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SLM Corporation (NASDAQ:SLM)

Q1 2008 Earnings Call

April 17, 2008 8:00 am ET

Executives

Steve McGarry - Senior Vice President, Investor Relations

Al Lord – CEO

Jack Remondi - Chief Financial Officer

Analysts

Matt Snowling – FBR Capital Markets

Brad Ball – Citi

Moshe Orenbuch – Credit Suisse

[Renee Toct – Carrin]

Sameer Gokhale – KBW

Cyril Battini – Credit Suisse

Bruce Harting – Lehman Brothers

Sameer Gokhale – KBW

Operator

At this time I would like to welcome everyone to the SLM Corporation First Quarter 2008 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Steve McGarry, Senior Vice President of Investor Relations.

Steve McGarry

Good morning everybody, thank you for joining us this morning. With me on the call today are Al Lord our CEO and Jack Remondi our Chief Financial Officer. Before we get started and I turn the call over to Al let me read the forward looking statement.

Please note that during the conference call we may discuss predictions and expectations and may make other forward looking statements. Actual results in the future may differ from those discussed here, perhaps materially based on a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-K and other filings with the SEC. During the course of this conference call we will refer to non-GAAP measures that we call our core earnings presentation.

The description of core earnings, a full reconciliation of the core earnings presentation to GAAP measures and our GAAP results can be found in our first quarter 2008 supplemental earnings disclosure accompanying the earnings press release which we posted under the Investors page at our website www.SallieMae.com. Thank you. Now I’ll turn the call over to Al.

Al Lord

Good morning. The last two earnings announcements that we’ve done, we’ve actually done in person, standing in front of you back in October and January. That was because there was a great deal of news to relate at the time and frankly there’s a great deal of news to relate to you today. The first piece I will mention is that today we are not reducing our 2008 earnings forecast. We continue to target $1.70 to $1.80 a share of core earnings.

In January we announced to you that we would make some changes on our Board and our Management. As you are probably aware by now the Board changes have added some financial, legal and capital markets expertise. In 2008 we’ve added Frank Puleo, Mike Martin, Howard Newman, you met Tony Terracciano in January but he’s also obviously new to the Board in 2008. We intend to add one more Board member later this year. The Board will have turned over roughly one third including a new Board Chairman.

On the executive floor I am increasingly pleased with the team that is serving the Board and you, as shareholders. It’s a very different team than we had a year ago. We’ve recently added Jack Hewes to be our Chief Credit Officer, Jack is a very highly experienced guy. We are pushing very aggressively to build both the breadth and the depth of our private credit team.

About the quarter, when we last met we were talking about a vastly changed due to loan landscape because the capital markets it has changed even a great deal more since January. You guys have seen our quarterly earnings. I understand some analysts might even be pleasantly surprised at our $0.48 run rate quarter. I am not particularly pleased with the $0.48. I’m a little disappointed in our fee business results, our collection revenues were a disappointment to me and frankly need more management attention. We’ve obviously been working on other things in the past 90 days.

I’m a little disappointed in the pace of our expense reduction but as I was writing these comments I realized that is my responsibility and while the company has figured out what it needs to do we are now moving into the execution phase and I think you’ll see the pace of those cuts picking up. Our goal, as you’ll recall is about $300 million overall. We will be reporting to you again on that in the not too distant future.

We were recently satisfied with our charge off in delinquency levels in our private credit portfolio. They may be a shade better than we expected. I’m sure also if you’ve had the time to dig into our numbers you’ve noticed that we had a pretty significant jump in level of our forbearance category. I think that begins to tell the story of a slowing economy. The category I know makes some of you nervous; it used to make me nervous. We’ve gotten into it a lot more in the last three or four months. Of course we’d like for the numbers to be lower than they are.

Even though the balance is up we at the company are performing increasingly more rigorous reviews of the loans that are in the category and loans that go into the category. I think Jack Remondi will give you a little better perspective on how we see that category when he talks to you in a few minutes. We believe, I strongly believe that our forbearance category as well as our delinquency in current loans are well reserved. We are increasingly vigilant of our portfolio in today’s economy and again I believe we are well provisioned.

In years past or even in quarters past we would talk about double digit asset and earnings growth. That is certainly not today’s story. Although we did have record asset growth in the first quarter and that occurred even after some very significant cut backs that we made back in December and January that we had to make for credit reasons. The volume that is coming into our origination center is larger than ever. Our first quarter growth was funded generally at small spreads but generally positive spreads. Those assets were largely pre-2007 legislation loans.

For the most part that lending model has ended; there will still be similar pre-2007 loans but not very many. Most loans from now on will reflect the legislative changes that occurred in the fall of last year. As you are all well aware we are operating as everyone is in some fairly strained capital markets and so our access to funding has been very limited. In round numbers and excuse the imprecision of these numbers but our loan demand right now from our customers is running about $3 billion a month and we’ve really only been able to access about $1 billion a month and that access has been at record costs.

When one looks at those costs and combines them with the 70 basis points effectively 70 basis points of legislative cuts our new loans are for the most part going to lose money. I mentioned already that we are seeing huge volume many banks have left this program either in full or somewhat selectively. Far more have left than have announced they’ve left. I would venture to say that students are probably accelerating their application process just because of what they are reading. That accounts for some of the additional volume.

Jack and I have, over the past 90 days or more been talking extensively with shareholders on an individual basis and we’ve been predicting something of a train wreck with the absence of credit and the explosion of demand for student credit. We all kind of expected that in the June, July, August time frame. I would say that that loan demand is here and its here right now. The company is working with members of both parties and in both houses of congress to make solutions for lending viable. We hope soon.

Jack Remondi’s Tuesday testimony in front of the Senate Banking Committee made the issues that we are dealing with an the rest of the market generally very clear. We are also working with the Department of Education, Treasury and the White House. After we finish here this morning Jack is on his way downtown to Washington for further conversations. Various parts of the government understand the issues. In fact, the recognition among parties I believe is very high.

I would say that the urgency is not maybe as well recognized about this challenge as we’d like for it to be but then again its really only been in the last week or two that we’ve seen the explosion of demand. The effort has been very pleasantly bipartisan at this point. Sallie Mae is a long time player in this business so it is very very important for students and schools to avoid any serious disruptions to service. We feel a special obligation to meet our mission of delivering higher education credit.

The point I’m trying to make is that we will go the extra mile to make a solution viable. We are prepared to respond as requested by the Federal Government at a moments notice. I think I will leave my comments about the quarter here. I’m going to ask Jack to review the quarter with you and then we’ll take your questions when he finishes.

Jack Remondi

Good morning everyone. I’m going to take the next few moments to review our operating results for the quarter about the core cash and GAAP basis. In addition, I will review the performance of our private credit portfolio, changes to our loan origination plans, our funding requirements and our cost reductions. Finally, I’ll provide an update on our outlook for the balance of the year.

As we began 2008 we spoke of significant challenges. Most of these such as dealing with our non-traditional private credit portfolio were within our control and have been addressed. Once significant challenge not only remains but is now worse, access to reasonably priced funding. This issue is significantly compounded by the steady exit or reduced commitments of other FFELP lenders. Our outlook in loan origination activities are very much dependent upon how this major issue evolves during the next week or so. Although we are waiting a potential resolution to this issue from Washington I want to be perfectly clear we will not do business that jeopardizes the company’s liquidity position or franchise value.

For the quarter our core cash earnings including non-recurring items were $188 million or $0.34 per share compared to $251 million or $0.57 per share. These results include non-recurring charges of $82 million from the accelerated loan premium amortization resulting from our decision to stop making consolidation loans and of $21 million restructuring expense. Excluding these charges earnings were $254 million or $0.48 per share. Our net interest income including the $82 million non-recurring charge was $567 million in the quarter versus $644 million in the prior year.

The net interest margin declined to 1.24% from 1.64% in the year ago quarter. The decrease is the result of several factors including the non-recurring premium amortization charge which totaled 19 basis points and higher funding costs. Our loan loss provision in the quarter was $181 million versus $199 million in the prior year. The results included an increase in the Federal loan provision with the elimination of exceptional pro-forma designation last fall and a decrease in the private loan provision as loan performance was stable. Charge offs came in below expectations. As a result, the total loan provision was at the low end of our expected range.

Fee income in the quarter was $271 million compared to $288 million a year ago. The decrease was the result of an impairment taken in the purchase paper portfolios and legislative changes that reduced guarantor servicing revenue. Operating expenses in the first quarter were $339 million compared to $365 million in the fourth quarter and $332 million in the year ago period. The decline in operating expenses reflects just the beginning of our expense reduction project.

Total equity at March 31st was $5.2 billion and our tangible capital ratio at quarter end was 2% of managed assets unchanged from year end and up from 1.8% a year ago. When we look at our total with 82% of our managed loans carrying an explicit government guarantee and with 65% of these loans funded for the life of the loan we believe our capital levels are appropriate for our asset mix. Our total preferred channel originations in the quarter were $8.7 billion an increase of 9% year over year.

Breaking this out Federal originations totaled $6.3 billion an 11% increase and private education loan originations were $2.5 billion a 5% increase. Total loan acquisitions for the quarter were $9.2 billion compared with $8.1 billion last quarter and $11.2 billion in the year ago quarter. Of this, $3.4 billion represented loans with the reduced yield from the change in legislation past last fall. For the quarter our core student loan spread was 146 basis points a decrease of 31 basis points from a year ago.

Our premium amortization cost increased to 36 basis points this quarter up from 17 basis points in the year ago period. The future premium amortization run rate will be approximately 21 basis points for the balance of this year. With our decision to eliminate our subsidizing of the borrower origination fee this run rate will decline over time. During the quarter we earned $38 million in floor income versus $39 million in the year ago period. We earned an additional $32 million in floor income that’s excluded from our core cash earnings.

The interest rate reductions in recent months have increased the value of the imbedded floor option in our portfolio and we took advantage of this and sold contracts in the last six weeks receiving a total of over $620 million in premiums which will contribute to core income for the next six years beginning next quarter. To say that the funding environment is difficult is a tremendous understatement. Market conditions have made the issuance of even Government guaranteed student loan asset backed securities a massive challenge.

Investor demand has been both limited and has required significantly higher spreads. In total, spreads for this asset class are up 15 fold since last summer and have more than doubled in the past six weeks alone. This is despite the fact that trusts can bear 100% default rate in the AAA bond holders still get paid in full. That said it’s our goal to issue term securities to match our gross loan acquisitions. In the first quarter we issued $4.8 billion in term FFELP ABS and since the close of the quarter we secured ties in additional $1 billion at an all end cost of 147 basis points over libor on the last deal. Our total issuance year to date stand at $5.8 billion at a duration weighted spread of 87 basis points over libor.

At the end of the quarter 65% of our managed loans were funded for the life of the loan. An additional 20% is funded with fixed spread liabilities with an average life of 4.1 years. At March 31, our net private loan portfolio totaled $30.2 billion or 18% of our managed student loans of this $26.3 billion is to traditional students and schools with the balance of $3.9 billion in the non-traditional segment. In our non-traditional portfolio net charge offs increased 0.2% to 1.7% from the prior quarter. Ninety day delinquencies as a percentage of repayment and forbearance loans were unchanged at 1.5%. Our forbearance usage during the quarter increased to 15.5% from 12.8% at year end.

In our non-traditional portfolio net charge offs increased to 12.9% from 11.9% with 90 day delinquencies declining to 8.4% from 8.9% and forbearance usage increasing to 21.4% from 19.4%. As we stated in January we fully expect net charge offs to rise in 2008 as the portfolio enters repayment and due to the higher default assumptions in our non-traditional portfolio that we made at year end. Actual charge offs in the quarter did rise but they were well below our forecast.

Combined with our delinquency trends our private education portfolio is performing well within our expectations year to date. Given the current and expected economic conditions, however we remain cautious on our expected charge offs. This outlook continues to produce elevated provisions and reserves that are consistent with the guidance we provided in January for private credit provision in the rage of $650 million to $700 million.

We continue to evaluate this very closely and are aggressively reviewing our servicing, forbearance and collection policies to improve their effectiveness. Our loan loss allowance coverage of net charge offs stands at 2.2 times for our traditional portfolio and 3 times for our non-traditional portfolio. We remain very comfortable with these coverage ratios. Forbearance usage in our portfolio has been increasing in recent quarters.

We believe that forbearance is an extremely useful tool for a borrower that is just beginning his or her career. It is designed to help these borrowers get through the early years out of college when they are establishing a career especially in difficult economic environments. That said we’ve recently begun a more individualized approach with borrowers seeing forbearance. The result has been a significant increase in cash payments from these borrowers.

We have a long history in working with borrowers through periods requiring payment relief. This history shows the effectiveness of our forbearance policies. For example, our history shows that within three years of being granted a first forbearance more than three quarters of the loans are repaid, are in a current or in school or grace status. Charge offs for these borrowers have totaled less than 8% total during that same three year period. The full details of this history can be seen in the charts released with today’s earnings. Bottom line, forbearance is a tool that works.

In our asset performance group segment net income was $18 million down from $32 million in the year ago quarter. The decrease is attributable to a $20 million impairment in our purchase mortgage portfolio and a $9 million impairment in our purchase non-mortgage portfolio. Obviously we are disappointed with these results. Revenues in our guarantor service business totaled $35 million in the first quarter versus $39 million in the year ago period. The decrease in revenue was due to the legislative changes that reduced the account maintenance fee paid to guarantors by 40%.

Sallie Mae holds significant forms of liquidity on balance sheet and through committed lines with banks. At quarter end we had $18.4 billion in primary liquidity consisting of cash and investment and committed lines. In an additional $19.2 billion in stand by liquidity in the form of unencumbered FFELP loans. Our existing sources of primary liquidity exceed our corporate debt maturities and other commitments through 2012. As I said at the beginning we will not do business that puts our liquidity position at risk. We expect to maintain these high levels of liquidity throughout 2008 and beyond as capital market conditions warrant.

In January we announced a cost reduction effort to reduce our expense base by 20% by year end 2009. Although we have recognized little savings to date we are on our way to achieving that goal. To date we have identified areas for savings that meet this target and we are now in the process of either implementing these changes or preparing plans to do so. We do, however want to speed up the pace to realize these expense reduction efforts. We expect to announce the full scope of this expense reduction project at our upcoming shareholder meeting in May.

On a GAAP basis we reported a net loss of $104 million or $0.28 per diluted share. The loss is primarily the result of a $273 million mark to market loss and derivative hedging activities. In the year ago period we earned $116 million or $0.26 per share. Turning to outlook it’s unclear at this time what we will originate and fund for the balance of this year. Much depends on what Washington plans to do to address the significant liquidity issues impacting the student loan program. In addition we are incurring higher than expected funding costs.

Despite the potential for wide difference in outcomes and because the current year earnings are driven principally by existing loans we expect core earnings per share at the low end of the rage we provided in January. This quarter has been a challenging one for the company, the industry and you our investors. We thank you for your support. I would now like to open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will be from Matt Snowling from FBR Capital Markets.

Matt Snowling – FBR Capital Markets

You have in your supplement you have about $19 billion of unencumbered FFELP assets as part of your liquidity sources. Is that even a viable option given where the ABS market is today?

Jack Remondi

Certainly it’s a viable option in terms of providing liquidity. Obviously the cost of the securitization activity is higher than we would like to experience. In terms of actually providing cash to meet obligations we do believe it’s a viable source.

Matt Snowling – FBR Capital Markets

In terms of funding new loans you wouldn’t necessarily want to go out and lock a higher spread I guess is what I was getting at.

Jack Remondi

It depends on the usage. An example would be if you were to securitize these loans at libor plus 140 and used the proceeds to buy back debt that yielding libor plus 500 that would be an excellent use. Obviously it would not be a good use in terms of raising money at those levels to buy new loans at a loss and that’s principally what we are working with Washington on at this point to make them realize, which they do, that lenders can’t lend at these kinds of spreads and expect to meet the rise in demand that we are seeing from students for this upcoming academic season.

Matt Snowling – FBR Capital Markets

Clarifying your guidance, the $1.70 to $1.80 range is that based off the $0.34 or $0.48 number?

Jack Remondi

$0.48

Operator

Your next question will be from the line of Brad Ball of Citi.

Brad Ball – Citi

I wonder if you could give us a sense for your view of the core cash student loan spread over the next couple of quarters to get to your $1.70 to $1.80 guidance and then I have another follow up after that.

Jack Remondi

The number is going to be in the mid to high 150’s for the balance of the year. Most of that, as I mentioned in my comments, because of the high percentage of the portfolio that’s funded to term or funded with four year average life liabilities that spread is pretty solid. What changes of course will depend on how much funding we do or how many loans we originate during the balance of this year and what those funding sources are.

At this stage in the game, when we look at the demand that’s coming through the door its pretty clear, as I said in my testimony to the Senate the other day earlier this week the pace of which applications are coming in is not a pace that we can fund. The access to liquidity is just not there and of course the cost is just too high to continue those kinds of activities. It’s early in the process, its only April and April is still a relatively light month in terms of applications but it is something that we are monitoring each and every day and keeping people in Washington informed as to what is happening here.

Brad Ball – Citi

The second disbursements that seem to have a lifting impact on your first quarter spread does that go away entirely or does it diminish as the year progresses?

Jack Remondi

Second disbursements are pretty much done at this stage in the game. We still have commitments to buy old loans, pre-10/1 loans from our third party lender clients. We will be bringing in some volume that is subject to these older terms. That runs off pretty quickly during the course of this year with a small balance trailing into 2009 as well. Going forward what’s coming through the door is going to be principally post-10/1 loans.

Brad Ball – Citi

With respect to your obligation or your commitments to extending FFELP loans even during these trying times how willing are you to continue making loans that are unprofitable with the uncertainty that’s facing us in Washington?

Jack Remondi

I think at this stage in the game, when asked to grade the seriousness of the issue on Monday I said it was between 9 and 10. Given the announcements of some lenders this week its certainly moving to the high end of that range. It’s a limited timeframe.

Al Lord

If we didn’t convey the urgency of the issue and we haven’t been particularly successful to date. Jack and I and our executive management team and the Board are very engaged in working this through. As I said, we feel a special obligation to make sure that this program operates without a serious hiccup. We think it’s important for the confidence of students and schools that there not be a dry period here for the students. We are literally in daily deliberations about how much further we can go. What I would ask you and other shareholders and questioners is to give us a little breathing space in the coming days to try to sort this through both with our various constituencies of schools, students, shareholders and the Federal Government.

Brad Ball – Citi

One last question you proposed to the Senate Banking Committee that the Federal Financing Banks step up and provide funding for the guarantee portion of FFELP loans. Is there any limitation on their capacity to do that at the FFB or is the FFB’s balance sheet big enough to absorb all of the FFELP loans you envision needing support?

Jack Remondi

That’s a good question because I think there was some confusion on this topic at the hearing. The FFB has unlimited ability to borrow from the US Treasury Department. There are no limits as to what they can do. The $15 billion number referenced in that Committee hearing was a limit as to the amount of debt the FFB can issue directly to investors. It does not limit what they can acquire in terms of loans or participation as was proposed. That doesn’t mean that they come up with a solution that is unlimited in size its just there are no limits that we are aware of as to what they can fund.

Operator

Your next question will be from the line of Moshe Orenbuch of Credit Suisse.

Moshe Orenbuch – Credit Suisse

Assuming that next week the Administration does come with some kind of plan that allow the Federal Financing Bank to support the securitization market, obviously the rise in spreads is a combination of general market stuff and the combination of reduced excess spread and higher credit somewhat higher credit risk in your FFELP assets do you have a point of view as to how much of that 140 basis points might be able to be recovered if they were to do that? The converse being how much would be structurally higher because of the new FFELP profitability?

Jack Remondi

Obviously between the 140 basis point cost to funds, 130 basis points higher than where it was last summer plus the 70 basis point reduction in yields have us absorbing a 200 basis point reduction in spread. That is a problem and it’s coming from both sides. As to how much of that 10 basis points the 140 is credit we actually think very very little. The issues here, we don’t hear any kind of feedback from investors of concerns about credit.

As I mentioned 100% of the loans can default in the AAA holders get paid in full. It’s, in our view more a lack of willingness of investors to buy asset backed securities at this stage in the game. We do believe that the Federal Financing Bank option does provide some relief here. It’s obviously very difficult to quantify that but it does take the supply issue of what has potentially coming into the market in terms of new asset backed securities down and gives, I think investors confidence that the Federal Government is supporting this program. Those two factors ideally will help to reduce spreads but it’s hard to say by how much.

Moshe Orenbuch – Credit Suisse

Will that have an impact on the private side or is that going to be a separate issue?

Jack Remondi

It’s hard to figure that out but I think the one thing where it helps us meet our demand we will see from investors for private credit loans. It frees up potentially what we are funding on balance sheet on the FFELP side of the equation, you can use those dollars for private credit funding instead.

Operator

[Operator Instructions] Your next question will be from the line of [Renee Toct of Carrin].

[Renee Toct – Carrin]

In the report released by Moody’s for April of this year Moody’s flagged that you are facing certain collateral posting agreements under you ISDA contracts as the result of your downgrades. Could you give us any visibility on current aggregate collateral posting obligations and the status of further demands for collateral percentage of ISDA agreements?

Jack Remondi

All of our derivative counter parties’ regardless of our corporate rating require collateral posting when positions move in favor for or against. Right now our collateral positions are net positive to us and so our counter parties are posting collateral to Sallie Mae. The issue there was more the use of that collateral and under certain downgrade levels that collateral would have had to have been restricted in use. All of our counter parties have waived those provisions for the DDD minus rating and we have full use of that collateral posting today. It’s more of a use of collateral versus the amount of collateral that needed to be posted.

[Renee Toct – Carrin]

Can you share with us the aggregate amount of such collateral with which the waive related to. How much hypothetically can the banks decide not to continue with the waiver status? Would they potentially require you to keep on balance sheet?

Jack Remondi

Those waivers were permanent and so some other event would have to occur for that to change. The amount of collateral that we are currently the net beneficiary of is about $2 billion. As I said, all that would have changed here. The standard process in ISDA agreements between counter parties is to postpone collateral back and forth regardless of rating. Its really just who has use of that collateral. The $2 billion is now cash on our balance sheet, although we certainly view that as restricted and not available for immediate liquidity needs.

Operator

Your next question will be from the line of Cyril Battini of Credit Suisse

Cyril Battini – Credit Suisse

I’d like to touch upon your debt and liquidity. Your short term borrowing went up by $2 billion, is that from the bank lines?

Jack Remondi

That was under our asset backed commercial paper program where those borrowings took place, $34 billion in total facility 364 day maturity non-recourse to the company.

Cyril Battini – Credit Suisse

Looking at your liquidity profile your total sources of primary and standby liquidity of $37.5 billion is just under total managed borrowings can you talk about the mitigating factor to meet those maturing liabilities?

Jack Remondi

On balance sheet there are different types of liabilities. There are non-recourse liabilities which is the $34 billion credit facility that I mentioned of which there is approximately $26 billion outstanding. Then there are unsecured debt obligations which are corporate bonds that have been issued in prior periods. When we look at what we have in terms of maturity there is approximately $7 billion of unsecured corporate debt that is maturing in the balance of 2008 and an additional $8 billion in 2009.

When I mentioned our sources of liquidity in my prepared remarks we look at that, we look at all of the debt maturity, interest payments and other cash going out the door including commitments to buy loans that we have with existing lenders or to fund second disbursements in our existing sources of liquidity meet all of those obligations through 2012.

Operator

Your next question will be from the line of Bruce Harting with Lehman Brothers.

Bruce Harting – Lehman Brothers

It seems like we’ve got a case of huge unintended consequence from the legislation to reduce spread which was meant to make lending better for the borrow but its having the exact opposite effect exacerbated by the credit crisis resulting in what could be catastrophic for the student in this school year. Is that a safe way of looking at this right now?

Not covering a lot of components of the lending business the Federal Direct and some of the other non-public companies just looking at market share just seems like with so many companies pulling out of the consolidation loan business and the FFELP business can you help size the best case versus a worse case 2008 scenario depending on whether we do get as you say a system wide liquidity solution or we don’t get that. Best case, worse case from not only your share outlook but what it will look like for the students if there’s not a fix here.

Al Lord

Let me try to take the first part first. I think you were talking about unintended consequences. At this juncture it’s a little difficult to parse basis points. Unfortunately there are so many basis points that have entered the fray. At this point our borrowing costs are up about 130 basis points against our best term financing but I think they are up 125 probably 115 against what we would have expected to fund in the term ABS markets. The legislation cost 70 basis points more so we are looking at 175 to 200 basis point decline in the margin of the student loan that does not have anywhere near 200 basis points to play with.

Whether it was legislation or the term ABS markets is very difficult to pinpoint. At this point it’s almost irrelevant because the fact is that the economics just aren’t working and we need to make a structural change. You asked for best and worse case for 2008, I think you were talking about our operating results. I think our numbers, best case they don’t change very much from what we’ve put forward. We would not be expecting much if any margin in a solution from the Government. We very much would expect to get paid for originating and servicing assets which is basically what we do and do well.

I would say, with respect to the numbers that we’ve put on the table for this year, as Jack said, the low end of the $1.70 to $1.80 range. The differences wouldn’t really be very much worth getting into it at this point. I think you did touch on the most important issue and that is kids getting loans without some major operational or financing snafu and as I said in my prepared remarks I’m very heartened by the recognition, the powers that be and the people that are most important to a solution here get it.

Obviously Government has a variety of heads but I’ve been very very pleased with the way that not only the various parts of Government but the two parties that work together on this. I really do believe that they understand that there’s an issue. As I said, we have only begun, literally in the last two weeks our volume flow has exploded and we’ve tried to convey that these issues have moved very much forward. It may well be just because banks have backed out and we are aware of quite a number of banks that are not playing, that you haven’t read about.

The other issue is that students reading the newspaper about credit availability are moving up their application flow. I think there are unintended consequences from the legislation but its not clear to me that the crisis would have been maybe less intense and maybe a little bit later had the legislation not passed. It’s at least a two part problem.

Operator

Your next question will be from the line of Sameer Gokhale of KBW.

Sameer Gokhale – KBW

I was wondering if you could share your thoughts on the issue of using the Federal Finance Bank again as a source of liquidity in the market. It certainly seems like that would be the quickest most efficient solution but in your discussions with people on the Hill is it your sense that there is significant resistance to this idea or is it just that it seems like the legislators and other folks on the Hill are trying to work through a variety of different solutions to try to get at the most optimal solution. If you could comment on that, that would be great.

Jack Remondi

As you heard from the Senate hearing earlier this week on Tuesday, Senator Dodd, Chair of that Committee came out at the beginning and supported the Federal Financing Bank option and by the end of that hearing he had bipartisan support for that. I think people are gravitating towards that solution because it is the most viable lowest cost and fastest solution available to policy makers right now. Anything else requires a fair amount of contractual negotiations and/or legislation and that just slows everything down.

If more time were available perhaps these solutions might be better. We are at the cust of peak lending and we don’t have weeks or months to resolve this solution. They need a solution today. Options like lender of last resort that require renegotiation and setting up an infrastructure to originate and process loans are just very very time consuming to put into place. Similarly other options that might be available from the Department of Education require legislation to pass and as Senator Dodd said at his hearings he sees that as being a very very difficult thing to do in the timeframe that’s available.

Sameer Gokhale – KBW

On a different topic, I don’t know if you addressed this when I was trying to get back on the call but in terms of capital levels can you talk about whether you will be seeking to additional growth capital at some point in time and if so when, how are you thinking about your capital adequacy at this point?

Jack Remondi

The approach that we use for what our capital levels should be is very much driven by our asset allocation mix. We fully understand that our private credit loans require more capital than our Federal student loans. We allocate capital according to that and have consistently done that for a number of years with rating agencies. We do not get a lot of push back from the rating agencies on those levels. Federal student loans because of that explicit government guarantee and the historically low levels of losses that we incur on that portfolio require very little capital.

That is consistently applied even today in the asset backed securities market. There have been very little changes to that at the rating agency level and perhaps more importantly at the investor level. We are not seeing higher subordination requirements in our Federal student loan asset backs because of any credit concerns there. It’s also important to note that the level may look low relative to other financial institutions but other financial institutions don’t have a mix of assets where 82% of their portfolio carried that explicit Government guarantee.

When you look at that and you look at the fact that, also I think another important differential between ourselves and other financial institutions is the significant portion of our portfolio is match funded to the duration of the asset. It creates no liquidity, normally you’d say there is little credit risk but you need liquidity capital. If 65% of your loans are funded for the life of the loan you don’t need to maintain lots of liquidity capital against that asset.

We think when you take all of these factors together that our capital level is adequate; the rating agencies in their write ups even through the downgrade process have reaffirmed that. Their issues are the same ones that we fully acknowledge, that it’s more about funding and liquidity today than it is about asset quality or capital. The short answer after my long one is that we think our capital is adequate at the moment and don’t see any need to raise additional capital at this stage in the game.

Sameer Gokhale – KBW

My last question was related to the impairment charges in the asset performance group. Were those impairment charges all because you expect to collect less on those portfolios than you paid for them or are they because of the accounting rules requiring you to record an impairment charges when you expect to collect less than you originally estimated even though it may still be more than your originally paid for those portfolios?

Jack Remondi

It’s the accounting rules that are driving this. It is two things. It’s both collecting less and the collection periods are extending in that process and when you extend that term you have to take an impairment charge as well.

Operator

There are no further questions at this time. Are there any closing remarks?

Al Lord

No, that pretty much wraps it up. Thank you everybody for joining us this morning on the call.

Operator

This concludes today’s conference call. Thank you for your participation you may now disconnect.

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