Good morning. At this time I would like to welcome everyone to the SLM Corporation's fourth quarter 2008 Earnings Call. (Operator Instructions). I would like to turn the call over to Steve McGarry, Senior Vice President of Investor Relations. Thank you. Mr. McGarry, you may begin your conference.

Thank you, Katrina. Good morning, everybody. Welcome to Sallie Mae's 2008 fourth-quarter and full-year earnings conference call. With me today on the call are Al Lord, our CEO, and Jack Remondi, our Chief Financial Officer. After they finish their opening remarks, we will open up the call for questions. But before we begin, let me remind you that we may discuss predictions and expectations and may make other forward-looking statements. Actual results in the future may differ from those discussed here, perhaps materially based on a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During the course of this conference call, we will refer to non-GAAP measures that we call our core earnings presentation. The description of core earnings, a full reconciliation of the core earnings presentation to GAAP measures, and the GAAP results can be found in the fourth-quarter 2008 supplemental earnings disclosure accompanying the earnings press release, which we posted on the Investor page at our website, salliemae.com. Thank you. I will now turn the call over to Al.

Good morning, everyone. As Steve said, we're going to review our results for our fourth-quarter and our full-year results with you and later answer your questions. As you may well guess, Sallie Mae is not well pleased with the quarter's results or with the full year's bottom-line results. The decline in those results, either against last year or against expectations, directly or indirectly relate to the economic downturn and the credit crunch. Maybe, I guess the credit crunch came first. We will discuss the quarter and its implications for '09. As you are probably all well aware, the credit markets remain highly unsettled, and in some markets without government involvement, they are largely closed. We're heartened from time to time when we see a few narrow market openings, and we hope that those occur more frequently in '09, and we hope to take advantage of them. Our reported results for the fourth quarter were $0.08 and for the full-year $0.89. As I said, they are not good numbers certainly by our standards, and I'm sure not by your own. Overall, 2008 results were adversely affected by higher interest costs, and mostly by higher interest costs, and higher bad debts. Our higher interest costs are principally related to the $28 billion asset-backed commercial paper facility that we have, which I guess began the year roughly at $34 billion. For perspective on our interest cost, it is worth noting that the company grew its assets by $24 billion during the year 2008. The net interest that was generated by those assets, which would typically be in the $300 plus million range, was more than negated by our overall higher borrowing costs. As I mentioned, bad debt costs were high, so the nontraditional loan costs, nontraditional borrower of loan costs as we have…

Thanks, Al. Good morning, everyone. I'm going to take the next few moments to review our operating results for the quarter and the year on both the GAAP and core earnings basis in a little bit more detail. In addition, we will talk about our funding activity and liquidity, provide an update on our lending businesses and review the performance of our private credit portfolio. I will end with a little bit more detail on our outlook for 2009. 2008 brought significant challenges, challenges that few of us could have really foreseen. Yet despite the most difficult financing and credit environment, thanks to Congress, the Departments of Education and Treasury, we were not only able to lend, as Al said, but we, more importantly, delivered on our commitment that any student who requested a federal student loan received one. I think the most important piece here is, bottom-line, these programs work. They worked as Congress expected them to work, and they worked as we expected them to work. As a result, education lending in this country actually increased in 2008 versus 2007. As Al said, we're not happy with the results that we produced in either the fourth quarter of 2008, but we did remain profitable during this timeframe. For the quarter core earnings, including nonrecurring items, were $65 million or $0.08 per share, compared to $117 million or $0.19 a share in the prior quarter. We had a loss in the year ago quarter of $139 million or $0.36 per share. This quarter's results were particularly impacted by the $146 million increase in our private loan provision and by a wider than usual commercial paper LIBOR spread, which reduced our net interest income by approximately $41 million. For the year, our core earnings, including nonrecurring items, were $526 million…

(Operator Instructions). Your first question comes from Lee Cooperman with Omega Advisors.

Good morning, Lee.

Go ahead with your question

The next question comes from Matt Snowling with FBR Capital Markets.

Good morning, Matt. Now we know we have a problem here.

We are not getting the questions.

Okay. We will go back and revisit the question from Lee Cooperman with Omega Advisors.

I was curious if you fellows have a view of normalized earnings and how you view the range of $1.45 to $1.65 that you put out for 2009 relative to your normalized earnings? Secondly, I realize this is not on your agenda, but kind of talk about runoff value, because ultimately, if the government doesn't provide an environment that the shareholders could prosper and get a reasonable return on their investment, we have this view that the assets are worth substantially more than they are selling for in the market. If we were to take the approach of saying, look, if we're not appreciated, we would return the money to shareholders and let somebody else do our job? Two different questions.

I think in terms of run-rate earnings, Lee, when we look at the $1.45 to $1.65 numbers, those numbers clearly include elevated losses given the current economic environment and the runoff of the nontraditional portfolio. As I pointed out, the nontraditional portfolio is roughly 14% of our total book in the private credit space, yet accounted for 54% of charge-offs in 2008, and we expect it to be north of 50% in 2009. This portfolio, however, is in a runoff mode, and as that portfolio declines and loans entering repayment in 2009, by example, are expected to decline by about 30% over what went into repayment in 2008, we would expect provision loss rates and, therefore our earnings to improve. In terms of the runoff environment, clearly we are not in a business to lose money for our shareholders. If the business model no longer works, that is certainly a direction that would need to be considered. I think you are correct in pointing out that the earnings profile of this company in a runoff mode creates a net present value in excess of the share price, though.

Thank you. Good luck. Appreciate your efforts.

Thanks Lee.

Your next question comes from Matt Snowling with FBR Capital Markets.

I will try this again. Can you hear me? It looks like Fitch came out this morning and assigned an F1+ plus rating to the government loan conduit. Can you just help us think about where you are, what more do you need before you can actually start going live with the conduit, and give us a gauge in terms of investor demand and pricing on the assets and the securities?

Sure. The conduit, the development of the conduit moved rapidly over the last couple of weeks, and the Department of Ed published the final terms and conditions of that program in the Federal Register last week. Some press releases came out earlier this week. At this stage in the game, the work that remains is operational. We are continuing to work with the rating agencies to get the actual securities that will be issued rated. We have to develop the marketing materials and prospectus offering documents for our investors and begin to educate them on that process. One of the reasons why some of this has been delayed is there was a significant development in the last couple of weeks of who provided the ultimate liquidity for securities issued under this program. Previously, it was expected that we would get that liquidity from commercial banks, and instead we have substituted the federal financing bank for that process. That is, in our view, a material improvement in the facility process and should help make the paper much more attractive to investors, particularly investors who would otherwise buy government-related securities. So we still have a little bit of operational issues to work out on some things, but we expect this program to begin funding over the next, say, three to four weeks.

Do you have a sense at what level the securities will be priced at?

Well, in normal times you would expect a security issued with a federal financing bank, which is a direct obligation of US government, to trade well below LIBOR. The problem is LIBOR is not very big these days. So we are looking in to see what that would trade at. In other normal times as well, you would be able to pretty clearly predict what those spreads will be, but until investors actually buy the product in this marketplace, it is more speculation then anything else. As Al indicated though, we expect the all-in funding cost of this facility to be substantially below our asset-backed CP facility.

Got it. Understood.

Just to point one last thing out, the target is that the Fed, the Treasury and the Department of Ed had here was to create a funding vehicle with a cost approximately equal to what we would have funded at historically. So you're looking at something like a LIBOR plus 10 target number.

Right. My understanding is that anything below LIBOR you have to rebate 80% back to the government?

There is a veritable fee in that process for that fee. That is correct. When I say LIBOR plus 10, too, remember in an environment where one month LIBOR is in the 30 basis point range, it is tough to get substantially below LIBOR.

Your next question comes from Michael Taiano with Sandler O'Neill.

Thanks. Couple of questions. Just to clarify on the pending $26 billion conduit coming due at the end of February, you're seeking a 60-day extension on that so that you will have time to put the loans that will go into this government backed to that conduit facility, is that how it works, and then you will look to extend whatever is remaining?

Thanks. Couple of questions. Just to clarify on the pending $26 billion conduit coming due at the end of February, you're seeking a 60-day extension on that so that you will have time to put the loans that will go into this government backed to that conduit facility, is that how it works, and then you will look to extend whatever is remaining?

That is correct. It is not a put. You are funding them through the conduit, though. We still will retain all the economic benefit of the loans and the margin associated with them.

Right. Okay. Given that the establishment of this government back stop facility and I guess you claimed that the guidance that you gave, that the intent was to at least for now put all the loans that were originated this year to the government before September 30. I mean would most of those loans also be eligible for this conduit facility or am I mistaken on that?

Right. Okay. Given that the establishment of this government back stop facility and I guess you claimed that the guidance that you gave, that the intent was to at least for now put all the loans that were originated this year to the government before September 30. I mean would most of those loans also be eligible for this conduit facility or am I mistaken on that?

No, that is correct, and the question that the ultimate decision will be based on whether or not funding for these assets is available at an attractive enough rate? Our concerns at this point in time or our focus is an assumption that the conduit doesn't have the ability to be unlimited in size. If there is limited capacity there or until the concept is proven with the exact funding cost known, we have to assume we're going to put those loans.

I see. Okay. But if in the event there was the capacity to do it, you would look at what is the best in terms of NPV for those loans in terms of value creation?

I see. Okay. But if in the event there was the capacity to do it, you would look at what is the best in terms of NPV for those loans in terms of value creation?

Absolutely. It becomes a pure NPV analysis at that point, absolutely.

Okay. The second question I had with respect to the roughly $1 billion that you sold to the Department of Ed in December and January, you mentioned potentially using that to repurchase debt. So, first of all, to what extent do you think you would be able to do that? And how do you go through that process? Do you look at like what is the cheapest debt that is trading out there? Do you go by duration, like how do you make that analysis? More broadly speaking, will you be more aggressive in buying back debt this year given liquidity seems to be improving?

Okay. The second question I had with respect to the roughly $1 billion that you sold to the Department of Ed in December and January, you mentioned potentially using that to repurchase debt. So, first of all, to what extent do you think you would be able to do that? And how do you go through that process? Do you look at like what is the cheapest debt that is trading out there? Do you go by duration, like how do you make that analysis? More broadly speaking, will you be more aggressive in buying back debt this year given liquidity seems to be improving?

We would certainly love to be repurchasing debt at the levels that it is trading at, particularly in the longer maturities. Little is available, little trades I should say in the '09 maturities, and so it is tough to get hold of any additional volume there. In the calendar year, we did buyback about $1.9 billion face of our debt, including for total gains in our core [accounts] of just under $69 million. In the fourth quarter, that number was $127 million at a gain of $27 million. We look at opportunities therein to the extent that we can execute on something that makes sense while still maintaining fortress-like liquidity, we would do so.

Okay. And then just final question, the RFP you mentioned from the Department of Ed on to service FFELP loans, is that for loans that are being put under the conduit program, or would that also include loans that are currently I guess being serviced by ACS for the direct loan program as well?

Okay. And then just final question, the RFP you mentioned from the Department of Ed on to service FFELP loans, is that for loans that are being put under the conduit program, or would that also include loans that are currently I guess being serviced by ACS for the direct loan program as well?

It is not particularly clear at this point in time, but we expect it to be the former. The FFELP loans that are put to the department under the Kennedy, Miller bill.

Okay. Thanks a lot.

Okay. Thanks a lot.

Your next question comes from Moshe Orenbuch with Credit Suisse.

Great. Two separate questions, one on the outlook for private credit losses in '09. I guess you ended last year with delinquencies on the traditional book I think of about $660 million. You got probably a little less than double that at the end of this year, and they were up probably $300 million in the quarter. Can you relate given the changes in the forbearance policy, how your expectations for charge-offs in '09 relate to that?

What happened in the fourth quarter of 2007 is, for the nontraditional portfolio, we looked further into the in-school portfolio for expected losses than we typically do. Normally, under GAAP accounting, you kind of have to wait until the student shows some related issues before you start booking reserves, but given the significant issues we were facing there, we got to take a look at almost like a four-year expected loss cycle for that portfolio. I will say in 2008, we had an estimate for what our charge-offs would be in our portfolio, and we did do better than expected there, despite a significant worsening economy, and one that we clearly did not forecast, particularly the fourth quarter's levels. On the nontraditional side of the equation, and particularly on the forbearance changes, what we are looking at here is there are segments of the population who don't benefit from a forbearance. They are relatively small. They comprise about 17% of the total forbearances that we grant, don't benefit to the same degree as the other side of the equation. When we looked through the data and at the actual experience, and remember you need time to be able to evaluate this and see the trends and develop models to approach this, we see that that 17%, looking back over the last couple of years, accounted for roughly 97% of the charge-offs that we incurred for loans who received the forbearance. So by ending that practice and pushing those borrowers into repayment sooner, what you're doing is accelerating charge-offs that would have occurred in future years, in a part of our default calculations, in part of our reserve calculation, but they will result in higher charge-offs in 2009 as a result. I'm going to say it again, it is not a forecast that our cumulative default rates are going higher; it is just the shifting of the time of when they are recognized.

Just to follow up on that Jack. I guess what I was saying is, if you are saying $1 billion in charge-offs and less than half of that coming from the traditional book, you've got $1.260 billion of delinquencies on that traditional book at the end of this year. With less use of forbearance, it seems like the loss rate on that should be higher than in prior years, not lower. I guess how do you get that less than $500 million losses from that? That is the disconnect.

If you look at the history of the portfolio, we look at the roll rates from delinquency class from one bucket to the next and we expect through a combination of things. One, we are expecting higher charge-offs in the nontraditional portfolio in 2009, but we do expect our collection activities to continue to be successful as well in this area.

Your next question comes from Jay Sheth with Columbus Hill Capital.

Hi. It is Kevin Ing. Just a couple of questions for you. When you referred to LIBOR on the conduit program, in that LIBOR plus 10 target, is that monthly LIBOR or three-month LIBOR?

Three-month LIBOR.

Three-month LIBOR. Can you confirm I was not sure if we heard it, did you buy any bonds back in the fourth quarter?

Yes, we bought back just under $127 million worth of bonds at a gain of just over $27 million.

When do you expect details of the TALF to be released, and do you expect that you would potentially be able to borrow directly on the TALF as opposed to the investors borrowing directly from the TALF?

The Treasury and the Fed has said that the TALF program is expected to be operational in mid-February, and that is probably the best insight that we have at this stage in the game. We have certainly requested the ability to borrow directly from the TALF, recognizing that student loan assets have a duration that is longer than the three-year timeframe of the facility. We had extensive conversations with the Federal Reserve on this topic, and we think we have made an effective case here, but we do not have any decisions at this stage in the game.

Have they given you a sense of what the haircuts would be for the private loans?

No, they have not released any indications on haircuts or rates at this stage in the game.

Another question on deposit growth, can you talk a little bit about the trajectory of deposit growth and what you estimate that trajectory to be?

First of all, it is not cost-effective to raise a huge amount of deposits well in advance of what the needs are. So our deposit issuance is really tracking our new private credit originations and funding needs there with some advance notice. As I said, our goal here is to raise longer term deposits. We're targeting north of three years. In the last couple of months of the quarter, we were almost at 40 months in terms of average life. We have not experienced in any period a challenge in terms of raising the amount of deposits that we are looking for with those maturities. When we look at the overall size of the broker deposit marketplace, we feel very comfortable that we could easily fund the next three years worth of private credit originations entirely in that marketplace without difficulty and could probably go beyond that, but that is kind of the outlook. Clearly, we want to be able to finance these assets in the term ABS market. I think the Goldman Sachs transaction that we announced is an indication that there will be availability for this asset class in the ABS market. Our securities that we have issued in the past continue to perform extremely well. We have had no downgrades, no expected issues in those securities that investors should be concerned with. So, overall, I think the issues are very positive here, and we see deposits as not only a stable funding source for the future growth but a relatively cost-effective funding source as well. The cost of deposit in that maturity range, range from 150 over LIBOR to about 200 over LIBOR.

Do you have a target for deposit balances at the end of 2009? Is the strategy on the private loan side to originate out of the bank and then sell whatever demand is into the TALF financing market?

We have over the last several years that we have had our Sallie Mae Bank originated all of our private credit loans through the Bank. Those loans were then sold to Sallie Mae parent and then financed in the ABS market. Today, we're retaining those loans in the Bank for funding and will do so until we can permanently fund them in the Capital Markets. I'm not sure that TALF would be a great place for us to go with these assets at this stage in the game, but we will certainly look at that.

Okay. My last question is regarding the bank and the temporary loan guarantee program, which is a program the FDIC has initiated. Certainly, you guys are not a bank holding company, but as some of the other brokers and the research have pointed out, there are non-bank holding companies that have issued successfully under the loan guarantee program. Any sense of whether or not that's a program that you guys are considering issuing paper under?

We would certainly love to have the ability to access that program and they've been pursuing that. However, there have been two entities that have issued under that program that were not bank holding companies. One was a technical waiver issue and the other was GE who got their own special exemption there. We'd certainly love the opportunity and are pursuing it. But at this point, we don't have any clear guidance that that will be available.

Thank you.

(Operator Instructions). Your next question comes from Jordan Hymowitz with Philadelphia Financial.

Hi, guys. Can you just discuss your current capital allocation between FFELP, private and the debt collection, which I know has kind of been run-off?

Sure. In the FFELP business, we have historically allocated 50 basis points of capital to those assets. As we're looking into the future here, we think that there's going to need to be some refinement in that model. Clearly, FFELP loans that are funded to term are funded in the DOE facility where we have no liquidity issues and can put loans at any time at a profit, have a different capital requirement than loans that might be financed in something like an asset-backed CP facility. On private credit, we have historically allocated 8% capital to that portfolio. Again, here, I think those numbers go north, but we're continuing to evaluate that based on the current climate. In the purchased paper business, we have typically looked at a 50% kind of capital requirement in that space. Both of those, however, are in significant runoff at this stage in the game.

I guess my question is, because of the "freed up" capital from your debt collection and that's going to be allocated more towards the private side, I would imagine because of the dollar numbers. I guess, it all depends on how high you have to raise the capital on the private to see what type of cushion you then have, you see what I'm getting at?

When you look at our earnings forecast in our plan, the capital generation is sufficient to meet the capital requirements for further growth. I think at this stage in the game as we look at what is going on in the capital markets; it's clearly not normal times. What we need to evaluate is what capital levels would look like in this environment versus what they might look at and be adjusted to in a more normal environment.

Got it. Do you have any sense when there would be some sort of thoughts as to what capital you're going to allocate for specifically the private side?

We've been allocating 8%.

Right. But you said it was probably going to go north. Is that something that will be done by the --

I think in the future we're probably looking at 10% to 12%.

Okay. Thank you very much.

You're quite welcome.

Your next question comes from [Peter Manico with Raptor Group].

Good morning. Thanks for your time. A couple of quickies. In terms of normalized operating expense go-forward, Jack, should we think in terms of annualizing the fourth quarter? Can we take it a little bit lower notwithstanding the fact that you exceeded the target you set out a year or so ago? Separately, given the evolving status of the mix of fee businesses, what can you say there?

I think on the operating expense side of the equation, first of all, a little bit of seasonality in the numbers. So, if you look at our overall efficiency in our lending and in our fee-based businesses, we'll continue to improve in 2009. The total dollars that we spend though will very much be dependent on the volume that we are generating. As Al indicated, we expect good growth in our lending activities in 2009 versus 2008. And so, those will drive some numbers. As a target, I would look for 2009 to be at about $1.2 billion or a little bit less for the full calendar year.

I think, Peter, if you wanted to be conservative, you'd annualize the fourth quarter. Our goal is to get the number under that but not significantly under it.

And with respect to the fee businesses?

On the fee businesses, the big issue that we are looking into is the contingency collection side as it relates to some collections on defaulted federal student loans and the ability to capture some of that revenue because of capital market limitations. We are looking at alternatives there. We do see lower growth in those businesses as a result of that in 2009. Then, of course, we have got the purchased paper business in complete run-off. So, you'll see continued declines in those revenues as well.

Okay. Thanks.

Your next question comes from Matt Burnell with Wachovia.

Thanks, gentlemen. My questions have been asked and answered. Thank you.

Well, thank you, Matt.

Your next question comes from Ryan O'Connell with Citigroup.

Thanks. I think this is probably for Jack. Could you just give us an update on your outlook for free cash flow? Last quarter, as I recalled, for the quarter we just went through and '09, it was about $8.4 billion. So, maybe, if you could just give us an update on that.

Thanks. I think this is probably for Jack. Could you just give us an update on your outlook for free cash flow? Last quarter, as I recalled, for the quarter we just went through and '09, it was about $8.4 billion. So, maybe, if you could just give us an update on that.

Yes. Our forecast for free cash flow continues to be in excess of our debt service requirements. In that end, we were putting the number at about $8 billion for the course of the year. We've done some things to improve funding. The sale of the Department of Ed, the $1 billion for the Department of Ed loans and the Goldman Sachs deal add $2.5 billion to at least our cash generation activities. In the Department of Ed numbers, only half of those loans were actually closed in 2008. So there is a $2 billion increase of cash as a result of those two financing transactions by themselves. Overall, just as an editorial comment, we look at our liquidity position here, and you know, in any way, shape or form you would look at this, we are in a far better position today than we were at almost any other point in time in 2008. The big challenge for us really is, and we sometimes say it's a big single issue, the $28 billion asset-backed CP facility. At this stage based on where we stand on the conduit and what we see coming from the TALF, we see very significant opportunities there to generate liquidity from longer term financing sources, and more importantly, cheaper financing sources to materially reduce the asset-backed CP facility very quickly in 2009.

Okay. Thanks.

Okay. Thanks.

At this time there are no further questions.

Thank you, everybody. That concludes this morning's call. If you have any follow-up questions, please call myself or Joe Fisher. Thank you.

Thank you for participating in today's conference.