Sallie Mae Corporation (SLM)

Q2 2010 Earnings Call

July 21, 2010 8:00 a.m. ET


Albert Lord – Vice Chairman and Chief Executive Officer

John Remondi – Vice Chairman and Chief Financial Officer

Steven McGarry - Senior Vice President of Investor Relations


Michael Taiano - Sandler O’Neill

Lee Cooperman - Omega Advisors

Sameer Gokhale - KBW

[Matt Mowing] – SBR

David Glick - Buckingham Research

Ed Groshans - Height

Moshe Orenbuch - Credit Suisse

Eric Beardsley - Barclays Capital

Michael O’Dell - AIG Asset Management



Good morning. My name is Cynthia and I’ll be your conference operator today. At this time I would like to welcome everyone to the Sallie Mae Q2 Fiscal 2010 Earnings conference call. (Operator Instructions).

I would now like to turn today’s call over to Steve McGarry, Senior Vice President of Investor relations. Pleas go ahead, sir.

Steve n McG a rry

Thank you, Cynthia. Good morning everybody and welcome to Sallie Mae’s 2010 Q2 earnings call. With me today on the call are Al Lord, our CEO, and Jack Remondi, our CFO. After their prepared remarks we will open up the call for questions.

Before we begin now keep in mind that our discussion will contain predictions, expectations and forward looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors, and listeners should refer to the discussion of those factors on the company’s Form 10K and other filings with the SEC. During this call we will refer to non-GAAP measures that we call our “core earnings.” A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Q2 2010 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the investor’s page at

Thank you, and I’ll now turn the call over to Jack.

John Remondi

Thanks, Steve, and good morning everyone. I’m going to start by taking a few moments to review our operating results for the quarter on both the GAAP and a core earnings basis. In addition we will review our funding activity and liquidly and provide an update on our lending business, and review the performance of our private credit portfolio. And at the end I’ll provide and update on our outlook for the remainder of 2010.

For the quarter our earnings were $209 million or $0.39 a share. That compares to $212 million or $0.39 per share in the prior quarter. This quarter’s results include restructuring and asset impairment changes related to the SAFRA legislation of $23.5 million, or $0.03 a share; a reserve for a litigation contingency of $0.02 a share; and debt repurchase gains of $91 million pretax or $0.11 a share.

Net interest income was $759 million for the quarter, versus $457 million in the prior year period. The net interest margin increased to 1.54% from 91 basis points in the year ago quarter. The changes of both net interest income and the margin from the prior period were primarily due to improved basis spreads, principally CP-LIBOR, increased floor hedge income and lower funding costs.

The provision for private credit loan losses in the quarter was $349 million, an increase of $24 million from the first quarter; and the total loan loss provision for the quarter was $382 million compared to $359 million in the prior quarter. At June 30 th our allowance for private credit loan losses was equal to 7.9% of loans in repayment, and after the provision net interest income increased to $377 million in the Q2 including $333 million from the FFELP portfolio and $45 million from the private credit portfolio, compared to $343 million in the first quarter which included $280 million from FFELP and $69 million from private credit.

Our private credit charge offs increased in the quarter to $336 million, up from $284 million in the first quarter; and charge offs on an annualized basis totaled 3.7% of traditional loans, up from 3.2% in the first quarter, and 18.7% of nontraditional loans compared to 15.9% in the prior quarter. Nontraditional loans now represent 11% of the total loans in repayment but contributed nearly 37% of the charge offs. The increase in charge offs this period is largely due to seasonal factors, though current economic conditions continue to negatively impact results.

Our private credit portfolio characteristics continue to strengthen. At June 30 th 89% of loans were traditional, 58% of loans had a co-borrower, and the portfolio had an average FICO score of 714. This compares to 87% traditional, 55% with a co-borrower, and an average FICO score of 711 from one year ago.

Due to seasonal factors the 31 to 60 day delinquency rate increased to 3.7% from 3.4% at March 31 st, while the 60 to 90 day delinquency rate remained unchanged at 2.3%, and 90 day plus delinquencies decreased to 5.8% from 6.4%. Overall, delinquencies in our private loan portfolio declined to 11.9% of loans in repayment from 12.2% at March 31 st. In addition, loans in forbearance remained relatively stable at 5.3% of loans in repayment, compared to 5.1% at March 31 st, both down from 6.5% a year ago.

Other income in the quarter totaled $308 million compared to $336 million in the Q1. This quarter’s numbers include $91 million in gains from debt repurchase, $88 million in revenue from our contingent collection fee business, and $111 million from our processing businesses which include phone servicing. Q1 results included $90 million from gains of debt repurchases, additional seasonal revenue from our guarantor servicing business, and an $11 million gain from the sale of securities.

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