SLM Corporation (SLM) Q1 2009 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. My name is Alexandria and I will be your conference operator. At this time I would like to welcome everyone to SLM Corporation’s first quarter 2009 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) I would now like to turn the call over to our host Mr. Steve McGarry, Senior Vice President, Investor Relations. Mr. McGarry, please go ahead.

Thank you very much Alexandria. Good morning everybody and welcome to our 2009 first quarter 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 remarks we’ll open up the call for questions. Please note that during the conference call, we may discuss predictions and expectations and make other forward-looking statements. Actual results in the future may differ from those discussed here, perhaps materially. This could be due to a variety of factors. Listeners should refer the discussion of those factors on the company’s Form 10-K and other filings with the SEC. During the conference call, we will refer to non-GAAP measures that we call our core earnings presentation. The description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the first quarter 2009 supplemental earnings disclosure, posted along with the earnings press release on the investors’ page at www.salliemae.com. Thank you and now I’ll turn the call over to Al.

Thanks Steve. Good morning all. I assume you’ve all seen our earnings release. We incurred a core loss to our common shareholders of $0.03 a share and it’s obviously not what I would call a good quarter, but we intend to improve those numbers soon. This result is largely attributable to the commercial paper LIBOR basis distortion; a problem that’s existed since last fall when commercial paper virtually stopped trading. As you may recall, the Federal Reserve stepped in to help CP issuers and relevant CP rates have been artificially low ever since. The index is broken and needs to be fixed. Congress is looking at the problem. To put some of this in perspective for you, the higher education act of 1965 describes the purpose of student loan compensation and I’ll paraphrase this. To be sufficient to cause lender returns to be equitable and it also directs, that appropriate consideration is to be taken of money-market conditions. In the fourth quarter when this problem also existed, the education department adjusted the broken index, to take appropriate consideration of money-market conditions. In the first quarter, the Department of Education did not make any adjustment to the CP rate. The low unadjusted commercial paper rate adversely affects us in a couple of ways, but in total it reduced our revenue by $180 million, which translates to about $0.24 per share. As you see, the economy continues to drive our private credit delinquencies up and our charge-offs up. We added $50 million to our provision that was higher than we had anticipated and we increased our loan loss reserve about $100 million or 5%. The third issue in the quarter was a $75 million markdown of our distressed real estate portfolio. We discontinued this business in the third quarter of ‘08. We actually at the time thought we had nearly finished writing it down. Sales and markdowns have cut that portfolio almost in half to $533 million, but even now we still see values deteriorate at a couple of percent a month. Good news in the quarter, we had record student loan volume at $6.6 billion. All those loans are made under the provisions of ECASLA legislation, for those of you who don’t use that acronym. That was legislation passed last year; it means insuring continued access to student loans, sponsored by Chairman Miller and Senator Kennedy and passed in May of 2008. Under ECASLA, loans are originated by lenders and obviously in this case the loans are originated by Sallie Mae and then funded by the U.S. Treasury. We service those loans today and we hope to continue to service those customer loans long term under servicing contracts, now being negotiated with the Department of Education. The ECASLA model has worked flawlessly since it was implemented last summer, which was right in the midst of historic credit crisis. No student lost access to federal student loans. Though it was likely unintended, the ECASLA structure system has also already created billions of dollars of savings for tax payers. Other news; after an eight month effort, we expect that the Straight-A commercial paper, funding program, sponsored by the Department of Education and Treasury, which also is mandated by the ECASLA legislation, could start funding as soon as 10 days. We have about $16 billion of loans that are eligible for this five-year funding vehicle. We also expect to renew our ABCP facility within days. Our CFO, Jack Remondi has a good summary of the financing picture and the quarterly results that he’ll deliver to you shortly. I just want to take a few more minutes of your valuable time, to talk about a few items that are obviously in the news these days. Student lending and Sallie Mae have been much in the news as attention is being directed towards President Obama’s various budget proposals. As a first point I’d like to make and maybe the most important point, is that Sallie Mae agrees with and wants to help President Obama achieve his education ends. Let me say it again, we agree with those goals. The President’s ends are clear; create enough savings to meet his $90 billion plus Pell Grant target. It’s truly a laudable goal and we heartily support it. The second point I’d like to make is that Sallie Mae has often reported to be fighting with advocates of direct lending and others. We are not fighting anybody. There maybe some who are fighting, but Sallie Mae is not fighting. We want to be a major part of achieving the President’s goal. We do suggest that Congress take the surest and safest route to achieve those goals. We trust the President would endorse an efficient risk free approach. Some think the only means to achieve the President’s Pell Grant goal is a 100% reshaping of the present system to assist in where all loans run through the Department of Education. We know there is at least one other means to achieve the President’s goal and we believe the most effective solution will use the current ECASLA model. It will continue to use government funds and compensate lenders with fees for the origination, servicing and collection services that they provide; in other words, fee-for-service. There’s a prevailing belief and I read it often, that lenders receive subsidies sufficient to fund Pell Grants. Let me give you the most current perspective we have on the so called subsidies. For the most recent 10 year period that ends in 2008, the most recent 10 year period, over those 10 years, Sallie Mae has received net special allowance payments, which are payments to us for providing capital servicing loans and the other service that we provide. That special allowance is $3.7 billion. During that same 10 year time period, we paid taxes and other fees to the government for participating in the program, aggregating $6.5 billion. Over the last 10-year we’ve been a net payer ultimately to the American tax payer of $2.8 billion. Now let me say it a little differently over the last 10 years we originated funded serviced and collected on about $200 million of loans and we paid $2.8 billion to the tax payers for the privilege of doing so and we do consider it a privilege. That’s the last 10 years; today we’re talking about the next 10 years. We know, and I want to emphasize that we know there are sufficient funds to pay for the President’s Pell Grants. Those funds will not come from subsidies paid to Sallie Mae or anybody else. The savings will come from financing 6.8% student loans, using cheap U.S. Treasury funds with the assets on the government’s books. Under ECASLA today, just as we’re operating today, we estimate the government is earning about 4% or more on FFELP loans. If we could sweep aside all of the rhetoric that surrounds direct lending and FFELP advocacy, we come to a simple basic fact. When both programs are funded in the same way, the only additional savings can come from operating efficiencies and better default prevention and collection. Sallie Mae is a very competitive company. We are prepared to compete on the basis of operating efficiency and default management. In fact, we suggest that participants in this program share the default risk by putting some skin in the game. One last thing; some have referred to this simple risk free solution as a Sallie Mae plan, which is flattering, but really the answer lies in the current ECASLA system which we did not design. That system is and can be the foundation to major tax payer savings. It will be in 2009 and it will be in the subsequent years. There are very few risk free changes. Today’s student loan industry can produce those Pell Grants with no transition risk. I thank you for your time and attention and I’ll turn it over to Jack.

Thanks Al and good morning everyone. This morning I will review our operating results for the quarter on both a GAAP and a core earnings basis. In addition, I’ll review our funding activity and liquidity, provide an update on our lending business and review the performance of our private credit portfolio. Finally, I’ll provide an update on our FFELP business opportunities and the outlook for the remainder of 2009. Today Sallie Mae reported net income on a core earnings basis of $13.9 million for the first quarter, which after the payment of preferred dividends resulted in a core earnings loss of $0.03 per share. These results compared to earnings of $0.08 per share in the prior quarter and $0.34 per share in the year ago quarter. As Al said, this quarter’s loss was the direct result of the continued broken relationship between the commercial paper rate, the index in which our federal student loan assets are based and LIBOR, the principal index in which our liabilities are based. Since the Federal Reserve intervened in the commercial paper markets in 2008, the CP LIBOR relationship has widened to unprecedented levels with extreme volatility. This fact caused the Federal Reserve to caution that the CP index is not likely comparable to historical periods. In the fourth quarter the Department of Education also recognized this issue and adopted an alternative approach to calculating the CP rate to better match money market conditions. This quarter the Department of Education made no such adjustment. As a result, the CP LIBOR spread for the quarter was 42 basis points wider than normal, reducing net interest income by $139 million and earnings by $0.19 a share. This quarter’s results were also impacted by the terms of the DOE participation program. This program is structured, such that the liability rate is based on the prior quarter’s commercial paper rate. It was done for operational ease for the Department of ED. As a result in a quarter, where interest rates declined sharply, the funding cost for this facility was $40 million higher, reducing core earnings per share by $0.05. Combined, these two items reduced earnings by $0.24 in the quarter. Finally, this quarter’s results include $74 million in impairments in our purchase mortgage portfolio or $0.10 a share. Our mortgage portfolio is carried at 67% of the estimated collateral value and includes an additional 10% decline in the price of residential real estate. Net interest income was $429 million for the quarter versus $567 million in the prior year; and the net interest margin decreased to just under 90 basis points from 1.24% in the year ago quarter. Net interest income on our federal loans of $61 million was $129 million lower than the fourth quarter due to the CP issue I described earlier. Our private credit portfolio generated net interest income of $395 million in the quarter and a 1.1% spread after provision. In the quarter, we earned $28 million in hedged Floor Income versus $38 million in the year ago period and we earned an additional $107 million in Floor Income that is not included in our core earnings; that’s up from $9 million in the prior quarter. If this was included, we would have increased earnings per share by $0.14 in the quarter. We booked $297 million provisions for our private credit portfolio in the quarter, versus $160 million a year ago and $348 million in the fourth quarter. Our provision in the fourth quarter included an estimate for increased losses as a result of changes in our forbearance practices. In addition, this quarter we provided $40 million for federal loans versus $33 million in the fourth quarter. At March 31, our allowance for private credit loans covered 9.3% of loans and repayment. Combined, our federal and private credit allowance covers eight quarters of expected charge-offs in both portfolios. Charge-offs within our private credit portfolio varied significantly from 2.2% of traditional loans to 14.5% in the non-traditional portfolio. This compares to 1.7% and 12.3% respectively in the fourth quarter. In addition, within our traditional portfolio, the charge-off rate for loans with a co-borrower, which is the primary focus of new lending for us, was 1.5% and even at these elevated levels of charge-offs our private credit portfolio earned a positive spread of 1.1% in the quarter. As discussed in prior calls and presentations, we changed our forbearance policies in the middle of 2008. As a result, loans and forbearance have declined sharply to 6.7% of eligible loans at quarter end versus 16.4% a year ago. As expected this has contributed to an increase in delinquencies and ultimately charge-offs, but far less than a one-for-one relationship. However, despite the economic climate, as the delinquency data reveals, we are beginning to see some improvement in early stage delinquencies. In addition, we are also seeing a significant improvement in cash collections at our centers. For example, the number of delinquent borrowers across all buckets that are making payments has increased over 70% over the prior quarter. In our traditional portfolio, 90 day delinquencies increased to 4.3% from 1.8% in the year ago quarter and forbearance usage at quarter end declined 6.3% from 15.5%. Our new forbearance policies are reducing both the term of the forbearance granted and the usage contributing to the overall delinquencies. Reserves for traditional loans at March 31 equal 5.4% of loans and repayment. In our non-traditional portfolio, 90-day delinquencies year-over-year increased to 19.1% from 10.7%, while forbearance usage declined to 8.5% from 21.4. Reserves for this portfolio were at 32.2% of loans and repayment. Fee income in the quarter totaled $239 million compared to $200 million in the fourth quarter. This quarter’s results include $77 million in impairments in our purchased paper portfolios versus $45 million in the fourth quarter, an increase of $8 million in guarantor servicing fees due to seasonal factors and $64 million in gains from repurchasing debt versus $27 million in the fourth quarter. A full description of our fee income is provided in the supplemental earnings release. Operating expenses including restructuring charges of $5 million were $297 million in the quarter, an 18% decrease from the first quarter of 2008. Within our lending segment, operating expenses declined significantly to $131 million in the quarter from $164 million a year ago or 29 basis points of managed loans and that’s down from 39 basis points in the first quarter of 2008 and 48 basis points in the first quarter of 2007. Our scale and efficiency are significant competitive advantages, helping us to secure market share in the student loan marketplace. In the first quarter of 2009, we began to see some welcome signs of activity in the capital markets. In this environment we completed our previously announced $1.5 billion private credit securitization. We also completed three securitization transactions of consolidation loans and student-loan backed securities in the last three weeks, totaling $5 billion. Together, these federal student loan asset-backed transactions had an average life in excess of 7.5 years and spreads of 225 to 280 basis points over LIBOR. Although, these transactions carry a high cost, especially considering the fact that 100% of the underlying loans could default and the security holders would still be paid in full, they do provide life of loan funding for assets that are not eligible for the DOE conduit. In the quarter we raised $1.2 billion in term deposits at the bank, with an average life of 3.2 years and a cost of 200 basis points over LIBOR to fund our new private credit originations. We continue to see strong demand for this important funding source and as Al indicated we expect to close on a 364 day extension of our FFELP asset-backed CP facility this week. We intend to repay the private credit portion as planned. The DOE conduit, the Straight-A funding facility continues to move forward, but has suffered from numerous delays. We’ve been assured that the delays are operational and we expect this program to be funding in the next seven to 10 days. At the end of the quarter, 72% of our managed loans were funded for the life of the loan; another 11% is funded with fixed spread liabilities with an average life of 4.4 years. Our position has remained consistent throughout 2008 and 2009. We only make new term loans to the extent we’ve secured access to term financing first. At quarter end, we had $9 billion in primary liquidity consisting of cash and investments and committed lines. In addition we had $5 billion in standby liquidity in the form of unencumbered FFELP loans. Adjusted for this month, ABS transactions primary liquidity increased to $13.6 billion. We expect free cash flow over the next 12 months to total approximately $7.5 billion versus corporate debt maturities of $5 billion. A sort of company that generates very strong free cash flow; this cash is principally generated from principal payments from our loan portfolios, cash distributions from our securitization trusts and other cash flows including net earnings and slower income. In addition we expect to obtain significantly higher advance rates for under the Straight-A funding vehicle compared to the asset-backed CP facility funding those loans today. During the quarter we originated a record $6.6 billion for FFELP loans, an increase of 10% from the prior year and through the first three quarters of the academic year we have originated $16.1 billion of federal loans for our book and an additional $2.5 billion for third-party clients. In total we expect to originate over $22 billion of federal loans in 2009. Our ability to meet the growing demand for federal student loans is the direct result of the ECASLA legislation sponsored by Chairman Kennedy and Miller. This program will allow us to ensure that every student at every school will continue to have access to student loans this year and next. Our private credit originations totaled $1.5 billion in the quarter, a decrease of 40% from the year ago, which significantly increased the quality of loans we’re underwriting in this area. In the most recent quarter for example, the average FICO score was up 18 points to 734 and over 74% of loans may have had a co-borrower. For our new program that has been launched this quarter, over 90% of the volume coming in has a co-borrower. This program which was introduced this quarter called the Smart Option loan requires interest only payments during in-school periods and shorter repayment terms. Combined, the typical borrower will save over 60% in finance charges over the life of the loan, dramatically improving loan affordability for students. Total equity at March 31 was $5 billion, resulting in a tangible capital ratio of 1.8% of managed assets unchanged from year end and with 81% of our managed loans carrying an explicit government guarantee and with 72% of managed loans funded for the life of the loan. We believe our capital levels are appropriate given our asset and funding mix. For GAAP, we recorded a first quarter net loss of $21 million or $.10 per diluted share and that compares to a net loss of $104 million or $0.28 per diluted share in the year ago quarter. The loss as with core earnings is the result of the CP issue and the interest rate timing issue discussed at the beginning of my remarks. In addition, we had a $261 million mark-to-market loss on the value of our residual assets. Combined, these items reduced net income by $394 million or $0.53 per share. Our GAAP results also include the net impact of derivative accounting that increased net income by $54 million. The net impact of derivative accounting under FAS 133 are recognized in GAAP, but not in our core earnings. The GAAP provision for loan losses was $250 million for the quarter, including $203 million for our private credit loans. GAAP net interest income was $215 million for the quarter and under GAAP accounting, as you know the provision for loan losses and net interest income are based only on the on balance sheet portfolios, compared to core earnings which are based on managed loans. Over the next several months the administration and Congress will consider significant changes to the federal student loan programs. In addition, we and other lenders are likely to put tens of billions of dollars in federal loans to the department under the ECASLA program. We will compete vigorously to demonstrate the value we bring to the federal loan programs. We believe the best program for students, schools and tax payers will leverage low cost federal funding, offer students and schools the ability to choose the origination platform and processes that best meet their needs, create competition to enhance the level of service and lower the cost of the program for tax payers. We also believe that the program should require services to have skin in the game by retaining risk in the performance of the loan and by not incurring implementation risk by forcing over 75% of schools to adopt an origination platform they did not choose. We believe we can deliver the savings outlined in President Obama’s proposal in a time assured process. We believe a program built off the foundation created on under ECASLA and the President’s proposal, can meet or exceed the budget savings and funding for Pell Grants as proposed by President Obama, while delivering a better program for students and schools. As Al described earlier, the savings forecasted by the CBO are produced from the government acting as a bank, earning the profit from making 6.8% to 8.5% fixed rate loans to students funded with low cost Treasury debt. They are not the result of eliminating lender subsidies and our proposal provides compensation to participants on a fee-for-service model, the same approach used in the President’s budget proposal. In addition, this week the Department of Education issued the final RFP for servicing FFELP loans that are put under the participation and put program or the ECASLA program. This contract will govern the servicing of the expanded future federal student loan products and we expect the contracts to be awarded in early June. As the largest lowest cost servicer of student loans, we believe we are well positioned to participate in this contract and we are confident that we’ll be selected. For 2009, there remain many variables that could have a material impact on our results. These include the CP LIBOR spread, funding availability and costs, credit costs and whether or not we put the 2008/2009 federal loans to the Department of Education in September. Given the uncertainty surrounding these issues, especially the CP LIBOR spread, it’s difficult to provide updated guidance at this time. With that, I’d now like to open the call to your questions. Operator, we’re ready for questions.

(Operator Instructions) Our first question is from David Hochstim with Buckingham Research

Would you be able to give us any sense of what you think losses on the private loan portfolio look like over the next few quarters?

As you can see from our allowance for the private credit loans, we clearly are expecting higher overall charge-offs compared to what we experienced in the first quarter. Our allowance at the end of the quarter on a managed basis was $1.9 billion. When you compare that to the charge-offs that we incurred in the quarter, it roughly covers 9.5 times the first quarter’s levels and our charge-off estimate, our provision covers eight quarters. So, on an average basis, you’d be looking at about $240 million a quarter during that two year time frame.

Are they sort of front end loaded as you have loans going to repayment declining or should we think about it as spread evenly?

Yes, I mean we’ve certainly given the economic environment; we would certainly expect them to be more heavily loaded towards 2009 versus 2010. Obviously economic conditions though will ultimately drive how those losses are incurred.

Okay and then could you help us think about the securitizations you just did and kind of what you think about the all in funding costs and the yield on the underlying assets. Is there a positive spread there?

Well clearly, those transactions, the average funding costs for the three transactions was 240 basis points over LIBOR. At those levels, they do produce those loans are funded at a loss, that would be a correct statement. However, they are funding the loans for the life of the loans and in one case the first transaction we did, we were refinancing our previously securitized student loans and repackaging those securities into a new transaction. For our purposes, when we looked at doing those deals, ultimately the life of loan funding out weighed the in providing liquidity to the company, out weighed the negative margin. We did minimize that to the extent possible and the appetite I would say to do more of those is certainly limited.

Alright, thanks.

Our next question is from Lee Cooperman with Omega Advisors.

Thank you very much. It’s kind of a strange actually as your irony of ironies in the sense that, the President to the country says his highest priority is to have the highest percentage of college educated people of any country in the world and we have a stock that or a company that is a leader in accomplishing this, selling at $4 a share at near historic lows; it’s kind of ironic, but anyway so much for observations. I have three or four questions. I apologize if you addressed any of these. I had the wrong time on the call, so I came in a little bit late, but my first question is a couple of conference call ago, earnings calls ago, we talked about run-off value and our calculation in our firm is somewhere in the teens and I’d like to state all my questions and give you a chance to answer them in any order you prefer, but do you fellows have a firm view of run-off value at the present time? Secondly, if you step back and look at two business models, business model one is you originate a loan, you service a loan and you carry the loan on the books or the second model is we originate the loan, we service the loan, but the government carries the loan to books. What’s a better business model in your opinion long term? Third question is; your debt in the market, certainly the intermediate term and shorter maturities are selling at yields of almost 20%. I’d be curious if you could contrast the profitability of originating a loan and carrying it on your books versus retiring debt at 20%. Where is the rate of return greater? Finally, someone once made a comment to me that you guys have no intention of being the Thanksgiving Day Turkey for government. Have you reached a conclusion that government doesn’t want to see you make a reasonable return on behalf of your shareholders; that will go after into run-off and return the money to shareholders? I want to make sure that we’re thinking like profit capitalists. I think you’ve done a great job in fulfilling your mission that you have, but if we’re not appreciated, whether we recognize the need to serve our shareholders properly and do what’s right for the shareholders. Sorry for all of these questions, but this is kind of what’s on my mind.

Okay, we’ll take them in the order I guess you asked them. We do look at the portfolio, obviously from an earnings contribution and capability over the life of the loans and because we do finance the vast majority of our assets that way, 72% at quarter end, we certainly have a firm view of what this business is worth and we would agree that it is worth substantially more than the stock is trading. A number in the teens is certainly a number that we can get to. When we look at question two, which is what’s a better business model, I think you have to look at the environment in which you’re operating in. If we could go back to an environment like we’re in at 2004 and 2005, with easy access to funding at 8 to10 basis points over LIBOR, in the margins we’re earning, we clearly prefer that business model over a fee-for-service one. Today however, the federal government has dramatically reduced the margins available on federal student loans to take into consideration what were previously low funding costs and they did that back in 2007 and today, credit spreads are no longer at 8 to10 but are at that 225 kind of number that we just did on our ABS transactions. That funding is scarce or it’s certainly at least uncertain. On that basis, a fee-for-service model for the FFELP assets is a far more attractive business model. We think we had a tremendous amount of value to the federal loan programs in that basis. We know we operate at the lowest costs in the industry. We know we deliver better services, and a piece that gets missed quite often in this process is, we also do a substantially better job on the collection side. When we look at how we perform on that basis, our loans, students who borrow from us attending similar types of schools as entities that operate on a pure fee-for-service basis without risk sharing, our defaults are on average, 30% lower across all school types and you have to look at it on that basis, because students attending different types of institutions, have materially different default rates. So if you just look at the aggregate, you can miss that performance, but those statistics are consistent over a multi-year timeframe and we think we can apply those under any business model with the right incentives to reduce defaults, which has an enormous benefit, not just to tax payers but to the borrowers themselves. On the debt yield side of the equation, we don’t disagree with the concept here that our debt is trading at ridiculous levels of spreads and where we have availability, we have been active in the markets, but if you look at new origination activities, the funding sources that are available to make those loans are not available to be redirected to debt purchases. On the federal loans we’re funding from the DOE; those proceeds must be used to fund new federal student loans and for our private credit book, we are raising bank deposits to fund those assets, also not available to repurchase debt. Clearly as we replace some of our short-term funding vehicles like the asset-backed CP facility, and cover our maturing unsecured corporate debt, we hope to be far more active in the markets in buying back our debt and we are pretty close I would say in moving from addressing the short term liquidities that have been overhanging this company through the asset backed CP facility for example, to focus more on long term profitability.

One other question if I may, and you may not be able to tackle this or want to tackle this, but assuming we remain in the constrained credit environment where structured finance just is not available like it used to be available and the government goes through with its program and no changes, and we essentially become an originator and a servicer and the government carries the loans; between your origination fee, assuming there is one and your servicing margin, what kind of earning power would this corporation have in three or four years? This is not like quarterly guidance, but just can we be earning a dollar a share and plus the value of the write-off or is that just too hard to pinpoint at this point in time?

Lee, this is Al. You’re a Chief Thanksgiving Turkey. You mentioned a number of things. We’re very confident that even in a servicing mode, that we have the earnings power to generate a substantially higher stock price. I don’t think there’s anyone in this building to your earlier point that’s not a capitalist.

I’m not worried about you guys by the way. I’m worried about somebody else.

I understand that and I understand exactly where you’re coming from with your questions. We have modeled out any number of scenarios and feel very confident. Today we’re beleaguered by a spread on the CP LIBOR thing that’s troublesome and what I would call short-term liquidity issues that are very close to resolving themselves. We are very anxious particularly with our new private credit product to get back to an earnings per share growth mode and we think that we’ve reached a point where we’ve got to go up.

I hear you; I appreciate it.

We do a variety of things well and we have growth in a variety of revenue areas. It was not enough obviously to overcome this CP LIBOR thing and we will push on and I frankly think either on or off balance sheet, we’re the people to maximize the returns on the student loan business in the next 10 years.

Thank you very much and good luck.

Thank you.

Our next question is from Matt Snowling with FBR Capital Management.

Good morning.

Good morning.

Can you guys talk a little bit about the surge in delinquencies and how much of that may have been a result of the change in forbearance status?

Well, we think it’s a significant factor here. When you are moving loans, if you look at the dollar balances or percentage balances of loans that the forbearance decreases and where they stopped, basically at the end of the third quarter, you could see that over the next 180 days, a significant increase in the rise of 90 day delinquencies. If you look at the 30 day buckets and the 60 day buckets though, you start to see a turn in those numbers as basically those portfolios are running through the delinquency curve. Now it’s early still and we want to see how this performs out over the next couple of months or quarters, but we’re optimistic in the direction that it’s heading. As I said on the cash collection side, one of the big changes that we’re doing here is instead of allowing a borrower to use a forbearance and then start making payments due and be current, we’re actually looking for borrowers to demonstrate a willingness to pay, along with the ability to pay, by making payments before they get granted the forbearance. So in that 90 day buckets and higher delinquency buckets, we’re seeing a significantly higher or a significant increase in the amount of borrowers who are making payments, but still remain in those delinquency buckets, because they are not rolling, but they haven’t been able to make enough payments to bring their account current. If we can get three payments from them and these are full payments, not $5 or $10 payments, but full payments, then we would grant them forbearance and let them begin the process as a current account. So we’re optimistic on the results. As I said, the ratio has been far less than one for one and we think it was the right decision and remain focused on that.

Matt, this is Al. Look, the forbearance numbers come down about almost $1.5 billion over the past year, obviously those loans had to go somewhere. Forbearance was virtually the only kind of benign collection treatment that we had a year ago. We have put a fair number of additional procedures in place, but they require the borrower to demonstrate the ability to pay cash, if it doesn’t demonstrate the ability to pay cash, we just put them back into repayment and a lot of those are coming through. To the earlier call, I think the earlier question from David Hochstim, that is why we see charge-offs and delinquencies high right now and we think that it’s the reason we’re seeing lower numbers in the earlier buckets. There’s a huge unknown in all of this and that is which direction is this economy going from here. If we stayed where we are right now, we think we could be a lot more certain about where those charge-offs will go, but I think we’re doing the right things and we expect that as Jack said earlier, that we’re going to see some heavy duty charge-offs in the next four quarters and we hope to get better from there.

Also, if looks like if you look at the portfolio performance in both delinquencies and charge-offs, compared to other consumer asset classes, on the traditional side of the equation we are far out performing any single asset class, any other consumer asset class. That’s true whether you look at cards or autos or HELOCs or even prime mortgages and I think that’s a testament as to who we are lending to and the economic benefit that these borrowers get from a college education.

Well, let me ask a different question. As far as the $13 billion or so loans that are eligible to be put back to the government in September, should we assume they are going to put all those $13 billion and if so, the cash that gets released, is that just the 1% origination fee rebate, plus $75 of loans?

That’s right and you should assume that in today’s funding environment, that those loans will get put.

Any indication how much cash that brings up for you? I guess we can do the math.

Yes. The cash that gets freed up here is what you described, the 1% plus the $75 per loan. I don’t have the loan count at my finger tips here.

Okay, I’ll follow-up later.

Our next question is from Michael Taiano with Sandler O’Neill. Michael Taiano - Sandler O’Neill: Hi, good morning. A couple of questions Jack; on the ABC conduit, you said you expect to renew it in the next few days. Are there going to be step down provisions as you move loans into Straight-A funding and then secondly, did you say that you were going to completely pay down the private loan portion of that conduit?

Yes, we are going to pay down the private loan portion. That was part of the rationale behind the $1.5 billion private credit transaction that we did and we also are reducing the federal loan component size as we have obtained in part because of the ABS transactions that we just did, any anticipation of what our needs will be after our Straight-A gets up and running. The facility will certainly include incentives for us to step down the facilities size overtime, but not include requirements for us to step down the facility size over time. We did restructure the facility from our perspective, because if you remember back in 2008 when we put this into place, we had high up front fees and a relatively low funding cost; obviously combined with a high funding cost. We’re flipping it around in this extension, so it’s a higher interest cost but lower fees. Economically it should be about the same cost as what we’re paying today, but as we step it down, it obviously has a better impact for us. Our goal is to reduce that facility as fast as possible. It’s been something that’s hanging over our stock price that impacts our debt trades. Replacing that funding vehicle with term funding sources like Straight-A funding is a key top priority for the company. Michael Taiano - Sandler O’Neill: Okay and then how should we think about private student loans going forward? I mean obviously you got the credit headwinds here in the near term, but what sort of profitability in terms of ROE and growth would you expect that this business to produce over the longer term?

Well, we think this business is obviously an attractive business, otherwise we’d be pulling back from it and we think even in this environment we can earn very attractive returns on both the ROA or ROE basis. The portfolio, typical loans today which we target to generate with elevated credit losses, a pre-tax margin of about 4% and we are certainly hitting those numbers or more on new originations. If you look at what’s going on in the portfolio though, if you look at the traditional segment of the business, charge-offs this quarter were 2.2% of loans and repayment and for loans with a co-borrower, that charge-off rate was 1.5%. If 90% of loans coming in application form are co-borrower accounts, this is a portfolio that as I just said is outperforming every other consumer asset class. There were questions I think in the past of these loans being perhaps in elevated levels of forbearance fee and as we’ve moved to address that, you can see that the performance statistics have continued to holdup. Michael Taiano - Sandler O’Neill: And so it sounds like you can generate at least on the new loans you’re talking about something, north of 20%, sort of ROEs?

Yes. Michael Taiano - Sandler O’Neill: Okay and then just last question on the politics and obviously there’s been this history of democratic bias toward the DLP. As you talk to members of Congress and the administration and the Department of ED, what sort of reception are you getting to the numbers that you gave us early in the call, about how much subsidies are versus how much you pay back, compared to what the CBO has been saying historically and what they are saying now? It seems like the governments always seem to rely on those CBO numbers even though there’s been fuzzy math in them. Are you seeming to get a little more reception to how you’re analyzing this now?

I think the goal here is to create savings to fund Pell Grants and the debate over whether its lender subsidies or profit from owning and funding 6.8% to 8.5% fixed rate loans with low government funding costs clouds the issue. Let’s just forget how you get to the savings. If the savings can be achieved and you meet your goal and you can do it with greater certainty in a better product for schools and a better product for students, building off of what the President’s proposal is all about. I mean the President’s principal component here is using the Federal Government’s balance sheet to fund these assets, that’s where the “saving” come from. We’re there and we are proposing a fee for service basis just as they are. So, I would suggest our proposal builds off of what the President has proposed. It makes it better; it puts risk, it takes some of the risk off the Federal Government and transfers it to servicers. All those things, as we explain them and people understand them should resonate very strongly, regardless of political affiliation. Michael Taiano - Sandler O’Neill: Thanks very much.

You asked what kind of reception we’re getting. I think you have to start with the basic premise that at least on one side of the isle there’s a predisposition to give President Obama what he wants at this stage of his administration. We believe what he wants are Pell Grant savings. The Congress will ultimately decide how we get those savings. I think the receptivity to some of these ideas and again I’d say that we may have gotten there inadvertently, but when they put a clause in, the basic model was in place to generate the savings and I think that the reception that we’ve gotten has improved over particularly in recent weeks. So, we don’t know how this is going to go, but as I answered in an earlier question, there’s a variety of ways for this company to go and we’re going to obviously push for what best helps achieve President Obama’s goals and what best ultimately helps our shareholders and our customers for both the students and the schools. Michael Taiano - Sandler O’Neill: Great thanks, very helpful.

Our next question is from Andrew Wessel with J.P. Morgan.

Good morning. Just a couple of other follow up questions. Just a quick one on the ABCP facility with the banks, is that going to be another kind of three month role or is that going to be a year or longer maturity extension?

It’s a 364 day.

Okay so one year extension. Great, and then is there any kind of timeline that you’re thinking about for an update on the servicing contract and the bids there, is it any day now or is it going to be pushed back?

The final RFPs just came out this week. We expect that we’ll hear sometime in early to mid June.

Early to mid June, okay and its six total companies including yourselves bidding on that?

Yes.

Okay and then lastly, I think just in terms of going back to that question in response to your alternative plan that you’ve been circulating, from the schools perspective, which I think maybe isn’t a very important component now in the overall public debate, but will become a bigger issue once funding actually has to be made; what’s the feeling you’re getting back from schools in both Sallie and direct lending institutions?

Schools have been far more supportive frankly than I expected. I think that they like the idea of having a choice; the direct loan program once upon a time had gotten to about a third of market share back in the mid to late 90’s. It declined from there to 18%. Direct lending tends to do very well and delivers a nice product to public schools that have back rooms; it has not fared very well with private schools and so as recently as a year ago, direct lending serviced something like 18% of the number of schools. It had a far higher dollar volume, but 82% of schools have made a different choice in direct lending.

And as Al said they’ve gone back and fourth, so schools have moved back to FFELP and vice versa and choice in that regard means schools can decide which best meet their needs and who wouldn’t want choice from that perspective, even a school NDL still had the ability to achieve DL.

I have noticed in e-mail traffic among the schools and back and fourth with us that they do grow vary of being part of a political process, but that’s the world we live in. We all do that.

Sure yes, me too. All right, thanks a lot. I appreciate it.

Our next question is from Moshe Orenbuch with Credit Suisse.

Thanks. I was wondering if you could kind of expand a little bit on the DOE conduit. Do you have any better idea of kind of how quickly that could phase in costs and the like in terms, and I assume that you used that knowledge I guess to think about step downs and the size of the renewed ABCP facility?

Yes. We certainly have a plan and expectations for how it will work. We will not be the only user of that facility and so how quickly we ramp up will in large part depend on how quickly others seek to participate. I think everybody involved in this process has been conservative in their estimates as to how fast the program can grow based on investor demand, that the good news I would say is, the assumptions are far lower than what investor demand looks like it will be, but in a marketplace like this, until you officially launch the product and see it trading, you don’t want to make too broad assumptions or too aggressive assumptions as to investor participation.

But are there specific guidelines as to cost or…?

It’s a commercial paper product so it should trade like commercial paper. We expect the reduction that this facility will be far lower in cost, more than 100 basis points lower in cost than what we’re funding at today and equally as important, far higher advance rates and so less collateral will be tied up for the same dollars raised.

All right, just raising that point, in terms of the new facility, will the advance rates be comparable to where they’ve been?

Yes. It’s the same market based advance rate structure.

And then just one quick question; you mentioned the new program on the private side. When did that start, how good is the customer uptake of that?

Well, I mean our business’s demand is very seasonal and so the reception has been strong in terms of application inflows, but it’s a very small segment, so we have to see what’s going to happen. Once award letters go out and demand will start peeking in the June, July kind of timeframe overall, but so far we’re very happy with the reception we’ve received.

Good. Thanks.

Our next question is from Kevin Ing with Columbus Hill Capital.

Hi, guys, how you doing? A couple of questions, you mentioned that $16 billion will be eligible for the conduit program and then in the supplemental I think it’s on page 49, you mentioned that $17.4 billion will be eligible for Pell. Can you confirm, is the 16 included in the 17.4 or can we add them together so you have liquidity for both programs in excess of $33 billion?

You combine both program, you combine the numbers.

Okay and then also on that same page, you talk about how the current ABCP facility is over collateralized by an amount of around $6 billion. Is that $6 billion included in the $17.4 billion to FFELP?

It’s included in the combined numbers. The asset-backed CP facility funds both DOE eligible and FFELP eligible loans. It does not fund one exclusively.

Okay got it. A couple of other questions; can you discuss a little bit, the process, the CP LIBOR fix, your confidence in whether or not you think you can get that resolved and what the process is and if you are able to get it resolve, do you think it will be retroactive through what period?

I think that’s a little hard for us to comment on at this point in time. It’s clear that we need a legislative fix to this, not an administrative fix and we’re working aggressively towards that. I think it’s also important to note that this is not just a student lender issue; it’s also an ABS Holder issue. The level of interest in getting this fixed and people advocating for it to get fixed has been elevated over the last couple of, over the last week after the Department of Educations decision not to take action on the CP index this quarter.

Okay and just a couple of other questions. There’s another company CIT that reported today and they got a partial 23 exemption which allows them to move assets into the FDIC regulated bank. You guys also have an FDIC regulated bank. Have you guys thought about the 23 exemption and if so, any thoughts as to what you think is a likelihood of receiving a similar sort of exemption to help you increase liquidity?

Obviously, those issues are individually specific to entities. We really don’t have anymore to add on that topic.

Okay and lastly, to follow-up on Lee’s question, clearly as you are able to generate more liquidity, with the combined FFELP and Straight-A funding will be in excess of $30 billion clearly after you use some of that to pay down the ABCP, but have you thought about tendering for your notes at significant discounts to par and also can you comment on what tenor of, what maturities you bought in the bond purchases during the quarter and what average price you paid?

Well, whether or not we tender I think is something to be decided in the future versus decided or discussed today. We have the debt we repurchased in the supplemental slides that are up in the website; we repurchased a $144 million worth of notes and you can see we recorded a gain of $64 million. So that gain is 44% of the total. The maturity ranges that we bought were everything from ‘09 out to I think maybe 2014. The thing you have to think, I think everyone has to keep in mind here is just because bond prices are indicated at a certain level, it doesn’t mean you can go out and actually buy size of those levels, as you probably know.

Kevin, if the point of your question was, are we looking at various and sundry alternatives once we have even more liquidity, obviously the answer is yes. I mean, we model all these things all the time and as we told Mr. Cooperman, all things are on the table, but at the moment obviously we have described to you our current priorities.

Okay, great. Thank you.

Our next question is from Ryan O’Connell with Citigroup Ryan O’Connell - Citigroup: Okay thanks. Jack you gave us an update on the cash flow estimates over the next 12 months, that’s very helpful. In July of next year, you’ve got about $3.3 billion of debt maturities. Could you maybe push out the estimates on a cash flow, but give us an idea of what cash is likely to look like through July or September of 2010?

Well certainly if you look even longer than that, like through 2011, which is where the last kind of big chunk that we have, we think with existing cash flows and the changes in advance rates that we’ll see on the financing of loans from the asset-backed CP to the DOE conduit, our cash flows are in excess of our debt service requirements. Ryan O’Connell - Citigroup: Okay and so now it relatively timing issues, but in other words it’s not necessarily you’ll be caught short in any particular month or quarter?

Right. Ryan O’Connell - Citigroup: Right. Okay thanks, that’s helpful.

(Operator Instructions) Our next question is from Cyril Patini [ph] with Credit Suisse .

Yes hi, good morning. I have one question; if you could please size or quantify the total liquidity call that you have related to rating triggers across the enterprise, including in your synchronization vehicle?

Ratings triggers from the rating agencies?

Yes.

We don’t have specific guidelines or triggers for those purposes. For the corporate debt rating?

Yes. So, if you’re saying that if there’s a rating down grade, there wouldn’t be any liquidity?

Oh, I see what you’re saying, I’m sorry. No, there are no triggers on our liquidity issues for ratings down grades.

Okay, thank you.

Ladies and Gentlemen, I would now like to turn the conference back over to our host for any other remarks.

Thank you very much Alexandria. Now that concludes this morning’s conference call. Thank you everybody for tuning in and if you have any follow-up questions, as always contact myself, Steve McGarry or Joe Fisher. Thank you.

Ladies and Gentlemen, thank you for your participation in today’s SLM Corporation’s first quarter 2009 conference call. This concludes today’s call. You may now disconnect.