Q4 2021 SLM Corp Earnings Call
And welcome to the 2021 fourth quarter Sallie Mae Conference call. At this time, all participants are in listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press Star then one on your Touchstone telephone.
If anyone should require assistance during the conference. Please press Star then zero. So it's an operator 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.
And welcome to Sallie Mae's fourth quarter and year end 2021 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.
These 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 Companys Form 10-Q , and other filings with the SEC for Sallie Mae. These factors include among others the potential impact of COVID-19 pandemic.
In our business.
Also 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 GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31 2021.
This is posted along with the earnings press release on the investors page at Sallie Mae Dot Com. Thank you I'll now turn the call over to John .
Thank you, Brian and Michele good morning, everyone. Thank you for joining us to discuss Sallie Mae's fourth quarter and full year 2021 results I am pleased to report on a successful year in 2021 and discuss our plans for 2022 and announced the beginning of an exciting new chapter for Sallie Mae stemming.
From last Night's announced agreement to acquire Nitro College.
I hope you'll take away three key messages today.
First we delivered strong results in 2021.
Second we expect to continue execution against our strategic imperatives and that will drive strong results in 2022, and three we will look for creative opportunities to enhance our core business and strategically evolve our company as evidenced by the acquisition of Nitro College.
Let me begin with a discussion of the 2021 results.
During the year, we maintained a focus on our core business.
Executed a capital return program that exceeded our original expectations and rigorously managed expenses our earnings outlook improved throughout the year based on this focus and an improving economy.
As our performance improved we increased our share repurchase goals and our dividend further returning capital to shareholders.
GAAP diluted EPS in the fourth quarter of 2021 was $1 <unk> compared to $1 13 in the year ago quarter.
Our strong results were driven by the premium we earned on the $1 billion loan sale, we executed in the quarter and the associated reserve release.
These earnings are lower than the prior quarter given two unique events that occurred in Q4 of last year. You may remember from our earnings call last January we reduced our fourth quarter 2020 provision by $316 4 million due to the combined impact of improving.
Endemic conditions, coupled with the reserve release actually related to our early 2021 loan sale.
Private education loan originations for the fourth quarter of 2021 were $737 million, which is up 18% over the fourth quarter of 2020.
Consistent with our guidance from our last call our full year originations ended at $5 4 billion, which is up 2% over 2020.
Credit quality at origination was consistent with past years, our cosigner rate for fourth quarter of 2021 was 83% flat to the fourth quarter of 2020.
And our average FICO score for the fourth quarter of 2021 was 749 versus $7 51 in the fourth quarter of 2020.
In the fourth quarter of 2021, we continued our capital return strategy repurchasing 14 million shares at an average price of $18 52.
We have reduced the shares outstanding since January one 2021 by 26% at an average price per share of $17 37.
We have reduced the shares outstanding since January one of 2020 by 35% at an average price of $15 52.
Steve will now take you through the financial highlights of the quarter Steve.
Thank you John Good morning, everyone, let's start where we usually do with a discussion of our loan loss allowance and provision.
Private education loan reserve was $123 billion were five 2% of our total student loan exposure, which undersea. So you may recall includes the on balance sheet portfolio plus the accrued interest receivable of $1 2 billion in unfunded loan commitments.
One $8 billion, our reserve rate is up slightly from five 1% in the prior quarter, but down significantly from six 4% in the year ago quarter lets now look at the major variables used to calculate our <unk> reserve.
Economic forecasts and weightings or a major input to our model in the current quarter and the year ago quarter, we used Moody's base S. One and S through forecasts weighted 40%, 30% and 30% respectively.
We can be expected to use this mix going forward.
During the extraordinary periods of uncertainty in the economy.
A major factor in the sharp improvement in our reserve was the improved economic outlook. The weighted average forecast of college graduate unemployment over the next two years declined from three 6%.
Last year to two 8%.
The fourth quarter of 2021.
Model inputs, such as prepayment speeds are important drivers as well as we have discussed over the course of 'twenty. One projected prepay speeds have increased which was another major contributor to the year over year decline in the reserve.
The fourth quarter is our lowest in terms of origination volume in new loan commitments provision for new unfunded commitments totaled 13.
In the quarter.
Loan sales are of course important we sold just over $1 billion of loans in the quarter, which resulted in a $56 million reduction in our loan loss allowance.
We booked a negative provision for loan losses of $15 million on our income statement this quarter.
This is a result of the reserve release from the loan sale and improved economic environment offsetting the reserve needs associated with new lending commitments and the natural accretion about discount to <unk>.
Sure.
Let's now discuss our credit metrics, which can be found on page nine of our investor presentation.
Private education loans delinquent 30, plus days with three.
Three 3% of loans in repayment. This is up from two four in Q3 and two 8% in the year ago quarter.
Private education loans in forbearance were one 9% down from two three in Q3 of 'twenty one.
Four 3% in the year ago quarter.
Let's take a closer look at this the fact that delinquencies are up when forbearance as are down there is not a coincidence.
The last quarter, we announced that we were transitioning to more stringent forbearance policies.
As expected we are seeing a significant increase in cash resolutions of delinquent accounts.
Move forbearance. This is obviously a positive. However, there is there is a population of loans that would've received forbearance in the past that are entering delinquency status as a result of the policy change.
In addition included in our November and December repay wave.
Loans that left school during the pandemic endemic and just entered full P&I repayment.
These loans are demonstrating higher roles to delinquency.
And we expect 31, plus day delinquencies going forward throughout the course of 'twenty, one two I'm, sorry, 'twenty two to hover in the low three percentage area.
Let's take a look at charge offs private education loan charge offs in the fourth quarter were in line with the projections, we made last quarter at 1.58% in Q4 compared to 129 in Q3.
And 152% in the year ago quarter.
Full year charge offs were one 3%.
Percent in 2021 compared to one 2% in 2020.
Going forward, we expect the private education loan charge offs to increase to about 2% in quarter one of 2022.
Then decrease over the remainder of 2022.
Totaling 1.75% for the full year.
We believe we are very appropriately reserved for this outlook.
A few other comments as you all know the payment holiday on the federal loan program has been extended through May of 2022.
As we have discussed on prior calls we believe this has been beneficial to many of our borrowers as they hold both private and federal loans.
Our positive credit performance demonstrates that our borrowers are engaged in good payment habits and servicing their loans effectively. However, we do expect that customers on the financial margin will be negatively impact when federal payments ultimately resume however.
I will reiterate that while credit outlook can change we believe we're very well reserved for the current economic outlook.
Now, let's turn to net interest margin, which you can find on page seven.
The net interest margin on our interest earning assets was five 1% in Q4.
This is up from both the prior quarter and the year ago quarter.
Full year NIM was unchanged from the prior year at four 1%.
Looking forward, we believe that our NIM will remain just over 5% for the full year of 2022.
Let's now talk about loan sales, we plan on selling $3 billion of loans in 2022.
We'll sell $1 billion in the first quarter and $2 billion in the third quarter of the year.
So let's put this into perspective, our loan portfolio was just under 50% fixed rate and just over 50% floating rate.
We saw representative samples of our portfolio when we conduct loan sales interest rates have increased approximately 50 basis points since we conducted our last sale.
The impact on the present value of the cash flows it was about a point on the fixed component of the portfolios.
If you accept that the value of the variable rate side of the portfolio is unchanged due to rate hikes.
Leads to roughly a half point decline and the premiums we would earn all things being equal while.
While the ultimate price will be term be determined by the auction we have confidence in the low double digit premiums. We have included in our guidance when we ultimately execute our loan sales.
Little more color on this we expect gain on sale revenue to comprise just over 20% of our pre tax but post provision revenue in 'twenty two.
The balance is.
Projected to come from our core business, 70% from our net interest income and 10% from the release of the seasonal reserves on the portfolios we will sell.
This means that just 20% of our revenue is subject to the volatility of the markets in the form of gain on sale.
Let's turn to Opex.
Quarter, noninterest expenses were $125 million compared to $141 million in our seasonally high third quarter.
$124 million in the year ago quarter.
Expenses are down.
I'm, sorry, full year operating expenses in our core student loan business declined 2% year over year, despite dispersed volume and loan service being up 2%.
Our unit cost of service declined an impressive 7%, while our cost to acquire ticked up marginally in what turned out to be a competitive year.
We will absolutely continue to focus on driving servicing and acquisition cost lower and continue to gain efficiencies from our operation.
Finally, let's look at our liquidity and capital positions, which are strong.
We ended the quarter with 21, 3% liquidity as measured against our total assets.
At the end of the fourth quarter total risk based capital was 14, 5% and common equity tier one capital was 14, 1%.
GAAP equity plus loan loss reserves, which was a ratio we'd like to call out in the post <unk> World was a very strong 15, 8%.
Risk weighted assets, our balance sheet remains solid and we are very well positioned to continue to grow the business and return capital to shareholders going forward.
Back to you John Thanks, Dave.
Let me wrap up with a brief description of the political environment, a discussion of the Nitro acquisition and an outlook for 2022.
Overall, the political environment remains constructive with the by the administration and Congress focused on simplifying the public service loan forgiveness process.
Increasing pell grants.
Offering for a community college and increasing funding for HBC is as discussed previously we support these types of efforts as they target assistance to those who need it most and our complementary tower business.
As hopefully you've all seen last night, we announced that we signed a definitive agreement to acquire Nitro College. This acquisition is an opportunity that both enhances our core business and creates potential new future opportunities.
We have partnered with Nitro College for nearly five years and I've gotten to know the team very well the partnership has grown significantly in the last few years to give you some perspective on that the growth we experienced in 2021.
<unk> 2020 in 'twenty, and 'twenty 2020, Nitro originated $19 million or disbursed $19 million and in 2021 that grew to $60 million. We expect originations through this channel to grow substantially over the next several years, increasing growth and lowering our cost to acquire.
Nitro generates these results leveraging a robust and low cost acquisition engine that sources customers through organic channels and a strong base of marketing partnerships.
These customers are drawn to nitro for their content tools and other resources valuable for families navigating the path to college.
This customer acquisition engine added to our own meaningfully increases the quantity and quality of our customer reach.
For example, the number of customers that we are actively engaged with is is projected to increase dramatically.
We estimate that on day, one we will have a direct relationship with seven times. The number of college bound high school seniors than we have today. Similarly, we estimate that we will have relationships with one seven times the number of enrolled college students.
And lastly, we estimate that we will have a direct relationship with two times. The number of parents of college age students compared to today.
We expect these numbers will continue to grow and by 2023, we expect to have a relationship with 50% of college bound high school seniors.
The high school senior population.
Along with this platform we are excited to welcome to Sallie Mae a talented team of professionals with industry knowledge and real entrepreneurial drive.
Combining and expanding the planning tools and content each company independently possesses will make the combined company a true destination for everyone navigating their journey to through and immediately after college.
This increases our customer reach and the depth of our customer connection and loyalty.
Our first priority is to leverage this enhanced position to drive growth and reduce Cta in our core business. We also expect that this platform will allow us to more efficiently and effectively compete in other product areas relevant to students and their parents.
This would obviously be valuable to our current credit card and deposit businesses as well as being potentially attractive to other product partners.
We will look to close this transaction by the end of the first quarter and of course, that's subject to all the customary approvals and closing conditions.
Let me conclude by discussing our guidance for 'twenty two.
We expect that the full year diluted non-GAAP core earnings per share will be between $2 80, and $3 a share.
We are expecting private education loan origination growth of 8% to 10%.
We expect our non interest expenses for the first year full year 2021 to be between $555 and $565 million.
And we expect our total loan portfolio net charge offs will be between $255 and $275 million.
In addition, today, we are announcing a new share repurchase authority to buy up to 125 billion of common stock over the next two years.
While dependent on share price and other factors, we expect to repurchase roughly half of that authority in 2022 and the remainder in 2023.
We will continue to programmatically buy back our stock over the next two years and look for opportunities to buy more on days when market conditions are favorable.
We believe the premiums for our loans and favorable market conditions will persist and continue to support our longer term capital return plans and reinforce our clear commitment to shareholder capital return.
With that Steve, Let's open up the call for questions. Thank you.
As a reminder to ask a question. Please press Star then one if your question has been answered and I would like to move yourself in the queue press the pound key.
Our first question comes from Sanjay <unk> with <unk>. Your line is open.
Thanks, Good morning, and good quarter.
So Steve maybe.
And you can just give a little bit more color on the premium on loan sales I appreciate it.
What you provided but I just wanted to make sure I understand.
Other factors that might play into that premium if the perception around rate increases changes for whatever reason does that seem to have an impact on those premiums are and what other factors might have an impact on the premiums that youre, assuming and then at current valuations of what's the threshold.
Of that premium rate.
It makes sense and where it doesn't today. Thanks.
Sure. Thank you Sanjay all great questions. So look basically the biggest drivers to the premium on our loan sale.
The underlying level of interest rates and credit spreads on top of the base.
Swap market rates.
Sure.
Basically I wanted to make a couple of points here. So interest rates are very important however.
Substance of the asset and knowledge of how the.
Our model is also extremely important Sanjay you might want to go on Skus I'm getting a lot of.
A lot of interference here.
Okay. Thank you very much so look the student loan asset class is no longer an esoteric asset class. There is an awful lot of interest in this asset from investors and I will point out that.
Our last auction basically drew coverage of eight times the amount of assets that we were attempting to sell so very strong demand for Sallie Mae portfolios. I'll also point out that while interest rates are very important interest rates grew substantially.
Italy or increased substantially between our January sale and our October sale, yet our premium increased significantly as you pointed out in your note and I think what drove that is the acceptance and knowledge of our portfolio's performance and how to.
Model it and the more history that we have on things like losses, and prepay speeds, which are the other factors that are as important as interest rates I think helps investors prize and accept this asset class for their investment portfolios. So we are.
In constant touch with and buyers of these portfolios and we know that there continues to be so.
Significant demand for the asset class because I leave anything out challenges against <unk> only thing I would add Sanjay to the second part of your question. The way, we think about it and I think we've said this before.
We are really looking at this as a great strategy to take advantage of this arbitrage between.
Hey, guys alone premiums and obviously sort of multiple evaluation yes.
So we have we have looked at that we have basically plotted out what we believe is a kind of green yellow red as it relates to loan freemium and valuation.
We have not publicly disclosed that nor do I think it's appropriate for us to get to but I think what we've said very clearly on the Alaska pauses. We don't believe we are close to entering that yellow zone and.
And so something would have to change pretty dramatically from here in terms of valuation or premium for us to believe that that arbitrage it makes sense.
Great. Thank you and one follow up question, John maybe for you on the Nitro College acquisition it.
It seems like a good complementary product for you guys. Just one on their revenues, obviously a lot of their revenues come from marketplace lender referrals, right and that might be impacted as Sallie mae's behind.
Then going forward, so how should we think about the accretion.
From this acquisition if those dry out.
Yes. It is.
Great question Sanjay first of all I think it's important to say, we really respect and value to current Nitro business model are very strong intent is to remain our keep that intact. While obviously look forward to getting to know them better and work more directly with them in the months ahead as we go through this first peak season.
My guess is our strategy and approach may evolve over that period of time, but we really like the Nitro brand, we really liked the nitro our business model.
And are very committed to making sure that that.
At first we start by doing no harm and really sort of enhance and protect the trajectory of of of that franchise.
Look I think at the end of the day.
<unk>.
Don a bunch of work understanding risk and we've done a bunch of work understanding opportunity on the risk side I think our sense is.
Potential lending partner decides they don't want to work with the combined companies going forward I think we feel like there are opportunities for us to pass those leads off to other lenders.
With little or no degradation by the way, including US. So there is a potential for some growth there we're not looking for that to happen, but if that were a decision that one of those partners made we think theres a good opportunity to retain that revenue.
And we also think that there is significant synergy value ahead and that takes in my mind a couple of different forms. We know there are some very direct our dollar cost synergies. For example, we will no longer have to pay a referral fee to nitro that we had previously paid on the originations there.
Giving to us.
We know that there is also a category of cost saves that I would put into that sort of avoided bucket. We know they are building technologies and capabilities that we have and vice versa and the opportunities to share those and avoid otherwise required investment I think is quite strong.
We think theres opportunities to enhance the pull through rate on the loans that they send to us through better integration of our platforms and lead and marketing efforts.
And to really make sure that what is already a very high quality channel for us becomes even more high quality and look I think there is no doubt that our plan is to dramatically grow the nitro channel going forward and I think we expect to be able to achieve a growth rate on that channel that's probably better.
And higher than what they could have achieved on their own.
So we've of course modeled all of that we've looked at all of that is a part of our diligence. We think that this is in its sole a strategic acquisition, but it's one of those rare strategic acquisitions that I think has a very strong and very hard nose business case really rooted in our core business today.
So we feel like we got the old Proverbial Double award score on this one as something thats going to really accelerate our strategic journey, but I think also ring the cash register along the way.
Great. Thank you very much.
Our next question comes from Michael <unk> with Wells Fargo Securities. Your line is open.
Hi, Good morning, I was hoping you could take further into your net charge off guidance for example, how much what's the uplift year over year coming from that forbearance policy change.
Much is coming from the end of the federal student loan payment cause how much is more general credit normalization. You also mentioned debt repayment wave impact if at all.
Is it.
Safe to say that the NCS could come down meaningfully in 2023 barring any changes in the economy.
Sure.
Happy to discuss all of that Michael So look.
There isn't an awful lot of expected charge offs from the.
<unk>.
Termination of the federal loan payment holiday, we think consumers balance sheets are in very good shape.
Organs behave very sensibly over the course of the pandemic and use our excess cash to pay down credit card balances mortgage balances auto balances et cetera. So we think consumers are in very good shape and we would also note that.
College graduates.
Recent new are also seeing significant increases in their pay packages. So we think the young adults are in very good shape to handle their student loan payments going forward with or without the federal loan holiday.
Turning to the other factors I mean, I don't want to try and.
This is two basis points from the additional.
Factors, but the A&P increase.
The increase in delinquencies from the changes in forbearance practices.
It was probably roughly half of the increase in delinquency that we saw from third quarter to fourth quarter and the repay wave.
Basically.
The dropouts from the pandemic is probably an additional.
The rest of that increase what we think is going to happen is the charge offs will absolutely peak.
In the first quarter of the year and trend down throughout the course of the year and get back to roughly where theres been hovering, which was around well actually a little higher than the one 3% they were doing in 2021 and the year around 1.5%.
So we think there are a couple of temporary factors impacting.
The delinquency buckets right now that will run through the system pretty quickly.
And we think we are very well reserved for the outlook that we have faced.
In the 2022 outlook and I will point out that.
The guidance that we gave for net charge offs in 2022.
Pretty much where we started off 2021. So there is absolutely a little bit of catch up and the lingering effects of the pandemic that is filtering into 'twenty two from 'twenty, one, but when we look at the performance of our port.
Folio overall, we feel very very good about what we're seeing.
Okay scratch very helpful. Second question was I wanted to get some thoughts on spirit long refi market as we've been mentioning that the payment holiday supposedly ending in May. We also got a major student loan refi competitor getting approved for the bank charter, which could potentially make them more dangerous.
But rates are moving higher so I wanted to see if you could share your perspective on the student loan refi market and maybe see if you have any sort of estimate how much of your portfolio to be refined in 2022.
Yes, Michael It's John Let me, let me take a crack at that and I'll, let Steve sort of chime in if he likes.
First of all I think you need to sort of go back and start with where we've been historically and I think our view is that.
That the refi business has been a relatively persistent constant and I would sort of call. It a modest disruption to our business. We of course don't like losing any customers to anybody.
But it really has sort of accelerated in the way that I think many people predicted it would have a number of years back and I think it's sort of in our minds gotten to the place where.
It's sort of viewed as a necessary cost of business and we've talked pretty extensively on these calls before about sort of that the cannibalization math and sort of our efforts to try to find opportunities to proactively.
Sort of manage and self consolidate our own business.
Sort of a double edged sword of having such a high ROE product that we have as you need to be really good and really precise in the self cannibalization activities to make it both a good activity for customers and a good activity for shareholders.
To me. The real question is has anything dramatically changed from that experience looking forward.
Yes, obviously the payment holiday is one thing.
But I would point to a couple of others on the flip side of the ledger.
One if there was ever any doubt in the mind of students about the value of having the federal government hold their loans I think they learned that during the pandemic with the federal payment holiday and potential ongoing discussion of some limited federal loan forgiveness.
Think in many respects people have come to understand that theres actually a real cost of not having the government hold that its federal loans and consolidating secondly.
Secondly, you mentioned it interest rates are rising that has both a customer.
Marketing, but I think it also has an underlying economic effect for the customer a lot of these hold fixed loans and so therefore the value proposition of refinancing is not as strong I. If the loans were originated during a lower rate environment by the way, we see that and most sort of.
Situations, where people are thinking about refinancing their debts.
And I think by the way. It's also true that the margins on this product will get squeezed continue to get squeezed by the higher interest rate environment and I think this was something that we view it as a.
Pretty marginal margin product historically, and you don't have to model or assume too much in terms of rate increases for that to get squeezed to the point, where it makes justifying the marketing Annapolis acquisition expenses sort of even harder so.
We put all of that together and I don't think we're anticipating that consolidations will be less the cost of our business, but I don't think we're sitting here, believing that the dynamics, we've seen historically are going to change.
As it relates to the competitive question you asked.
Really want to talk about specific competitors.
Certainly someone becoming a bank has certain advantages in terms of funding costs and also has disadvantages in terms of regulatory cost and most importantly capital costs.
And I think if you start to look at minimum capital requirements.
Against a low and shrinking margin loan category.
It could very well be that the capital implications are more important than the funding cost benefits of that kind of a change.
So I don't think we're really viewing that as a major risk for us going forward and I think it's worth noting of the players that we see engaged heavily in the refi space. Historically most of them have been non banks, which I think lends credibility to the fact that it's just hard to make that capital.
Calculation go around so hopefully that gives you a few perspectives, but obviously I think we're viewing at this very much as sort of a steady as she goes type of outlook barring something changing in that environment.
Okay, Steve have any sort of estimates what are you expecting for.
How much of your portfolio can be refined in 2022.
Michael I don't think we expect to see a whole lot more in 'twenty two refined way than we have seen in 'twenty.
'twenty, one it's been very steady.
Seasonality for the numbers and it's been very sporadic.
Okay. Thank you. Thank you everyone.
Our next question comes from Mark device with Barclays. Your line is open.
Thank you.
Can you talk a little bit about your assumptions around the 8% to 10% origination guidance this year.
Are you expecting some of the headwinds you faced this year, we will get resolved.
Yes.
It's John Mark Thanks for that look I think we have tried to incorporate into that all of the known things we have not gotten over our skis and unknown or speculated things. So we've looked really long and hard at.
At what happened in originations last fall.
It's a really important barometer and of course, we were glad to see.
Some of the growth coming back into the market after the pandemic.
We of course looked at what we think is going to happen with the ending of the FERC programs.
Talked about this pretty extensively on the last call, but youll remember there is a very large amount of aid given four universities and colleges for direct financial assistance to students.
That program I think by statute has to come to an end here. This spring so we've absolutely sort of.
I assumed that.
And then we have applied to that sort of the natural market growth rates and so forth that we would expect as part of <unk>.
Any of our outlook development processes.
What we've not included just to say it explicitly is if there is an unexpectedly large snapped back in enrollments back.
<unk> from the end of the pandemic so depending on what numbers you want to look at we know that from the beginning to the end of the pandemic enrollment in schools were down mid.
Mid single digits.
Versus a pretty flat to slightly upward trajectory before that.
We have assumed that enrollment growth continues from kind of where it's been but we've not assumed that kind of a snapback because we've just not seen it yet in the numbers.
So obviously if enrollment trends are very very different than historical patterns coming out of the.
Coming out of the pandemic than than you might expect to see something definitely.
Okay got it.
And then turning to buybacks I mean, I think you're indicating.
<unk> you expect to use about half of the authorization in 2022 and half next year.
The question is why not get a little bit more aggressive than that just considering how well capitalized you are even after kind of thinking about the seasonal trading them.
Yes.
It's a great question and I think if there's one thing I hope Stephen I have demonstrated to you is that we and our board are really committed to the notion of capital allocation and capital return.
I think thats pretty clearly evidenced by the fact that we bought back 35% of the company in the last 18 months.
But I think with that what we really learned last year Mark during the tender offer is that the governor for US is really how quickly can we put capital to work. So just just to remind you all about a year ago, we put in place a $1 billion tender it was what 42%.
Scribed it led to a great year in terms of share repurchase but.
We recognized that there is an upper limit to how quickly we can return capital and have it be done efficiently.
And by the way don't forget we love our loans and we want to keep as many of those on balance sheet as we can while really being aggressive on capital return.
And so I think we're trying to get that balance right. It's.
It's a little bit of science, it's a little bit of art.
But I think you can rest assured if we see opportunities for us to be on the margin.
More aggressive on capital return I think we've demonstrated we will always try to do that of course with an eye towards always making sure we're well capitalized.
In the eyes of our investors and regulators.
Okay. It makes sense. Thank you.
Yep.
Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks.
I guess.
I was hoping maybe you could.
Talk about your views kind of on a.
Multiyear basis as to the.
As to the loan sales I mean, how do you think about that.
That $3 billion.
Do you think about it over time as a percentage of originations thats coming down like how do you think about it particularly.
The comments in terms of the levels of capital that you've got and are generating.
Can you just give us a framework is how to think about that over the next couple of years.
Yes, Moshe happy too and look again, let me sort of rewind the tape and remind everyone where we've been.
Our real sort of mid term strategy here and remember the loan sales in my mind, our chest that a mid term strategy. We are not trying to become a long term originate and sell a company, but I think we are really trying to both manage and take advantage of two different factors number one is the arbitrage disconnect between.
<unk> valuation and loan premiums and then the second is obviously the capital implications IFC, so phase and and the effect that that would have on our ability to return capital all other things being equal so for the next couple of two or three years, we've got both of those things at play.
And the first one will be at play for however, long market conditions persist.
What we have said pretty quick pretty clearly is we want to be as aggressive as we think we can and returning capital to shareholders. Recognizing that these are really high quality loans and our long term strategy is to retain and hold most of them on balance sheet.
While generating organically capital that we can return to investors in a very meaningful measure.
So I think what we have said historically is people should expect a flat ish balance sheet. My guess is over the next couple of years, it will be flattish to slightly increasing balance sheet.
So.
<unk> suggests probably a pretty consistent level of loan sales over the next few years as we've guided to for next year, but of course, each year, we will evaluate that based on market conditions, we will evaluate that based on what we think is our ability to return capital efficiently.
Actively.
In our broader longer term plan so.
I think we've set a pretty clear sort of precedent for how we're thinking about it and doing it and I think until one of those two factors changes the arbitrage opportunity and doors T cell phase in my guess is you should expect on average more of the same.
Okay.
Got it thanks.
Just to say as a follow up.
The discussion on the competitive dynamic I think it's probably fair to say that both of them.
The major competitors that you see in the consolidation market.
I actually do need to put those loans over time into the capital markets, even if they hold them on balance sheet of a bank for six months. So.
I guess the question is does it really change the dynamic that much.
As they as they need to do that plus.
One of one of your competitors had been kind of targeting private student loans. During the moratorium. So I guess, maybe could you kind of reflect on both of those points.
Sure So look Moshe.
At the end of the day, yes, Youre right.
That market is where these players are going to fund them. One is retaining them on balance sheet, but the fact of the matter is the increase in basically the cost of medium term swaps has increased about 100 basis points over the last six or eight months.
And that has had a direct and offsetting impacts.
On the NIM in those portfolios and the gain on sale players are confronting.
The exact same impact measured in a in a different way the comment about.
Player originating a whole bunch of private student loans just doesn't.
Through the refi market doesn't really add up based on what we've seen happen in our portfolio. Since we're probably 50% of the volume out there I don't know where they would have gotten the other 454 5 billion.
And volume so so that one doesn't add up but yeah really I mean, the capital markets are the driver of what these players can ultimately get done.
A reasonable margin or gain on sale.
Okay. Thanks, Steve.
Yes.
Our next question comes from Matthew Howlett with Jefferies. Your line is open.
Hi, I'm on for John Hecht.
The first question is.
With interest rates expected to rise this year, how many rate hikes are you putting in your modeling.
More or fewer hikes impact your expectations.
So great question and the answer to that is very simple.
Put into <unk>.
Our model is based basically the forward curve. So look the market says its going to happen is is what we've put into our models.
As you may recall from our interest rate sensitivity presentations in our 10 Qs we are very well balanced we've been published one this quarter because of it into two but our position hasn't changed dramatically I think based on the third quarter queue. If there was 100 basis points sure.
<unk>.
In market rates, our earnings at risk increase very modestly I think the number was 2%. So we are.
Very well positioned for the current market expectations of a rise in interest rates.
You read the headlines this morning, it seems like the market is expecting.
Five rate hikes, I think that that's probably pretty much already priced into the swap and the government bond market. So something dramatic I think would have to happen from here in order for the five year swap market has increased from one 5% yield up to on the one three.
Quarters, 2%, but we think we are very well positioned for what comes down the pike in terms of interest rates.
Okay. Thank hopefully in animals.
Got it.
As a follow up on your expectation for an 8% to 10% pickup in originations. This year is that with the market expectation for growth is or are you accounting for some share gains as well and if so where are you gaining share.
Yeah.
I think it is sir.
Our base assumption is that we're going to retain share and then we look for opportunities where we can modestly grow at.
The 50% plus market share player, obviously, theres not huge opportunities for us to to it.
Increased share to a large large amount, but I think what we have demonstrated over the last six quarters is pretty consistent and steady share gains during that time I don't think we've announced Steve yet market share for the fourth quarter of last year, but up to the last quarter that we announced it.
And look I think we do that based on really quite frankly, good old fashioned hard work, we spend a lot of time thinking about application throughput and yield.
Unique to the private student lending business.
Certification process with schools is very important so we spend a lot of time working with our school partners to make sure that loans are not getting caught up in their systems and that those loans are being certified and dispersed we do a lot of work with students educating them on sort of what they can use there.
Their student loans for surprisingly many students don't know that they can use their student loans for related travel and supplies and fees and they end up putting those on more expensive credit cards. So there's opportunities for us.
Actually on the margin expand the pie slightly by crowding out other more expensive less customer friendly sources of funding and financing.
I think I would just say Matthew Theres no one silver bullet in any of that.
We have learned is you need to work all of those angles and if you do that and you do that well.
Can maintain your share and you can grow it modestly on the margin and again I look back over the last six quarters for our experience in doing that.
Great. Thanks for taking my question.
There are no further questions I'd like to turn the call back over to CEO , John Winter for any closing remarks.
Great well, thank you everyone for dialing in and Michelle. Thank you for your help today. We appreciate your interest in Sallie Mae obviously, Brian in the whole IR team are here at your disposal to answer any questions.
We look forward to continuing the dialogue and talking again next quarter if not before.
That Brian I think I'll turn it back over to you for some last minute business great. Thank you John and thank you for your time and your questions today, a replay of this call and the presentation will be available on the investors page at Sally made a com.
If you have any further questions feel free to contact me directly. This concludes today's call. Thank you.
This concludes the program you may now disconnect everyone have a great day.
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