SLM's CEO Discusses Q1 2012 Results - Earnings Call Transcript


Q1 2012 Earnings Call

April 19, 2012 8:00 am ET


Steven J. McGarry - Senior Vice President of Investor Relations

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

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

John F. Remondi - President and Chief Operating Officer


Eric Beardsley - Barclays Capital, Research Division

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

Moshe Orenbuch - Crédit Suisse AG, Research Division

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Michael Tarkan - Topeka Capital Markets Inc., Research Division

Leon G. Cooperman - Omega Advisors, Inc.

David S. Hochstim - The Buckingham Research Group Incorporated

Scott Valentin - FBR Capital Markets & Co., Research Division



Good morning. My name is Maya, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sallie Mae First Quarter 2012 Earnings Conference Call. [Operator Instructions] Mr. McGarry, you may begin your conference.

Steven J. McGarry

Thank you very much. Good morning, everybody, and thank you for joining us for our earnings call this morning. With me today are Al Lord, our Chief Executive Officer; Jack Remondi, President and COO; Jon Clark, our Chief Financial Officer.

After the prepared remarks, we will open up the call for questions. Plus, before we get started, 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 all be found in the first quarter 2012 supplemental earnings disclosure. This is posted, along with the earnings press release, on the Investors page at Thank you. And I will turn the call over to Al.

Albert L. Lord

Thanks, Steve. So good morning to all of you, and thank you for your interest in Sallie Mae. I'm going to try to keep my comments short, talk to you about the quarter's performance a little bit, and I will have a few comments about recent news reports that continue to report on growing student loan defaults.

First quarter unfolded generally as we and you projected. We earned $0.55, which includes some earnings from debt gains. We are well on track to meet and we will likely exceed our $2 annual earning expectations. As Sallie Mae evolves, our growing private credit earnings are replacing diminishing self revenues. We are growing earnings in the aggregate.

A pleasant surprise in the quarter was not just the direction because the direction was expected, but the pleasant surprise was the pace of our private credit quality improvement. Charge-offs were down. Delinquencies are down. Forbearance was down, and our collections were up, and so we lowered our provision.

Not a surprise, but a major factor in the first quarter earnings, was our reduced FFELP margin, and Jon will talk to you about that in some detail. It's a combination of timing and permanent declines. Margin fell all the way to 85 basis points. We think, as a longer-term running rate, the number will be closer to 90 basis points. But it was down and affected our earnings substantially.

Our OpEx was too high. Again, most of that was timing. But I think maybe we lost a little discipline after our focus on last year's Q4. Those numbers will go down in subsequent quarters. So we see 2012 playing out very much as expected. Certainly, the credit situation feels better. We'll update guidance in June, but I'll tell you that, at least as of today, our -- the bias is probably up.

Let me just talk a little bit about recent headlines, and then turn this over to Jon. This country underwent a significant financial crisis in our very recent past. All of us want the crisis to stay in the past, and I would bet that our listeners remain somewhat twitchy about America's economy. Even after several years of 0 interest rates and aggressive Fed action and stimulus spending, et cetera, et cetera, et cetera, the economic direction is far less than certain.

So it's not really a surprise that many of us see bubbles around every corner -- financial bubbles around every corner. And it's certainly difficult not to notice and maybe even worry about the recent run-up in student loan debt. There has been $200 billion originated in the last couple of years. I would note that of that $200 billion. Probably less than $20 billion of it was private loans, and something around $6 billion of that $200 billion was Sallie Mae loans. And I am certainly not the last word on this subject, and I confess to being a little bit wide-eyed myself at the $200 billion number.

But the fact is that we manage about 20% of those loans, and we do have pretty close insight into how they behave. I can't speak for the other $800 billion of the so-called $1 trillion of student loan debt, but I can tell you based on the performance of our portfolio, we don't see any evidence of anything close to a bubble.

You heard what I mentioned earlier, that our $40 billion private loan portfolio is improving as credit quality is improving. Our 90-day past-due loans were down to 4.4% from 7% at their worst. Our $135 billion federally guaranteed portfolio is not underwritten, of course, and so it has higher defaults. Its 90-day past-due rate is about 8.5%, about double the private number. But it's been a number that's held steady over the years, and we don't see any evidence that it's worsening.

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