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 third quarter fiscal 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you. I would now like to turn the conference to Steve McGarry. Sir you may begin the conference

Thank you Regina. Good morning and welcome to Sallie Mae's 2010 third quarter earnings call. With me today are Al Lord our CEO, and Jack Remondi, our CFO. Before we begin, keep in mind that our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future maybe materially different from those discussed here. This could be due a variety of factors and listeners for a 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 that we call our core earnings. And description of core earnings, a full reconciliation of GAAP measures and our GAAP results can be found in the third quarter 2010 supplemental earnings disclosure. This is posted along with the earnings press release on the investor's page at salliemae.com. Thank you and now I'll turn the call over to Al.

Thanks Steve, good morning everyone. Thanks for your interest. I am going to cover briefly our third quarter earnings and a couple of items that I want to cover with our shareholders and now I'll turn it over to Jack. So we reported $0.35 per share in earnings from the third quarter 2010, up from $0.26 a year ago. There really weren't a lot of so called one time items in our $0.35 in earnings and so it's actually a fairly reliable indicator of where we are. The net interest income in this preceding quarter was better than a year ago better because CP-LIBOR normalized over the past year and we have higher private credit yields and very, should I say very, very slight asset growth on the private credit side. We had a significant year-over-year reduction in our charge-offs and private credits some $95 million versus the year ago quarter, through there was a slight seasonal up tick from the second quarter. I'll talk a little more about credit quality in a minute and Jack Remondi will also talk about credit quality and the seasonality of credit quality in a minute. Our operating expenses were up very slightly from 2009 and while I don't hear the questions so I can sort of feel them and I know the question is why aren't they down, so first on there is a variety of reasons for that. I think our time is probably better spent on talking about the quest levels for today and tomorrow. Costs are coming down. They are in fact coming down gradually in a variety of areas. For the year 2010, full year 2010, operating expenses will be about $1.3 billion. You can expect expenses in quarter four 2011 to be about $250 million; that's one year…

Okay, thanks Al, Good morning everyone and I'm going to take the next few minutes to review our operating results for the quarter on both the GAAP and core earnings basis. We'll take a look at our funding activity and liquidity providing update on our lending business and review the performance of our private credit portfolio. And at the end we'll provide an update on outlook for the remainder of 2010 and a first look at 2011. For the quarter, core earnings were $189 million or $0.35 a share that compares to $164 million or $0.26 a share in the year ago quarter. This quarters results included debt repurchase gains of $18 million or $0.02 a share. Net interest income was $756 million for the quarter versus $690 million in a prior year period and the net interest margin improved to 1.52% from 1.32% in the year ago quarter. The changes in net interest income and the margin from one year ago or primarily due to improved basis spreads principally CP LIBOR spreads increased floor hedge income and lower funding cost. The provision for private credit loan losses in the quarter was $330 million, a decrease 19 million from the prior quarter and the total loan loss provision for the quarter was $358 million compared to $382 million in the second quarter. At September 30th, our allowance for private credit loan losses was equal to 7.9% of loans and repayment. Including the provision, net interest income totaled $320 million from FFELP and $73 million from private credit loans in the quarter compared to $333 million from FFELP and $45 million from private credit in the second quarter. Seasonal factors drove an increase of private credit loan charge-offs of $12 million to $348 million in the third quarter from $336 million…

(Operator Instructions) Our first question comes from the line Sameer Gokhale with KBW.

My first question Jack was more for you, I think you talked about the trust data and some of the statistics there and your private student loan data, and I guess I was curious why it seemed like there was more of a divergence between the trust charge-off metrics and your reported metrics? It seemed like there was more of a divergence than you've seen in prior quarters. Was there any sort of change to the way you estimate recoveries or anything of the sort that might explain that difference this quarter compared to prior quarters?

There were no changes in the assumptions on any of those categories. The difference between the trust portfolio and the managed book really relates to the fact that the non-traditional loans are principally on balance; they are not in securitization trusts and so you see a significant divergence there. The charge-off rate for traditional loans in the quarter was 3.9% of loans in repayment compared to almost 18% of the non-traditional book, and that really is what drives the different performance statistics.

I'm sorry, I should have clarified. I was comparing the trust to the traditional loan performance only so because keeping aside the non-traditional loans. It just seemed like there was still more of a divergence there than we've seen in prior quarters.

To that extent it would be a function of where the loans are in the repayment cycle. If you refer just some of the slides that we released this morning you can see that you know if the loans that are in the first year of repayment in the traditional book, we had a charge-off rate of about 6.4% compared to loans that are in subsequent 12-month buckets that are substantially lower than that. So that seasoning, obviously loans that are in the securitization trust are more seasoned than loans that are on balance sheet, and that's a big driver of performance.

And then, I just want to get a sense for earnings expectations. I know you've given us guidance for 2011. I am not asking for specific guidance looking out to 2012 at this point but just to try to think through this a little bit; if your guidance is for $1.50 next year, you are expecting these operating expense improvements and you'll realize most of them in 2012 onwards because by then you'll be done with all your expense reduction initiatives of most of them and then you add on top of that the fact that could experience a much more normalized loss rate, charge-off rate in 2012. Is it reasonable to think when you factor those numbers in there that your EPS could be north of $2 in 2012 or am I missing something there?

We're not prepared to give specific dollar ranges directionally though 2012 will be higher than 2011. You are correct in the positive fact just that you mentioned. On the opposite side of that is you do have one-off or the amortization of your FFELP book. And so that's a pretty steep hill decline. But earnings will be higher in 2012 than it will be in 2011.

And then, just a last question Al. I think in your comments you talked about being months away from a better matching of assets and liabilities and I just wanted to get a better sense for what you meant by that. Is it something like you intend to issue unsecured debt, use the proceeds to maybe even out your debt maturities and then have more free cash flow you can give to equity holders? Is that what you are envisioning or is it something else?

I think the bottom-line, Sameer, is that we want to extend our liabilities. I think we have some $22 billion in round numbers of unsecured liabilities. In total, about $14 billion of them mature in the next four years. We would like to spread that out a little bit better. As I said, we have managed that number actually very aggressively over the past couple of years and literally taken almost $10 billion of unsecured debt off the books. Now it's just a matter of spreading a little bit more smoothly against the cash flows that we have.

Our next question comes from the line of Mike Taiano with Sandler O'Neill.

Just the follow-up on the sort of the strategic initiative; I guess now that it's been out, looks like it's off the table, sale of the residual. Looks like that's not going to happen. So I guess at the end of the day, it’s more or less status quo and just trying to get a sense of the capital return or the cash flow return to shareholders and you mentioned that asset liability is mismatch. I mean, as it stands now, it seems like it will be difficult to initiate a significant dividend or share buyback given where you’re liquidity is. I think you have like X within the bank, roughly $3billion or so of cash available and you have I guess over $5billion of debt maturing through 2011. So can you help us maybe understand what your thought process is in terms of the timing there. Does something else need to happen and correct me, is dividend and share buyback what you are thinking about at this stage?

I think on a cash flow side of the equation, we’ve tried to lay that out, the substantial components of that particularly from our FFELP book by year for investors and we look at those numbers and we look at cash that’s generated from other components of our business relative to our unsecured debt maturities. We are in a good position through 2014 which is when our peak liabilities, maturities occur. Our challenge as we want to have financial flexibility to do different things and I think the student loan corp deal is a good example of that. We are able to work that transaction out with a seller financed note, but those aren’t necessarily things that will always be available and having greater access to liquidity and financial flexibility would be important. You hate to have lost a deal like that because of some other commitment on the returning capital to shareholders. We are committed to that, that is our goal and objective to get there. As a financial services company, we certainly I think expect to be in that position but would like to see a little bit more time and a lot more flexibility on our debt maturity structure first.

Okay and then I guess switching to another topic, the Department of Education, on the servicing contract I guess was a little bit disappointing, you know 22% for you guys, can you touch on how and do you expect to get up to the level I think you would initially thought you would be closer to 35% and then second to that I am just curious as to your thoughts on, you've got a lot going on but in terms of other businesses related to processing, loan servicing, things like that. Company went public Tier 1 recently and the market is signing a very high multiple to that business. So I was just curious as to, are you thinking or looking at opportunities like that or like you would have capabilities that align pretty well with those sorts of things?

On the Department of Education contract we were clearly disappointed with the score. There were components where we did very well. We received a top ranking for the service we provided to borrowers, albeit one of the more important metrics that we measure ourselves against. Unfortunately where we didn’t stack up, where we fully expect to be is on the default side of the equation and I would describe that. I hate to be complaining about technical issues, but it was a technical issue. We actually had loans that could default and others got their portfolios later in the cycle and so therefore defaults didn't have time to materialize, but the department did not adjust for those factors. We fully expect given our strong history of out performance or virtually everyone else in the FFELP area that we will have better default statistics and leave that group overall. We refer to working with the department and making sure that we have a good relationship and capture the disproportionate share that we desire there. On the higher one side of the equation, you are right, we actually compete with these guys today on the refund side of the equation. What we don't do is kind of connect that far or back to a more longer-term relationship overtime and we see a significant opportunity in that space to expand our presence with colleges and universities. This is a good space for us to be in. The customer base, the customer that we have worked with for years and years on the FFELP side of the equation private credit side and you're going to expect to see us do more in that area going forward.

Your next question comes form the line of Lee Cooperman with Omega Advisors.

I am listening carefully to the call; basically it seems that you have to do something with that maturity schedule before shareholders start to see money. So my first question would be how are things running in the credit markets such that you'd have the opportunity to extend maturities to share some of this $50 and rising earning power with the shareholders. And secondly are there other FFELP portfolios out there you could purchase as you did with Citicorp?

On the first question Lee, I think our credit spreads were stuck for quite a period of time over the last four to six weeks that moved in quite a bit. They are still higher than we'd like to see them but we're working very hard to address that back. We're also seeing improvements in credit spreads in the ABS markets and particularly on the private credit side and in our view we've got multiple tools available to us to build and enhance our liquidity position and make sure that we've got both the financial flexibility to manage the company as well as return capital to shareholders. On the loan portfolio side of the equation, I think our biggest challenge to acquiring more portfolios is what the folks do with the proceeds. There is a real absence of opportunity for them and I think that has slowed down some of the potential loan sales that we would otherwise see. That said we still expect them to come most of the institutions that are holding FFELP portfolios that we expect to sell. It's a very small portion of their book of business and a run off-book just becomes more of an operational distraction and so we do expect them to sell. That said The Student Loan Corp. deal was by far the largest transaction available out there by multiples.

We are not trying to put you in a spot, do you think that before 2011 comes to an end you guys will be in a dividend paying status or is that uncertain at this time?

I think it's certain, it's possible.

Your next question comes from the line of David Hochstim with Buckingham Research.

Thanks. I wonder, could you just give us a sense of how much seasonality there is or was over the course of the quarter in terms of private loan charge-offs or maybe where of the $348 million you had in Q3 was sort of 40% of it in July and then it just dropped gradually.

We had $4 billion more loans in repayment and they entered repayment about a year ago, and it takes about a year for those loans to kind of cycle through the various delinquency buckets and reach charge-offs. In virtually every calendar year, our peak charge-off month is in July, and rates drop off of that. In the slides that we've provided to you this morning, our release this morning, we show the components of loan that enter repayment by quarter. And you can see from those statistics kind of what drives the delinquency trends. There is no question that there is a big seasonal component as we kind of laid out in the first quarter for early stage delinquencies, second quarter for later stage delinquencies and third quarter for charge-offs. And we expect fourth quarter charge-offs as a result will be lower than the third quarter as that seasonal peak passes.

All right, so I guess I was just trying to get how much lower could Q4 be and could your $1.3 billion guidance be maybe too pessimistic at this point.

Well as we've said at the beginning of this year, we wanted to be in a position where we were not growing down reserves based on just kind more the economic outlook. I would describe our portfolio… Our future credit performance is really driven by two things. Its one you take a look at just the overall mix and seasoning of the portfolio. Those statistics are clearly getting better. When you look at the quality of loans that are entering repayment this quarter which will drive defaults in July of next year, they are substantially better than they were a year ago or two years ago. When you look at the balance of loans that are entering repayment this fourth quarter, they are down about $0.5 billion from last year. So just on a pure volume basis, we should see better charge-off rates as well. The wildcard is really the economy. When we get past and we talk to you again in January, we'll have much better ideas to how last May and June's graduating class has weathered this economy, what their job prospects look like and what their ability is to pay loans. But overall the trends here are positive and we expect those trends to continue to be positive going forward.

Could you just comment a little bit or an update on how much of the private credit volume came from four profit institutions this quarter and is there any real risk unless companies go out of business that volume goes away?

There is something less than 17-18% I think.

For this quarter was even lower. I think that was the second quarter number.

Second quarter is a little higher than that.

So where we look at on the private and we look at the four profit schools, you know that's a very broad range of different types of institutions in that category. There are schools that focus on traditional degrees, full year and graduate programs, and then there are schools that focus on more certificate types of programs. We are focused on the full year and graduate degree lending segments and we don't see the pressure points quite as large in that area as you see in some of the other areas.

Is your borrowers there also getting federal money or not necessarily?

Yes, most of them are getting federal money. I mean that's been the biggest pressure point on demand in the private credit loans is that several dollars available to undergraduates and graduates students is substantially higher than it was now a year two years ago that has to decrease demand and overall and decrease even the dollars for people who are borrowing then the amount they need in the private credit side.

Next question comes from the line of Matt Snowling with FBR Capital.

Just to be cleared, the 2011 guidance include the increases from the student transaction?

Yes.

It does, okay. And can you help us think about what a $36 billion seen in the private loan portfolio looks like in terms of normalized provision?

Well I think it’s our function of what the mix is between traditional and non-traditional but I think if you look at the loans that we are originating today more than 92% co-sign rate versus something in the 60's and higher FICO scores you should see substantially lower default rates. We talked about the fact that we expect the life of loan default rate on loans were originating today to be about a 6% range and that compares to base of what we are seeing today is almost 4% [charge-off] rates annualized in our traditional book.

Well Jack, doesn't that imply kind of may be $400 million and $500 million annual provision on that type of product on $36 billion portfolio.

Yes, but it takes.

Yes, I understand it takes six years to get there. And one other quick question the $300 million of cost sales that you are targeting how much of that is directly related FFELP originations, and therefore we'd kind of fall out from the expense line fairly quickly here.

There's about $100 million in FFELP origination related expense, and so that will fall away fairly quickly. And then there's also activity associated with the servicing side of the equation on the FFELP related that will come out in that process as well.

So does that mean we could see maybe a third of the cost saves in the next quarter or so?

That would be a little aggressive.

(Operator Instructions) Your next question comes from the line of Moshe Orenbuch with Credit Suisse.

Jack did you just talk about the relative attractiveness of purchasing portfolios versus debt, or is it just the reason to repurchase debt is it because just of availability versus portfolios, how do we think about those two choices for you?

We would prefer to be purchasing portfolios, particularly at similar terms to what we did on this most recent transaction. But the issue is more supply on that side of the equation. We do expect it to come, but it is coming in our view a little bit slower than otherwise would be the case of if folks had opportunities to reinvest the money. On the debt repurchase side of the equation, a lot of this is just due to the simple fact that these notes have near term maturity dates. And so to some extent we're sitting on cash in anticipation of having to pay the notes off that maturity. If that cash is earning 15, 20 basis points and we combine debt back earning, yielding 4% or 5%, it's obviously a really simple analysis and we should be doing that. You notice that we are buying most of the debt we are repurchasing is from 2014 and even the tenders that 900 million we repurchased this quarter was principally focused in 2011. Those are all near-term maturities that are basically or holding cash for. So it just makes tremendous economic sense to take that off the table.

In terms of the reserve on the private student loans, given what you said about the phase in and the expected performance up to new originations, I guess I am a little surprised but there wasn’t more of a drawdown in the reserves, is it really just waiting to see how this year is kind of crop going into repayment are treated by the economy, is that the fact?

That is the factor and at September 30th we still had a $1billion of non-traditional loans in that first year of repayment and another $1billion to come into repayment. So it has been a little bit conservative perhaps, but we think it’s the appropriate thing and so until that the older loans underwritten in 2006-2007 timeframe, kind of clear through the season.

Your next question comes from the line of Eric Beardsley with Barclays Capital.

I was wondering if you could give any guidance on the private loan margin, little bit surprised to see it up so much quarter-over-quarter?

We target a pretax way in this business depending on the risk factors somewhere between 3% and 4% on newly originated loan. The margin, the net interest margin on the private credit book increased this particular quarter principally due to a favorable spread in the prime LIBOR area. Most of our older private credit loans are indexed to prime and as LIBOR has been coming down, prime of course has been stuck for more than a year now, so the spread had widened there, that’s the principal factor.

And then just related to your disclosure on the goodwill impairment, just related to the Upromise segment, what are your thoughts for growth there, it sounds like you are tied up in a potentially challenging environment.

I think the Upromise acquisition which took place in 2006 always had a very steep growth curve associated with it and we moderated that somewhat. It come from, maybe step back. The impairments in this quarter for the Upromise segment was really driven by two things. One is new loyalty customers are coming in heavily from our student loan book and with the change in the FFELP legislation, that raises some question as to how much we can grow that particular side of the business. On the 529 side of the equation there is much more significant pricing pressure going on in that space and it was really just a reflection that this business is going to grow at more normal rates versus kind our hockey stick growth rates and that began to tap into the value of the goodwill. Our view is once you kind of hit that number, we were far better off just bringing it down to zero and so we got perhaps aggressive in some assumptions to bring those numbers down as you put the issue just completely behind us.

Okay, great. So in terms of growth rate, so you're talking 3% now as opposed to 10% and also on APG, what’s your outlook is there?

We think long term, the growth rates in the Upromise segment can be in the high single digits to low double digits, but this would be a little bit more of a re-trenching year for that. What was your second question again?

On APG growth.

APG, the APG unit is a great business. The issue that we have in this particular space is that is we dominate the guarantor collection business that have a significant market share and we have a significant market share because we do a better job than anyone else in this space. In the Department of Ed, we’re also the number one performer, but the way they allocate volume to us, they allocate less than the market share we have on the guarantor sides. So as volume shifts from FFELP to direct lending, that’s the principal driver of the impairment charge there. We fully intend to convince by performance that we deserve, the department that we deserve a higher market share in that space and we’ll continue to work on that front.

And at this time, there are no further questions. I would now turn the conference back over to management.

Thank you very much. That concludes this morning’s call. If you have any follow-up questions, please call me, Steve McGarry or Joe Fischer. Thank you.