SLM - Q4 2023

Transcript

Operator (participant)

Hello, and thank you for standing by. Welcome to Sallie Mae 2023 Q4 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one one on your telephone. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I will now like to hand the conference over to Melissa Bronaugh. You may begin.

Melissa Bronaugh (Head of Investor Relations)

Thank you, Tawanda. Good evening, and welcome to Sallie Mae's fourth quarter 2023 earnings call. It is my pleasure to be here today with Jon Witter, our CEO, and Peter Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations, financial conditions, and/or cash flows, as well as any potential impacts of the COVID-19 pandemic on our business. During this conference call, we will refer to non-GAAP measures we call our core earnings.

A description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2023. This is posted along with the earnings press release and the earnings presentation on the Investors page at salliemae.com. Thank you, and now I'll turn the call over to Jon.

Jon Witter (CEO)

Thank you, Melissa and Tawanda. Good evening, everyone. Thank you for joining us today to discuss Sallie Mae's fourth quarter and full year 2023 results. I'm pleased to report on a successful year and discuss our outlook for 2024. I hope you'll take away three key messages today. First, we delivered strong results in 2023. Second, our credit performance is in line with the expectations we laid out in the beginning of the year, and we anticipate that we will experience continued improvement in the coming year. And third, we believe we have strong momentum entering 2024 and are well-positioned to deliver on the investment thesis we introduced approximately a month ago. Let me begin with the discussion of 2023 results.

GAAP diluted EPS in the fourth quarter was $0.72, compared to a loss of $0.33 a share in Q4 of 2022. Our full year GAAP diluted EPS was $2.41, compared to $1.76 in 2022. Without the non-cash write-down of the intangible asset associated with the Nitro trade name and trademark, which Pete will discuss in more detail, GAAP diluted EPS would have been $0.91 for Q4 and $2.59 for the year, well within our guidance expectations for 2023. Private education loan originations for the fourth quarter of 2023 were $839 million, which is up 2% over fourth quarter of 2022. Consistent with guidance provided on our last earnings call, our full year originations ended at approximately $6.4 billion, which is up 7% over 2022.

Application volume also increased year-over-year by 10% and has been fueled by a 12% increase in underclass applications. This is especially important given the greater serialization potential and lifetime value of this group. In a year where students returned to campus in record numbers post-pandemic, we are pleased that we were able to maintain our 55% share of the private student loan lending market, according to the most recent industry report. Credit quality of originations was consistent with past years. Our cosigner rate for the fourth quarter of 2023 was 84%, up slightly from 82% in the fourth quarter of 2022. Our average FICO score for the fourth quarter of 2023 was 750, an increase over the fourth quarter of 2022 at 747.

For the full year, our originations were 87% cosigned and had an average FICO score of 748, both improvements over full year 2022. We remain focused on credit and our path back to normalcy and are pleased that we have seen the expected improvement in performance this year. We ended the year with net charge-offs as a percentage of average loans and repayment of 2.4%, and at the lower end of our net charge-off guidance for the year at $375 million. Having assessed the underwriting, programmatic, and operational changes made to date and segmented the performance of our portfolio, we continue to believe that the right net charge-off goal for our portfolio is the high 1%s-low 2% range.

Understanding that we won't see a reversion to those rates immediately, we are happy with the progress made from 2022 to 2023 and expect continued progress from 2023 into 2024, of course, assuming no changes to the broader economic environment. We did see a rise in delinquencies in the fourth quarter to 3.9%. We believe this is largely the mechanical result of borrowers enrolling in new programs, who are in their qualifying period versus a broader worsening of performance. In fact, we are seeing early indicators of success of our new payment programs, and in December, observed the lowest roll-to-default rate in over two years. Turning to capital return, in the fourth quarter of 2023, we repurchased 6 million shares at an average price of $15.43.

We have reduced the shares outstanding since January 1, 2023 by 9% at an average price per share of $15.64, and by approximately 50% since January 1, 2020, at an average price of $15.93. Before I hand the call over to Pete, I'm pleased to share that last week we agreed to indicative pricing terms for the sale of approximately $2 billion of private education loans. We expect the transaction to close in early February. With general market improvements in the consumer lending segment during the fourth quarter of 2023, as well as the improvements we saw in ABS spreads, we are encouraged by the price that we received, which is in line with our expectations for the year. We expect to sell additional loans in 2024.

Market conditions will dictate the timing of additional sales, and volume will be driven by our balance sheet growth targets. We expect our balance sheet growth to be in line with or slightly above the strategy we shared at our investor forum just a month ago, roughly 2%-3% balance sheet growth in 2024. Pete will now take you through some additional financial highlights of the quarter. Pete, over to you.

Peter Graham (CFO)

Thanks, Jon. Good evening, everyone. Let's continue with a discussion of our loan loss allowance and provision. Our total provision for credit losses on our income statement was $16 million in the fourth. The provision build of $86 million was driven almost entirely by volume increases and was offset by a $69 million reduction associated with the $1 billion loan sale that closed in the fourth quarter. This fourth quarter provision represents a decrease of $182 million from the prior, and a $282 million decrease from the year-ago quarter. Net charge-offs for our private education loan portfolio in the fourth quarter were $93 million, or 2.4%, compared to $116 million, or 3.1% in the year-ago quarter.

Full-year net charge-offs were $375 million, or 2.4%, and at the low end of our guidance for the year. These provisions and net charge-offs in the fourth quarter reduce our private education loan reserve to $1.4 billion, or 5.9% of our total student loan exposure, which under CECL includes the on-balance sheet portfolio, plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of $2.2 billion. Our reserve rate continues to improve as compared to 6% in the third quarter of this year and 6.3% at the end of 2022.

Private education loans delinquent 30 days or more were 3.9% of loans in repayment, an increase over 3.7% at the end of the third quarter, as well as 3.8% at the end of the year-ago quarter. We believe this uptick in delinquencies is primarily driven by the increase in enrollment in our new loss mitigation programs that Jon discussed earlier, rather than a negative credit indicator. year-after-year, our quality loan portfolio generates significant net interest income. For the full year of 2023, we earned $1.6 billion of net interest income, higher than full year 2022. Net interest margin for 2023 was 5.5%, compared to 5.3% in 2022.

Going into 2024, we continue to expect our NIM to be in the low- to mid-5% range. Fourth quarter operating expenses were $143 million, compared to $167 million in the prior quarter, and $138 million in the year-ago quarter. Operating expenses are down from the prior quarter, which was our peak lending season. Total non-interest expenses in the fourth quarter were $202 million, compared to $170 million in the prior quarter and $140 million in the year-ago quarter. The increase to non-interest expenses in the fourth quarter relates to the write-down associated with the Nitro trade name and trademark.

We continue to be very pleased with our acquisition of Nitro, as it has helped us build a more resilient marketing model and driven down our cost to acquire. Interestingly, as we've integrated Nitro and begun to test the effectiveness of their programs and strategies, we've seen performance meaningfully better using the Sallie and Sallie Mae names and platforms. For example, when testing performance with one of our affiliate channels, the Sallie Mae brand performed 68% better than the Nitro brand in measuring conversion rates. We believe that continuing to build on the Sallie and Sallie Mae platforms will accelerate growth. With this decision to stop using the Nitro brand, we determined that the intangible asset associated with the Nitro trade name and trademark need to be written down to zero.

As a reminder, this was an intangible asset established using a 10-year life....That would have continued to incur amortization expense of approximately $7 million per year until 2031. The decision to write this asset down this year resulted in a non-cash charge of $56 million. That impacted earnings per share for the quarter by $0.19 and for the year by $0.18. Absent this write-down, non-interest expenses would have been $146 million in the fourth quarter and $629 million for the full year, within our guidance expectations. Finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 21.4% of total assets. At the end of the fourth quarter, total risk-based capital was 13.6%, and common equity Tier 1 capital was 12.3%.

Another measure of loss absorption capacity of the balance sheet is GAAP equity plus loan loss reserves over risk-weighted assets, which was a very strong 15.8%. We believe we're well-positioned to grow our business and return capital to shareholders going forward. Now I'll turn the call back to Jon.

Jon Witter (CEO)

Thanks, Pete. 2023 was a year of incredible progress. We feel like we're on the right path to normalizing credit and are happy to finish 2023 with credit performance consistent with our previous expectations. We experienced excellent originations growth in 2023 and expect considerable originations growth in 2024 and 2025 as one of our largest competitors exits the business. We were also able to return meaningful capital to shareholders through the successful loan sale and share buyback arbitrage strategy and are already seeing positive momentum in this space for 2024. Just over a month ago, in our investor forum, we introduced an investment thesis built on four principles. First, strong and predictable balance sheet growth. Second, strong EPS performance and return on common equity. Third, meaningful capital return. And fourth, all within manageable risk.

As we embark on the next year, we expect to deliver on these principles. We believe that meaningful origination expansion, coupled with loan sales to moderate growth and a steadfast focus on expense management, will allow for both organic earnings growth and generous capital return to shareholders. It is in this context, I'd like to provide our guidance for 2024. Specifically, we expect full year education loan origination growth of 7%-8%. Total loan portfolio net charge-offs will be between $340 million and $370 million, or 2.2%-2.4% of average loans in repayment.

Non-interest expenses for the full year of 2024 to be between $335 million and $655 million, and full year diluted non-GAAP core earnings per share between $2.60 and $2.70. In addition, today we are announcing a new share repurchase authority to buy up to $650 million of common share stock over the next two years. While dependent on share price, continued planned loan sales, and other factors, we expect to repurchase roughly half in 2024 and the remainder in 2025. We expect to continue programmatically buying back our stock over the next two years and look for opportunities to buy more on days when market conditions are favorable. We continue to support our longer-term capital return plans and our clear commitment to shareholder return.

With that, Pete, let's go ahead and open up the call for some questions. Thank you.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, to ask the question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Arren Cyganovich with Citi. Your line is open. Please stand by.

Arren Cyganovich (VP and Equity Research Analyst)

Hello?

Operator (participant)

Our first question comes from the line of Arren. Your line is open.

Arren Cyganovich (VP and Equity Research Analyst)

Hi, can you hear me?

Operator (participant)

Yes, we can hear you.

Jon Witter (CEO)

We can hear you.

Arren Cyganovich (VP and Equity Research Analyst)

Got it. Thank you. Sorry about that. So it looks like you have some modest market share increases soon with one of your larger competitors exiting the market this year for next year. Are there any other kind of items of note that you have included in there in terms of, like, enrollment trends, et cetera, for the 2024-2025 academic year?

Jon Witter (CEO)

Yeah, Arren, it's Jon. Let me take that. You know, we build up our projections bottom up and top down. So we do a bottom-up analysis, where we're absolutely looking at sort of enrollment, you know, trends and the like, and we do sort of a top-down analysis, which is more of a share-based approach, and we triangulate those two things together, and this year, those numbers were pretty close. So yes, we do have, you know, views around enrollment increases. Yes, we do have views around the effectiveness of our various marketing programs, which we feel have been getting more effective each year over the last several years, given both organic investments and the acquisitions we've done.

And yes, we have assumptions in there around, you know, the potential for a competitor to be exiting the space. I do think the thing that's important, and I'll just say it proactively, you know, any exit will likely impact the fall peak season more than it will impact the spring. And so you may remember from my comments, we believe any market share gains driven by that will likely be spread over two years, not entirely resident just within 2024.

Arren Cyganovich (VP and Equity Research Analyst)

Yeah, that makes sense. Second question on the gain on sale. It looked like the 4Q is a bit lower than normal or what it has been recently. Was that because it was struck during the third quarter when rates were high? And I believe you said that you expect that to improve in the first quarter sale of the $2 billion.

Peter Graham (CFO)

Yeah, Arren, this is Pete. That's right. At the timing of when, you know, when that deal was struck, that was sort of at peak rates. And we've seen, you know, obviously improvement in rate, in the rate environment as we moved into the year. And so again, as we said in the prepared remarks, it's largely in line with what our expectations for this year were.

Arren Cyganovich (VP and Equity Research Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is open.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Great, thanks. Maybe, you know, Jon, if you could talk a little bit about how you think about, you know, the capital deployment. The $650 million is, you know, is a nice large number. But and, you know, given the fact that you've already agreed to, you know, the first loan sale of the year, can you talk about the pace of that capital deployment over the next, you know, 12 or 24 months?

Jon Witter (CEO)

Yeah, Moshe, happy to, and, you know, Pete, jump in if you want to add anything to that. You know, I think if you look back historically, really given the low rate environment, you know, our philosophy has been one of deploying capital, you know, very, very quickly, because of the, you know, potential impact that that has on NIM. While we do not divulge specific plans or timing around capital deployment, I think you should assume that higher rates, you know, give us a bit more flexibility to be thoughtful, strategic, and a bit more opportunistic about how we deploy that capital. And so, you know, I think you should expect, and I think we said this in our comments, that we will take, you know, a more programmatic approach.

We'll obviously look to be opportunistic, you know, at times where we think, you know, market conditions are favorable for buybacks. But I think we also want to make sure that, you know, we are being, you know, sort of consistent in our approach or reasonably consistent in our approach across that time period.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Great, thanks. And maybe just as a follow-up, I mean, one of the things that we talked about a little around the time of your call last month was, you know, kind of the dynamic elements of your plan. Could you talk a little bit about how you would think about if, you know, if the market share gains and origination gains later in the year were better than you had, you know, than you kind of included in your forecast? I mean, how do you think about what you kind of do with that difference? You know, is it, is it something that you're more likely to increase the amount of loans sold or increase the amount staying on the balance sheet? Can you talk about just your thought process?

Jon Witter (CEO)

Yeah, I'm happy to. You know, I think if you go back to our investment thesis, Moshe, you know, number one on that is strong and predictable balance sheet growth. And I think, you know, in my comments, we talked about likely balance sheet growth this year in the 2%-3% range. I think you should assume that that is going to be sort of the primary determinant of how much loans that we sell, you know, versus how much we keep on the balance sheet, sort of plus or minus. You know, and obviously, if we end up in a place where market conditions are extremely favorable to loan sales, you know, we might, you know, sort of push that a little bit to the lower end.

If we found a place where market conditions weren't as favorable, maybe we push it a little bit to the upper end. But I think our goal, you know, very much as we discussed in the investor forum, is to have really measured, predictable balance sheet growth, couple that with really strong operating leverage to be sure that we're driving quite attractive EPS growth, but also returning during that time, significant capital to shareholders. So I think that's how we think about it. You know, it is, again, I think, really based on predictable balance sheet growth as, you know, as we say in the investment thesis.

Moshe Orenbuch (Managing Director and Senior Equity Research Analyst)

Great. Thanks so much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Terry Ma with Barclays. Your line is open.

Terry Ma (Senior Equity Research Analyst)

Thanks. Good afternoon. Can you maybe just comment on the credit outlook for this year? It seems like the high end of the range implies not much improvement compared to 2023. So maybe just talk about what gets us or gets you to the high end versus the low end, and then longer term, how should we think about the time frame for getting back within your target underwriting levels?

Jon Witter (CEO)

Yeah, happy to. You know, I think we've tried to give a range, obviously recognizing it's sort of early in the year, and you know, we continue to be, I think, in a little bit of a volatile sort of economic environment. And I think, you know, of course, want to be sensitive to that. You know, what we have effectively done in building up that forecast is a pretty deep look at sort of the programs, the new programs we've developed, the use of those programs, the uptake of those programs, sort of the effectiveness we've seen, recognizing some of those are in early days.

You know, we have looked at the credit and underwriting changes that we've made and sort of the differential performance between, you know, loans that we continue to underwrite versus those we don't. We've looked at things like the standard aging and vintaging of our portfolio, understanding that different loans behave differently over time. And we've looked down into the details of those portfolios at things like, you know, balances and fixed rate versus variable rate, again, knowing that the performance of some of those things is a little bit different. And I think at the end of the day, you know, that's, that's sort of how we arose, you know, kind of, you know, came to the view.

I think the thing that would take us to the lower end is if we, you know, felt like the programs that we had put in place were, you know, slightly, you know, sort of better and more effective than we've seen in the early days. And I think the things that would take us to the upper end would be, you know, sort of the opposite of that. You know, I think what you ought to take away is we are and continue to be very confident in sort of year-over-year improvement in credit. I think that detailed analysis I described makes us, you know, more comfortable, as I said in my talking points, that the high 1%s-low 2%s is really the right place for us to be.

I think you should expect, you know, and we believe that, you know, we'll see continued performance improvement in 2025, of course, assuming no broader macroeconomic changes. I have to say that. Whether we get all the way back to, you know, a normalized level of 25 or just close, you know, I think it's a little bit too far out to make that call, but I think we are confident in continued and meaningful improvement.

Terry Ma (Senior Equity Research Analyst)

Got it. And then, longer term for your market share, how should we think about how that evolves over the next few years as the competitor fully exits?

Jon Witter (CEO)

Yeah, you know, I think we would, assuming all of those plans that, you know, move forward as, you know, the media has suggested, I think we would expect that there will be, you know, jump ball market share for us to compete for, much like there was when Wells made the decision to leave the marketplace several years ago. You know, we will compete for that in exactly the same way that we compete for any other business. We'll decide which of that business we like, versus not based on credit characteristics, pricing characteristics, all sort of resulting in the expected ROE of those loans. My guess is we will end up competing for and trying to compete for a good piece of it, but I don't know that we'll necessarily compete for all of it.

It's just too early to sort of tell. But I think our hope is that this does represent, you know, a near-term, sort of multi-year, but one-time opportunity to increase share, and we're excited to compete for that in what is, and I think continues to be, you know, a nicely competitive marketplace, where, you know, we expect other competitors to show up and very much compete with equal zeal as we're competing.

Terry Ma (Senior Equity Research Analyst)

Got it. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

Sanjay Sakhrani (Managing Director)

Thanks. I guess question for Pete. Could you just talk about the 2024 assumptions on level of loan sales, like the gain on sale margins, and maybe what you're assuming in terms of share repurchases in the guide?

Peter Graham (CFO)

Yeah, we, we kind of laid that out at the investor forum. In large part, our guidance is pretty similar to that. And in terms of sizing of the overall program this year, you know, again, we're targeting that sort of 2%-3% balance sheet growth. And, you know, that will determine the ultimate sort of overall level. The $2 billion that we've agreed indicative terms on is a good, you know, start to that program for the year. And we'll begin to, you know, utilize the capital generated by that for, as Jon said, a programmatic approach to share repurchase.

And then, you know, when we do a second installment of loan sales at some point later in the year, we'll build on that as we go.

Sanjay Sakhrani (Managing Director)

And then, like, that $2 billion that's been sold already, that's consistent in the range that you guys articulated at the investor forum, sort of like mid-singles, a little bit higher than that?

Peter Graham (CFO)

Correct.

Sanjay Sakhrani (Managing Director)

Okay. And maybe just on rates, interest rates, could you just remind us sort of how, as rates come down, that affects the P&L and sort of, you know, what's been done around rates and what you've assumed in the guidance?

Peter Graham (CFO)

Yeah, sure. So, over the course of the last, you know, couple of years, we've had a little bit of a tailwind on our NIM. Because, in the rising rate environment, our loans tend to reprice faster than our liabilities reprice. And that's why, you know, we've kind of peaked at where we did in 2023. Our expectation is that that will start to moderate, which is why our guidance for this year around NIM is lower than where we were last year. And we're not necessarily taking a position on rates. We're just acknowledging that we do have some timing disconnects in terms of pricing.

And you know a bias over the course of this year for incrementally lower cost of funding as our liabilities reprice.

Sanjay Sakhrani (Managing Director)

How many rate cuts have you factored in here?

Peter Graham (CFO)

We base our assumptions on, you know, kind of forward curves. So I think the market assumption there is probably five rate cuts.

Sanjay Sakhrani (Managing Director)

Okay. So there's a punitive impact of the five rate cuts in the NIM right now. To the extent that doesn't happen, that would, that should help all else equal?

Peter Graham (CFO)

Yeah, perhaps. I mean, again, it's anytime you're forecasting future interest rates, there's always going to be some level of variability that's unknowable until it actually happens.

Sanjay Sakhrani (Managing Director)

Got it.

Peter Graham (CFO)

We tend to run a fairly balanced book. So any moves should be, you know, kind of gradual and likely within the guidance range that we've articulated.

Sanjay Sakhrani (Managing Director)

Okay, great. Thank you so much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Kaye with Wells Fargo. Your line is open.

Michael Kaye (VP and Equity Research Analyst)

I was hoping you could dig a little bit more into those new borrower assistance programs that you rolled out and you alluded to. I know it's early days, but could you just give us some of the early signs of how that's performing? And secondly, could you talk about how that enhanced recovery strategy, which you recently implemented, how's that going? Is it going according to plan?

Jon Witter (CEO)

Yeah, Michael, it's Jon. Happy to. You know, in terms of the specifics, you know, there's a few different flavors of programs we've developed. And, you know, as quick context, you will remember with the credit administration changes we made, you know, several years ago. You know, we moved from having, you know, a very effective, sort of, but very general forbearance program to a strategy where we had more programs, but much more tailored, much more focused on specific customer needs. That had the advantage of being aligned, and we've, I think since at the time with OCC guidance. It also allows us, you know, again, to be really efficient and effective in the design of those programs and really test for their effectiveness over time, recognizing that they're all still pretty new.

So to give you a sense of that, you know, we've developed a newer early to repayment assistance program. This is specifically designed to help folks who are literally just coming out of school and starting to take on their financial obligations. We've developed a term extension and loan modification program that allows us to tailor and offer slightly more combinations of rate and tenure modification. You know, again, really to the idea of sort of specifically tailoring the sort of mod to the unique needs or circumstances of that borrower. And we haven't done it yet, but we are looking at establishing, you know, a more permanent loan modification program for borrowers who are really experiencing, you know, longer term hardship and or sort of a permanent reduction in their income.

And so, you know, hopefully, that gives you a little bit of a sense of the kinds of programs. But again, I would put it in the context of very tailored and specific and focused programs as a replacement or a substitute for the more general and flexible program that we had before. I think we like the results we're seeing so far, Michael, to answer that part of the question. You know, I think we are seeing first and foremost, our agents being able to communicate the benefit of these programs to our customers. I think the programs that we've developed are largely matching what customers need. We see that because we can see sort of the improved uptake of those programs when we offer it.

You know, we can literally go back and listen to those calls and monitor all of that very, very closely. It is too early to be able to start to do what we will eventually do, which is the, you know, sort of longer term, you know, loss curves of those programs and whether or not they are generating, you know, meaningfully better outcomes or not. That will certainly be a part of the fine-tuning that we will do over the, you know, the quarters ahead. But obviously, the programs have to run their term, and then we have to observe behavior and success of customers going forward....

I think it is really important to note, you know, our goal here is, you know, to work as productively as we can with all of our borrowers who have fallen on hard times. We recognize that, you know, there is a human behind every one of those customers who is struggling with their loans, and we want to be as helpful as we can. We think that this targeted approach is really a great step in that direction.

Michael Kaye (VP and Equity Research Analyst)

And at the part about that enhanced recovery strategy, I know you've made some changes. How's that going?

Jon Witter (CEO)

Yeah. It has continued to perform along our expectations. There's no update there, and we continue to believe that that is the right program and have confidence in that decision.

Michael Kaye (VP and Equity Research Analyst)

Great. My second follow-up question is, is there any early signs of increased competition from new and existing players, you know, with one of your competitors looking to exit? For example, I saw word that the Carlyle Group purchased $415 million of private student loans and made a strategic investment in a company called Monogram.

Jon Witter (CEO)

Yeah, Michael, I think it's sort of too early and not the season to really see the change in competitive intensity. You know, you have to remember, number one, lots of the spring disbursements happen in the very end of 2023 or the beginning of 2024, but they were really set up by the great work that we and our competitors do during the fall peak season. You know, by the way, if you look at the announcement of the competitor in question, you know, they were very clear to articulate that, you know, they were going to stop originations on February first, which, you know, we imagine is a nod to that dynamic. They obviously want to see the business that they've already committed through, you know, through to a natural conclusion.

I think we'll really start to sort of understand the change in competitive dynamics as we move into peak season this summer. You know, as it relates to the Monogram investment by Carlyle, you know, I'm not sure I read a lot into that. I think there's been, you know, certainly interest by private equity players in all manner of asset generators for a while now. That's a very clear part of their strategy. What I take away from it is, it is a sign that another really smart and savvy investor, Carlyle, sees the incredible value in this asset class. And I think we view that as net, net a positive.

Michael Kaye (VP and Equity Research Analyst)

Okay, thanks.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of John Hecht with Jefferies. Your line is open.

John Hecht (Managing Director)

Afternoon, guys. Thanks for taking my questions. I guess going back to Sanjay's inquiry about NIM, maybe just talking about the asset side, I mean, you do have a mix of some adjustable rate mortgages or, excuse me, student loans. Can you tell us kind of the cadence of how the assets move specifically with interest rates?

Michael Kaye (VP and Equity Research Analyst)

Yeah, I would say in large part, they're SOFR-based, and they're priced, repricing on a monthly cadence. Whereas, you know, as I said earlier, on the funding side, it tends to be more quarterly resets.

John Hecht (Managing Director)

How much of the assets reprice monthly against SOFR?

Peter Graham (CFO)

The bulk of our floating rate or variable rate loans would be SOFR-based.

John Hecht (Managing Director)

Okay. And then, maybe, the second question I have is, the provision against unfunded commitments. You know, I think we're familiar with CECL and how you would provision against a new loan, but maybe, can you refresh us about how you provision against unfunded commitments? Because I think the ratio fluctuated this year versus last year in the same period.

Peter Graham (CFO)

Yeah, I think in general terms, we're taking a reserve rate, and we're applying it to that commitment. And so we've -- Again, under CECL, we've got to fully provision for our life of loan expectation for loss. And we do that, you know, in a programmatic manner for the new commitments. And then as those fund, we transfer balances out and into the overall provision. But when we give statistics around our, you know, overall rates, we're combining those together. So the rates I was quoting in my prepared remarks is including kind of a combined view of provision on the, you know, the loans on balance sheet, as well as the piece related to unfunded commitments.

John Hecht (Managing Director)

Do unfunded commitments kind of as a percentage of seasonal originations, are they fairly, you know, typical or consistent, or is there some fluctuations in that part of the equation?

Peter Graham (CFO)

Again, it's going to be largely dependent on the, kind of the seasonality, and so we make those commitments largely in the peak season. We'll fund the first tranche of that as the students are entering the fall semester, and then, you know, the other piece will remain as an unfunded commitment, until the spring disbursements. Again, that's a generalization based on, you know, assumed two semesters and, you know, most university experiences. We have other programs for different types of schools that might fund slightly differently than that.

Sanjay Sakhrani (Managing Director)

Okay, thanks very much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Mark DeVries with Deutsche Bank. Your line is open. Mark, check to see if you're on mute. Mark, check to see if your line is on mute. Due to no response, I'll go to the next participant. Please stand by for our next questioner. Our next question comes from the line of Jeff Adelson with Morgan Stanley.

Jeff Adelson (Executive Director)

Hi. Yes, good evening. Thanks for taking my questions. So just to circle back on this exit from one of your large competitors, understood the potential benefits here to originations, but just also want to understand any of the other potential benefits that could flow through here. Are you contemplating any sort of benefit to your credit as a result of that, or could that be upside? And, you know, as we think about, you know, the loan sale of that portfolio, is there anything to be thinking about in terms of, demand or supply of loan sales in the market impacting your loan sales going forward?

Jon Witter (CEO)

Yeah, Jeff, we, you know, we have thought through it, and, you know, obviously, we have general industry knowledge and hypotheses about, you know, the nature of different competitors and where they, you know, sort of favor or disfavor within their buy box and underwriting grids. And I think, you know, we can make some educated guesses on that, but, but at the end of the day, you, you know, we don't have the level of insight that I think would allow us to, to make perfect assessments around, you know, sort of the impact that that would have on our credit. I think, you know, the, the general comment I would make is, you know, I, I think, we will continue to stay very true to our credit discipline.

We will continue to stay very true to our ROE sort of framework around, you know, how we think about the profitability of a loan. But I think it will sort of take a little bit of time to see how that plays through directly, which is why, you know, I think we've given a range around our origination guidance for the year, because it could obviously turn out in, you know, slightly more favorable ways or slightly less favorable ways. But I think all of the outcomes are still favorable ones. Remind me the second part of your question, Jeff.

Jeff Adelson (Executive Director)

Yeah, just as we think about-

Peter Graham (CFO)

I can take it.

Jeff Adelson (Executive Director)

Your loan sales with, with another $10 billion of sales coming into the market, just any sort of impact to be thinking about there or considerations?

Peter Graham (CFO)

Yeah, look, the demand for various asset classes, including our asset class, is pretty deep. You know, our discussions with various parties in the market, we don't feel like that's going to impact demand for our loans or, for that matter, for asset-backed funding in general as we move into this year.

Jon Witter (CEO)

Yeah, and in fact, Jeff, I would add, I think anecdotally, we heard when the last major competitor left the space, that it actually may have been a net positive for demand for loans because, you know, it was a large transaction. It encouraged lots of people to get smart on the space. It encouraged lots of people to allocate resources to the space, and obviously, there could only be one winner of that. So, I think we view it as, you know, at worst, a neutral, probably, you know, a slight positive. But, again, we feel like the market for the asset class is deep. We feel like it's matured significantly over the last half decade, and you know, we think there will be lots of positives that come from this.

Jeff Adelson (Executive Director)

Okay, great. And, and just on the $650 million repurchase authorization, I know you talked about doing half this year, half next year. Does that also contemplate the plan you laid out at the investor forum in, in kind of the base case for loan sales, or, is that more of a conservative outlook on your part? Because, you know, it does look like half and half is a little bit below what you did, this past year.

Peter Graham (CFO)

Yeah, I mean, it's roughly in line. You know, we didn't say exactly half. We said, you know, approximately half. And as I said in my remarks on a prior question, you know, the pace and amount of that will be governed by the loan sales that we do this year. We're off to a good start with the $2 billion that will close this quarter. And you know, the timing and amounts will be dictated by you know, when we do additional loan sales as we go through the year.

Jeff Adelson (Executive Director)

Okay, and just one last one for me. On federal student loan payments, you know, anything you can update us on what you're seeing from your borrowers that are making those payments? I think there are still some puts and takes to come here with, you know, the full benefit of the new income-driven plan kicking in in July, but then you have this on-ramp expiring later in the year. Just maybe give us a quick update on what you're seeing, what you're expecting there.

Jon Witter (CEO)

Yeah, Jeff, happy to. You know, we track as best we can, you know, sort of the performance of our customers who have federal student loans and those who don't. You know, we don't know as perfectly who has, you know, enrolled in which, you know, income-driven repayment program, you know, or, you know, sort of other programs. But we have a pretty good sense of it. As of the last month I saw data for, which was pretty recently, we have not yet seen any material divergence in performance between those with or without federal loans. And so, you know, we continue to watch it closely. We recognize that the on-ramp is, you know, a powerful tool for customers. We understand that the income-driven repayment plans are a powerful tool for federal customers.

But as of yet, we've not seen anything that would strike us as a material divergence.

Jeff Adelson (Executive Director)

Perfect. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Vincent Caintic with Stephens. Your line is open.

Vincent Caintic (Specialty and Consumer Finance Analyst)

Good afternoon. Thanks for taking my questions. First one, wanted to get your industry thoughts on the student loan refinancing market, you know, on the expectation of five rate cuts, you know, what that would do. And then for Sallie Mae, specifically, how you're thinking about maybe any consolidation pressure or your thoughts on the balance sheet growth. Thank you.

Peter Graham (CFO)

Yeah, I'll take first crack, and Jon, you can add on.

Vincent Caintic (Specialty and Consumer Finance Analyst)

Okay.

Peter Graham (CFO)

If I miss any of the high points. You know, obviously, the consolidation market is really a rate-driven, you know, exercise, and so as rates are going down, we do expect a return in some respect of the consolidation, you know, players. But I think the wild card in it for us is what impact the new programs in the federal space have on sort of deterring folks from consolidating their loans. Because generally, you know, that's gonna be a big factor in terms of whether someone wants to give up the potential benefits that they might be able to get in the federal programs in order to get an overall lower rate. So it's something we've got our eye on.

Certainly, we have expectations in our outlook for what consolidations will be, and that's considered within our guidance. But, yeah, I think that's one that's gonna have to play out a little bit.

Jon Witter (CEO)

Yeah, and Vincent, I think the only thing that I would add, and let me preface this the way I always do when I get questions on consolidations, this is obviously not our core business. I'm sure there's people out there who have deeper insight into sort of the economics of the refi game than we do. But I think if you look at, you know, even the sort of rate cuts that are being assumed, that doesn't take us anywhere back to the kind of uber-low rate environment that I think we've been living in for the last 20 years. And, you know, you asked me for my opinion, I will give you my opinion. I don't think we're gonna see that kind of uber-low rate environment ever again.

And so I think, you know, you have to realize there's an awful lot of recent college grads, and there's an awful lot of, quite frankly, even current college seniors, juniors, and sophomores who made loans under a much lower interest rate environment than what we've seen over the course of the last 18 months. So I think when you think about the, you know, sort of, you know, refi economics, I think you have to look at it through the lens of: When did different borrowers make loans? You know, what is the prevailing interest rate when they made those loans? You know, and what are the rates today? You know, we have done and will continue to do, you know, manners of those analyses. I agree with what Pete said.

There will be some time in the future where consolidations, you know, come back and are larger than they are today. But I think we saw a golden age of, you know, loan consolidations, given the super low rate environment. I think we'll all have to see if we ever see that kind of golden age again.

Vincent Caintic (Specialty and Consumer Finance Analyst)

Okay, that's helpful. Thank you. And, second question, just on the forbearance programs and actually how we should think about the, the numbers. So I guess as these modification programs roll out, should we be expecting that, I guess, the forbearance number will increase from this level? And I'm just wondering how that plays out, because usually, you know, if we see forbearance, we might be concerned, but if it's from these new programs that are driving some more success, just want to anticipate that in advance. Thank you.

Jon Witter (CEO)

Yeah, Vincent, it's a, it's a wonderful, simple answer, question deserving a simple answer. I'm going to make it slightly more complicated. The answer is, for most customers using what we call hardship forbearance today, which, you know, is, is still allowable under sort of OCC guidance, and our program is, is, you know, is absolutely geared to that. You know, it is, you know, short in duration and highly limited in use. It's really no longer a substitute as we've used it today or have used it for the last few years, for the kind of more tailored and systematic programs that both Pete and I described earlier. There are some of our programs, for which forbearance is a part of the recipe.

You know, I think our plan is to sort of break those out separately in our reporting so that you can see those. But I would not necessarily expect, you know, that there would be huge changes in forbearance because I think, you know, we've largely operated under the new system for the last two years. And I think at the end of the day, it's serving a fundamentally different purpose than these other programs at this point in time.

Sanjay Sakhrani (Managing Director)

Okay. It's very helpful. Thanks so much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Mark DeVries with Deutsche Bank. Your line is open.

Mark DeVries (Senior Research Analyst)

Hi, can you hear me now?

Jon Witter (CEO)

Yep. Yep.

Mark DeVries (Senior Research Analyst)

Hello? Okay, great. Thank you. Sorry about that. I had a couple follow-up questions on credit. Just wanted to clarify some of the comments made. Jon, I thought I heard you indicate that part of the reason for the rise in delinquencies is related to some of the enrollment in some of these borrower assistance programs. Did I hear that correctly? And if so, what's kind of the dynamic there? Are you moving them into a status that has to be treated as delinquent? Is there something else affecting that?

Jon Witter (CEO)

Yeah. So, it's really a fairly mechanical answer. When someone enters, you know, one of our payment programs, before we can re-age them to current, you know, guidelines and, you know, standards say they have to make, I think it's typically three qualifying payments. And so, you know, in a past world, we may have collected on that customer. In a past world, they may have gone through to default. In a past world, you know, several years ago, they may have used forbearance and been brought current more quickly. Here, we have to see that period of positive pay before we can re-age that.

And so, as we parse apart the delinquency data, and we look at what portion of it is driven by what I would call normal sort of delinquent situations versus which are caused by, you know, this, this phenomena of customers making payments but waiting to re-age. You know, that, that's what we believe has driven, you know, sort of the, the small increase that we talked about.

Mark DeVries (Senior Research Analyst)

Okay, got it. That's helpful. And it, and it sounds like you're, you're still pretty confident about year-over-year improvement in the, in the charge-offs, this year included. Well, whether charge-off comes in at the low end or the high end of that guidance range, should we expect charge-offs to be kind of higher in the first half of the year and then start trending down in the, in the back half of 2024?

Jon Witter (CEO)

Yeah, there is a seasonality to our charge-offs, which I think always occurs. You know, because, and I think we've talked about this on past calls. The most likely time, you know, unfortunately, when a borrower gets into financial distress is pretty soon after they've entered repayment. You know, these are young borrowers. They may not have, sort of, you know, built up any, any savings at that point. They may be experiencing disruptions moving into the labor force. They may just not have yet the same financial habits that they would have later in life. And so we always see a period of seasonality in our results, and I think you should expect that same pattern of seasonality to persist in 2024.

Mark DeVries (Senior Research Analyst)

Okay, understood. Thank you.

Jon Witter (CEO)

You're welcome. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Rick Shane with JPMorgan. Your line is open.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Hey, guys. Thanks for taking my question. Look, historically, this has been an industry that was concentrated among three originators. Two have essentially exited the business. You know, there's been some conversation about new entrants, but at the end of the day, what is, what is the binding constraint in terms of your market share?

Jon Witter (CEO)

Rick, I think-

Rick Shane (Managing Director and Senior Equity Research Analyst)

Other than 100%.

Jon Witter (CEO)

You know, look, we absolutely, you know, continue to face, I think, lots of good competition in this business, Rick. You know, again, I'm not sure I want to go much deeper in predicting what's going to happen with the latest set of news. You know, we'll see that play out over the next couple of months. But there are, you know, very formidable, smaller, private, and other players that we compete against. And at the end of the day, I think what, you know, sort of binds, you know, our market share potential is, you know, a little bit of competition. You know, it's a little bit of customer choice. You know, it's a little bit of, you know, different marketing strategies and focusing on different parts of the credit spectrum.

You know, at the end of the day, you know, we love our 55% market share. We think there's opportunity for it to go up a little bit. It's obviously grown, you know, nicely over the last three years. But I don't think, you know, anyone should expect, you know, that, you know, we will be, you know, 70%-80% market share player. I think there will always be good competition in the market, and quite frankly, we welcome that.... I think it makes us better when we've got great competition out there. I think it's better for the customers. So, you know, I would expect there to be that limit, probably driven by a number of different factors and forces.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Got it. Okay, that's helpful. Thank you. Look, Moshe asked a question sort of trying to dimensionalize growth, asset growth prospects, and we're in this unique window right now where there is a lot of market share up for grabs. Gain on sale has improved. And so potentially the economics are shifting, or clearly are shifting to be more favorable than they were at the end of last year or at the end of 2023. When you think about what the priority will be, imagine a scenario where volumes - market share is better than you're looking for, gain on sale is solid. That gives you the ability to hit the high end of your earnings guidance, but it also potentially gives you the ability to form enough capital to grow beyond your 2%-3% range.

Conversely, there are going to be times where it's not going in your favor. Is the priority going to be to solve for earnings and let the growth of assets be the swing factor, or is it going to be targeting the asset growth and letting earnings fluctuate?

Peter Graham (CFO)

I mean, I think we were pretty clear in the December investor forum that, you know, we're going to step into growth over time. We're going to be relatively flat this year, our final sort of CECL transition year, and then we'll grow modestly in subsequent years. And so, you know, that framework calls for us to use loan sales as a governor of that balance sheet growth. That's fully what we intend to do as we embark on this strategy. So in your scenario of higher originations growth, then at the margins, we might do more loan sales as long as the pricing, you know, dynamic, you know, makes sense from an economic perspective.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Got it. So your priority is to follow that asset growth profile that you laid out in that five-year case as closely as possible, regardless—not regardless of conditions, but within a reasonable set of expectations.

Peter Graham (CFO)

Yeah, I think we said there that to the extent we start to see, you know, multiple expansions and be getting rewarded for balance sheet growth, we'll do a little bit more of that. But if things stay kind of status quo, then we'll do marginally more loan sales as long as the trade is there. And it's a dynamic evaluation of the value we're getting in the loan sale market versus the implied valuation for our balance sheet that we're getting in the equity market.

Rick Shane (Managing Director and Senior Equity Research Analyst)

Great. You know, I know it's fun answering questions. What's going to happen in the next 12 months? It's even harder over the next five years. So thank you for answering that.

Peter Graham (CFO)

Sure.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna (Managing Director)

Good evening. I had a question that might be a little bit of a follow-up on the topic Vincent was kind of touching on, but from a different angle. You know, one thing that I'm curious about is, you've pivoted your kind of mix of originations towards fixed rate, which obviously has benefits, you know, as rates move down, because it'll make you more liability sensitive. But I'm curious, at what point do you think about pivoting that strategy? Because, you know, originating more fixed rate loans, you know, at peak rates, you know, could also make them much more susceptible to, you know, to consolidations in the future. I'm kind of curious, at what point do you think about pivoting or, you know, moving back towards a higher mix of fixed rate originations?

Peter Graham (CFO)

Yeah, I mean, the pricing dynamic is always something that we have control of at the margins, but I think, you know, there's also a human emotional element in terms of what selections the borrowers are making. And I think the emotional reaction to, you know, the dramatic increase in rates over the last year. If you think about during, you know, during the fall, there was, you know, more potential for further increases because inflation had not started to subside yet. So I think that overall customer choice has been a pretty dramatic impact on the mix of origination.

I think that naturally will subside as we go into this year, but we'll be looking at that mix in terms of how we set our pricing grids as we go into peak this year.

Jon Witter (CEO)

Yeah, and Pete, I think the only thing I would add is, you know, we clearly don't have the ability to set those pricing grids in isolation. We do that, you know, sort of through the lens of our economic models, but we also do that through the lens of competitive realities. And so, you know, the fact is, if fixed rate is what customers want and if competitors are pricing fixed rate at a level that makes that attractive, you know, there is there is a certain competitive dynamic that, you know, I think Pete said it well. Our ability to influence that is on the margin, but it is much, you know, it is part of the broader competitive set.

Giuliano Bologna (Managing Director)

That's very helpful. And then one quick one, just thinking about the other potential for market share gains. I'd be curious, when you think about the kind of depth of the market for loan sales, you know, if you're able to capture some more additional market share, you know, the numbers, you know, based on the midpoint of the 7%-8% growth is already called $200 million or so above the investor forum-

Peter Graham (CFO)

Sorry, you're-

Giuliano Bologna (Managing Director)

Number 24?

Peter Graham (CFO)

Julie, you're fading in and out. Maybe if you could get closer to your mic.

Giuliano Bologna (Managing Director)

Sorry about that. Hopefully, it's a little bit better now. You know, as you potentially gain market share, I'm curious when you think about the depth of the loan sales market. You know, is there, do you think there's any limitation to the amount of loans you could sell, you know, in any given calendar year at this point? Or could the, you know, could market share be absorbed by loan sales?

Peter Graham (CFO)

Yeah, I think the dynamic that we've seen over the last, you know, half decade is a pretty dramatic search for yielding assets to support, you know, pension liabilities, insurance liabilities, and the mutual fund complexes. So, I, I think there's a strong demand for student loans. I think we have a preeminent, you know, ABS platform in this space, and I, you know, I don't, I don't see any issue in, in both loan sales or ABS funding to fund balance sheet growth, you know, as we sit here now. You know, it's not infinite, but we don't need infinite demand for, for the asset class.

Giuliano Bologna (Managing Director)

That's great. Thank you very much, and I'll jump back in the queue.

Operator (participant)

Thank you. Ladies and gentlemen, I'm showing no further questions. I would now like to turn the call back over to Jon Witter, CEO, for closing remarks.

Jon Witter (CEO)

Great. Thank you, and appreciate everyone dialing in tonight. Appreciate the interest in Sallie Mae. As always, our IR team is standing by and happy to help follow up on specific questions that folks may have, and look forward to talking to you all again in about three months' time about our performance in the first quarter. With that, Melissa, I'll turn it back to you for, I think, a little bit of closing business.

Melissa Bronaugh (Head of Investor Relations)

Sure. Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.