SLM CEO Discusses Q4 2010 Earnings Call Transcript


Q4 2010 Earnings Call

January 20, 2011 8:00 am ET


Albert Lord - Vice Chairman, Chief Executive Officer and Member of the Executive Committee

John Remondi - President and Chief Operating Officer

Steven McGarry - Senior Vice President of Investor Relations


Eric Beardsley - Barclays Capital

Michael Taiano - Sandler O’Neill & Partners

Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.

Matt Snowling - FBR Capital Markets & Co.

Moshe Orenbuch - Crédit Suisse AG

Bradley Ball - Evercore Partners Inc.

David Hochstim - Buckingham Research Group, Inc.

Leon Cooperman - Omega Advisors, Inc.



Good morning. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Steve McGarry, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Steven McGarry

Thank you very much, Regina. Good morning, and welcome to Sallie Mae's 2010 Fourth Quarter Earnings Conference Call. With me today are Al Lord, our CEO; and Jack Remondi, our President and Chief Operating Officer.

Before we begin, keep in mind that our discussion today 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. Listeners should refer to the discussion of these 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. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the fourth quarter 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 Al.

Albert Lord

Good morning, and thank you for being on the call. I always appreciate the opportunity to speak to those of you who are interested in our company.

As you know, we reported $0.75 a share and $401 million of net income for the quarter. These are obviously strong numbers. They reflect a good quarterly performance and they also reflect income from two largely non-recurring sources, which drove our revenues substantially above run rates.

First, we made our last sale of Self loans to the Department of Education in October, and we earned $321 million in that transaction. Secondly, we've also earned $118 million during the quarter from early debt retirements. I think most followers of Sallie Mae know that over the past couple of years, difficult economic and difficult political environments, the company’s debt spreads have gotten fairly ugly. They've gotten better as we've emerged from this environment. Our spreads have improved, we still have a distance to travel. In any event, we took the opportunity over the last couple of years to capitalize on those wide spreads and bought in a significant amount of debt.

During the full year of 2010, we added $318 million to our earnings. We expect the gains of that magnitude will not be available in 2011. Also in the fourth quarter, we took a significant charge to earnings by writing down our Purchased Paper business, which we refer to as Arrow. It's a company that we expect to sell in the not-too-distant future.

So now to address -- before turning this over to Jack Romano, I'll address the areas that I know you're interested in. During the quarter, we provided $294 million for private credit bad debts, that's slightly below the charge-off level in the fourth quarter. We are optimistic about the direction of our credit costs, but we remain cautious about the economy. Over the course of 2010, our caution led us to build our reserve slightly. In 2010, credit quality ended the year better than it started.

We entered 2011 with $28 billion of our $37 billion of private credit loans in repayment. That's fully 75%. We ended the year with a 13% lower delinquency rate than we started the year. Our portfolio improvements occurred in a 2010 employment environment that was flat or worse than 2009, and in an environment that was particularly bad for recent graduates.

In 2011, we again expect improvement in our delinquency, forbearance and charge-off rates, much as they improved during 2010. Our forecasts rely on portfolio seasoning and higher portfolio quality they do not rely on improvement in the employment situation, although we are hopeful. The charge-off and provision comments that I've made are consistent with our earnings-per-share guidance of $1.50 for 2011.

To talk to you a little bit about private credit volume, private loan application flow picked up very slightly in quarter four versus quarter four a year ago. I'll remind you that the private credit market is still only about 1/3 of the level that ran in 2007. While school costs, that means tuition and fees, rose significantly again in 2010, that has not translated to private credit demand or additional private credit demand other than negligible amounts. Nevertheless, we project 10% growth in high quality student loan and private credit originations in 2011 to a level of about $2.5 billion.

The operating expense front as you're aware, management is committed to reducing our quarterly operating expense run rate to $250 million or less in Q4 2011, now just nine months away. Our run rate, When I talk about a $250 million run rate, the run rate is essentially our total operating expense less restructuring charges, which are mainly severance costs and asset write-downs.

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