SLM Corporation Q4 2008 Earnings Call Transcript

SLM Corporation Q4 2008 Earnings Call Transcript

SLM Corporation (SLM)

Q4 2008 Earnings Call

January 22, 2009 8:00 am ET

Executives

Steve McGarry - SVP of Investor Relations

Al Lord - Chief Executive Officer

Jack Remondi - Chief Financial Officer

Analysts

Lee Cooperman - Omega Advisors

Matt Snowling - FBR Capital Markets

Michael Taiano - Sandler O'Neill

Moshe Orenbuch - Credit Suisse
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Kevin Ing - Columbus Hill Capital

Jordan Hymowitz - Philadelphia Financial

Matt Burnell - Wachovia

Ryan O'Connell - Citigroup

Presentation

Operator

Good morning. At this time I would like to welcome everyone to the SLM Corporation's fourth quarter 2008 Earnings Call.

(Operator Instructions).

I would like to turn the call over to Steve McGarry, Senior Vice President of Investor Relations. Thank you. Mr. McGarry, you may begin your conference.

Steve McGarry

Thank you, Katrina. Good morning, everybody. Welcome to Sallie Mae's 2008 fourth-quarter and full-year earnings conference call. With me today on the call are Al Lord, our CEO, and Jack Remondi, our Chief Financial Officer. After they finish their opening remarks, we will open up the call for questions.

But before we begin, let me remind you that 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 the GAAP results can be found in the fourth-quarter 2008 supplemental earnings disclosure accompanying the earnings press release, which we posted on the Investor page at our website, salliemae.com.

Thank you. I will now turn the call over to Al.

Al Lord

Good morning, everyone. As Steve said, we're going to review our results for our fourth-quarter and our full-year results with you and later answer your questions. As you may well guess, Sallie Mae is not well pleased with the quarter's results or with the full year's bottom-line results.

The decline in those results, either against last year or against expectations, directly or indirectly relate to the economic downturn and the credit crunch. Maybe, I guess the credit crunch came first. We will discuss the quarter and its implications for '09.

As you are probably all well aware, the credit markets remain highly unsettled, and in some markets without government involvement, they are largely closed. We're heartened from time to time when we see a few narrow market openings, and we hope that those occur more frequently in '09, and we hope to take advantage of them.

Our reported results for the fourth quarter were $0.08 and for the full-year $0.89. As I said, they are not good numbers certainly by our standards, and I'm sure not by your own. Overall, 2008 results were adversely affected by higher interest costs, and mostly by higher interest costs, and higher bad debts. Our higher interest costs are principally related to the $28 billion asset-backed commercial paper facility that we have, which I guess began the year roughly at $34 billion.

For perspective on our interest cost, it is worth noting that the company grew its assets by $24 billion during the year 2008. The net interest that was generated by those assets, which would typically be in the $300 plus million range, was more than negated by our overall higher borrowing costs.

As I mentioned, bad debt costs were high, so the nontraditional loan costs, nontraditional borrower of loan costs as we have defined them, were generally expected. The economic environment obviously worsened during the course of the year and added costs as delinquencies grew, particularly late in '08.

I will make just a few comments about the fourth quarter, and I will move back to the credit cost or the bad debt cost. Our provision in the fourth quarter, as you have probably seen for private credit, is $348 million. The $348 million is roughly double the average of the first three quarters of 2008 and had the effect of reducing our earnings versus the third quarter by $0.20.

You know, or you will recall, that we began building the reserve at year-end 2007 and through the year 2008 largely for nontraditional loans, which are now moving rapidly into repayment status. We see an acceleration of nontraditional losses in 2009 even somewhat beyond what we were expecting. We also believe the year 2009 will be the peak of such losses, and the acceleration of those losses may well be precipitated by the company as it further refines its forbearance requirements.

We expect the 2009 provision to be in the realm of $1 billion. I would suggest that you not annualize the fourth quarter's provision.

Obviously, as I mentioned, delinquencies increased during the year and reached 4% in December. I would ask you to note, because it is very important, that though delinquencies in total reached 4%, our nontraditional loans have a delinquency rate in roughly the 12% range, and our traditional loans, even though they are higher, are in the 2.6%, which is up but hanging in pretty impressively.

The quarter was also affected by higher than average index basis exposure. I'm referring specifically to what we refer to as the CP LIBOR spread. It is typically 8 basis points, and we have had it for over 10 years or roughly 10 years. It has been so reliable over that time period that we have not really even tried to hedge that risk. The fact is, we borrow based on LIBOR, we earned based on commercial paper. Only government intervention in those marketplace and other market dislocations have changed the stark relationship between these indices and other indices as a matter of fact.