Q3 2011 Earnings Call

October 20, 2011 8:00 am ET


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

John F. Remondi - President and Chief Operating Officer

Steven J. McGarry - Senior Vice President of Investor Relations

Jonathan C. Clark - Chief Financial Officer, Principal Accounting Officer and Executive Vice President


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

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

David S. Hochstim - Buckingham Research Group, Inc.

Michael Tarkan - FBR Capital Markets & Co., Research Division

Farhad Nanji - Highfields Capital

Mark C. DeVries - Barclays Capital, Research Division

Michael P. Taiano - Sandler O'Neill + Partners, L.P., Research Division



Good morning. My name is Detania, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae 2011 Third Quarter Earnings Call. [Operator Instructions] Mr. Steve McGarry, you may begin your conference.

Steven J. McGarry

Thank you, Detania. Good morning, everybody. Welcome to Sallie Mae's 2011 Third Quarter Earnings Call. With me today are Al Lord, our CEO; Jack Remondi, President and COO; and John Clark, our CFO. After their prepared remarks, we will open up the call for questions.

But before we begin, please 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. And listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC.

During this conference call, we will refer to non-GAAP measures we call our Core Earnings. A description of Core Earnings and a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2011 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the Investors page at

Thank you, and now I'll turn the call over to Al.

Albert L. Lord

Thanks, Steve, and good morning, all. I'm here to review our third quarter earnings with you, which, as you're well aware by now, are $0.36. And I'll comment on the quarter and I'll also comment a little bit on our outlook for 2012. As most of you know, Sallie Mae is not a usually seasonal company. Our results are typically pretty ratable, but Q3 is typically different for us. It is the quarter when we have our highest loan activity, our originations peak, we add headcount and operating expense in the quarter. Also in the quarter, recent graduates, most recent graduates enter repayment and so our charge-offs tend to be higher in the quarter and delinquencies are higher in the quarter as compared to other quarters. It's also the quarter when we learned a fair amount about the success of our current year's efforts, and it also gives us some insight into the subsequent year. And so with that said, I can tell you that the news is good, and it gives us some major optimism about 2012's outlook as well.

Year-to-date, loan growth is 21%. That's a good number. Our $0.36 quarter while lower than recent quarters, includes $125 million bad debt reserve addition that we made for it, was either in new accounting principle or a change in interpretation of an old accounting principle, but nonetheless, we mentioned it to you at the end of the second quarter. And we also mentioned to you at the end of the second quarter that this reserve addition does not reflect in any way, shape or form a change in the portfolio quality. It is, in fact, a change in accounting. I also don't mind -- suggesting to you that I don't mind having larger reserves. I'll have more to say about credit quality and bad debts in a couple of minutes.

I will try to be brief. As I said, we grew in the third quarter and are growing. That feels a lot better than the last 3 years which, in fact, were down years on a credit front. It also feels sustainable. As I said our volume was up 21% year-to-date. It was actually up quarter-to-quarter over the last year, 29%. We don't have a lot of evidence about the facts of the quarter. I will share at least the anecdotal piece of it from our end. It appears more like market share gains than market size gains. We'll let you know when we have all the facts. Perhaps the most positive fact about the asset growth in the quarter is that it came with FICO scores with an excess of -- in an average, in excess of 750 and with more than 90% cosigners. We are lending to very responsible students and families. These are very high numbers.

Moving to net interest. Our net interest before provision was down about 2% from 2010 and just about flat with Q2. Our slight private growth largely offset our FFELP balance declines. Our fee income was up slightly from Q3 in 2010 and from the second quarter of 2011, that's without debt gains in the previous quarters. And I guess, the most salient fact here is that our direct loan servicing revenues have benefited both those comparisons.

While Sallie Mae's operating expenses are declining generally, they did not decline in Q3, and they were up against Q2. As I mentioned, Q3 is a pretty heavy seasonal quarter. We also had a cleanup adjustment, if you will, for pension plan that we terminated about a year ago, and that costs us $15 million. Probably the most important factor here is that we are on track for a roughly $250 million fourth quarter and sustaining that into 2012.

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