SLM CorpCreditSuissePresentation020708


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SLM CorpCreditSuissePresentation020708

  1. 1. Credit Suisse Financial Services Forum February 7, 2008
  2. 2. Forward-Looking Statements This presentation contains forward-looking statements and information that are based on management’s current expectations as of the date of this document. When used in this report, the words “anticipate,” “believe,” “estimate,” “intend” and “expect” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks, uncertainties, assumptions and other factors that may cause the actual results to be materially different from those reflected in such forward-looking statements. These factors include, among others, the occurrence of any event, change or other circumstances that could give rise to our ability to cost-effectively refinance the interim asset-backed commercial paper facilities extended by Bank of America and JPMorgan Chase in connection with the Merger Agreement including any potential foreclosure on the student loans under those facilities following their termination, increased financing costs and more limited liquidity; any adverse outcomes in any significant litigation to which we are a party; our derivative counterparties may terminate their positions with the Company if its credit ratings fall to certain levels and the Company could incur substantial additional costs to replace any terminated positions; changes in the terms of student loans and the educational credit marketplace arising from the implementation of applicable laws and regulations and from changes in these laws and regulations, which may reduce the volume, average term and yields on student loans under the Federal Family Education Loan Program (“FFELP”) or result in loans being originated or refinanced under non-FFELP programs or may affect the terms upon which banks and others agree to sell FFELP loans to the Company. In addition, a larger than expected increase in third party consolidations of our FFELP loans could materially adversely affect our results of operations. The Company could also be affected by changes in the demand for educational financing or in financing preferences of lenders, educational institutions, students and their families; incorrect estimates or assumptions by management in connection with the preparation of our consolidated financial statements; changes in the composition of our Managed FFELP and Private Education Loan portfolios; changes in the general interest rate environment and in the securitization markets for education loans, which may increase the costs or limit the availability of financings necessary to initiate, purchase or carry education loans; changes in projections of losses from loan defaults; changes in general economic conditions; changes in prepayment rates and credit spreads; and changes in the demand for debt management services and new laws or changes in existing laws that govern debt management services. The Company does not undertake any obligation to update or revise these forward looking statements to conform the statement to actual results or changes in the Company’s expectations. 2
  3. 3. SLM Overview • Top originator, servicer and collector of student loans in the U.S. education lending market 2007 “Core Earnings” Sources of Income FFELP Loans, 33% • More than 10 million customers Other, 11% • Relationships with over 6,000 schools APG, 16% Guarantor Services, • Managed Loans exceed $163 billion 4% Private Loans, 36% After the impact of Interim ABCP Facility Fees, before Provision for Losses and including the Wholesale Consolidation Loans. 3
  4. 4. Business Strategy Student Loan Originations - Focus on school relationships that generate acceptable returns under new FFELP economics and increased funding spreads Curtail unprofitable originations with little strategic value, including High default rate non-traditional schools and borrowers Lower tier credit borrowers Wholesale FFELP Consolidation Loan acquisitions Adjust pricing of Private Education Loan products to reflect market conditions Reduce Borrower Benefits Regain A rating 4
  5. 5. Strong Industry Trends Continue Growth in Education Enrollment Projections Annual Cost of Education Degree Granting Institutions ($ thousands) 21 Public Private 20 Public CAGR: 6.8% Private CAGR: 5.1% 19 $32.3 $30.4 in m illio n s $27.5 $28.7 $26.1 $23.9 $24.9 18 $21.5 $22.2 17 $13.6 $9.0 $9.7 $10.6 $11.4 $12.1 $12.8 $8.1 $8.4 16 15 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: College Board Source: National Center for Education Statistics 5 Note: Academic years, average published tuition, fees, room and board Note: Total enrollment in all degree-granting institutions; middle alternative projections for 2006 onward charges at four-year institutions; enrollment-weighted
  6. 6. Earnings & Unemployment by Degree 8% $120 $100 6% $ thousands $80 4% $60 $40 2% $20 0% $0 e ol 's te . ge al 's .S at or r on ho ra le te H i oc l to ol he si Sc as an oc ss C es M ac th h e A D of ig B m s Pr H s So Le Earnings Unemployment Rate Source: U.S. Census Bureau, Current Population Survey, 2006 Annual Social and Economic Supplement. Represents median earnings for a full time, year-round worker over age 25. Unemployment data as of 2006. Represents unemployment for civilian noninstitutional population over age 25. 6
  7. 7. Managed Private Education Loan Portfolio Performance Portfolio Performance - • Defaults are concentrated among a small set of non-traditional schools and borrowers • Non-Traditional portfolio accounted for 60% of all charge-offs • Failure to complete program is major driver of defaults • More than 65% of borrowers that charged off withdrew from programs or were less than ½ time status 7
  8. 8. Divergent Portfolio Performance Gross Charge-Offs as a % of Average Repay 90 Days Delinquent as a % of Repay 18% 18% 15% 15% 12% 12% 9% 9% 6% 6% 3% 3% 0% 0% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Non-Traditional Total Traditional Non-Traditional Total Traditional • Delinquency & charge-off rates at non-traditional schools and borrowers much higher than portfolio average • Credit quality at traditional schools and borrowers produces high risk- adjusted returns 8
  9. 9. Loan Loss Provision for Private Education Loans 2007 2006 Non- Non- Traditional Traditional Total Traditional Traditional Total Loan Loss Allowance (LLA) 424 796 1,220 179 215 394 Net Charge-Offs as % Average Loans in Repayment 1.47% 12.15% 3.07% 0.63% 7.17% 1.62% LLA as % of Ending Loans In Repayment 3.34% 36.93% 8.21% 1.82% 11.82% 3.38% LLA as % of Ending Loans 1.64% 17.38% 4.13% 0.89% 5.91% 1.71% Net Charge-Off Coverage 2.57 3.29 3.00 3.33 2.01 2.44 9
  10. 10. FFELP Spread Pro Forma Table Stafford Loan in Stafford Loan in Repay Pre-CCRAA Repay Post CCRAA Repay SAP Spread 2.34% 1.79% Funding Costs 0.55% 0.55% Lender Origination Fees 0.10% 0.20% Borrower Benefits Zero & Guarantee Fee (2.00% - AY08-09) 0.40% 0.40% Repayment Benefits 0.09% 0.09% Total Borrower Benefit Costs 0.49% 0.49% Net Loan Spread 1.20% 0.55% Risk Sharing 0.02% 0.06% Origination and Servicing Costs 0.41% 0.41% Pre-tax Yield 0.77% 0.08% 10
  11. 11. Current vs. Future State – Preferred Channel Originations $20 $17.6 $16.4 $15 $10 $7.9 $7.6 $5 $0 2007 2008 - Forecast FFELP Private • Preferred channel originations at traditional schools expected to increase 10% FFELP and 15% Private Education 11
  12. 12. Fee Income Streams Fee Based Revenue • Diverse yet complimentary lines of $1,173 Million business Contingency Fee, $288 • Contingency Inventory of $9.7 Billion Other, $154 • Collecting on behalf of the Dept of Education for close to ten years Late Fees, $134 Collections - Non-Mortgage, • Upromise – largest private source of $217 college funding contributions Upromise, $124 Collections - Mortgage, $52 Guarantor • Guarantor Servicing for student loans Other DMO, $48 Servicing Fees, $156 12
  13. 13. Operations Review The new economics of student lending require a more efficient operating structure Undertake a review of all business activities for justification in new environment Achieve appropriate risk-adjusted returns across all business segments First steps taken with more to come particularly on the expense side 13
  14. 14. Funding Requirements Term Funded Portfolio and Spread FFELP Private $135.2 Billion $28.3 Billion Unsecured, Unsecured, $22.8 $8.0 L + 0.32 L + 0.32 ABCP Term ABS, Conduit, Term ABS, $15.7 $15.4 $97.0 L + 0.37 L + 0.24 ABCP L + 0.54 Conduit, $4.6 L + 0.52 • 88% of portfolio is term funded 14
  15. 15. 2008 Funding Plan • Commitments received for $31 Bn warehouse line of credit • Funding for both FFELP and Private Education Loans • Term FFELP ABS issuance of $25+ Bn • Expected cost of funds L + 50 • Term Private Education ABS issuance of $3 Bn • Expected cost of funds L + 100 • Term Unsecured debt issuance of $1 Bn • Expected cost of funds L + 250 • Expected CP – LIBOR spread of 12 bps in 2008 15
  16. 16. FFELP ABS – Highest Quality Asset Class FFELP Student Loan has EXPLICIT Q407 Issuance by Industry: $55 Billion Government Guarantee Equipment 3.7% Student Loans Sub-prime 16.2% Mtge 5.2% Other Managed FFELP charge-offs 3 bps 3.8% Credit Card in 2007 42.7% Auto 28.5% ABS investment dollars are likely to be redirected into high-quality ABS, such as “AAA” FFELP ABS Q406 Issuance by Industry: $180 Billion Student Equipment Loans 1.5% 9.1% Issued $8.9 Billion in Term FFELP Other 3.9% ABS since October Auto 14.1% Credit Card Sub-prime 6.7% Mtge 64.7% 16
  17. 17. Liquidity Position At December 31, 2007, SLM maintained a primary liquidity position of $26.7B Dec 31, 2007 Sources of Primary Liquidity: Unrestricted Cash & Investments $10.3B $6.5B CP and Bank Lines 6.5B $6.0B Asset-Backed CP Program 5.9B $30.0B Interim Asset-Backed CP Program (1) 4.0B Total Sources of Primary Liquidity $26.7B Stand-by Liquidity: Unencumbered FFELP Loans(2) 18.7B Total Primary and Stand-by Liquidity $45.4B (1) $30.0 billion Interim ABCP facility effectively terminates on May 16, 2008 but our cost of funding will increase substantially to Prime plus 2% if the facility is not refinanced prior to February 15, 2008. (2) Total unencumbered assets equal $51.7B and include $11.7B Private Education Loans and $21.3B other assets. 17
  18. 18. Outlook • Grow both Private and FFELP market share at traditional schools • Expect 10% growth in FFELP originations • Expect 15+% growth in Private Education Loan originations • Improve profitability of Lending segment • Lower Borrower Benefits • Re-price Private Education Loans • Increase operating efficiency • Focus on traditional schools and borrowers leads to improved credit quality • Significantly lower delinquencies and charge-offs • Re-establish diversified funding sources • Unsecured debt markets • Secured markets • Bank deposits • Improve profitability of fee income businesses • Increase operating efficiency • Exit low risk return adjusted businesses 18
  19. 19. Disclosures Non-GAAP Financial Measures - The following presentation includes non-GAAP performance measures. A presentation of the most comparable GAAP financial measures and a reconciliation of the non-GAAP performance measures to the most directly comparable GAAP financial measures are included in the our most recent quarterly earnings release, quarterly earnings report on Form 10-Q and annual report on Form 10-K, which are available on our website at ( and ( and on the SEC’s website ( U.S. Government Guaranteed Student Loans – The following presentation contains references to U.S. Government guaranteed student loans. All such references are to loans made in compliance with the Federal Family Education Loan Program (“FFELP”), under Title IV of the Higher Education Act, to finance educational costs. As more fully described in our most recent quarterly earnings release, quarterly earnings report on Form 10-Q and annual report on Form 10-K, available on our website at ( and ( and on the SEC’s website (, the federal guarantee of FFELP loans is conditioned on loans being originated, disbursed and serviced in accordance with ED regulations. In addition, unless a loan default results from the borrower’s death, disability or bankruptcy, the federal government guarantees only 97 percent of the principal balance (95 percent on loans disbursed after October 1, 2012) plus accrued interest and the holder of the loan generally must absorb the three percent (five percent after October 1, 2012) not guaranteed as a loss on the loan (“Risk Sharing”). Additional Information - The following presentation contains certain information about the Company that management believes is important to investors, but should be read in conjunction with other material information about the Company, including, but not limited to, the operational, market and interest rate, political and regulatory, liquidity, credit, and consolidation loan refinancing risks that the Company faces. For a discussion of the risks described above as well as additional information about the Company you should refer to our most recent quarterly earnings release, quarterly report on Form 10-Q and annual report on Form 10-K, available on our website at ( and ( and on the SEC’s website ( For a discussion of the specific characteristics of any specific security, you should refer to the pricing supplement, prospectus supplement and/or prospectus applicable to that security. 19
  20. 20. “Core Earnings” Presentation “Core Earnings” Performance Measures – Used by SLM’s management in developing financial plans, tracking results, establishing corporate performance targets and determining incentive compensation Used by equity investors, credit rating agencies and debt capital providers to measure the company’s business performance Treat securitizations as long-term financings and recognize the economic effect of hedges; specifically exclude (i) gains on sales from securitizations, and the subsequent Retained Interest revenue (ii) derivative unrealized mark-to-market adjustments, (iii) unhedged floor income, and (iv) goodwill and intangible impairment and the amortization of acquired intangibles Reflect only current period adjustments to GAAP earnings and are not a substitute for reported results under GAAP May not be comparable to similarly titled measures reported by other companies Note: Both a description of SLM’s quot;Core Earningsquot; treatment and a full reconciliation to the GAAP income statement is contained in the supplemental earnings disclosure to the company’s quarterly earnings releases and most recent Form 10-Q. 20