Sallie Mae Announces Restructuring; Smart Option Volumes Continue To Disappoint (Updated)

One advantage of flying back from Europe (a one week vacation turned into ten days due to that volcanic ash cloud) is the ability to listen in on a 5am PT conference call.  Here are my brief notes (will provide additional analysis later today) based on comments from Sallie Mae executives.  Note that this post has been updated using a transcript provided by Seeking Alpha. 

Restructuring:  "The loss of the business is – will cause Sallie Mae to reduce its employee number by approximately 2,500 persons. We expect that will be done by the end of the year 2011.  Yesterday, we announced the closing of two service centers, one in Killeen, Texas; one in Panama City, Florida. And this starts the unfortunate process of the 2,500 person reduction. There are 1,200 people in those centers and other locations informed yesterday."

Private student loan volume continues to disappoint:  "I’d say if there’s a – a not so great spot in the first quarter picture, it would be with private credit volume. Private credit demand remains weak. And I’ll tell you that our new credit quality – and when I say new, I mean particularly in 2008 and 2009 and mid-2009s over – to today, credit quality is solid gold. There's just not enough of it. It’s becoming clear – clear as we get more and more information that 2010 will show an enormous increase in Federal lending, both in FFELP dollars, direct loan dollars, and in total grant dollars. Those dollars obviously reduce demand for private credit."

• Credit quality remained high:  "Loans underwritten in the quarter remained at very high quality with an average FICO score of 740 in 85% of the loans made had a co-borrower."
• Company did $840 million in private student loan originations, down by 45% from last year.  Here are their originations over the last nine quarters.  Note that 1Q 2010 volumes are down 66% as compared to 1Q 2008. 

	Originations	Year-over-Year
Quarter	(Millions)	Change
1Q08	$2,478
2Q08	$891
3Q08	$2,117
4Q08	$850
1Q 09	$1,516	-39%
2Q 09	$387	-57%
3Q 09	$894	-58%
4Q 09	$381	-55%
1Q 10	$840	-45%

On private loan chargeoffs:  "Private credit loan charge-offs declined $14 million in the first quarter from $298 million in the fourth quarter. And charge-offs on an annualized basis within our private credit portfolio totaled 3.2% of traditional loans, unchanged from the fourth quarter; and, 15.9% in the non-traditional portfolio, an improvement from 18.6% in the prior quarter. Non-traditional loans today represent 12% of total loans and repayment, but nearly 40% of charge-offs."

On delinquencies:  "Performance statistics also improved with loans and forbearance at 5.1% of the portfolio, compared to 5.5% at December 31st, and 6.7% a year ago. The 30-day delinquency rate decreased to 3.4% from 4% in the fourth quarter. Our 60-day to 90-day delinquencies increased to 2.3% from 2%, and 90-day-plus delinquencies increased to 6.4% from 6.1% at December 31st. The increase in delinquencies is principally driven by seasonal factors as the new class of graduates enters repayment. Over $3 billion were since the third quarter of 2009. The increase that we are seeing in delinquencies is within our range of expectations for the quarter and significantly lower than the levels reached in 2009. Based on the activity we are seeing in our collection centers, we are confident in our outlook for charge-offs and provision."

Strength in FFELP originations (which will translate into a servicing revenue stream for Sallie Mae when loans are sold to the Department as they will continue to service):  "On the lending side, we originated a record $7.7 billion worth of FFELP loans in the quarter, an increase of 16% over the year ago period. Through the first three quarters of the 2009-2010 academic year, we originated 26% of all Federal student loans."

Pricing on Smart Option to be reduced:  "Yes, it is coming down, and it’s coming down as our cost of fund decreases. We've seen probably a 200-basis point improvement in our funding costs over the last six to nine months. So you can look at more – and that's basically how we're pricing. We’re not pricing it to a yield or pricing it as a margin to our funding costs. And one of the things that we are looking at also doing as credit performance in that portfolio class is becoming substantially better is tightening a little bit on the margin targets as well.

Outlook on $3.5 billion target for Smart Option private student loan, including competitive environment:  "You asked before and I – if we're going to hit our $3.5 billion. At the moment it does not look that way. We would have to have a – we’d have to have a huge second and third quarter to achieve $3.5 billion. With a – and whether we're able to achieve that, it is not likely.

The competitive dynamics are – I don't mean – every piece of information we have, and this is an area that we're seeking information all the time – market information all the time. Every piece of information we have is that that no one – no one is achieving market share gain, and in fact they're suffering market share losses very similar or greater to the ones where we are – I guess the word is – not achieving."

•  On the competitive front:
  
  • Wells Fargo disclosed 10% growth in private loans in their 3Q of 2009
  • Discover has grown their private student loan business by $500 million in the past twelve months based on a recent analyst day conference (admittedly starting from a small base).
  • Citibank continues to struggle and has seen originations drop close to or more than 50% over each of the last three quarters. 
• On growth of federal sources:  "But in the first half of the academic year between Federal loan increases and Pell Grants is an additional $17 billion of Federal money in the system compared to the year ago period."
  • Here are SLA posts earlier this week on growth in Pell Grants and growth in federal student loans. 

Funding strategy for private loans:  For last two years new loan originations through the Sallie Mae Bank through brokered bank deposits.  Launched retail bank deposit strategy which will be additional source of funding for new originations.  Plan to securitize those assets in capital markets.  Recent $1.6 billion securitization did finance loans held by SLM Bank and there were a  number of cash investors in that deal.  Expect to see non-TALF deal sometime in second half of 2010.

Industry consolidation accelerating post-FFELP elimination:  "This year or this quarter we've agreed to purchase three portfolios totaling $1.5 billion worth of FFELP loans, and we expect to see more opportunities to purchase loan portfolios, and to take on additional loan and guarantor of servicing."

• Here is a shopper's list of the top 100 holders of federal student loans

On opportunity in the collections business:  "We are the largest contingency collector on both – for both guarantee agencies in the country as well as the Department of Education. We do, however, have a larger market share in the guarantor market because they frankly distribute volume to the top performers in a more concentrated fashion.

We certainly hope to be able to and know that we can – if the Department of Ed took the bottom 20% of volume that they allocate to collectors and gave it to the top performing 20%, it would collect billions of dollars more each year in revenues. So I think as we continue to demonstrate our performance in that space, we will continue seeing freeze (sp?) market share. But we are the largest and the best performing for both customer types there."

On outstanding Direct Loan portfolio held by ACS:  "We certainly expect, although the department has not announced plans yet, to – that the balance of outstanding loans will eventually transfer to the four other services as well...I think the outstanding balance is somewhere around $115 billion to $120 billion outstanding."

On impact of recent bill in House and Senate that would allow private student loans to be dischargeable in bankruptcy:  "Sameer [analyst, Sameer Gokhale, who asked the question and estimated 20bp impact on loss rate], you need to stop writing about this stuff because you encourage them. I don't know the precise number. Maybe Jack knows more precise numbers. But I think the numbers are small, and your number sound pretty small. So it’s not something at least that – particularly given the structure of the lending that we do that is particularly troublesome. I think it is very troublesome for young people, ultimately, the availability of credit. But on the bad debt side and how it might affect our provision, we don’t see anything catastrophic there...We have been – I want to be clear, we’ve been supportive of this bankruptcy reform provided that borrowers make – have some obligation after they leave school to make payments. And we’ve said five years. And then, if there is a hardship-related issue, we would be supportive of that."

On their expectations of market share with the DL servicing:  "We certainly expect to get more than 25% share. I just think – what do you guys – I mean to be right at the top of the contract [40% is maximum written into the contract], I just think it's a high expectation. That's all."

• Recall also that non-profit servicers may receive servicing allocations (up to 100.000 borrowers per state) sometime in the future which could impact overall volumes for the four servicers with the contract today. 

Comments

[Craigie]

"I think the outstanding balance is somewhere around $115 billion to $120 billion outstanding."
More like $170 billion, and would likely be well over $200 billion with ACS before Sallie begins.

[Bizzaro Watchdog]

Sallie Mae announces "restructuring". Well, that's a whitewash if I've ever heard of one. Why not (in keeping with the official propaganda line from DC) call it "Sallie Mae implements reform?" If you're going to drink the kool-aid Tim, you should go all in!

[aonsfgionaiosfnasnfuion]

I'll tell you why the Smart Option Student Loan isn't doing good.

It sucks.

As pointed out before, it does not offer a deferment option and instead requires what is optional for every other loan(Interest Only Payments). Also, the interest rates, frankly, suck. The rates are (4 to 12.5) + LIBOR and frankly, even people with really good credit don't get the low end interest rate. Also, the credit criteria is way too strict, no where near enough people good approved for it, even when they are applying for small amounts.

[Tim Ranzetta]

Bizarro,

Let's not forget the small detail that writing off over $2.5 billion of private loans in two years (mostly "non-traditional" sub-prime loans with avg. FICO of 623 and less than 30% cosigner rate) could force some expense reduction too, which is why the second stage of the restructuring will likely involve consolidation of credit and collection centers. Did the government force them to make those loans?

[Bizzaro Watchdog]

Well, at least you tacitly admit that Congress has blood on its hands with the layoff. It would fit your narrative perfectly if the second half of your statement were 100% true, but it isn't. The economy sucks, people default when the economy sucks. Let's not forget that small detail of 10% unemployment.

As for your quip on government forcing lenders to make loans...I know it's a favorite conservative talking point, but, it happens to be true. Who is the biggest subprime lender today? Here is a hint: FHA. The G Tim! Picking up where no bank wants to go (the G will be pushing "social loans" through the private sector again soon enough Tim don't worry--have to let the dust settle from the other social loans first)! Now, tell me again the government don't pursue dumb loans with reckless abandon Tim! Sound like any other lending the government now does 85% of of Tim? Hmmh?

The left keeps trying to fly away from economic reality, but, it keeps bringing them right back down to Earth!