SLM Corporation

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Good day and welcome to the 2022 third quarter Sally 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. Instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Brian Cronin, Vice President, Investor Relations. You may begin.

Thank you, Michelle. Good morning, and welcome to Sally Mae's third quarter 2022 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 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 Sally Mae, these factors include, among others, the potential impacts of the 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 GAAP measures, and our GAAP results can be found in the form 10Q for the quarter ended September 30th, 2022. 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, Brian and Michelle. Good morning, everyone. Thank you for joining us to discuss Sally Mae's third quarter results. I hope you will take away three key messages today. First, we had a successful peak season, highlighted by increased demand from underclassmen. Second, in a challenging environment, we delivered strong results for the third quarter and the first three quarters of the year. And third, our credit performance is in line with the expectations we laid out on the second quarter earnings call, and we continue to believe that the factors we previously identified as elevating charge-offs will be largely isolated to 2022. Let's begin with the quarter's results. GAAP diluted EPS in the third quarter of 2022 was 29 cents compared to 24 cents in the year-ago quarter. In the quarter, we closed a $1 billion loan sale and booked a gain on sale of $75 million. This sale also released over $50 million of reserves through our income statement and freed up meaningful capital that can be returned to shareholders. In this market environment, we are pleased that we were able to execute our planned $3 billion of loan sales for the year at an average premium of just under 10%. Our loan sales share buyback arbitrage strategy has continued to work in a challenging environment. Since January 1st of 2022, we have repurchased $553 million of shares and reduced shares outstanding by nearly $34 million, or 11%. Since January of 2020, we have reduced shares outstanding by 42% at an average price of $15.40. We expect to continue to repurchase shares daily for the remainder of 2022. Our financial results are not just about gain on sale. Year in and year out, our quality loan portfolio generates significant net interest income. Through the first nine months of 2022, we have generated $1.1 billion of net interest income, higher than the year-ago period, despite having slightly lower loan balances. In this rising rate environment, our Treasury team has effectively managed interest rate risk and grown our net interest margin. The rise in interest rates has reduced prepayments, enhancing the growth of our portfolio. This is most obvious in consolidation activity, which continues to slow. However, partial prepayments are also down. This has both a positive impact on our loan balances and likely on future loan sale premiums. As we have discussed in past calls, prepayment speeds, along with rate outlook and credit spreads, have a significant impact on the expected value of a loan. While a positive, slower prepayment speeds also increase our CECL allowance because we anticipate having more loans on our books for longer. We added an additional $57 million to our reserves to cover the impact in the quarter. The good news is we estimate we will have additional loans on our books that will grow to $600 million by the end of 2023 due to these slower prepayment speeds. At our standard NIM, the net interest income that will be generated from these loans will pay for these additional reserves many times over. Private education loan originations for the third quarter of 2022 were $2.4 billion, which is up 13% over the third quarter of 2021. This wraps up a successful 2022 peak season with the highest application volume we have experienced in many years. Through the end of September, we have seen 13% application growth over the same period in 2021. This has been fueled by a 15% increase in underclassmen application growth. Freshmen and sophomores have higher lifetime value to us due to greater loan 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 Q3 of 2022 was 89%, up slightly from 88% in Q3 of 2021. Average FICO score at approval for Q3 of 2022 was 747 versus 749 in Q3 of 2021. That's a good segue into a discussion of our credit performance. As you will no doubt recall, We had a thorough discussion of our credit performance during our second quarter call in July. At that time, we discussed in detail the transitory nature of three factors that were impacting our portfolio. These include collection desk staffing, pandemic withdrawals we identified as gap year students, and credit administration forbearance practice changes. We indicated that we believe defaults would hold steady in Q3 and decline in Q4, and that delinquencies would end the year in the low 3% range. The performance of our portfolio has stabilized. The factors that drove higher delinquencies and charge-offs in Q2 and Q3 have been addressed or are abating. Early indications suggest that the reduction in the fourth quarter will happen as expected. We have increased staffing levels in our collection center, particularly for our early-stage delinquency buckets, and as of August, believe we are fully staffed. Early-stage delinquency is down 13% since July month end. Losses from the population of students who withdrew from school during the pandemic or the gap year population continue to trend lower and appear to be largely behind us. These loans are now performing much like prior annual withdrawal cohorts, and as a result, future defaults from this population are expected to decline meaningfully. We believe we have realized approximately 85% of the expected losses from this population through the third quarter. Finally, accelerated defaults from borrowers who have already used all the forbearance that is available to them are also declining. It is therefore reasonable to expect that once the impacts of staffing and forbearance-related accelerations run their course, our charge-off rate will revert back to the long-term run rate under 2%. These are signs that customers are entering delinquency today at a more normal rate and that the factors that drove the 2022 charge-off increase are normalizing. While it is difficult to predict credit performance for 2023 this far in advance, given the broader macroeconomic uncertainty, we do remain confident that the factors that drove the higher-than-expected 2022 charge-off performance continue to wane and will be largely or fully washed out of the system by the start of 2023. Steve will now take you through some of the additional financial highlights of our quarter.