SLM Corporation

Hello, and thank you for standing by. Welcome to Sally Mae's second quarter 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 session, 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 turn the call over to Melissa Brunard. Ma'am, the floor is open.

Thank you, Tawanda. Good morning and welcome to Sally Mae's second 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 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, results of operations, financial conditions, and or cash flows, as well as any potential impact 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 gap measures, and our gap results can be found in the Form 10-Q for the quarter ended June 30, 2023. This is posted along with the earnings press release and 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 Sallie Mae's second quarter 2023 results. I'm pleased to report on a successful quarter and continued progress towards our 2023 goals. I hope you'll take away three key messages today. First, we delivered strong results in the second quarter and first half of the year. Second, we are well positioned to deliver solid results for the year by continuing to drive our core business and serve our customers. And third, we have a resilient business model that should drive results, even if some headwinds materialize related to the resumption of federal loan payments or other macroeconomic conditions. Let's begin with the quarter's results. GAAP diluted EPS in the second quarter of 2023 was $1.10 per share as compared to $1.29 in the year-ago quarter. In May, we closed on the sale of $2 billion in loans at a premium of approximately 6.5%. As we mentioned in April, we accelerated the sale of the second billion of loans given bank valuation levels and the potential for further market volatility. We were able to put the proceeds from this successful loan sale and the corresponding capital release to work in the second quarter, repurchasing just over 16 million shares of our common stock. We have reduced the shares outstanding since January 1st of 2023 by 7% and by 48% since January of 2020. Our assets continue to be in demand from a deep pool of well-informed loan buyers. We expect to commence our next loan sale at the beginning of September and close in the third quarter or early in the fourth quarter. depending on buyer preferences and market conditions, subject, of course, to board approval and careful consideration of capital levels in an uncertain economic environment. Private education loan originations for the second quarter of 2023 were $651 million, which is up 6% over the second quarter of 2022. Our originations for the first half of the year are slightly ahead of our forecast for 2023. We are also seeing strong underclass application growth. Through the first half of the year, our underclass application volume has increased approximately 11% as compared to the first half of 2022, driven by our investments in technology and content, as well as the successful integration of Nitro marketing strategies and techniques throughout Sallie Mae's channels. Credit quality of originations was consistent with past years. Our cosigner rate for the second quarter of 2023 was 76% versus 74% in the second quarter of 2022. Average FICO score for the second quarter of 2023 was 747 versus 746 in the second quarter of 2022. Seasonally, the second quarter has lower cosigner rates due to a higher mix of nontraditional students. We expect our cosigner rate to finish the year in line with past annual levels. Net private education loan charge-offs in Q2 were $103 million, representing 2.69% of average loans in repayment, up from 2.56% in the year-ago quarter. There is seasonality in our charge-offs, with the second quarter reflecting performance of the most recent graduation vintage, that entered repayment in the fourth quarter of the previous year. With our previously implemented credit administration practice changes, we expected that we would see an uptick in defaults in the second quarter, and we are appropriately reserved for this result. Our annualized net charge-offs as a percentage of average loans and repayment for the first half of the year is 2.41%. and remains lower than our plan for the full year of 2023. We continue to operationally and strategically focus on credit and our path back to normalcy. As is the case every year prior to peak season, we reexamine the performance of our credit standards. As is also the case every year, as consumer and market conditions changed, we found subsegments of our portfolio that were responsible for elevated levels of losses. We have refined our underwriting standards, incorporating this new insight. We are pleased that we have been able to lower risk on new originations while maintaining strong growth. In addition, we continue to develop new programs and practices to appropriately help customers who are facing financial difficulty. We expect to implement another set of program enhancements in early fall prior to the November repayment wave. Before I turn the call over to Steve for a deeper review of performance, let me address the news from Washington related to the federal lending program. President Biden signed a federal spending bill which specifies the end date for the federal student loan repayment pause. In addition, the Supreme Court struck down the administration's proposed federal loan forgiveness program. While both decisions were anticipated and not directly related to our business, One might ask the expected impacts on Sally Mae. It's important to note that our historical underwriting models assume levels of federal debt and payments consistent with the Supreme Court decision and payment resumption. Therefore, we do not believe these federal loan decisions will have a permanent long-term impact on our credit outlook. With that said, payment habits and hierarchy are important determinants of short and medium-term performance. In addition, federal loan servicers have an important role to play in ensuring a smooth transition for these federal borrowers, and they may experience operational or readiness issues. Therefore, we have tried to consider what near-term impacts the resumption of payments might have on our business. The Biden administration is heavily vested in ensuring a smooth transition for federal borrowers and is taking steps to ensure a seamless transition to repayment. They have taken two important such steps. First, the Department of Education is instituting a 12-month on-ramp program running from October 1st of 2023 to September 30th of 2024 so that financially vulnerable borrowers who miss monthly payments are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. Additionally, the Biden administration is finalizing an enhanced income-driven repayment program that would not only increase borrower eligibility, but also lower a borrower's payments. These regulations will go into effect on July 1st of 2024. However, the department has indicated it will implement some critical benefits prior to the end of the payment pause this fall and before loan payments are due. Our understanding is that many borrowers will not have to make monthly payments under this plan. For a summary and timing of these rules, please see page six of our second quarter earnings presentation. We are taking our own steps to help customers succeed as federal payments resume. We are increasing communication with customers who have federal loans, to help them better understand what federal resources are available to them, in addition to the programs and services that we offer. We are training our staff to be more conversant on these programs to help federal borrowers who might be struggling to find available resources. We are also increasing our monitoring and customer engagement to ensure we have good early indicators of performance and identify potential issues as this information might be helpful in setting or refining our expectations or strategies. Based on all of this, we believe the resumption of payments represents a short- to medium-term watch item. At this point, however, we do not believe it represents a major risk to our credit outlook, but we will remain vigilant. We are not alone in this view. Economists at Bank of America and Moody's size the average federal loan payment respectively, and by considering a range of factors, have projected that the resumption of federal student loan payments will have a minimal impact on consumer credit overall. Steve will now take you through some additional financial highlights of the quarter. Steve? Thank you, John.