Sallie Mae Back-To-School Private Student Loan Originations Disappoint

I listened to the Sallie Mae presentation at the Barclays Capital investor conference (see presentation here), which took place last week. 

Here were some of the highlights:

• CEO Al Lord talked down SLM's private student loan forecast to $2.25 billion for 2010, which is 36% below the company's forecast just six months ago.  From March 2010 Citi Investor Conference of this year:  "Our volume goal is $3.5 billion for 2010; that is not in the bag.  Goal would be to get that number to $5.0 by 2012-13." 
  
  • If Sallie Mae hits their forecast, their last two quarters of 2010 would be 7% below 2009 levels despite significant marketing spend on their Smart Option loan and a reduced $25 per month payment option they introduced in June of this year.  Sallie Mae is the only major lender that requires borrowers to make payments while they are still enrolled in school.  Let's see if there are any additional product modifications upcoming to try and address this ongoing slide. 
  • Company forecast likely loan growth for 2011 of 10-11%.  Sallie Mae's private loan originations have dropped by more than 24% in each of the last nine quarters.  Their projected private loan volumes for 2010 of $2.25 billion are 71.5% below their peak levels of $7.9 billion in 2007. 
  • Company's research indicated that tuitions rose 4% (after two relatively flat years) on a base of $300 billion or $12 billion incremental costs for students for 2010-11. 
  • Going forward, "company will invest modestly and intelligently to resuscitate its private credit business..."

• Company to significantly shrink cost structure by 20-25%; need to take one more whack and take draconian measures to reduce our operating expenses.  Targeting 25% reduction by this time in 2012. 

• While FFELP business will not be generating new volume, it will be cash cow as the portfolio runs off:
  
  • Will have $125 billion of FFELP assets after selling recent FFELP volume back to the Department (company announced later in the week that they would be purchasing $28 billion of FFELP assets from Citibank) so total portfolio will be over $150 billion by early next year
  • Runoff of FFELP portfolio will generate $15 billion of cash flow over next 23 years not including floor income estimated at $2 to $3 billion

• In terms of credit costs, company stated that until economy demonstrates improvement going to provide for loans at roughly the level that they charge them off;  won't be decreasing the reserve.  Expect to see chargeoffs to be down 10% or better next year.  The company's current loan loss provision for 2010 is $1.3 billion. 

• Regarding the Direct Lending servicing contract that SLM began implementing last year, company is "still spending to get servicing investment fully made and hope that this business will turn positive in 2011; have to get better at government servicing; very different business than FFELP; need to add volume and cut costs.  

• Strategic options currently being considered by the Board
  
  • Status quo
  • Split business into a runoff business (FFELP portfolio) and operating business (private credit, collections and FFELP servicing)
  • Sell or accelerate cash flows on the FFELP portfolio; key question is price and at what discount rate might they be able to move those cash flows
  • Spin-off not a practical option at this point in time