Q4 2022 SLM Corp Earnings Call
Okay.
Good day and welcome to the 2022 fourth quarter Sallie Mae earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation there'll be a question answer session and instructions will be given at that time as a reminder, this call is being recorded.
I'd like to turn the call over to Melissa Bruno Vice President Investor Relations you may begin.
Thank you Michele good morning, and welcome to Sallie Maes fourth 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 discussions will contain predictions expectations and forward looking statements.
Actual results.
May be materially different from those discussed here.
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.
These factors include among others the potential impact of the COVID-19 pandemic on our business results of operations financial condition and or a cashless.
During this conference call we will refer.
And non-GAAP measures, we call our core earnings.
Description of core earnings.
All reconciliations to GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31st 2022. This is posted along with the earnings press release on the investors page at Sallie Mae Dotcom.
You and now I'll turn the call over to John Thank.
Thank you Melissa and Michele good morning, everyone. Thank you for joining us today to discuss Sallie Mae's fourth quarter and full year 2020 to your results and our outlook for 2023.
Hope you'll take away three key messages today.
First on most dimensions Sallie Mae had a strong 2022.
Second we now believe that the level of charge offs, we experienced in 2022, well likely improve but remain at an elevated level for a period of time.
As such we have taken tough financial and operational medicine to start to put that impact behind us.
And third and as a result, we believe we have strong momentum entering 2023 and are well positioned for future success.
As we released last night, Sallie Mae's, Sallie Mae experienced a loss of 33 cents a share in Q4 and diluted earnings of $1 76, a share for the year.
This quarterly loss was.
Due to both an increase in our provision for credit losses, as well as the write down of the value of an investment in non marketable equity securities.
As Steve and I will discuss we believe both charges helped position Sallie Mae for strong performance in 'twenty, three and beyond apps.
Absent these charges our financial results for the quarter were in line with our guidance expectations.
Let's get into the details that drove our performance in the quarter and the year.
Private education loan originations for the fourth quarter of 2022 or $819 million, which is up 11% over the fourth quarter of 'twenty one.
Consistent with guidance on our last call our full year originations ended at approximately $6 billion, which is up 10% over 2020 one.
It's about medicine has carried into 2023 as we have just experienced the strongest January origination month in our company's history.
We also saw a notable market share growth in 2020 to Sally.
Sallie Mae share of the core student loan lending market.
Increased 200 bps year over year. According to the most recent industry report reflective of R. 22 peak season success.
We also observed important changes in the mix of our originations specifically, we saw a 15% increase in underclass disbursements compare it to last year.
Underclass originations have higher lifetime value to us due to greater serialization opportunity, which bodes well for future peak seasons.
This performance was driven by a number of factors.
Including realized benefits from our acquisition of Nitro College.
And our marketing effectiveness enabled by past Mar Tech investments and the strength of our partnership and school relationships.
Credit quality of originations was consistent with past years.
Cosigner rate for fourth quarter, 2022 was 82% versus 83% in the fourth quarter of 2021.
Average FICO score for the fourth quarter of 2022 was 747 versus $7 49 in the fourth quarter of 2021.
For the full year, our originations were 86% cosigned and had an average FICO score of 747.
Year in and year out.
Our quality loan portfolio generates net interest income significant net interest income.
For the full year of 2022, we earned $1 5 billion of net interest income.
Here, then full year of 2021, 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 from $4 eight 1% and 21 to $5 three 1% and 22.
We have also manage expenses rigorously and this highly inflationary period.
And then on the lower end of our guidance at $559 million.
This is despite an increase in volumes and in costs, such as wages benefits and other expenses.
Despite this pressure.
We continue to ruthlessly prioritize and invest in our most important operational and strategic initiatives.
In the fourth quarter of 2022, we continued our capital return strategy repurchasing 10 million shares at an average price of $16.25.
Have reduced the shares outstanding since January one 2022 by 14% at an average price per share of $17 58.
We have reduced the shares outstanding since January 1st of 2020 by 44% at an average price of $15 44.
While we are excited about this performance charge off results in the year worse than our original expectations, specifically as discussed on page 15, and 16 of our earnings press release, our net private education loan charge offs for the year were $386 million above the revised range we set.
At the end of the second quarter.
You will remember at that time, we expected charge offs to remain elevated in Q3 and begin to abate in Q4.
While we have seen improving performance in many of the transient factors. We've previously discussed.
Some factors remain elevated.
In addition, while we don't see evidence of stress across the portfolio as a whole we began to see elevated levels of delinquency and charge offs in pockets of our portfolio toward the end of the year.
We assess industry and competitor data. We believe this is a trend similar to those seen in other areas of consumer lending.
These combined factors have led us to conclude that while we expect charge offs to be lower than 23, then in 'twenty two the charge off rate will likely remain elevated in fact, we saw this play out in January where roughly where results.
Improved relative to our expectations.
We have reflected this view in our charge offs estimate and resulting allowance calculations, specifically, we expect charge offs in 'twenty three will be between 345 and $385 million.
As a result, we added $181 million to our reserves in Q4 and.
In addition to this charge off outlook. This provision build incorporates portfolio and commitment growth modeling changes.
And a true up of modeled in actual results.
At least 70% of this allowance build is related to elevated charge off expectations over 'twenty three and then to 24 that I described a moment ago.
The remaining 30% comes from a prudent assumption that while we are optimistic that credit will eventually normalize we are not willing to assume an immediate improvement where we and others are continuing to see economic stress.
In addition to this financial charge. We have also made significant changes to our people processes and programs to improve loss performance. We will continue to evaluate performance and the effectiveness of these changes and make further enhancements to our operations as results dictate.
The other main factor of our financials in Q4 in golf the valuation of our investment in non marketable equitable equity securities.
In the third quarter, we made the decision to exit the credit card business and divest the portfolio.
As you May recall, we made a strategic investment in a servicing partner when we entered the credit card business in 2018.
In 2021, we marked this investment up by $35 million.
However, based on prevailing market sentiment in the fourth quarter of 2022.
Were required to write the asset down and have done so by $60 million the.
The remaining investment on our balance sheet is immaterial.
The increase in our provision and the write down of our equity investments were the primary drivers of EPS coming in approximately 74 cents lower than our expectations about two thirds of this impact was driven by the provision build I just described and the remainder was due to the write down of a strategic investment.
And a business line we are exiting.
Steve will now take you through some additional financial highlights of the quarter Steve.
Thank you John Good morning, everyone, let's continue with a deeper dive into our loan loss allowance and provision.
Our total provision for credit losses on our income statement was $297 million in the quarter driven by an allowance build of $181 million and net private education loan charge offs of $116 million.
This Q4 provision represents an increase of $90 million from the prior quarter of $313 million from a year ago quarter.
At a more detailed level the increase in the allowance during the fourth quarter brings our private education loan reserve to one 4 billion.
Or six 3% of our total student loan exposure.
Each under Cecil includes on balance sheet portfolio, plus the accrued interest receivable of $1 2 billion in unfunded loan commitments of another $2 billion.
As John mentioned, there are a few factors that influenced this increase in allowance the largest being our charge off expectations over 'twenty and into 'twenty for Chris.
Persistence of operational issues credit administration practice changes and the potential for increased pressure on our borrowers from the current economic environment.
We also built allowance in the quarter for slower than expected prepayments.
Let's now discuss our credit metrics.
Private education loans delinquent 30, plus days were.
Three 8% of loans in repayment.
A slight uptick from three seven in Q3 and up from three 3% in the year ago quarter.
It is worth reminding everyone that a natural result of reducing forbearance is an uptick in delinquencies in fact, since we implemented our forbearance policy changes the increase in our 30 plus delinquency rate is equal to a decline in forbearance usage.
We now expect 30, plus day delinquencies to remain at recently experienced levels through 2023.
Private education loans, and forbearance were one 8% at the end of the quarter and increased from one four at the end of Q3 are lower than one 9% from a year ago quarter.
As may graduates exit their grace period in November and December it is typical to see seasonal pressures pushup forbearance usage.
Net charge offs for the portfolio.
Three 1% in the fourth quarter compared to two 7% in Q3, and one 6% in the year ago quarter.
Full year charge offs were $2 five 5% in 2022 compared to one three.
3% in 2021.
We expect the private education loan charge offs for the full year of 'twenty, three so total 2.4% to 5%.
As John mentioned earlier, we are appropriately reserved for this outlook.
Let me provide some further context around our projection in <unk>.
Patients for a lifetime loss.
Todays discussion has highlighted the fact that we continue to believe 22 charge offs do not reflect our long term run rate. This belief is reflected in our profession provision, whereas John mentioned earlier, 70% of the increase is driven by expectations of elevated charge offs over them.
Next two years.
With that said, we also believe that our 'twenty one charge off rate of one three.
3% does not reflect our long term expectations either.
We believe that our long term through the cycle loss rate should be closer to one 9% to be consistent with our expected life of loan default rates at underwriting.
In recent years, we've seen loss rates well beneath that 2022 was a catch up year for a lot of reasons that John and I have already discussed however, when we look at vintage curves and the expected remaining credit performance of our assets over time.
We think that life of loan losses will be within the estimated range anticipated underwriting and we will continue to drive attractive returns and profitability going forward generating life of loan return on equities.
The 20% range despite recent credit performance.
John has already reported on our solid NIM performance I would like to add to that discussion that we remained marginally asset sensitive and should benefit from a continuation of rising rates.
We continue to expect our NIM to.
C 5% throughout 2023.
Income tax expense for the year was $162 million.
<unk> represents an effective tax rate of 24, 5%, which was a reasonable run rate for our company.
Fourth quarter operating expenses were $138 million compared to $1 50 in the prior quarter and $1 25 in the year ago quarter.
Expenses are down from the prior quarter, which was our peak lending season.
Full year operating expenses in our core student loan business increased just seven 8% from the prior year.
<unk> significant inflationary pressures and disbursed volume being up 10, 2%.
We will continue to focus on driving both servicing and acquisition costs lower on a unit basis.
Finally, our liquidity and capital positions remain strong.
We ended the quarter liquidity of 23, 5% of total assets.
At the end of the fourth quarter total risk based capital was 14, 2%.
Common equity tier one capital was 12, 5%.
GAAP equity plus loan loss reserves.
Over risk weighted assets and important metric in the seasonal environment wasn't a very strong 15.9%.
We believe we are well positioned to continue to grow our business and return capital to shareholders going forward.
I will now turn the call back to John .
Thanks, Dave.
As I said previously I believe Sallie Mae is well positioned for the future.
While we expect the private student lending market to return to a more normalized growth rate in 'twenty three compared to the post COVID-19 bounce back year of 'twenty two our originations engine is strong and prepayment speeds continue to slow.
Both of which bode well for balance sheet growth or continued loan sales are.
Our NIM is resilient and we have demonstrated strong expense management, while charge offs are elevated we have taken measures by increasing reserves and making operational changes that we expect should help insulate future performance from these effects.
On top of these factors. We are also seeing positive signs in the fixed income markets.
Rates are now at the levels, where we executed our 2022 loan sales credit spreads are normalizing and prepayment speeds slowing all of this helps support future loan sale plans as such subject to market conditions, we plan to sell $3 billion of loans in 2023 and <unk>.
Keeping with our past loan sale and share buyback arbitrage program <unk>.
These sales are likely to take place in Q2 and Q3.
In addition, under our 2022 share repurchase program, we still have the authority to purchase $581 million worth of shares. This year, we do not anticipate having to seek additional board approval for repurchases this year beyond.
Beyond 2023, we remain committed to our capital return strategy.
It is in this context I would like to provide our guidance for 2023, specifically, we expect full year diluted non-GAAP core earnings per share between $2 50, and $2 70.
Full year private education loan origination growth of 5% to 6%.
We expect our non interest expenses for the full year of 2023 to be between 610 and $620 million and as stated earlier, we expect our loan portfolio net charge offs will be between 345 and $395 million with that Steve Let's open the call up for questions.
As a reminder to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
For questions.
Our.
First question comes from Moshe Orenbuch with Credit Suisse. Your line is open.
Great.
Thanks, maybe just to think about given the strength in originations for 'twenty and.
In 2022.
John the deceleration Youre seeing is could you talk about or that you're expecting is it an element of conservatism or what do you think about.
How do you think about that guide in the context of what's happened now we could see this morning to report that the freshman class at least is starting to grow again I know there's been some declines in college enrollment over the last couple of years. So can.
Can you put the 5% to 6% in context floors.
Yeah, sure happy to Alicia and good morning, and thanks for your question I think the biggest thing to remember is in 2020. One we were still dealing with the impacts of the federal government <unk> program as a result of Covid.
And that had as Youll remember a pretty material impact on borrowing requirements for students.
As colleges had just a lot of money directly earmarked toward direct aid and assistance to college.
We are we absolutely expected in our numbers last year to see a rebound does that program went away by by statute and I think we believe that the market. This year will look more like a normal market and I think our view is sort of long term. This is a market that is growing in the sort of.
Yeah mid to upper single digits.
And that's sort of the expectation that that we have brought in.
Ben I think excited by the performance we put out in 'twenty two both in terms of sort of the growth of the market and our market share gains as I mentioned before I think we saw a very strong in fact, a record setting start in our January origination and so I think we are.
We're optimistic about our originations outlook, but it's really the loss of the <unk> program that led to a view of just a different market wide growth rate from 'twenty two to 'twenty three.
Okay got it.
And just as a follow up.
Very good to hear your comments about the interest rate environment, we should see things that the spread environment is getting a little bit a little bit better.
Can you talk a little bit about whether the improving margin slowing.
Kind of slowing prepays, but somewhat higher credit losses, how to think about that in the context of how we should be thinking about.
The value of those loans the gain on sale that you can achieve.
Sure Moshe ill take us evidence or in that question. So the fixed income market has been extremely volatile.
And we saw interest rates go up and come back down over 100 basis points from where we last executed I think it's pretty widely known that we last executed in the high single digits.
And since that point in time, I think ABS spreads, which many of our loan buyers go the ABS market to fund their purchases.
Actually tightened a little bit since then but market is wide open and deals are getting done very actively so that's very very encouraging.
The fact that prepayments have slowed significantly I think we saw consolidations down something like 50% year over year extends the life of these loans and generates additional residual cash flows that is a very big positive so look.
And as I discussed I think in some detail, while we did have charge offs exceeded our expectations in 'twenty, two and probably going to persist into 'twenty, three or a little bit into 'twenty. Four we don't think that that has had a major impact on our life of loan expectations, which is certainly.
What investors will factor into their pricing on the product.
In our guidance, we were a little bit conservative in terms of the premiums that we expect.
Or receive and I don't want to start negotiating against myself here. So maybe I shouldn't have even brought that up but we are very optimistic.
That we will be able to execute some very strong loan sales then finally I will point out that.
There are many many interested buyers. The list continues to grow as we steadily so plus $1 billion of loans. Each year. So we are very encouraged and looking to get the process Rolling now that we have released earnings.
Great, Thanks, and I'll get back in the queue.
Thank you. Our next question comes from Mark Devries with Barclays. Your line is open.
Yes, just one follow up on those comments Steve.
On the gain on sale margin assumed in guidance is it kind of consistent with the last sale or when you say conservative potentially lower than that.
How should we think about that.
I prefer not to give any further specificity on that front more.
Okay fair enough.
Next question is just on cosigner rates, well I think you alluded to it being kind of consistent I think it's been steadily migrating down over the last several years can you just talk about what's driving that and also.
What share of kind of the charge offs and delinquencies are coming from the population of loans, where you don't have a cosigner.
Let me.
Let me take the.
First part of that question.
We have not seen material changes in our cosigner rate on what I would describe as sort of a mix adjusted basis. So when you look at it.
The various types of schools and you look at the population of those schools.
We have not seen a change there I think the biggest change that we have seen is at.
Growth in a sort of a different set of programs, which tend to attract often times older and more established credit risks.
<unk>, who don't in fact need a cosigner to support the underwriting decision. So.
A great example of this is think about.
The $25 26 year old individual recently got out of the armed services has decided to go back and get their degree yes, that's a pretty good indicator of the kind of person that.
Would not have a cosigner and so I think that that sort of steady drift down that you are referring to we have not noticed patterns of that as we normalize for the underlying segments of customers.
Customers.
I do not have Mark let me ask Steve if you do views on.
What are the specific cosigner non cosigner default rates, we can certainly follow up on that Steve. If you don't have a look we obviously core over the default stats.
Every quarter and there has been no meaningful yes.
The percentage of defaults that come from coastline Rosemont goes one.
I think we went from 87% to 86% of applause.
So it hasnt been really a big mix shift of that either.
Okay got it thank you.
Thank you. Our next question comes from Michael Kaye with Wells Fargo. Your line is open.
Hi, Good morning, I think I heard Steve mentioned lifetime loss estimate now of one 9% I thought I heard.
John previously say, 175% so that an.
And increasing that estimate correct and also I wanted to ask how can you have confidence of estimating these lifetime losses, when youre, having trouble forecasting even current quarter credit metrics, which happened in Q4.
Thank you for that question, Michael So look I went back and I took a look at what John said at the Barclays Conference.
I would call his comment 10, five divided by six is really being illustrative.
Put life of loan default rates into perspective, what I've done with the one 9% as I have taken a look at basically the disclosures that we've included since seasonal was implemented where we basically provide information.
<unk> on what origination cohorts, our defaults come from quarter in quarter out.
And basically what I've done is applied.
Charge off rates informed by the by the charge off rates that we disclosed occur and the principal in full principal and interest repayment cohorts.
Excuse me excuse me essentially normalized.
Current charge offs, but we are seeing excluding things like our best estimates of.
Defaults from the continuous enrollment program that was the cap year population that we've talked about and also normalizing for the issues that we've seen in our collection centers as well as the issues that we have seen with the forbearance changes trying to estimate what was.
And what was a continuation of.
An increase in life of loan default rates and I would just add Michael that look we're confronted with administration administrative changes.
And operational issues that are quite candidly difficult to forecast the model doesn't do that and we need to rely on a management judgment to calculate what we think are the appropriate and meaningful overlays John anything you'd like to add to that Steve I think that was all right.
Michael first of all let me say.
Thank you for your question and I appreciate and understand the frustration you feel in.
Sort of that charge off performance, we showed last year and let me just assure you. There is no one who takes it more seriously and there is no one who is more sort of disappointed in the fact that we were behind on forecasting those losses that Steve and I.
It is something that that has and continues to have our utmost attention as I look forward.
First of all let me say, we're in a pretty uncertain economic environment. So everything I'm about to say is in that context, obviously, if things change dramatically on a broad at macroeconomic perspective, Yeah, then obviously our outlook and our views can change.
But I think Michael there is theres three things that give me confidence and sort of our ability to better predict going forward than we have in the last year.
First we are now a full year into the seasoning.
Last if the credit administration practice changes that Steve referenced I think the last changes went in early last January if memory serves me right.
Getting that kind of ability to look and start to understand on a year over year basis is really really useful for us.
Disentangle in sort of the credit administration impacts versus seasonality and quite frankly, just the normalization of life post COVID-19.
Thank everyone saw delinquency and charge off performance sort of behaved differently than historic norms.
I think seasoning is the first thing that I would add that I would look at.
Secondly, you will not be surprised at all.
We have ripped apart and reconstructed.
Our analytics around loss forecasting and I think in particular.
It has started to build new and different models that is specifically look for.
And track the kind of unique patterns the unique sub populations that really seem to drive the outsized loss performance in 2022.
We now feel like we have analytics that specifically take that into account and again, we couldnt previously because those are populations that behave differently in 2022 than we had seen the same before that.
And I think the good news is you know.
We have validated those models against our historic models and actually think we have a good understanding of the similarities and the differences between them. So I think our our level of analytical understanding has really grown in this post credit administration world.
Look the third thing is I am incredibly impressed with our company's ability to swarm to an opportunity when we understand that opportunity is out there and it's a little bit of a tangent, but I would look at originations is a great example, I think if you go back two years.
You will see US I think we had a pretty good.
Marketing and originations engine.
We saw that as a huge opportunity and we made leadership and talent changes we made technology changes we made analytic changes we made process changes.
And I am biased, but I would say we are on the verge of that being a real source of distinction for us in the financial services space after lots of years of good performance.
I don't think we recognized coming into 'twenty, two that we had the opportunity to improve our our collections and loss mitigation programs to that degree believe me we understand that now.
And we talked really hard about the tough Madison, we've taken I think we have done many things over the last six months to put that change into a fact I think some of those things are already starting to gain traction.
And we will continue as I said in my talking points to work that hard to make sure that we get actual losses to their appropriate and lowest level and that we can quite frankly, Michael regain your trust in our ability to call our shots.
We will allow really look forward to a day, where you say we've kind of gotten back on are on the right footing. There. So I. Appreciate your question, but Steve maybe that's what I would add to it.
Alright. Thank you for that my follow up question is also on credit you know besides the impact on that.
The impact of the forbearance Barron's policy changes and a whole staffing operational issues that are going to impact 2023, whats kind of that.
<unk> financial health of your borrowers I think you mentioned something about seeing some pockets of weakness in the opening statements could you just elaborate on that like what's going on.
Yeah, Michael happy too.
First of all I want to say and I said this in my statements. We continue to look I continue to ask us as recently as yesterday, we do not see sort of evidence of.
Broad stress across the portfolio.
What I think we started to see.
Part way through the third quarter, but really into the fourth quarter of last year.
<unk> growing stress on what I would call sort of.
Smaller kind of layered risk segments of the portfolio. So I'll give you. An example, if you look at.
Our performance of our.
Charge offs by payment.
You don't see sort of much of a difference between high and low payment, but if you start to layer in payment and years in repayment, so like high payment amount say.
Over several hundred dollars first year and repayment you start to see very different levels of performance than what we would have seen for a similar cohort in the past.
And so you know as we've really done the analytical work that I talked about earlier, we've gotten very deep into understanding these kind of layered risk pockets.
I think we understand now where that risk is coming from.
By the way as I mentioned earlier those are the kinds of populations that we have tried to build explicitly into our loss forecasting methodologies going forward. So we know that these are things that maybe in the past we didn't have to pay as much attention to but we need to know.
And we're developing specific programs policies procedures products to go after those types of customers. So you know.
Again, it is not broad, but it is the sort of two and three dimensions layered risks.
Where we're starting to see sort of pockets of outsized performance difference and I think that really.
<unk> is driving a meaningful part of our forward looking credit outlook.
So I just want to make sure I understand that you are seeing the pockets of weakness or are these borrowers that have higher relative payments earlier in the lifecycle of their repayment.
Is that right would be why is that what's happening why are you seeing that weakness there.
Yeah, I think I.
Thank Michael it it makes a lot of sense, if you're a brand new out of college.
And maybe you haven't fully grown income wise into your full payment.
And inflation is going up seven or 8% a year or so you think about that person's individual income statement and balance sheet.
Thinner income statement and balance sheet.
On top of that maybe they have some other variable rate loans you can all of a sudden see very clearly why that small sub segment of customers might be very different than someone who has the exact same payment.
Three years later in their post graduate journey.
And so I do think we see a pretty direct correlation between the sort of layered risk segments and the broader economic environment and the way that I would sort of describe it to you I don't think we believe that there is a broad recessionary environment out there today again, that's why we don't see distress in the portfolio as a whole.
But I do think we have.
Places where there are for.
For lack of a better analogy sort of some scattered showers, where yeah. This economic environment is for hitting certain borrowers harder.
And I think that's really what we're tracking and and trying to manage with those borrowers to help them return to financial health.
Okay. Thank you so much. Thanks for my question My question Yeah. Thank you Michael.
Our next question comes from Sanjay <unk> with <unk>. Your line is open.
Thank you and good morning.
I wanted to follow up on some of the previous questions.
John can you maybe just talk about what specifically went wrong with the process element of it and what what's been done over the fourth quarter to remediate that maybe we could just do a little bit of a case study there.
Yeah.
Great Great question, Sanjay and sort of thank you for that and we.
We would probably need an hour to do justice on all of the diagnostics and analysis that you know that we've done.
I think at the end of the day the simplest thing that I would say is yes.
It all starts with our historical modeling.
Of the portfolio and I think at the end of the day. These types of layered risk segments that I talked about before.
Exhibiting in this economic environment very different patterns than we have seen them exhibit in the past.
And I think we.
We needed to see some of that experience to sort of retrain, our analytics into retrain our approaches.
The most important question is like what are we actually doing about it and what are we changing and again I can't be Sanjay comprehensive with you in a short period of time, but let me let me give you a couple of examples.
Maybe give you a flavor of it.
First we've looked really hard at sort of leadership talent and the skills of the people that we have on these teams and the way that they are organized and we've made.
Full changes in that space.
We are working hard at developing specific programs.
For the sort of layered risk populations to make sure that we're being as effective as we can so one that I'm, particularly excited.
Excited about is recognizing that new to repayment seems to be a you know a.
Subpopulation, that's feeling real stress right now.
We implemented a pre delinquency and loss mitigation program. This year that was heads and shoulders above what we've done historically, so even before someone gets into trouble establishing communication with borrower cosigner.
Beginning to sort of help them understand the options should they be feeling financial stress.
Reinforcing and rent and re communicating the programs that exist for them like our existing graduated repayment program G. R. B.
By the way, even just some simple things like making sure we have right party contacts.
Text and email information again borrower cosigner. So that we you know if we do get into a situation where they're delinquent. It's just a lot easier to make a note to make that first contact.
We have implemented over the you know.
The last quarter.
Quarter or two.
Major technology improvements in the collection space. So we are doing an awful lot of work right now to give them the workflows and the tools to make it easier.
For them to navigate with these customers and more cost effectively and efficiently get them into the right programs in a shorter period of time, that's a great way for us to sort of manage our manage that we're.
We're looking a lot at our training programs.
We are fully staffed today, that's different from where we were you know mid year, we are not seen our new collectors. Despite a really high quality set of classes, we brought in rage proficiency and effectiveness in all the areas as quickly as we would've expected. So we're doing a lot of work for example, looking at what's the right way to <unk>.
Train them in person versus remote how do we make sure. We've got you know sort of the right actual tools and experiences for them and the like so probably can't go into all of it but I mentioned before the way we swarmed the opportunity that we saw on originations you can rest assured we are swarming the opportunity that we see.
Loss mitigation in exactly the same way.
Okay.
Great and then just maybe a follow up question for Steve I'm, just trying to reconcile that one nine I seem to recall like in the past that number was closer to one right and when I look at some of the peers like discover understanding they have a smaller portfolio in there they're kind of in that 1% range still in terms of their annualized loss rate.
Is there something different about sort of your portfolio versus there. So I'm just trying to reconcile that.
So look the.
The credit card lenders have talked about the seasoning of recent borrowers.
We see in our portfolio. So if you go back and take a look at our disclosure on where losses emerge.
From 2019, you will see that basically 75% to 80% of losses basically come from origination cohorts that are three plus years and older.
A it from origination cohorts that are five plus years and older which makes perfectly good sense, because with people borrowing while they're in school and not starting to make full P&I payments until six months. After graduation that is exactly where you would expect our.
Defaults to come from so if you look at the 2019 cohort, which totaled 1.3% of loans there wasn't.
High volume of loans in repayment at that point in time, if you take a look at the 2022 cohorts. Obviously, we had some challenges in the organization total default rates.
We're 255% obviously the deferred.
All right on the older cohorts was much higher than our run rate sort of P&I default rates.
So if you apply aboard normalized.
And I read.
With default rates. So those cohorts across time, you basically could triangulate back to that 1.9% default rate and I'd be more than happy to offline walk you through those disclosures and show you how I arrived.
That number which I believe is perfectly reasonable if you look at P&I default rates over time from cohort to cohort they sort of peak at 4% and then drop back down into the 3% level hours or.
Running much hotter now obviously you can see that in all of our rig maybe disclosures what I did was applied.
Default rates that are stressed compared to what we've seen over time to accommodate for the potential for higher bulk rates from for example, our forbearance administrative.
Change is difficult to describe a spreadsheet verbally on a conference call, but did that.
It makes sense to you so I'm just.
Yeah, I guess I'm, just trying to think about you guys relative to others in that and in the same space right and in private student loan.
That's a very important point that we have a much higher volume of loans now that are actually repayment than we did in 2019 and 2018.
17th so to try to expect our default rates, you're and you're out to run at a one one or one three or even a 1.5 rate doesn't add up with Johns illustrative math.
What you see in our disclosures when we published full P&I default rates.
So really is very similar to that.
The seasoning issue that I think cap one described on their call, where they said Hey, we grew the book 18 months ago, and now those defaults or starting to emerge our full our origination cohorts went from.
345 billion to now $6 billion and higher overtime. So so really is an issue.
The thing with a little bit of an increase in life of loan charge offs from both our operational charges that changes that John was just talking about.
The well telegraphed forbearance changes that we've been talking about since 2019, and and Sanjay It's Jonathan I think the only thing I would add to Steve's discussion.
It's hard to compare loss rates across companies, there's there's different customer strategies theres different underwriting strategies, there's different pricing strategies.
And so you know I'm not sure I'm the <unk>.
Wanted to sort of try to do that.
Specific crosswalk.
I think what is important to me, though is is not the charge off rate in isolation, but the charge off rate in the context of.
The overall ROE on those loans over time.
And obviously there is a level of charge off rate that we would be uncomfortable with from a reputational risk perspective, and just the impact. It has on customers you know no matter how much we could price for that loan, but I think within those guardrails. The process that we employ is really a pretty rigorous process. We look at every kind of credit cell we look.
At sort of you know sort of expected lifetime loss for that unique credit cell, we look at the cost to acquire within those credit shells and.
And we look at the pricing of those credit shops, and we very routinely will sort of ex small cells off if we feel like losses that are at a place again, where its not in the customer or our reputations kind of best interest to do that business, but what we really focus on for the majority of it is are we.
<unk> that you know that attractive Roes that that Steve talked about previously.
And Thats why quite frankly, we really focus so much on.
What is our expected lifetime loss versus what we assume at underwriting because we know if we can stay within that and we use our vintage curves to sort of manage that then we know we're generating those high quality returns, which are investors should really appreciate it.
Okay. Thank you very much.
Thank you. Our next question comes from John Hecht with Jefferies. Your line is open.
Good morning, guys. Thanks, very much most of my questions have been asked I guess one question is maybe just a refresher.
<unk> moved up pretty big from Q3 to Q4 I know there are some kind of resets during the year, maybe can you just.
Refresh us about the repricing mechanisms in the portfolio.
Sure John so pretty straightforward.
Basically half of our portfolio is tied to one month LIBOR <unk> portfolio was fixed rate borrowers have been choosing fixed rate at a much higher rate in the last two or three years of originations for all the obvious reasons.
So that mix is changing slowly but surely.
Bottom line is that we were positioned you know marginally asset sensitive over the last year or two and we have benefited to a certain degree from the rise in LIBOR, which was up you know obviously four plus percent over.
The last well over the last year. So we have benefited from that somewhat but we try and run a pretty balanced book. So we're not really.
Adding out over our Skus in terms of taking interest rate risk. Our real goal is to book a nice solid then you're in you're out and I think we're pretty much in that sweet spot right now.
Okay. Thanks, and then in terms of just thinking about capital allocation I mean, it seems like youre targeting targeting a similar amount of sales of 23 versus 22, how do we think what that means in terms of like comparable buyback cadence in 'twenty three versus 22 or other or other kind of facets of your capital return program.
Sure. So you know what we're trying to be balanced here, we want to maintain.
<unk>.
Steady program at that $3 billion more.
We do want to see slight growth.
Our balance sheet over time.
As seasonal gets phased in.
Is it a little bit more challenging to maintain the size of the buyback program that we have.
In the past the 1 billion. After we did 700 plus million last year John .
Her remarks.
The cases that we have $581 billion of authorization left from our board approved buyback, we do not expect to go back to the board this year too.
Require additional share repurchase authorization. So I think that gives you an indication of.
The size of the program that we're contemplating this year, it's probably a little bit under the 500, maybe $1 billion. We did just make our second down payments on seasonal phase in with two left to go and we don't talk a lot about the medium.
Term, but we have indicated in the past that as we fully phased in.
Seasonal charge on equity, we will get to a point, where we can generate capital to return to shareholders without a significant loan sale and I think that's very important to keep in mind because that means we can start to grow our balance sheet Roe or earnings.
And return.
Capital for shareholders without any major charge on our balance sheet.
And obviously, it's probably always worth reminding people that in the loan sale process not only do we earn the premium but we released the big seasonal loan loss reserve and then a nice chunk of capital that's applied to the sort of balance sheet to return to shareholders.
John anything you would like to add to that I think you covered it well step thing.
Very very helpful. Thanks, guys.
Well.
Thank you. Our next question comes from Jeff Adelson with Morgan Stanley . Your line is open.
Hi, Thanks for taking my questions.
John I appreciate all the color you've given.
So far on the actions you are taking to remediate some of the issues Youre seeing but I guess my question is it sounds like Thats you know more in the P&I side on the <unk> side I guess I'm wondering is there anything youre also doing on the front end of the book as you underwrite.
I know that takes a little bit longer to play out in terms of impact to credit down the line, but just wondering if there's anything you're taking away from your new modeling and analytics to apply it to your underwriting today.
Yes, Jeff Great Great question and <unk> you.
You can imagine that's getting a lot of our thought and.
It is.
And it goes through effectively the same process that I just described a few minutes ago. So.
Every year and we will do this again you know as we sort of head into peak season. We will go back we will look at all of the losses by all these layered risk segments that I've talked about.
And we will look at the returns we will look at you know sort of the pricing and we will look at you know.
Sort of that you know the ROE that result from that I think at this point I am sure there will be some adjustments on the margin anytime you have greater insight about sort of potential.
Losses.
Have to incorporate that into that process.
I don't think we have reason to believe at this point that that will be a major redefinition and of course remember were rear we're underwriting today for loans that will come into P&I, you know a year or 234 years from now.
And so we also want to make sure that we're picking up on is.
A true lifetime loss change versus just a blip because of environmental factors. So.
We will think through all of that you know as a as a as a part of this so yes, we absolutely think through that by the way not just during times like this where we see a little more strain we do that during the good times to where we see less strain and we feel like we're always trying to optimize those underwriting conditions.
Got it and then just to maybe follow up on the other questions.
The loan sales this year.
Can you maybe shed some light on what your your potential buyers are thinking about.
As they see these losses start to tick up a little bit.
You mentioned you don't think that this is changing your.
My time loan assumption, but.
Are the buyers.
Willing to maybe except a little bit of that because of the higher interest rate theyre getting today or maybe what are what's the thought process you're hearing from them.
Okay.
So buyers always stress their default expectations when their pricing.
The when their pricing.
The loan portfolio I think it is the case that a increase in life of loan losses of one or 2% does not have a meaningful issue on the IRR on that portfolio.
Of our loan buyers or you know very serious students. So the historical performance of our assets and I'm pretty confident that they will be able to assess the issues that we're having with the portfolio at this point in time and draw.
All the appropriate conclusions are they going to try and challenge us and get a better premium.
No doubt whatsoever, but I think that the long term performance of this portfolio will carry the day.
John mentioned in his prepared remarks that we are starting to see some improvement in ROE and default rates and I think that that will manifest itself in the stats as they emerge for example in the next.
Monthly ABS servicing report et cetera.
So hopefully that answers your question.
Great. Thanks for taking my question.
Thank you. Our next question comes from Aaron <unk> with Citi. Your line is open.
Yes, I just wanted to follow up on the net interest margin.
Above 5% can you give us an idea of that much.
Much of <unk>, 5%, and what kind of cadence I think cash usually kind of swings around your net interest margin quarter to quarter.
Sure so.
I mean.
Try to answer the question with as much candor as possible.
Thinks that you can be pretty confident that our net interest margin should be relatively close to what you saw and saw what you saw in 2022 give or take a handful of basis points. It is the case that.
Our funding is pretty steady and pretty long term. So in any given year, we're replacing I don't know, 20% 30% of our funding.
Our portfolio performance.
Is pretty predictable and I think we actually have done a very good job.
Estimating our net interest margin you're in and you're out so I feel pretty confident in making the statement.
That I just did and you are correct. So for example, we ended the year with 23, 5% of total liquidity on the books and that was positioned to fund the big loan disbursements that we made in the first quarter of this year. So there is cyclicality.
And the NIM, but it's not as.
As as meaningful as it was back in the days when we carried a lot less liquidity than we do today.
Great. That's helpful. And then just last question is with the higher loss expectations kind of booked into the provision this quarter does that essentially kind of reduce the need for additional provision builds.
Well above the.
I guess the charge off rate I know it is kind of different because it's more geared towards the originations.
And then the last Oh.
Part of that is what kind of unemployment rate are you assuming this year in your net charge off guidance.
Sure so.
The one benefit of Susana I can't think of many more is that at any given point in time, you are reserved for all expected losses in the future.
I think we were.
Pretty thorough in our reserve build this quarter. So unless there are major changes in the performance of our portfolio or the outlook for the economy. The only reserve building, we should be doing in 2023 is for.
New loan originations. So I think that's the situation there in terms of of.
Economic assumptions and.
Unemployment rates.
We are a user of Moody's forecasts, we blend the base B S. One which was a slight improvement in the economy and the U S.
<unk>, three which is a meaningful economic downturn and when we compare expected unemployment rates of both the college graduate level.
The household unemployment level prediction for the economy at large we're seeing pretty steady unemployment rates. So no major changes for example from Q3 to Q4, although that being said as a result of the probability of default model.
Obama outlook, there was a component of the reserve build that was attributable to.
And change in the.
Negative change in the economic outlook.
Thank you.
No.
Thank you. Our next question comes from Giuliano Bologna with Compass point Your line is open.
Yeah.
Good morning.
I realize a lot of these are the.
Two questions around this subject.
One thing I'm curious about when you think about your reserve forecasting and Youre actually their strengths who knows.
You were highlighting.
A higher contribution from <unk>.
Hum less season early in the lifecycle borrowers with higher payments being the largest person weakness at the moment I'm curious how you think about student loan forbearance I realize that it's a never ending each country. Dan has been the way it's been pointing out but I'm curious how you think about the restart of our payments.
Payments on federal interest federal loans, because I don't know if you had an additional payment on top of a prolonged borrowers were seeing weakness in higher payments.
Yes, Giuliano, it's John happy to take that question.
First of all again just to make sure there's no misunderstanding.
The example, I gave you is a true and indicative example, there are other small pockets as well, but I think that's one that's pretty easy for folks get their head around but to your specific question of forbearance I think our analysis and our perspective for a while has been that.
Student loan federal student loan forbearance when it when it is no longer an enacted when it's when payments come back will be a slight negative to our sort of.
Are you kind of lost forecast.
And I think we believe should it happen that.
That debt forgiveness is probably a small positive to that forecast.
So you can pick from column, a or column b of various federal proposals and you know, it's probably a marginal benefit of marginal cost or maybe even just sort of neutral down the metal lift both happen I think the thing that's really important to note on this is you know.
Our our customers are we really very actively move back into repayment.
And Steve remind me August or so of 2020 September of 2020.
So we you know we really feel like keeping people in good financial habits is that most important thing that we can do.
And so I think part of why we believe the impact is probably more muted is.
If you are in the habit of making your regular payments to Sallie Mae.
Robert we're going to continue to do that.
And by the way if you do feel stressed because of your federal programs.
I think what we see pretty clearly is there's a lot of options for federal borrowers to get.
Forbearance and other you know other forms of income based repayment and the like.
And so my guess is with the ones that are really in trouble and really sort of a you know sort of struggling with that added federal payment. They will have other options that are available to them through the federal program. So you sort of put all of that in the proverbial mixed master and I think we believe it's sort of.
Probably a small negative but nothing that I think we believe will kind of meaningfully move our results.
So hopefully that gives you some some perspective.
That's very helpful. I appreciate it I'll jump back in the queue.
Okay.
Thank you there are no further questions I'd like to turn the call back over to John Winter for closing remarks.
Great well, thank you and let me just say thanks to everyone I thought the questions were great. Hopefully they provided you I you know really good information that you can use to make sense of what I know is that there's a little bit of a challenging quarter here with lots of moving pieces and parts. So really do appreciate every.
One's thoughtful engagement and I would just sort of continue to offer if any of us in our IR group.
Melissa can be helpful. As you sort of continue to do your assessment of the quarter. Please reach out are happy to engage I think with that unless I'm, turning the call back over to you.
Thank you for your time today.
A replay of this call and the presentation will be available on the investors page at <unk> Dot Com. If you have any further questions Jonathan can feel free to contact me directly. This concludes today's call.
This concludes the program you may now disconnect everyone have a great day.
Yeah.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
[music].
Okay.
Okay.