SLM Corporation

Good day and thank you for standing by. Welcome to the second quarter Sallie Mae 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 that session, you will need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Brian Cronin, Vice President of Investor Relations. Please go ahead.

Thank you, Carmen, and good morning, and welcome to Sallie Mae's second quarter 2022 earnings call. It is my pleasure to be here today with John Winter, 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 on the company's Form 10-Q and other filings with the SEC. For Sally Mae, these factors include, among others, the potential impact of the COVID-19 pandemic on our 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 to GAAP measures, and our GAAP results can be found in the Form 10-Q for the quarter that ended June 30, 2022. This is posted along with the earnings press release on the investor page at sallymay.com. Thank you. I'll now turn the call over to John. Thank you, Carmen and Brian. Good morning, everyone, and thank you for joining us to discuss Sally May's second quarter results. I hope you'll take away three key messages today. First, we delivered strong results for the second quarter and first half of the year. This includes the continued successful execution of our loan sale and share buyback program. Second, we are seeing some real positives throughout our business with regard to college enrollment, originations, consolidations, and expenses. Third, despite these positives, we are not immune to this challenging and volatile environment. The decline in the EPS guidance announced in our press release is driven by an expectation of lower loan sale premiums due to higher rates and wider spreads, and separately, the impact of certain credit pressures that we believe will be largely isolated to 2022. Let's begin with the quarter's results. GAAP diluted EPS in the second quarter of 2022 was $1.29 compared to 44 cents in the year-ago quarter. In April, we sold $2 billion in loans at a premium of approximately 11.5%. You will remember that we accelerated the sale of the second billion of loans as a risk mitigation given early signs of market volatility. In the second quarter, the company repurchased 20 million shares. We have reduced the shares outstanding since January 1st of 2022 by 11% and by 42% since January of 2020 at an average price of $15.41. Private education loan originations for the second quarter of 2022 were $616 million, which is up 16% over the second quarter of 2021. This is a strong start to our 2022 peak season and is tracking better than our initial guidance for the year. Following two years of declining FAFSA completion numbers, the high school class of 2022 has returned to near pre-pandemic levels with 52.1% of the senior class completing the application. We are seeing strong underclassmen application growth. Through the first half of the year, our underclass application volume was up 16.6% over the first half of 2021. These growth trends are continuing as peak season ramps up in July. Freshmen and sophomores are more valuable in terms of lifetime value and serialization potential because they are at the beginning of their education journey. Credit quality of originations was consistent with past years. Our cosigner rate for Q2 of 2022 was 74%, down slightly from 76% in the second quarter of 2021. Average FICO score for Q2 of 2022 was 746 versus 750 in Q2 of 2021. Seasonally, the second quarter has our lower cosigner rates due to the higher mix of nontraditional students, and we expect our cosigner rates to finish in line with past annual levels. Consolidation shows signs of slowing. In June of 2022 versus June of 2021, we saw refi volume drop from our two largest refi competitors by 60 and 37% respectively. Monthly consolidation volume June of 22 over June of 21 was down 21%. Steve will now take you through some additional financial highlights of the quarter. Steve?

Thank you, John. Good morning, everybody. We'll start where we usually do with the discussion of the components of our loan loss allowance and provision. The private education loan reserve was at $1.19 billion, or 5.4% of our total student loan exposure. which recall under CECL includes the on-balance sheet portfolio plus the accrued interest receivable of $1.2 billion and unfunded loan commitments of $1.4 billion. Our reserve rate is up slightly from 5.3% in both the prior and year-ago quarter. Take a look at the major variables used to calculate our allowance for credit losses. We continue to use Moody's base S1 and S3 forecasts weighted 40%, 30%, 30% respectively. We expect to use this mix going forward except during extraordinary periods of uncertainty. There were no changes in model inputs such as prepayment speeds or other important drivers. Loans sales in the quarter reduced the allowance by $116 million. While the second quarter is not a large disbursement quarter, we do begin to book commitments for the new academic year. I mentioned the $1.4 billion in commitments, and we reserve accordingly. The provision for new unfunded commitments totaled $120 million in the second quarter. All in, we booked a provision for credit losses of $31 million on our income statement in the quarter. Our reserve and our outlook covers all the topics we will discuss this morning. Private education loans delinquent 30-plus days came in at 3.7% of loans in repayment, up from 3.5% in Q122 and 2.1% in the year-ago quarter. We expect 30-plus-day delinquencies to drop in Q3 and end the full year near 50%. Private education loans and forbearance were 1.3% at the end of the quarter, down from 1.4% at the end of Q1 2022, and 3% at the end of the year-ago quarter, which you may recall we have not yet implemented our forbearance policy changes. In the quarter, net charge-offs for private education loans were $95.5 million, resulting in an annualized charge-off rate of 2.56%, which exceeded the forecast of 2.25% we provided in April. Based on our current performance of our portfolio, we now expect charge-offs for private education loans will remain steady at this higher level in Q3, and declined in Q4. John is going to provide a brief dive on current charge-offs, as well as our outlook in just a few minutes. NIM for the quarter came in at a strong 5.29%, up significantly from 4.7% in the year-ago quarter. Our portfolio benefited from the rising rate environment, and in addition, the drag on our NIM from our liquidity portfolio declined meaningfully, as we invested our cash in medium-term treasuries as interest rates have risen over the last several quarters. We do expect our NIM will remain in the low 5% vicinity for the full year of 2022. Second quarter operating expenses were $132 million unchanged from the prior quarter and $128 million in the year-ago quarter. OpEx in our core business increased just 5% while we experienced 16% increase in disbursements and a 19% increase in applications being processed. These are key drivers of expense and highlight the fact that we continue to focus on driving servicing and acquisition costs lower on a unit basis. Finally, our liquidity and capital positions are very strong. We ended the quarter with liquidity of 20.3% of total assets. And at the end of the second quarter, total risk-based capital was at 15.6% and common equity tier one came in at 14.3%. We believe we continue to be well positioned to grow our business and return capital to shareholders going forward. Back to you, John.