusting for some of the non-recurring items, Al had mentioned that op ex should be flattish for next year, I am assuming that is consistent with the run rate of op ex for Q4, funding costs should be lower maybe with some of these new facilities that you’ve structured, provisions should maybe be lower than the run rate in Q4 so why is the analyzed earnings number that you are looking for in ’10 still $1.50? Couldn’t it easily be $1.60 or higher or are you just being conservative there?

John F. Remondi

If you look at the fourth quarter numbers, $0.33 of earnings came from the annual impact of selling loans to the Department. So if you’re looking at the run rate, subtract that out and then do your annualized stuff and then add that back. I think the trends you are illustrating are certainly moving in that direction but $1.50 is where we stand today.

Operator

Your next question comes from Matthew J. Snowling – Friedman, Billings & Ramsey.

Matthew J. Snowling – Friedman, Billings & Ramsey

Just to follow up on your guidance, particularly on the spread you came out and said mid 150s which is below the fourth quarter but you noted that there will be a lower cost of funds and better contribution from the private credits so I am wondering what is driving that lower? Presumably you are selling more of the lower yielding FELP loans today.

John F. Remondi

Well, in the fourth quarter the spread was not burdened by the lower earnings spread of loans funded through ECASLA. Those loans were sold to the Department at the beginning of the quarter. So, for the full year you get in effect loans held for sale bringing the spread down.

Matthew J. Snowling – Friedman, Billings & Ramsey

Can you talk a little bit about the servicing contract with Ed? An update on volume, market share? Servicing fees from third parties only went up $1 million from the third quarter so I am wondering was there any real impact from a revenue standpoint?

John F. Remondi

We’re servicing just over two million accounts today for the Department. Remember the vast majority of these loans are in school and so subject to the lowest of the monthly servicing revenues that we generate. In total, the total revenue book from the DOE contract in the fourth quarter was just under $10 million.

Matthew J. Snowling – Friedman, Billings & Ramsey

Where does that show up?

John F. Remondi

It shows up in the other income line in the servicing component.

Matthew J. Snowling – Friedman, Billings & Ramsey

Was that the $18 million?

John F. Remondi

That sounds about right. That would include servicing for lenders as well as for the Department of Education.

Operator

Your next question comes from Brad Ball – Ladenburg Thalmann & Co.

Brad Ball – Ladenburg Thalmann & Co.

Also on your guidance for 2010, Jack what was your market share of guaranteed originations in the fourth quarter and what are you assuming that will be in that $20.8 billion origination number for 2010?

John F. Remondi

The Department statistics for the fourth quarter aren’t out yet so we don’t know the denominator. For the third quarter we were about a 31% market share of all federal loans including DL.

Brad Ball – Ladenburg Thalmann & Co.

Is your expectation in 2010 that you’ll see the market share slip a bit? Is that part of the reason why originations are down in 2010 versus 2009?

John F. Remondi

Calendar year we actually expect disbursements to be about flat, that’s right. But, it is because of the tail off at the end of the year we’re expecting a higher percentage of direct lending volume or market share in the 2010/2011 academic year.

Brad Ball – Ladenburg Thalmann & Co.

The same kind of question on the private loan side, I know you said that one of the factors for lower private loan originations was the increase in the guarantee amount and lower demand and tighter underwriting but what do you estimate your market share is on private credits?

John F. Remondi

Again, there is no real national statistics here. But, when you look at third parties, other entities that are in the private lending space they have all more or less reported similar decreases in originations in the private credit space. We have traditionally seen our market share of about 35% in that space. I would think with the exit of some lenders it might be a little bit higher but we just don’t have a full picture as to what the denominator was or the total universe of private credit lending was in 2009. We are not aware of any entity though that has seen anything more than significant decreases in origination volume during the course of the year.

Brad Ball – Ladenburg Thalmann & Co.

Separate question, I don’t know that you talked about the impact of FAS 166/167 on either your reserves or your capital accounts here in the first quarter. Can you give us some sense of what you think the impact will be?

John F. Remondi

The equity impact at yearend is $800 million, that is up a little bit from the number we gave you at the end of the third quarter simply because we had a mark-to-market increase on our residual assets of the same amount. So net-net the impact equity is identical.

Brad Ball – Ladenburg Thalmann & Co.

Any impact on your reserve account?

John F. Remondi

Everything comes on balance sheet so everything is going to basically follow to what the core cash numbers are. So, the differences in provision, differences on ending level of reserves will match what we have on a core cash basis.

Albert L. Lord

Effectively all these new account standards do is adopt core accounting which we adopted years ago.

Brad Ball – Ladenburg Thalmann & Co.

So that is all captured in your guidance, your provision guidance?

John F. Remondi

Yes.

Operator

Your next question comes from Janet Sung – Loomis Sayles & Company.

Janet Sung – Loomis Sayles & Company

Most of my questions have been answered. Maybe you can just clarify though on the ECASLA fee would this be repeated again in 2010? And, did you mention that there will still be some residual in 2011? I wasn’t sure if I caught that correctly.

John F. Remondi

It most definitely will be repeated in 2010 and as I said we’ll basically have originated these loans already and the second disbursements were made in January so that volume in that revenue source is very predictable at this stage in the game and will occur sometime around September 30th. We are forecasting in our assumptions that there will be a tail carried over in to the 2010/2011 academic year but at a materially reduced level. Obviously if we’re successful on the ECASLA with either the community proposal passing or ECASLA being extended the opportunity would be for that number to be larger and the revenue on that would be booked in 2011 not ’10.

Janet Sung – Loomis Sayles & Company

Then would it be also in the fall of 2011?

John F. Remondi

If the terms and conditions were the same, that would be correct.

Janet Sung – Loomis Sayles & Company

I am still scratching my head about the private loan originations being down so much. I know that others have asked you the same thing. If you had to pick one reason would you say it is more demand driven or your underwriting standards driven through tighter underwriting?

Albert L. Lord

If we had to pick one it is underwriting. Demand is down maybe 15% to 20%. When I say demand I mean application flow. The originations are down significantly more than that.

Janet Sung – Loomis Sayles & Company

Down over 50% year-over-year?

Albert L. Lord

Application flow is down but the volume is down, and I don’t know exactly what the volume is down 40% or 50% probably.

Operator

At this time there are no further questions.

Steve McGarry

Thank you very much. That concludes our call. If you have any follow questions please feel free to call me in the office.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: SLM Corporation Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts