SLM Corporation (SLM) Q4 2010 Earnings Report, Transcript and Summary

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 Sallie Mae Fourth Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Steve McGarry, Senior Vice President of Investor Relations. Sir, you may begin your conference.

Thank you very much, Regina. Good morning, and welcome to Sallie Mae's 2010 Fourth Quarter Earnings Conference Call. With me today are Al Lord, our CEO; and Jack Remondi, our President and Chief Operating Officer. Before we begin, 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. Listeners should refer to the discussion of these 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. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the fourth quarter 2010 Supplemental Earnings Disclosure. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you and I'll now turn the call over to Al.

Good morning, and thank you for being on the call. I always appreciate the opportunity to speak to those of you who are interested in our company. As you know, we reported $0.75 a share and $401 million of net income for the quarter. These are obviously strong numbers. They reflect a good quarterly performance and they also reflect income from two largely non-recurring sources, and which drove our revenue substantially above run rates. First, we made our last sale of FFELP loans to the Department of Education in October, and we earned $321 million in that transaction. Secondly, we also earned $118 million during the quarter from early debt retirement. So I think most followers of Sallie Mae know that over the past couple years, difficult economic and difficult political environments, the company’s debt spreads have gotten fairly ugly. They've gotten better as we've emerged from this environment. Our spreads have improved, we still have a distance to travel. In any event, we took the opportunity over the last couple years to capitalize on those wide spreads and bought in a significant amount of debt. During the full year of 2010, we added $318 million to our earnings. We expect that gains of that magnitude will not be available in 2011. Also in the fourth quarter, we took a significant charge to earnings by writing down our Purchased Paper business, which we refer to as Arrow. It's a company that we expect to sell in the not-too-distant future. So before turning this over to Jack Romano, I'll address the areas that I know you're interested in. During the quarter, we provided $294 million for private credit bad debts, that's slightly below the charge-off level in the fourth quarter. We are optimistic about the direction of our credit costs, but we remain cautious about the economy. Over the course of 2010, our caution led us to build our reserve slightly. In 2010, credit quality ended the year better than it started. We entered 2011 with $28 billion of our $37 billion of private credit loans in repayment. That's fully 75%. We ended the year with a 13% lower delinquency rate than we started the year. Our portfolio improvements occurred in a 2010 employment environment that was flat or worse than 2009, and in an environment that was particularly bad for recent graduates. In 2011, we again expect improvement in our delinquency, forbearance and charge-off rates, much as they improved during 2010. Our forecasts rely on portfolio seasoning and higher portfolio quality. They do not rely on improvement in the employment situation, although we are hopeful. The charge-off and provision comments that I've made are consistent with our earnings-per-share guidance of $1.50 for 2011. Talk to you a little bit about private credit volume, private loan application flow picked up very slightly in quarter four versus quarter four a year ago. I'll remind you that the private credit market is still only about 1/3 of the level that it ran in 2007. While school costs, and that means tuition and fees, rose significantly again in 2010, that has not translated to private credit demand or additional private credit demand other than negligible amounts. Nevertheless, we project 10% growth in high quality student loan and private credit originations in 2011 to a level of about $2.5 billion. The operating expense front as you're aware, management is committed to reducing our quarterly operating expense run rate to $250 million or less in Q4 2011, now just nine months away. Our run rate, when I talk about a $250 million run rate, the run rate is essentially our total operating expense less restructuring charges, which are mainly severance costs and asset write-downs. We achieved our fourth quarter 2010 expense targets. We will also achieve our expense targets in Q4 2011. In other words, we'll make the $250 million target. On the capital and liquidity front, I think most of our listeners are aware that we took $2 billion from the capital markets last week. It was a five-year transaction unsecured borrowing that will be repayable in 2016. It was fixed rate debt, which we sought to LIBOR plus 4.3%. That's a better spread than in recent years, but still very expensive; certainly expensive versus our balance sheet quality and our capital strength. The transaction added significantly to our balance sheet strength and our liquidity profile. I have commented over recent months and quarters that it is soon time for our shareholders to directly benefit from Sallie Mae's improving capital strength, its liquidity and its very predictable cash flow. This transaction certainly brings us closer to meeting our goals, our balance sheet goals and more likely that we'll be able to do something on behalf of our shareholders in the second half of this year as we've talked about on recent calls. Management and Sallie Mae's board will continue to discuss its balance sheet situation and its ability to invest more directly in our equity investors. I will have more to say about this in the not-too-distant future. Before I turn it over to Jack, I want to say we are soon to say goodbye to our Chief Lending Officer, Jack Hewes. Jack is probably singularly more responsible for a difficult metamorphosis at Sallie Mae than any of us anticipated. I can't thank him enough for his contribution to the company during what were remarkably rugged circumstances. You will not likely be hearing today from John Clark, our new CFO, but you can expect to be hearing from John in subsequent calls. When you get an opportunity, you should congratulate John. And I will personally congratulate Mr. Remondi, who's now our Chief Operating Officer and President and you can congratulate him yourselves later. Jack?

Thanks, Al. Good morning, everyone. I'm going to take the next few minutes to review our operating results for the quarter, for both the full year on a GAAP and a core earnings basis. In addition, I'll explain our change in operating segments. We'll review our funding activity and liquidity, provide an update on our lending business and review the performance of our private credit portfolio and we'll end with an update on our outlook for 2011. For the quarter, core earnings were $401 million or $0.75 a share compared to $268 million or $0.44 a share in the year-ago quarter. For the full year, core earnings were just over $1 billion at $1.92 per share, compared to $807 million or $1.40 per share in the prior year. These results include debt repurchase gains of $118 million or $0.14 a share on the quarter and $317 million for the full year; restructuring charges of $42 million or $0.05 a share for the quarter and $104 million for the full year; transaction costs of $10 million or $0.01 a share related to The Student Loan Corp. purchase in this quarter; a loss from discontinued operations of $52 million after-tax or $0.10 a share from the write down of our purchase paper portfolio; and un-hedged floor income of $0.01 a share in the quarter and $0.04 a share for the full year. The elimination of the FFELP origination business, along with other factors changed the way we look at and manage our business lines. Today, we look at the company as having four reportable segments: a FFELP Loan segment, Consumer Lending, Business Services and Other. In addition, we'll now include un-hedged floor income in our core results as its cash flow is a component of the performance of the FFELP segment. Our reporting this quarter reflects these changes and my presentation here will report along these lines. The FFELP Loan segment reports earnings and cash flows from our securitized and non-securitized portfolio of federal loans. The operating expenses that we record here represent the servicing fees paid to our Business Services segment. And these fees are set equal to the actual servicing fees paid by the securitization trusts on the securitized portfolio or a similar fee that we assess on the non-securitized loans. FFELP core earnings were $289 million and $557 million for the fourth quarter and full year, compared to $246 million and $340 million for the fourth quarter and full year of 2009, respectively. The FFELP net interest margin improved to 99 basis points from 81 basis points in the year-ago quarter and the net interest margin for the full year was 93 basis points compared to 67 basis points in 2009. The changes in the net interest margin were primarily due to an improved CP-LIBOR basis spread, the sale of lower margin loans to the Department of Ed under the ECASLA program and lower funding costs. In October, we sold $20.4 billion worth of FFELP loans to the Department of Education as part of the ECASLA programs. It generated a gain of $321 million in the quarter, and that compares to a gain of $284 million from the sale of $18.4 billion of FFELP loans in October of 2009. On December 31, we closed on our agreement to purchase an interest in $26.1 billion of securitized federal loans and related assets from the Student Loan Corp. And as we move forward, we'll continue to look for opportunities to acquire FFELP loans from other lenders. Operating expenses excluding restructuring charges were 54 basis points of the average FFELP portfolio in the fourth quarter compared to 52 basis points a year ago. At year end, 93% of our $149 billion worth of FFELP loans were funded for the life of the loan or long-term in the Straight A conduit facility, up from 91% in the prior year. Our Consumer Lending segment includes the results of our Private Education Loan Portfolio and its associated fees, including the provision for loan losses and all costs of originating, servicing and collecting these assets. Our bank subsidiary, Sallie Mae Bank and its direct banking products are wholly contained in this segment. Core earnings in the Consumer Lending segment were $24 million in the quarter compared to $20 million in the fourth quarter of 2009. And for the full year, core earnings were $13 million compared to a core loss of $33 million in 2009. Net interest income was $409 million for the quarter versus $398 million in the prior-year period and the net interest margin improved to 3.92% from 3.78% in the year-ago quarter. For the full year, the net interest margin was 3.85%, unchanged from 2009. The provision for private credit loan losses in the quarter was $294 million, a decrease of $36 million from the third quarter. And for the full year, the private credit loan provision was $1.3 billion compared to $1.4 billion in 2009. At December 31, our allowance for private credit loan losses was equal to 7.3% of loans and repayment. Private credit loan charge-offs decreased $26 million to $322 million in the fourth quarter from $348 million in the third quarter. And for the full year, charge-offs decreased by $8 million from 2009, even as the average balance of loans and repayment increased by $3.9 billion year-over-year. Charge-offs on an annualized basis within our private credit portfolio totaled 4.8% in the fourth quarter compared to 5.1% in the fourth quarter of 2009. And charge-offs for the full year declined by a full 100 basis points to 5%, down from 6% in 2009. The loans that entered repayment in the fourth quarter of 2010 will drive delinquency trends in the first half of 2011 and charge-offs in the second half. This cohort of loans is $637 million smaller than prior cohorts and of higher quality than previous periods as well. It has a higher average FICO score and is comprised of $500 million less of high-risk, non-traditional and non-cosign loans. Non-traditional loans, as you know, default at 5x to 7x the rate of the traditional portfolio and all else being equal, non-cosign loans default at 2x the rate of cosign loans. In addition, once the borrower has made more than 12 payments, the incidence of delinquency and default decrease significantly. At December 31, a larger and growing portion of our loan portfolio, 66% has made 12 or more payments compared to 58% a year ago. For these borrowers, the 30-day plus delinquency rates are more than six percentage points lower. Based on these factors, we are confident that the positive credit trends we are seeing in our portfolio will continue. We originated $413 million in private credit loans in the quarter, an increase of 8% from the $381 million originated in the fourth quarter of 2009. Loans underwritten in the quarter had an average FICO score of 737 and 89% of the loans made had a co-borrower. At quarter end, our portfolio of private education loans stood at $35.7 billion. Operating expenses in this segment at 92 basis points of average managed assets are still too high and will come down over the course of the year as we execute on our expense reduction initiatives. In the Business Services segment, we service federal loans, provide default prevention services and post-default contingency collection services for both FFELP and non-FFELP customers. We also provide campus-based payment services including tuition payment plans, refund processing services and we provide account management services for our 529 and loyalty programs. Although a significant portion of the revenue in this segment is derived from the FFELP program, we provide similar services on non-FFELP assets and for non-FFELP customers. As a result, we manage this business by the services we perform versus the specific loan program. The largest component of Business Services revenue is received from servicing fees on our FFELP portfolio. These fees are primarily paid from the securitization trust and are of high quality in both priority they're in the first payment from the trust cash flows and predictability as the terms are contractual and based on the outstanding loan balances. Core earnings in the segment were $118 million in the fourth quarter compared to $136 million in the year-ago quarter. And for the full year, core earnings were $515 million compared to $570 million for 2009. In our Other Business segment, we include the discontinued operations of our Purchased Paper and Mortgage business. Our other loan wind down businesses, as well as the gains from the repurchase of our outstanding debt and the net interest margin earned in our corporate liquidity portfolio. This segment also includes all corporate overhead and un-allocated IT expenses, which totaled $67 million in the quarter compared to $65 million in the fourth quarter of 2009. Core earnings in this segment from continuing operations were $22 million in the quarter compared to $15 million in the year-ago period. Including discontinued operations, the quarter saw a core loss of $30 million compared to a core loss of $134 million in the year-ago period. Combining all segments, our total operating expenses excluding restructuring charges and deal-related expenses decreased to $289 million in the quarter compared to $302 million in the third quarter of 2010. And as Al indicated, we are fully focused on rightsizing our operating budget. We're well on our way to achieving the targeted operating expense of less than $1 billion by the fourth quarter of 2011. We expect to see sequential quarterly declines and fully expect to reach this rate. At December 31, 89% of our managed assets are funded for the life of the loan, up from 85% a year ago. During the quarter, the company retired $2.5 billion of unsecured debt, including the repurchase of $1.3 billion in notes with maturities in 2010 through 2014, generating gains of $118 million in the quarter. Our 2011 debt maturities now totaled $4.4 billion compared to $6.4 billion at the beginning of 2009. As Al mentioned last week, we priced the $2 billion five-year fixed-rate note. The total book of demand for this bond was the highest ever for a Sallie Mae issue and more than 3x oversubscribed. It's also important to note here that we decided to increase the size of this issue to $2 billion from $1 billion because of the success we had in our debt buyback activity during the fourth quarter when we bought back $1.3 billion worth of bonds, including $800 million of 2014 maturities at effective yields slightly higher than the bonds we issued. Although this transaction was an important step in our funding plans, we will not be fully satisfied until we see our credit ratings and our funding costs significantly improved. At year end, we had $4.4 billion in primary liquidity, consisting of cash and short-term investments. We have ample liquidity to service our unsecured debt and I guess more importantly here, grow our business. Total equity at December 31 was $5 billion, resulting in a tangible capital ratio of 2.2% of managed assets, an increase from 2% at December 31, 2009. In the quarter, we recorded net income for GAAP purposes of $447 million or $0.84 a share, compared to net income of $309 million or $0.52 per share in the year-ago quarter. For the full year 2010, we recorded GAAP net income of $530 million or $0.94 a share, compared to net income of $324 million or $0.38 a share in 2009. Fourth quarter GAAP results includes $74 million of unrealized mark-to-market pretax gains on certain derivative contracts. These items are recognized under GAAP, but not in core earnings results. For 2011, we expect to generate core earnings of at least $1.50 a share, which includes floor income. We're looking at a full year of private credit provision of $1 billion and just north of that in terms of charge-offs. Our operating expenses for the full year will be $1.2 billion and as we said, at a run rate of $1 billion or less by the fourth quarter. And we expect to originate $2.5 billion of new private credit loans, an increase of a little more than 8% over 2010. Now we'll open up the call for your questions.

[Operator Instructions] Our first question comes from the line of Lee Cooperman with Omega Advisor.

I guess you said at least, but listening to the dialogue between reduced expenses and improved credit and increased loan origination, wouldn't $1.50 seem to be a very low number? And more important question, though I'd like to get a response to that one, but the more important question is we've raised $2 billion of capital. How do we expect to use that capital to the benefit of the equity shareholders?

This is Al. As I've commented over a period of time, we are considering paying a dividend. We're considering the repurchase of common shares, and we will very definitely be buying in more debt. That's how the $2 billion will be used. We'll be discussing this with our board very shortly and as I said, you'll be hearing from me soon. With respect to the $1.50, that is essentially where the numbers come out. If you look at the operating expenses, I think Jack mentioned $1.2 billion, that's roughly in aggregate only about $100 million better than this most recent year. I would hope we can improve on that. We will be exiting 2011 at a far lower run rate than we enter it. And we'll see, we've had one quarter of private credit improvement and it wasn't a massive improvement. We'll see where those numbers come out. We've just not seen any significant pickup in that demand in over the past year. Notwithstanding, as I've said before, a pretty significant increase in college costs.

My only observation that I’d make on this issue of repurchase versus dividend, you guys have spent a lot of quality time in the last year trying to figure out the value of the business and the best way to achieve that value for the shareholders. And the repurchase decision is a very simple decision. If we are selling materially below private market value or liquidating value of the business, then buying back shares benefits all the shareholders. If we're selling in line with fair value with all these price objectives of 15, 16, 17 are right, I think the best way to return money to shareholders is through a dividend rather than repurchase.

Our next question comes from the line of Matt Snowling with FBR Capital Management. Matt Snowling - FBR Capital Markets & Co.: Just looking at the acquisition of SLC. It looks like a lot of the loans that you picked up are generating pretty substantial floor income. So I'm wondering what your plans are in terms of potentially hedging that floor income and what does that do to the spread going forward in the next quarter?

Sure. You're correct, the big portion of the portfolio is made up of consolidation loans, which do have fixed rate floors associated with them. We typically hedged those by selling floor options in the marketplace and we do so for a couple of reasons. One is you typically get paid an option value on that which is higher than what you -- so in effect you can earn a little bit more than what you would if the future interest rates kind of map out as the market expects. In this environment, when you grab such absolute lows, there is not a lot of upside by not selling relative to downside by rising rates. So that is something -- that's how we tend to look at it. At this point in time, we expect to sell floors against that portfolio and that's baked into our assumptions for 2011 forecast. Matt Snowling - FBR Capital Markets & Co.: And what does that acquisition do in terms of the spreads for the FFELP portfolio?

You'll see an improving spread in 2011 as a result of that portfolio. Matt Snowling - FBR Capital Markets & Co.: One other question if I may. Jack, I'm curious to hear your thoughts on potentially securitizing some of the residuals or even the servicing fees from the FFELP portfolio? Just to pull forward some of that cash.

The challenge that we had -- the marketplace for structured products I think is still, although it's certainly much, much better than it was in 2009 still remains, I would say, fragile. The challenge we have in selling residual assets at this stage in the game is we have a view as to what those cash flows look like. And when you start talking to buyers on that, although they may agree with you, they start with a number less than ours. And that is I think the biggest challenge. And because it's a unique asset class, they tend to then -- buyers at this stage of the game are still looking for very high returns. And we think our shareholders are better off, and we are shareholders, are better off by holding that residual asset rather than selling it at those kinds of prices. Remember, I think the other piece of that was just an opportunity; can you monetize that cash flow and put it to better use? And so if those yields are higher than what we can put it to better use, we certainly retain it. The servicing stream is a different question because I think there you're talking about AAA, better, super, it's top of the waterfall, so it's better than AAA rating kind of concepts. And certainly to the extent that we can use securitized or sell portions of that cash flow out, that is the amount that's in excess of our cost and use those proceeds to fund asset generation or return it to shareholders earlier in the stream, that's something we would certainly take a look at. Matt Snowling - FBR Capital Markets & Co.: Seems like buying back stock would be pretty attractive.

Matt, those assets are not -- we don't view them as some protected class. We were very actively pursuing the possibility of selling them with very specific ends in mind and they related to balance sheet downsizing and a variety of risks that we had at the time that we think we don't have at the moment. But if we could generate cash at a lower cost than our basic cost of funds, they're not sacrosanct, they would be gone. But we've moved them into a separate segment and you can watch them operate there. And as I said, if we can generate cash for our creditors and our shareholders in a way that's cost effective, we'll do that.

Our next question comes from the line of Mike Taiano with Sandler O'Neill. Michael Taiano - Sandler O’Neill & Partners: I guess the first question is on the expense cuts, the targeted number. Just for modeling purposes, how should we think about those being allocated amongst the segments? Should we expect the majority to come in the Other segment or would it be the majority in the FFELP segment? Sort of maybe give us a sense of how we should allocate those?

Mike, I think I read your piece this morning about allocating expenses? Michael Taiano - Sandler O’Neill & Partners: Yes.

And you commented on the magnitude of the unallocated piece. And I think it's important that you understand that frankly, those are costs as we've remodeled the company, that are effectively stranded and are the large target of the operating expense cuts. So that it would be very difficult to pinpoint at the moment exactly where they would otherwise be allocated. So we will take a couple hundred million dollars of operating expense out of the company. I would hope that it's going to come from the unallocated piece. Michael Taiano - Sandler O’Neill & Partners: And along the expense lines, you give us the breakout on the Business Service segment of the sort of the inter-company or servicing your own portfolio. But to maybe give us a sense of what the cost piece would be on that? Because I assume the margins on that are quite a bit higher than the third-party servicing. Just trying to get a sense of the differential there.

Look, I'm going to ask Jack to handle the cost side of this. I, again, saw your comment this morning and I would agree with you that a user of those financial statements would be mistaken to try to extrapolate the margin levels, if you will, for the in-house servicing versus prospective servicing. But the revenue that you see in that segment comes from the contracts that we have with all of those assets which are securitized.

The cost side of this, we specifically don't break this out for, I would say, obvious reasons. I mean, when you start disclosing margins on single customers, it gets a little bit difficult to maintain, you lose a competitive advantage in your pricing negotiations, right? The reason why the revenues get moved into the Business Services segment is we are basically servicing like assets and utilizing a lot of the same core capabilities in terms of systems, infrastructure, people and know-how and it makes it a little bit more difficult to spread those out into two different areas. The FFELP asset servicing revenue will decline with the portfolio amortization. It declines over a very long time. As you know, it's a 25-year plus amortization period and just under an eight-year average life. We also expect to see opportunities to continue to acquire portfolios in this space so that is a potential offset to that amortization. And on the direct lending side of the equation, that's a portfolio that's going to be growing and growing, in our view, fairly rapidly. And as the direct origination activity kicks in and I think more importantly, as we continue to improve the score and capture a higher percentage of that business from the Department of Education. One other piece I just mentioned is that the servicing revenue that we extract from our securitization trust is based on a percentage of loans outstanding. And so the revenue mix and the profit margins of that look different than what you get in the direct lending contract, which is paid on a unit basis. And so if you think of the margins, they're not even across the life of the loan because your costs of servicing are different at different segments of the life cycle, and margins are higher earlier on in the life cycle when you're servicing on a percentage of loans outstanding, than unit costs and higher at the back end on a unit cost than they would be on a percentage of loans outstanding. So we look at the Department of Ed contract as a very favorable one, and one where margins could be improving as the portfolio ages and moves through kind of peak operating cost life cycle segments. Michael Taiano - Sandler O’Neill & Partners: No, that's helpful. And then just one last question if I could on a separate topic in sort of the Private Student Loan business. Saw you had a little bit of an uptick in volume this quarter. Just curious to see what you're seeing on the competitive landscape side. I think one of your larger competitors put out earnings yesterday and showed that they had picked up about nine percentage points of market share in the last two years. And so just curious, as to if you're seeing a much more significant competitive landscape right now?

I wouldn't call the competitive landscape more competitive. It's more concentrated as a number of players have exited the space. There used to have a fair number of lenders originating loans and selling them as well as others have been holding them. Obviously Citibank, which was one of the largest providers in this space, obviously exited that with its sale of Student Loan Corp., half to us and half to Discover. So we're not seeing significant pressure on the pricing side. I think where we viewed ourselves as having a little bit of a competitive disadvantage in the last academic year is we did not offer consumers a deferred student loan product. And our focus was very much in offering products that we thought and believe, and we know are correct, are more favorable financially for students and families as they decrease the amount of the costs of borrowing for higher education by having them pay interest instead of capitalizing it. We will return to the deferred private loan product space for the upcoming academic year. And as a result, we expect to be in a much better position from a competitive place going forward.

Our next question comes from the line of Sameer Gokhale with Keefe, Bruyette & Woods. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: I mean firstly, in terms of the funding side, you started marketing retail deposits last year and you've raised those to more than $1 billion, and as I understand it, you're targeting your existing sort of borrower base to try to sell these products or raise these retail deposits. At this point, I mean in your commentary in your supplement, you've talked about doing some other things to raise deposits. But I mean how much more in deposits could you extract from your existing customer base or do you feel you're tapped out there at this point?

Well, at Sallie Mae, we have more than 20 million customers. About half of them are borrowers under various loan products. And I think a lot of people think that half are students. Only about 2 million of them are students, 8 million of them are working adults. And so we see that as an opportunity to tap into, to raise deposits and to offer them other banking-type products. We also have 10 million customers, who work with us to save for college. These are parents of future college students, they're saving with us through our loyalty programs and saving with us through our 529 plans. And that's a base that we see significant opportunity to tap into, both in the form of direct retail deposits from that base, as well as offering banking products to the 529s specifically. And I think today, we have a little over $32 billion or $33 billion of assets under management in the 529 plan, so we see that as a great opportunity. Another area where we see opportunity to raise deposits is in our Refund Processing business. Here, typically when a student receives financial aid, a portion of that is refunded to that student to provide for their expenses for non-tuition based products; books, living expenses, travel, et cetera. And we process those refunds today but we don't actually work to connect to that customer as a ongoing banking customer. And we see a good opportunity to offer those customers, probably don't have banking accounts to begin with as they're 17 and 18 years old, to provide debit cards and online checking, things that they are used to doing. And that we see as a significant opportunity for growth. I don't think we're anywhere near our potential here in this space on the deposit side. Sameer Gokhale - Keefe, Bruyette, & Woods, Inc.: No, that's very helpful color because I mean I think to a certain extent, the limitation or governor also was I mean the demand for private loans was somewhat tepid last year, but as that picks up and there'll be more of a need for funding these loans, then you can tap into this potential base in order to raise more retail deposits. So that's pretty helpful color. I guess on the other side, you talked earlier about this potential for selling like residuals and I know that has been talked about before as well. I assume you were talking primarily about the opportunity to maybe monetize your FFELP residuals as you have in the past. But if you talk specifically about the private student loan ABS market, you did some private securitizations last year. And I was wondering what you're hearing there? The reason I ask this question is because people talk about the bubble in the fixed income markets in many areas and investors looking for yield. There seems to be a sense that in certain markets like the CLO market, there will be improvement again as capital goes to that area given that's where there seems to be more yield. Private student loan seems to be another area of the securitization market where it's far from normal. So do you have a sense as you talk to the rating agencies, investors, when you think issuance could pick up significantly in that market?

I think it's a great question. The securitization market has not kept pace with the corporate debt markets in terms of spread compression and performance. And a large part of that is just that the money is managed separately and there's not a lot of crossover investors between corporate and structured. The short end of the market, I think, certainly has performed very well. It’s the long end that is the biggest challenge. But I think you're right. As investors start looking at the fact that yields are -- the yield pickup that one can get in a structured product of AAA-rated quality, be it FFELP or private relative to corporates, is significant. And as a result to that, we would expect to see that market to continue to heal in 2011. And certainly, given the volume that we have to do in that space, we don't see any challenges of being able to tap that market for what we need.

Our next question comes from the line of Brad Ball with Evercore.

Jack, you had mentioned back on the expense issue, you had mentioned targeting, lowering expenses in the Private Credit business. Could you talk about where you see some cost-saving opportunities especially in light of increased originations this year? And also, will that expense rundown, will it keep pace with the overall reduction in expenses across the company?

The question did come up as to where the cost reductions would take place because the cost in the FFELP segment are basically just a pass-through to the business segments, all cost reductions are really going to come in those three other segments: the Consumer, Business Services and Other. On the customer side of the equation, you can see where we have a fair amount of collection costs running through that segment today. And certainly, as the portfolio credit mix continues to improve, we would expect those numbers to come down. We also expect that as we continue to grow originations, that a lot of our expenses on the origination and servicing that tend to be more a component of which are fixed yet better leverage as we move forward and so we don't move up and lockstep out there. So we do see the opportunity for a continued improvement in efficiencies in that segment, in the servicing of federal and direct loans as well and of course, in the overhead areas.

And the growth that you talked about, the better than 8% growth in originations relative to 2010, is that mostly coming from the offering of the deferred product or you beefing up marketing and sales efforts?

No, I think it's coming from a variety of factors. The biggest demand, the biggest driver of demand for private credit loans is the increase in the cost of education relative to the increases in federal student loans and other aide. And in the last two years, we saw a significant increase in the amount that the federal government put into the system over $50 billion worth, between increases in federal student loans, borrowing capability and Pell grants. As we enter the next academic year, that's not going to be an increasing number, in either of those fields and in fact Pell grants might actually be coming down due to budgetary issues in Washington. And that's what's really driving the demand, is that consumers need to fund the difference in the increase in cost of higher ed. It's not coming from other sources, and we can offer them financially responsible products. That's how we're capturing growth and market share.

So those kinds -- I know you're not making a long-term forecast, but those kinds of growth projections could be achievable in the future? This is a sustainable model.

Sure. If you think of the higher education spend in this country, we spend about $400 billion a year. Private loans, finance, somewhere between 2% and 3% of that number. So if $400 billion is growing by 5%, let's say, up to $20 billion increase in spend, you don't need to see a whole lot of that flow-through to private demand to see 8% to 10% kind of growth rate annually in that space.

You mentioned that you're seeing or you expect to see an increased share in the Department of Ed Servicing business. Have you recently had an exam by the DOE and have the scores improved relative to last year? And when will we start seeing those new servicing units coming online?

The Department does publish the score quarterly, but they allocate volume only annually. So we won't increase in share until they published the annual score later in 2011. As we've said at the beginning, there are five factors that the Department of Education uses to allocate volume, two of them are default related. And because of the way we got loans versus the other servicers got loans in 2009, we were disadvantaged on that score. That moves away and we fully expect that our historical performance in the default prevention side of the equation, which we peg at roughly 30% better than the industry as a whole will shine through and put us on the top ranking in those categories. And if you're top ranking in those categories, given how closely bunched everyone is in the other three, from a score perspective we fully expect to be able to win the top ranking and the servicing contract as well.

But the allocation is later this year, you said?

Yes. They do it annually, not quarterly.

[Operator Instructions] Your next question comes from the line of David Hochstim with Buckingham Research.

Could you just give us a sense of how much of the gain from repurchasing debt this quarter came from unwinding swaps? And could we see similar kinds of gains in 2011 as you buy back more debt?

Ultimately, I don't have the breakout of that number. It comes from a variety of factors. There's no question that unwinding the hedge associated with that debt is a component of the gains. But everything, if you think of how Sallie Mae finances itself, whether we borrowed fixed or floating or we borrowed in dollars or foreign currency, we swap everything back to dollars floating. And so when you buy back a bond that might be a euro-denominated security with a fixed rate, and you can actually pay a premium or close to par on that bond and still report a gain because you're unwinding the hedge on that. Ultimately, what we're doing is we're buying back debt at effective yields. And in the fourth quarter, the 2014 maturities were effective yields in the LIBOR plus 450-ish range and replacing it with debt that we issued at LIBOR plus 430 as an example.

And that same kind of trade is available still going into 2011 you think?

Well, probably less so, because upon the issuance of the five-year spread certainly have tightened.

And in the $1.50 forecast for 2011, how much do you assume in terms of debt repurchase gains?

There's minimal, minimal gains assumed in that.

And then just on your 8% private loan origination growth, it seems that would be conservative because you're talking about expanding the market, your share by offering the deferred interest loans? And as you describe it, the market should be expanding probably anyway. So is it possible that you're being conservative again as you tend to be?

We hope we're being conservative, yes.

The share count was higher in the fourth quarter, is that run rate going forward?

The effective share rate's about the same. What you're seeing there is the impacts of the Series C convertibles.

But you still have preferred dividends in Q4?

Slightly. It was what, $3 million higher? The big issue is the conversion of the Series C gets included in the -- under the accounting rules, you basically have to calculate your earnings and your share count two ways, dilutive and non-dilutive, and you find which way it works.

So that hasn't changed?

We don't want to get into deep accounting issues.

So basically that hasn't changed?

No. If it's changed, it's changed very minimally.

And then finally, just to clarify. You indicated that the improvement in the student loan margins, I guess particularly the FFELP margin should continue into the first quarter because that’s not reflecting the benefit of the purchase portfolio? Is there anything going on in the private loans that would lead to lower funding costs, I guess?

Two things there. On the FFELP side of the equation, in 2010, the overall net interest margin is weighted down by the cash from funded loans. Those have lower margins and so they pull the spread down. The Student Loan Corp. portfolio closed on December 31. So it had no impact on margins in 2010 and will be a positive contributed to margins in 2011. On the private credit side of the equation, you're going to see the potential for continued improvement in spreads, as we originate loans at better margins because we're match funding them at the beginning compared to what happened in 2008 and '09, where older loans that were originated for the 2007 funding environment in effect got funded at 2008 and '09 cost of funds, which is obviously not a pleasant experience.

Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Moshe Orenbuch - Crédit Suisse AG: Could you talk a little bit, expand a little bit on the plans on the servicing portfolio, I guess? I mean I was intrigued obviously that you addressed the point that the Sallie Mae portfolio that will be in the servicing and your Business Services will be running down, but you hope to offset that. Could you talk about the potential for sales of the servicing stream? Because that's I guess something new.

Sure. When you securitize a portfolio of loans, there’s a contractual rate that the trust kicks off or pays for servicing those assets. And by structural design, that revenue stream is always higher than actual costs and it's set that way so that if you need a higher replacement servicer, there's in effect, funds to pay it. So what we're saying is, "Look, if that number is higher than our cost, there's a piece of it that you could, in effect, securitize." It's AAA quality in cash flows because it gets paid before even interest on the AAA bondholders get paid. And if you think the AAA FFELP, ABS spreads as being in the 30 basis points to 40 basis points over LIBOR, that's the kind of math that one would look at saying, "All right, can you offer charged that? I mean are you better off buying in or issuing that at LIBOR plus 30 and you can replace unsecured debt that's yielding LIBOR plus 400?" That's where I think the opportunity is from. Moshe Orenbuch - Crédit Suisse AG: So it's really a function of the its place in the waterfall as opposed to the interest on your FFELP portfolio?

Correct.

Our final question will come from the line of Eric Beardsley with Barclays Capital.

Just wondering if we should read anything into your choosing between the Private Loan segment and Consumer Lending? If there is anything else in the works there, potential in the future?

As I was describing our customers earlier, we have 20 million customers at Sallie Mae. And the demographics and characteristics of that customer base, we believe, are extremely attractive and probably amongst the best types of consumer, customers that one could get. They're either college graduates or they're parents who are making the overt decision to save for their children for college. And so there are certainly products and services that we think we can cross sell to these customers. We're seeing it on the direct banking side, through the savings products that we've been offering. For years, we've offered these consumers, particularly in the 529 and loyalty programs, a credit card that we partner with other institutions. And I think the opportunity for us in this space is really to see how we can leverage that customer base further to sell other product. It may be products that we do ourselves, it maybe partnerships that we have with other players where we would actually end up earning fee income. But we think that the customer base is really the important driver of what our potential is here. And frankly, we would describe it as an untapped asset of Sallie Mae.

And then just in terms of your origination in the fourth quarter and earlier this year, do you know offhand what percentage of those were new to Sallie Mae or on the other hand, renewals?

I don't know that number off the top of my head, but we can certainly get to you. You're basically asking who is serial and who is not?

Exactly.

25% were roughly serial customers.

At this time, there are no further questions. I will turn the conference back to management for any concluding remark.

Thank you very much for tuning in. There are no concluding remarks. That completes our conference call, if you have any follow-up questions, please call myself or Joe Fisher. Thank you.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating and have a nice day. You may now disconnect.