SLM Corporation

Good day, and thank you for standing by. Welcome to the Sally May 3rd Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I'll now hand the conference over to your speaker today, Brian Cronin, Vice President of Investor Relations. Please go ahead.

Thank you, Shannon. Good morning, and welcome to Sallie Mae's third quarter 2021 earnings call. It is my pleasure to be here today with John Witter, our CEO, and Steve McGarry, our CFO. After the prepared remarks, we will open up 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 than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in the company's Form 10-Q and other filings with the SEC. For Sally Mae, these factors include, among others, the potential impact of COVID-19 pandemic on her business, results of operation, financial conditions, and or cash flows. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation of gap measures, and our gap results can be found in the Form 10Q for the quarter ended September 30, 2021. This is posted along with the earnings press release on the investors page at sallymay.com. Thank you. I'll now turn the call over to John. Thank you, Shannon and Brian.

Good morning, everybody. Thank you for joining us for a discussion of Sallie May's third quarter 2021 results. Our third quarter performance represents a continuation of the success we had in 2021 and reflects a continuing trend toward normalcy. I hope you will take away three key messages today. First, we've delivered strong results in the quarter. Second, we're adding more capacity to our 2021 capital return program. And third, we believe we are well positioned for a strong finish to the year. and expect to continue our positive trajectory going into 2022. Let me jump right in. GAAP diluted EPS in the third quarter of 2021 was 24 cents compared to 45 cents in the year-ago quarter. Our results were driven by a combination of strong business performance and continued improvements in the economic outlook. The decline from the year-ago quarter was largely driven by a substantial provision release last year. You may remember that we lowered our loss expectations at that time as the result of an improving economic outlook as the impact of COVID subsided. Private education loan originations for the third quarter of 2021 were $2.1 billion, which is up $192 million, or 10.1%, over the third quarter of 2020. Although this is a noteworthy rebound from 2020, this falls below our original expectations. We believe that originations were restrained for two reasons. First, there remains significant liquidity in the system due to the federal stimulus, thriving equity markets, and direct subsidies to schools from the Higher Education Emergency Relief Fund commonly referred to as HEERF. HEERF provided $73 billion directly to higher education institutions and was intended to help students who were financially impacted by the pandemic. To put this in perspective, this 73 billion in aid represents nearly 16% of total annual spend on higher education. Our top 10 not-for-profit schools received over $800 million in HEERF funding that had to be used for direct student aid and that could be distributed at the discretion of the school and without limitation. We surveyed our top 100 schools. Eighty-four percent distributed between $500 and $3,000 in HEERF funds per student. We see the impact of this, especially in our volume of lower-balance loans which you would imagine would be most impacted by this type of support. Year-to-date, our loans less than $5,000 were down 19% compared to the same point a year ago. The last of the HEERF grants are set to expire during the 2021-2022 academic year. The second factor impacting originations was the level and composition of enrollments. Eighty percent of the schools we surveyed reported flat to minor increases in enrollment. The composition of enrollment also changed and impacted our business due to lower numbers of foreign students with U.S. co-signers and fewer out-of-state students as students chose to stay close to the home. Students in these segments typically have a greater need for gap financing and and our schools are reporting a lower percentage of these students in the current academic year. While likely having a positive impact on credit, these factors are clearly impacting the demand for private student loans. Equifax reported in their September 2021 US National Consumer Credit Trends Report that the total number of student loans, including both federal and private, fell 4 percent in the first half of 2021 compared to the same period in 2020. We believe the private student loan market grew in the low to mid-single digits in the quarter, suggesting our 10 percent growth likely led to market share gains. If true, this represents the sixth consecutive quarter of market share gains. Moving on, credit quality at origination was consistent with past years. Our cosigner rate for Q3 of 2021 was 88%, which was flat to the third quarter of 2020. Average FICO score for Q3 2021 was 749 versus 752 in Q3 of 2020. The quarter was relatively quiet from a CECL perspective. Our total loan loss provision was $138 million for the third quarter of 2021, driven primarily by a provision for new loan commitments. Additionally, we took additional reserves for changes to our forbearance practices we expect to execute in the fourth quarter. This was offset by an improved economic outlook and higher expected recoveries. We continue to believe that forbearance, when appropriately used, is effective at helping customers overcome short-term financial challenges. Steve will discuss the specifics of the quarterly changes in more detail. In the third quarter of 2021, we aggressively executed our capital return strategy. We repurchased 13 million shares in the quarter under a 10B51 plan at an average price per share of $18.75. We have reduced the shares outstanding since January 1st of 2021 by 23%, at an average price per share of $17.17 and 31% since January 1st of 2020 at an average price per share of $15.19. We have two updates to our 2021 capital return plans. First, our board has authorized $250 million of additional share repurchase authority incremental to the $50 million remaining of our original $1.25 billion plan. We expect to make significant progress deploying this $300 million in authority over the balance of the year and into January. Importantly, this is incremental to our original capital return plans and is driven by improving performance and capital levels. Our second important update is our board has approved an increase in our fourth quarter 2021 common stock dividend to 11 cents per share. This represents an approximate 2 percent dividend yield, which we believe is in line with our banking peers. We believe going forward, maintaining a competitive dividend will increase the universe of interested investors and add to the attractiveness of owning Sallie Mae shares. As we have signaled with the increase in our share repurchase program, we remain committed to selling loans and repurchasing stock, especially while the current valuation arbitrage exists. Going forward, we expect the mix of capital return over the next several years will be approximately 20% dividend and 80% share repurchase. Of course, all of this is subject to receiving requisite board approvals at the appropriate time. In some late breaking news, we have reached a preliminary agreement on indicative terms for our next $1 billion loan sale and look forward to closing the transaction in the coming weeks. The terms we received exceeded the terms of our first quarter sale. Let me say that again. The terms we received exceeded the terms of our first quarter sale. While interest rates have ticked up since our last sale, spreads have tightened and our credit performance remains strong. The successful completion of this transaction will support our belief that premiums will remain strong even in a rising rate environment. Steve will now take you through the financial highlights of the quarter. Steve?