Here were the questions they answered in their earnings supplement, which I posted earlier. Thanks to Seeking Alpha, who provided this transcript of the Sallie Mae conference call held earlier today. What follows are the questions that I posed prior to Sallie Mae's earnings announcement, which happily they addressed on their conference call today:
- With the House Committee expected to pass the Student Aid and Financial Responsibility Act (SAFRA) as soon as this week [it passed on Tuesday], what hopes are there for the Sallie Mae or Student Loan Community Proposals which would give SLM and other lenders the opportunity to continue to originate federal loans?
- When do you expect that this issue will ultimately be resolved?
- Was the Sallie Mae proposal ever scored by CBO (as mentioned during a conference call in May)?
- Is this bill likely to hold up in the Senate?
Answer:
- On prospects of alternative student loan reform proposals: "I’m sure you’re well aware that Congress is deliberating the future of various student lending programs at the moment. Yesterday the House Education Committee voted a bill that proposes to end FELP after 2010. We and others in the industry have put forward a proposal that saves as much or more money as the House bill would save. We are hopeful that our proposal and others proposals will get a better reception in the Senate which is yet to act on legislation."
- On timeline for CBO score of Sallie Mae proposal: "Unfortunately they [CBO] don’t operate too specific timelines. We’re obviously very eager to see that. It’s a little hard to understand how you can vote for proposals for vote down alternative proposals without knowing the scores of each of the programs. In fact, the President’s proposal, I’ll just point out, has not yet been scored itself either, it’s an estimated number not a final score."
- What are the contingency or restructuring plans the company has in place should SAFRA pass through Congress largely intact?
- How quickly will you move to adjust staffing of your FFELP activities?
- US Bank, the #6 largest FFELP originator, has contacted financial aid directors about their intent to suspend their FFELP activities starting in September
- What impact do they anticipate a move to SAFRA-like legislation will have on their private loan activities?
- How quickly will you move to adjust staffing of your FFELP activities?
Answer:
- Non-answer to restructuring necessary if SAFRA passes largely intact: "Obviously some redesign of our business would be appropriate. We are very well along in assessing that. I think it really is premature at this point to dig into those numbers. As you would expect we’re very, very much aware of what the affect of this legislation would create.
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- On the private loan front, what is the average interest rate on Smart Option loans that they are making today?
- In December 2008, the company had noted that their average private student loan was priced at LIBOR + 10%; has this changed at all?
- Recently several lenders (Discover, Citibank and PNC) have increased the margins on private student loans
Answer:
- No indication on pricing; but did provide information on how credit profile of borrowers had improved under this new program: "We have significantly increased the quality of loans we are underwriting. In the most recent quarter, for example, the average FICO score was up 21 points to 747 and over 76% of the loans we made had a co-borrower."
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- What has been the market's receptivity to the new Smart Option loan
which is the only private student loan from a major lender that
requires interest payments while a student is in school?
- Earlier SLA analysis indicated that peak borrowing season is in the summer months, so SLM should have a decent read based or originations to date.
- What is their current estimate for private loan originations for calendar year 2009?
Answer:
- On the initial reception to new Smart Option loan, in a quarter where SLM saw private loan originations drop over 50% on year-over-year basis: "Two things happen in terms of the reduction in actual disbursements
that impacted disbursements. One is we withdrew from the
non-traditional lending component which was a little bit more than 15%
of originations back in the first half of 2008. Remember even though we
exited the business there was still a tail that was getting disbursed
for applications that had been processed and approved.
The second piece is under both the 2007 higher education act amendments and again in 2008 the Congress raised the loan limits for federal loans and that obviously decreases demand for private education loans and those two factors are the big drivers.
Applications flows in the second quarter and even in June under our Smart Option loan are towards schools that we target are certainly lower than we were last year but are single digit percentage points lower. Not what I would argue. It is very early still in the cycle, people are still I think figuring out how they’re going to pay for college in the upcoming academic year."
- On private loan origination targets for CY09: "For this calendar year we’re looking at originations that will total around $5 billion in the private credit book. As I said, there are two factors at play here that are different from prior periods. Clearly exiting the non-traditional space has had an impact. Although given our loss experience in that portfolio it’s a positive impact, and the increase in higher loan limits."
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- Regarding the Direct Lending servicing contract that SLM was one of four awardees recently selected by the Department of Education:
- Is implementation likely to be delayed due to the ACS protest?
- What percentage does SLM anticipate they will be allocated to them for 2009-10?
- The Street seems to be estimating 30-40% of the volume will be going to SLM
- What impact do they think the set-aside for non-profit servicers (in the SAFRA bill) will have on the overall volumes in the out years?
Answer:
- On potential rollout date there seems to be an admission that start date may slip from August deadline listed in Dept. contracts: "We expect to begin operating under that contract either this quarter or the fourth quarter. It’s a good contract with fair margins. It will begin to contribute to earnings per share soon. It will only begin to contribute significantly as we build our servicing portfolio. Obviously we’re starting from zero."
- On number of borrowers that SLM expects to continue servicing under this contract: "We expect to service all of these loans which represent over two million accounts of 4.5 million loans as the result of the servicing contract we were awarded in June."
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- While on the subject of Sallie Mae Bank, do they anticipate any regulatory issues due to their reliance on brokered deposits for financing, which seems to be on regulator's screens these days as an area of concern?
- See First Marblehead's issues with their banking subsidiary, Union Federal Savings Bank.
Answer:
- On potential changes to the Sallie Mae Bank driven by regulatory changes: "I think there’s no question that the ILCs are getting a lot more attention, certainly we got a fair amount of attention a year ago and some of the other financial institutions are being looked at pretty closely on the ILC front. At the moment we don’t foresee any significant change there. As we evaluate our operating structure, as we go forward, as we mentioned earlier, a bank holding company is certainly one of the things we will be considering."
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- On the subject of brokered deposits, how much were they able to raise in the last quarter, at what interest rate and what was average duration of deposits?
Answer:
- "At Sallie Mae Bank we raised $3.4 billion in term bank deposits during the quarter with an average life of 39 months and a fixed average cost of 3.2%."
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