SLM Corporation

Hello, thank you for standing by and welcome to Sallie Mae Q1 2023 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 time, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. I would now like to hand the conference over to Melissa Brada. You may begin.

Thank you, Tawanda. Good morning, and welcome to Sally Mae's first quarter 2023 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 the call up 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 impact of COVID-19 on our business, results of operations, 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 gap measures, and our gap results can be found in Form 10-Q for the quarter-ended March 31, 2023. This is posted along with the earnings press release on the Investors page at sallymay.com. Thank you, and now I'll turn the call over to John.

Thank you, Melissa and Tawanda. Good morning, everyone. Thank you for joining us today to discuss Sally May's first quarter 2023 results. I'm pleased to report on a successful quarter and progress towards our 2023 goals. I hope you will take away three key messages today. First, we delivered strong results in the quarter. Second, our balance sheet and liquidity position are solid despite disruption in the larger banking industry. And third, we believe we have momentum for continued positive performance throughout the rest of the year. Let's begin with the quarter's results. GAAP diluted EPS in the first quarter of 2023 was $0.47 per share as compared to $0.45 in the year-ago quarter. Our results for the first quarter were driven by a combination of strong business performance as well as improvements in credit trends. Private education loan originations for the first quarter of 2023 were $2.4 billion, which is up 12% over the first quarter of 2022. This quarter marked our highest level of originations in the company's history. Q1 freshman originations were also the highest in the company's history, with 27% of originations coming from this group of students. As we have mentioned previously, underclass originations have higher lifetime value to us due to greater serialization opportunity. So this trend is especially encouraging for future peak seasons. This is a strong start to 2023 and is tracking better than our plan for the year. We are also happy to communicate that for the full year 2022, we were able to increase our market share by 90 basis points over a full year of 2021. Our market share is 58% of the full private student lending marketplace. Credit quality of originations was consistent with past years. Our cosigner rate for the first quarter of 2023 was 89% versus 88% in the first quarter of 2022. Average FICO score for the first quarter of 2023 was 746 versus 748 in the first quarter of 2022. We are also encouraged about the improvements we have seen in credit trends for the first quarter of 2023. Net private loan charge-offs in Q1 were 83 million, representing 2.11% of average loans in repayment. This is down 104 basis points from the fourth quarter of 22 and ahead of where we expected, but still elevated compared to 1.89% in the year-ago quarter. During our fourth quarter 2022 earnings call, I mentioned that we were already seeing improvements in delinquency and default trends in our January results. Those improvements have continued into February and March. For Q1 of 2023, we saw the lowest entry rate into delinquency since the first quarter of 2022. And in March of 2023, the lowest roll to default rate in over a year. This improvement is driven by a number of factors. We believe we are seeing the continued normalization of the transient factors we discussed last year. We also believe we are starting to see the benefits of operational and strategic changes we made starting last year. You may also remember that we discussed seeing elevated levels of delinquency and charge-offs in narrow pockets of our portfolio toward the end of 22. We have continued to closely monitor the performance of those loans over the quarter and have not seen similar elevated levels expand into other parts of our portfolio. With that said, we acknowledge that three months of improved performance does not yet constitute a sustained trend. Additionally, the economic environment is uncertain, and general economic worsening is still a possibility. We will continue to monitor these trends and adjust our expectations around credit normalization for the full year as appropriate. Following the recent turbulence in the banking sector, we thought it prudent to provide additional commentary about funding and liquidity. Despite the disruption in the larger banking industry, our balance sheet and liquidity position remain strong. We ended the first quarter of 2023 with liquidity of 19.7% of total assets. Marketable securities make up a portion of our approximately $6 billion liquidity portfolio, and at the end of Q1 of 2023, our unrealized loss on that portfolio totaled $155 million. In the unlikely event we had to sell this portfolio and recognize losses, we would incur a regulatory capital charge of approximately 50 basis points. Deposits have been very stable for Sallie Mae. Balances at the end of Q1 of 2023 were slightly higher than at the end of both the fourth quarter of 2022 and the first quarter of 2022. At the end of Q1 2023, our uninsured deposits made up only 2% of our deposit base. Additionally, during the quarter, we were able to execute an ABS funding transaction at spreads that came in about 23 basis points better than our previous transaction completed in 2022. Our Treasury team continues to effectively manage interest rate risk and has grown our net interest margin from 5.29% in the first quarter of 2022 to 5.7% in Q1 of 2023. In February, we stated that we expected to sell 3 billion of loans in 2023, with sales likely to take place in the second and third quarters. We are pleased to share that we have agreed to pricing terms for the sale of approximately $2 billion of private education loans, so we are able to discuss the transaction. We expect the transaction to close in early May of 2023. Given general bank valuation trends, I'm confident our investors will agree that completing a larger sale earlier in the year is the prudent thing to do. We were able to reach this preliminary agreement with our buyer at prices consistent with the assumptions in our 2023 guidance. Our plan is to use the gain in capital released from the sale to buy back stock at current levels to create shareholder value and minimize the impact of more capital on our NIM. We expect to do so while maintaining prudent capital and liquidity levels recognizing the uncertain macroeconomic environment. Our assets continue to be in demand from a deep pool of well-informed loan buyers. As such, we expect to execute future loan sales at attractive premiums. We expect to sell an additional $1 billion of loans this year, likely in the third quarter. Steve will now take you through some additional financial highlights of the quarter. Steve?