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TIM FITZPATRICK, CEO, SLM CORPORATION: Well, thank you, Brad, and
good morning, all. Before we get into the outlook for our Company for
2007 and the strong tenets of the student loan industry, as a whole,
let me just spend a few minutes just quickly finishing up the
year-end 2006 results of our organization.
We certainly delivered a strong EPS growth of 17%. This has put us
now for seven consecutive years with above 15% EPS growth. As I
commented on our most recent earnings call, we expect to do that once
again, with the guidance that we provided for 2007, with a 15 to 17%
targeted EPS growth.
Some of the strong results came from a surge in our managed assets,
which grew 16% over the prior year. In recognizing we were in the
midst of a little bit of flurry with the consolidation,
reconsolidation, the repeal of single-holder rule, in-school
consolidations that actually affected many lenders during the year of
2006, we held quite steady, with a considerable growth in our earning
asset base that certainly gives us a great deal of lever into 2007.
And having said that, the composition of these managed assets now
represents a far longer life to our balance sheet than what you, who
had been looking and following us for the last seven years, are used
to calculating up, the earning assets of our Company now, for at
least 80% of those earning assets have an average shelf life close to
10 years, which is about 2.2X what the old assets on liquidation
bases were unconsolidated back in the year 2000/2001.
We've also been able to take advantage of our scale and servicing
capabilities and relationships in the industry to begin also
acquiring portfolios from willing buyers. In addition, our student
loan spreads stabilized and moved slightly higher during the year,
much to the influence of our continued increase in private education
financing, our direct-to-consumer initiatives, and certainly a final
tempering, if you will, of the FFELP margin erosion now that over 70%
of our assets are now consolidated federal assets, as opposed to
being unconsolidated.
On the expense side, we're still in a good path of making certain
that we have modeled up ample scalability in this Company, and while
our assets grew by 16% on the balance sheet, our core operating
expenses were tempered at a 5% growth, and we've certainly been able
to demonstrate the operating leverage in our business model and
continue to expect that through the efficiencies in technology, we'll
be able to grow our balance sheet in the low to mid-teens and still
be able to fulfill our core operating expense levels at that 4 to 6%
range.
On the fee-based businesses, our DMO revenues grew over 20% during
the year, driven certainly heavily by our results and efforts with a
number of contracts servicing and supporting federal FFELP loans and
federal DL loans on a default curve.
Not only did our total fees exceed $1 billion, but they actually now
cover over 90% of the total operating expenses in the Company, quite
a change from where we were back in '99 and 2000, where we were
really 100% reliant on a FFELP asset and an interest margin to drive
the core of our earnings.
And as we move into our private credit, we mentioned that our 90 days
and our net charge-offs on our private loans had moved up at the end
of the year. They certainly are consistent with the modeling that we
had done in building these portfolios in the past.
As a footnote, they've been certainly running better than expected
for over 2.5 years, so this is a tempering off, as we see it, and
we're certainly very confident that our modeling and the ability to
be able to manage our private credit remains quite well intact.
Our FFELP loans actually accounted for 43% of our revenues in 2006.
That's a shift downward from the 51% that you see on the illustrated
chart.
And, also, our private loans contributed 23% of our revenues, which
is certainly a quite noticeable difference from the 17% it
contributed in 2005.
Growth in our private credit portfolio is just one of many revenue
streams supporting our earnings. Not only do we have $23 billion of
private education loans, but that's brought through by a number of
initiatives.
We have a Tuition Answer product that grew by 30% in the year 2006,
and the remaining 85% of our private credit originations continued to
come from our school-based channels, and we expect this to continue
to be the source of the vast majority of our private credit
originations. Originations through this channel are extremely
efficient. Furthermore, these loans are typically service and billed
together with the FFELP loan that is accommodated on that same
campus-based initiative, which both complements our cost, as well as
maintains a very steady order of managing the portfolio's payments on
both the federal and the private loan.
We'll continue to grow in our direct-to-consumer product, Tuition
Answer, and as we have strengthened the internal side of our
organization, we brought over a gentleman that has been running our
Upromise acquisition, Tom Anderson, who ran a number of initiatives
at Capital One under youth marketing/credit card operations, to head
up our Upromise initiatives going into 2007.
As we move into the portfolios and their characteristics of our
portfolios, our trusts continue to perform well within our
expectations, both in charge-offs and in the 90-day-and-over
delinquency categories. For the full year of 2006, our charge-offs
were just 1.6% of the portfolio -- that's in total managed assets --
down from 1.9 in 2005. Characteristically, we modeled those
portfolios to have charge-off expectancies in the low 2% range. So in
both years, we certainly received, if you will, a benefit from the
cycle by which those loans fill themselves through the
characteristics of their cohorts of performance.
And at the end of the year, we have over $11 billion of these loans
in repayment, and as these loans season, we certainly will find that
between the months of 12 and 36 months, during their lives of
repayment, we will find their most -- highest point of the charge-off
cycle in their stages of repayment.
In the fourth quarter this year, as I mentioned on the earnings call,
we saw our charge-offs increase to 2.3% from the 1.7 in the prior
quarter, and as our loans season and charge-offs normalize, it should
not be a concern to see the volatility of these numbers move in that
range between the 1.7 to 2.3 to 2.4 range.
And we certainly need to keep in mind that these charge-off stats can
be a little misleading at portfolio levels. In order to truly
determine credit quality, we looked at some of the isolated pools and
cohorts, and investors can find that detailed information on nearly
60% of our portfolio that has been securitized. The data shown here
is just a sample of what is available.
And by analyzing these trusts, one can find that charge-offs are well
within the expected life of the loan default rates, depending on the
loan type and the FICO scores. Apart from that, we have career
training loans that have not been securitized and represent about 30%
of the portfolio that remains on the balance sheet. These loans
certainly do have a higher expected charge-off and a delinquency rate
that explains most of the disparity between the on and off-balance
sheet portfolios that you would certainly be -- [ample] to read
through. And we certainly do anticipate a spike of charge-offs in any
given quarter beyond the sort of direction that we've provided at the
end of the year.
We look at some of the basic changes in the guidance by both the
Department of Ed on Rules and Regulations. We look at the repeal of
the single-holder rule, and those that look at that in somewhat of a
dismal way, realizing, my gosh, portfolios are going to be left for
anyone to pick apart, we look at that as a real business opportunity.
We represent around 27% of the market share of held federal loans,
which really means the other 73 are held by others. That
"other" portfolio of 73%, which is significant in dollars,
as we hold about 120 billion, so the rest of the market in total is
close to $400 billion, is now for anyone's picking, if you will,
knowing that no one lender has the right to that single asset as it
did before.
Thus, it leaves us in a fairly attractive position with the
scalability that we have for this Company to begin marketing and
purchasing pools of other people's portfolios, which is an activity
that we have begun in the tail end of quarter 3, a little bit further
in quarter 4, and as we [inaudible - technical difficulty] provided
some color into what we're going to do in the year 2007, we'll be
finding ourselves bringing in 7 to $10 billion of assets that once we
never had a reach and access for without obviously the change in the
regulations on the Department of Ed's ruling of what they call this
interpretation of the single-holder rule.
So it's changed certainly the dynamics of the marketplace. For us, we
will build a newly designed revenue stream out of this purchasing of
what we call wholesale assets. We will certainly engage, as well, on
the retail side, putting some marketing money together to both
retailing capture that and also purchase loans from other gatherers.
That certainly will work with us in the right partnership relations.
So we'll continue to move forward, and as part of the complements to
our portfolio, we're quite positive on the outcome of our growth in
those earning assets in 2007.
Growth in our fee-based businesses has always -- has been an
important growth driver over the last five years. In 2006, 34% of our
revenues were fee based, up slightly from the previous year, and 70%
of those fee-based revenues come from education-related businesses,
both in the form of guarantor servicing, collections, and servicing
fees for other lenders' portfolios.
We have deepened our roots in these businesses by growing our
guarantor services and default recovery operations. These
annuity-like income streams certainly support, if you will, the
student loan margin.
And the balance of our revenues come from fees generated by
non-student loan collection activities, which are principally related
to state tax collection business, credit card contingency businesses,
and purchased paper businesses and the like.
We look at our guarantor services fees as an annuity-type concept.
These are tied directly to the growth of a loan that we originate on
a federal campus with a link of a guarantee to one of 34 eligible
guarantors in the marketplace.
We are linked contractually with USA Funds, and for every guarantee
that is being driven through our lending platform, about a 40
basis-points origination fee and then another 10 basis points per
year for servicing that guarantee fee are part of the fee
compositions of our revenue stream. And we're particularly focused on
growing, obviously, the USA Funds guarantee.
As an example, 61% of the originations that we've driven on the
federal side of our internal brands that have been growing at a
plus-40% clip over the last two years had a USA Funds guarantee
affixed to them. And that's up from just 38% just a year ago. So when
you look at the dynamics of being able to link a product along with a
loan that has the attributes of a lifelong fee income benefit, that
link to a USA Funds guarantee is quite powerful in fueling the
pipeline for future revenue growth. And we certainly look at that
revenue as certainly being an incremental to the, as I said earlier,
student loan spread.
Today, we do servicing, partially or whole, for 9 of the 35
guarantors in the marketplace, the largest link being USA Funds, and
the next largest link being NELA, which is a guarantor in Washington,
Oregon, and Idaho.
And we're certainly working to grow this business. We strengthened
our relationships over the last year with linking to the guarantor on
default management services, both in the state of California [and]
the state of New York, and we certainly are working in concert with a
host of other guarantors for the year 2007.
One of our subsidiaries, Pioneer, that I've mentioned in the past,
has been collecting defaulted student loans on behalf of our
competitor and our regulator, which is the Department of Education,
for close to 10 years. We've managed the defaulted loan portfolio
quite well on behalf of the Department of Ed. We've been the
number-one or number-two ranked collector for the last six years.
We've actually strengthened our position by receiving a greater share
of the defaulted paper relative to other collectors on the direct
loan program, and certainly, that is a strong appeal of how both the
public and private sector work in hand. And while they are our
competitor and regulator, they certainly use us for the strength of
what we provide in both service and return of defaulted loans, which
certainly lessens the cost to the Department of Education [and]
lessens the funding that has to go to education for defaulted paper.
We've also managed defaulted loan portfolios of a host of guarantors,
including USA Funds, and have had long-term relationships that are
certainly renewable as we've been able to build our support and the
confidence with those guarantors, as well.
In addition, there certainly has been growing evidence that defaulted
student loans that -- have hit historically low percentages over the
last three years. Those of you that were around in the early '90s may
recall that student loans were at one time at 15% default rates. They
retreated down to 10% in 1996, and here we are now in 2006 with
historically low default rates of 5% or slightly below 5.
Those inventories are beginning to show some stress tests of maybe
being able to maintain that low default curve, and it's likely that
the student loan default rates will begin showing slow and steady
increases, which will certainly add to the pipelines of those service
providers that will be collecting more on behalf of both the direct
loan program and the entire FFELP industry.
Moving quickly over to our capital and then our drive to maintain our
ratings with the agencies, and certainly is assuming suitable pricing
on our holding company debt, we certainly manage what we feel is very
good and ample risk-adjusted capital level.
Our tangible equity-to-managed asset ratio does not adjust for the
fact that 86% of our assets are government guaranteed and experience
very little charge-off experience. As the chart indicates, we
certainly hold more capital and generate more income to cover our
charge-offs than our more highly rated peers in the financial
industry do.
Just quickly moving over, which is a topic, I'm sure, of many of you
here today on politics and some of the sponsored bills that are
floating between -- from the House to the Senate. The bill that the
Senate will consider bills on is HR-5, by adding an increase in Pell
grants, the STAR Act, and an increase in student loan tax credits.
The Senate has yet not convened and has not been able to reveal first
how it's going to pay for this bill. And as important, the Senate
certainly hasn't conferred on how they view the merits of the House
bill that was floated over to the Senate strictly for the benefit of
reducing interest rates on a handful of students. And, obviously,
that is not providing what are the strong responsibilities of the
Department of Ed on providing access to those who need it most.
Our position has been and will be very clear on the STAR Act. No
doubt, there was no availability or time for any conscious debate in
the House. It was a drop-dead bill, no amendments being allowed or
attached, so most of our efforts of weeks ago and today are going to
be concentrated more on the Senate and the hearings that the Senate
will have regarding the merits of the co-sponsored bills that are
floating around today.
No doubt, we've been at the forefront of demonstrating sound
private-sector behavior, with over 80% of the schools in
post-secondary education. And no doubt that the proponents of the
direct loan program, that go all the way back to 1993, had much
higher expectations of the direct loan program serving as really the
path for schools to follow in the managing of the Title 4 loan
program.
And one only needs to go back to 1993 to dust off and remind the
newly elected both Senators today, as well as those that served in
those '90s, on what was the strength or the weaknesses behind direct
loan program. Well, today, the direct loan program supports a little
over 1,200 schools, and instead of saving money, as it was published
in the reports back in '93, it's lost in excess of $21 billion. It
was supposed to save taxpayers 5 billion. It spent $16 billion more
than it has actually received in in revenues. So as we look at the
partnership that the private sector has provided to education, we
feel very strong about the merits of how the private sector's role
has been with over 4,800 schools, and we expect our voice to be heard
in the upcoming Senate hearings.
An increase in Pell grants is a policy that Sallie Mae has long
supported, which would provide access to the neediest students and
would fill more seats in higher education, which is certainly one of
the designs of what the Department of Education's role and
responsibilities are.
As you may recall, legislation passed one year ago reduced subsidies
at a student loan industry by over $12 billion. The attempt to cut
another 6 billion, we look at it as being quite unproductive.
Students and schools benefit from the efficiencies created by
competition in the FFELP industry. Students have received lower rates
and fees as a result of competition.
So as we look at the tenets of both the legislation pay-fors along
with the Senate bills of four-point effort, we certainly are at a
stage today to be able to present, both artfully, intelligently, and
without bias, the facts behind the realities of the direct loan
program and the private sector's FFELP program.
As this map indicates on the next page, the reality of the student
loan program is that more than 80% of guaranteed lending is done by
the private sector. Many of these states are key states of some
leading Democratic Senators, Pennsylvania being one, and we expect at
the Senate level to have the right type of debating that will put
logic ahead of personal ambitions and personal slant.
Sallie Mae alone will invest close to $200 million just this upcoming
year to both enhance and maintain originations and servicing
platforms that enable schools to not only electronically process
federal loans but electronically disburse/electronically reconcile
data so that FFELP schools are certainly at the forefront of keeping
their data balanced between what the government lends and what the
school spends, which is something that the direct loan program hasn't
figured out yet.
And realizing that the capital that not only Sallie Mae puts into the
private sector for FFELP but the rest of the industry players, I
think, echoes some very strong benchmarks on how well controlled and
disciplined that part of the industry is.
In addition, initiatives like exit counseling to borrowers at early
stages of delinquency, default management services, enrollment
management processes and techniques that the private sector provides
in directing close to 4,800 schools, are all services that the DL
program falls short of providing.
And recognize today that there are 17 million students enrolled in
some form or another in a community college, a public university,
private university, or the for-profits.
And for those 6,000 schools, for the last 12 years, a choice has
existed between opting for the direct loan program and the FFELP.
The choice that schools have made, not the choice that lenders have
made or not the choice that the direct loan program has made, has
been overwhelmingly clear. They've chosen FFELP for a simple reason
-- the service levels that are required today by the diversity of a
college student going on to a campus today is far different than what
it was like 10 or 15 years ago.
When asked, schools repeatedly and consistently state they do want to
have both programs out there for an option of choice, and it also is
a great comparative benchmark that allows schools to look at the
initiatives of the ease, perhaps, of processing between the FFELP and
the DL programs. So we also applaud that as being a fair benchmark,
providing that there are no other subsidies that one program gains
from another. After all, it's our taxpayer dollar that's going into
the Title 4 loan program, and providing that each program stands on
the same merits as one another, we're certainly in support of
maintaining a competitive spirit with our friends over on the DL
side.
So I -- just a conclusion -- on the political side, I'm certainly
confident [that] the value of the FFELP program, a program that we're
quite proud of, will certainly be realized, giving us the opportunity
to continue to serve students and provide access to higher education
for all that seek it.
We look at the fundamentals of the underlying business here. They do
continue to be exceptionally strong. We still see ahead of us three
years from now in 2009 the largest high school graduating class in
America. A record 3.3 million students will receive their diplomas.
And demographics are not the only factor driving demand for higher
education. Increased complexity of the economy, challenges in the
labor markets have led to a steady increase in the -- just the
percent of the population seeking a college degree.
In addition, continuing education -- continuing education is growing
in popularity. Today's student is more like a 25 and 26-year-old than
they were just 10 years ago coming out of high school at a raw age of
18 or 20 years old.
And today, when you look at the population across the U.S., we still
have an overwhelming percent of adults over the age of 27 that have
not obtained a college degree. In fact, that number is below 30%. So
when you think of the entire population, adult-wise, over the age of
27, 28, 30% of them have obtained a college equivalent or a graduate
college equivalent degree.
So suffice to say that there certainly is an enormous population of
eligible seeking adults and high school graduates that will be
certainly drawing more of their skills through a post-secondary
education with the changing labor markets here in the U.S. in years
to come.
We've also been able to demonstrate that as we have moved this
Company over the last 13 years, since the early '90s all the way up
through 2006, that we've been able to provide a very strong track
record of navigating through times of political uncertainty. No
longer when we look back in 1994, if you will, which was at the
advent of the direct loan program, we were 100% relying on a federal
loan as our only means of a revenue stream. That held true all the
way up till actually 1998, when we began diversifying this Company.
And as indicated in the previous slides, a little over 40% of our
revenues now come from a FFELP asset, down from 51% in 2005. It's
likely in 2007 that number is going to hover more in the 30+% range
of the composition of our earnings stream.
So we're certainly confident that the FFELP industry can still stand
tall on its merits, and we continually serve the financial aid
professionals, students, and families as they strive for their
college education.
We will continually focus on generating the high-quality, low-risk
earnings. Our FFELP portfolio will continue, as well as our fee-based
businesses, to generate a very good return on equity. We have
virtually little or no credit risk on that portfolio, and we
certainly are in position to provide students with the sorely needed
gap financing on the form of private loans and are confident that the
portfolios will continue to perform as expected.
And, finally, our fee incomes that are being built to continue to
support and supplement our earnings are still looking to grow in the
low to mid-teen range. This year, our fee income exceeded $1 billion,
and we certainly are expecting to have the same incremental gains on
that side of our income statement in the year 2007.
So I will open now the floor for questions, having a little over
seven minutes of time remaining.
BRAD, ANALYST, MODERATOR, CITIGROUP: Any questions for Tim?
Maybe I'll just kick it off real quickly, Tim. You talked about --
briefly about the opportunity created by the repeal of the
single-holder rule and the opportunity to buy the wholesale
consolidated loans, which you did a little bit in the fourth quarter.
I think you said in '07 expect to see 7 to 10 billion of volume
there. How much more can that grow? Can we see that be substantially
larger?
And could you talk a little bit about the returns on that business?
It's relatively low spread, but I understand it requires less capital
than the other businesses, as well.
TIM FITZPATRICK: Certainly. The dynamics of that space are quite
looming for us. As we've put together a business plan going into this
for the first year, these are still federally insured assets,
recognizing that they have about 2X to life of a standard Stafford
unconsolidated loan. They certainly lengthen out a far greater, if
you will, annuity stream for us. And while we would post the same,
say, 50 basis points of capital to that type of a federal
consolidated asset, measuring that in a cost and a value to us of
anywhere between 35 and 50 basis points after servicing provides a
very healthy [still] return on capital.
And we do expect to be able to build this business measurably. We
don't necessarily [inaudible] ourselves out beyond what is ahead of
us for the next 12 months, but we can certainly easily see ourselves
capturing almost an entirely new path of federally -- federal earning
assets that can aggregate anywhere between, I would say, 40 to $60
billion in the next three to four years, which is an add to the
balance sheet that Sallie Mae has never had. So when you think of the
track record of building ourselves to where we are today, roughly
$145 billion of earning assets, that has taken 34 years of
accumulation, since we were founded in 1972. We can find this new
market that has been authorized by the repeal of the single-holder
rule to use our skill sets, use our marketing advantage, and use, if
you will, the bandwidth of our servicing platforms to be in a
position to capture loan consolidations from other originations
better.
So we look at this as both opportunistic. We feel both ambitious in
our drive to really put these high-quality, high-insured,
longer-term, annuity-like -- they would be more like an annuity
revenue stream than a margin basis. Most of you that look at our
interest margins realize that the retail assets that we bring on
carry about 180-basis-point spreads, and these certainly are going to
be quite different as we'll be paying a price for these in the
marketplace but paying a price that will still allow us to earn a
relatively good return to our shareholders.
Yes, up here?
UNIDENTIFIED AUDIENCE PARTICIPANT: Hi. Just a question on how
difficult do you think it's going to be in Washington to recast the
debate in terms of the true economics of the direct lending program?
You know, you have the sort of -- the CBO report that basically says
it's cheaper to do a direct loan than it is private sector and then
kind of the overwhelming vote in the House for the proposal for the
surgical rate cuts on the subsidized Stafford. How hard is it going
to be for Sallie to kind of get the true numbers in there?
TIM FITZPATRICK: Well, life is never easy in Washington, to start
with. Recognizing the front end of your question on the real true
merits and the cost of the direct loan program, it goes certainly
beyond the CBO scoring, and where we're putting most of our efforts
through both the lobbyists that certainly have been representing the
Democratic side of the chambers, as well as the Republican side,
history provides the best grade to those that voted on the merits of
the direct loan growth 12 years ago.
One can't erase what was put in the front of a Senate committee and a
House back in 1993 to authorize the direct loan program, and it was
represented strongly by then-President Clinton, Senator Kennedy, and
a host of others. They -- and as you probably have noticed, they very
seldom reference back what didn't work. In fact, there's no legacy of
that in any of the text that the Democrats have been populating out
in the marketplace other than we're going to re-energize the direct
loan program. Forget that it didn't work. Forget that it cost the
government 21 billion, and so they're saving 5 billion. Forget the
fact that it didn't capture 60% of the market share; it ended up
plateauing at 32% and retreating today to 20%. Those are the facts.
We are attempting to take facts to one side, and CBO is obviously
projections, right? That's the future, and if the CBO was so far off
in 1993, of which they placed all the requirements of what would be
saved by having the government run the Title 4 loan program, I would
-- it hits them right between the eyes, and we are positioning to be
certain that some of the leading Democratic Senators, some of the new
incumbents, have enough of that data to be -- to articulate that
without getting into the personal ambitions of others at the Senate
level and look at this in the most practical way. I would say that
practicality always doesn't find its path to closure in Washington.
But we're going to take the approach, first, on the actual results of
the DL program, and then, second, when you look at CBO's scoring,
they -- I believe they've qualified some of their reports insomuch
that they've actually remarked that it's an apples-to-orange
comparison. And, Steve, is that factual on what they've put out
publicly?
STEVE, SLM CORPORATION: Yes, I think that's correct [in essence].
TIM FITZPATRICK: They don't add up the -- and, gees, it almost sounds
like Enronitis again. They forget to put in all the administrative
and overhead costs. Well, anybody in public -- in the public sector,
certainly, if we forewent all of our overhead and operating expenses,
we'd look pretty good, too. And they forget the fact that private
sector pays 36 to 35% taxes on all the revenues that the private
sector brings into the program. And they forget the risk requirements
on managing credit risk over a period of maybe choppy interest rate
cycles, that the discounted rates that the DL program used seem to be
somewhat inconsistent over the best practices that both the private
sector, along with what general good accounting principles should be
beholden to.
So we're going to go on both paths. There's certainly no easy street
to take the right both ammunition and this will be certainly done
with those that are industry experts. We certainly won't be able to
represent ourselves; however, we didn't create the facts. We only
adhere to the rules and regulations of the programs and its merits.
The gentleman in the back first, and then I'll -- halfway back.
BRAD: We can go over because -- we have time to go over. Keep going.
We have another five minutes.
TIM FITZPATRICK: Five minutes? Okay.
I don't know whom I have to yield to. You know, when we watch C-Span,
you have to yield your five seconds --
BRAD: Yield to a coffee break.
TIM FITZPATRICK: I'll just yield to the gentleman in the front here.
Go ahead.
UNIDENTIFIED AUDIENCE PARTICIPANT: Your arguments for the benefits of
your program versus the direct lending program are persuasive. And
let's say that a lot of the people in this room agree with you. As a
person who hasn't dealt with Washington, I'd like to know why you
cast those who favored the other position, the sponsors of the bill,
as the people with personal ambition? What's that all about?
TIM FITZPATRICK: What's that all about? Well, I'm not going to get
into the same type of spitting behavior some of our leading
Congressional and Senate heads of state are other than to say this.
Perhaps when you've erred so significantly and if you were the
sponsor of a bill that didn't really make the progress it was
supposed to, you certainly have a desire to right-size that error
personally to save face. I think that's human nature. And if you were
standing amongst your constituents in Washington and you suggested to
your fellow Senators that this is the best bill to pass to tame
school behavior and rid the program of the private sector's greed and
it will work -- and that was a convincing way of getting people to
vote for a bill 12 years ago -- and it failed miserably, you're still
in office.
There are probably still whispers around that are reminding you of
your personal failure, and I would say that I think each of us has a
little bit of fire and passion in our bellies, and I would suggest
unless someone would be willing enough to come forward and say,
"You know, it didn't work. It didn't work because the private
sector did a better job in the merits of the DL program," that
has yet to be cast, and I truly believe that some of the new and
existing people in the Senate will articulate the merits of what it
is that the program out of personal drive and ambition has provided
in real value to whom? To schools, to students, and taxpayers. And
when somebody authors a program and the program fails, I truly
believe that that takes on a little bit more of a personal tone and
ambition than it's supposed to.
Yes?
UNIDENTIFIED AUDIENCE PARTICIPANT: Thank you. Pursuing the theme of
this morning a little bit, acknowledging that the direct lending
program didn't work, couldn't an argument, however, be made that
you're still too profitable, you're making too much money, 19%
compound earnings growth, high return and lots of free cash flow? You
know, great business model but one that's sort of too profitable for
operating in the public space. Do you think there's any sentiment in
that direction? And if there are threats to your profitability, maybe
not direct ones like a direct lending program, but where do you think
they would likely arise? Is it spreads or --
TIM FITZPATRICK: I mean it's a fair look and peek into your return on
capital, the progress of having compounded 17, 18% return EPS-wise
year over year. One has to look at what has to be first built to
achieve those levels. You need scalability. You need a long-term
commitment in order to get to the threshold of being 50 billion, 60
billion, $80 billion efficient before you begin seeing the
consistency of those returns.
Having said that, one has to ask, well, if it's such a good business
as you have suggested, why aren't there 15 other banks or insurance
companies or other corporate financial service companies in the same
space? We're not gating people out of this space. And I think the
answer lies within.
To really get to these returns, you need a long-term capital plan,
you have to invest hundreds of millions of dollars into technology,
and you have to be efficient, and you have to be able to build an
infrastructure that can work with the disciplines of a
government-regulated business.
There are a lot of corporations that do not enjoy that infrastructure
requirement that have to have a testament to your systems, your --
the elements of the data that you are required to report timely and
regularly to a regulatory body, and for that, I guess the way I would
challenge the robust of these earnings is there should be more
players in this space. Those that are in this space in a smaller way
-- and you can certainly look at companies like [STU] that's publicly
traded.
There are one or two other publicly traded companies -- I don't
believe they're at the levels you just indicated and the returns that
we are showing here for -- they do not have that scalability, nor
have they invested the hundreds of millions of dollars of capital
each year over the last, say, 10 or 11 years to make us a leader in
this industry.
And I think as a leader in any industry, we have a right to make a
good return for our shareholders. We also realize that the margins on
these products, when you think about what we earn on a spread of a
federal asset, is a hair over 100 basis points. Now, certainly, risk
capital isn't certainly something you have to look at when the
government's covering, say, 97 to 99% of the risk, but the difference
between 99 and 97 looms on how strong your infrastructure is to get a
higher risk here than a lower risk here. And all those elements are
factored into the model of economics.
Justifiably, we've built an infrastructure that makes us the best at
what we do, and certainly, I truly believe we should be rewarded for
that, and we are not at all ashamed of what we've earned. We've
earned a fair dollar for the services that we've provided, and we've
been under the whole direction of a federal loan program like
community banks and other small banks were involved in years ago that
decided to leave the business because they couldn't find the same
type of return composition that we've been able to manage over the
last decade.
BRAD: I think we'll have to break it there. Thanks very much, Tim.
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