Q1 2023 SLM Corporation Earnings Call
Speaker 2: Hello, thank you for standing by and welcome to Sally May Q1, 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this time, you will need to press star 11 on your telephone.
Speaker 2: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again.
Speaker 2: I would now like to hand the conference over to Melissa Broder. You may begin..
Speaker 3: first quarter 2023 earnings call. It is my pleasure to be here today with John Witter, our CEO , and Steve McGarry, our CFO . After the prepared remarks, we will open the call up for questions.
Speaker 3: Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10Q and other filings with the SEC.
Speaker 3: For Sallie Mae, these factors include, among others, the potential impact of COVID-19 on our business, results of operations, financial conditions, and or cash flows. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings.
Speaker 3: A full reconciliation to GAAP measures and our gap results can be found in Form 10Q for the quarter ended March 31, 2023.
Speaker 3: This is posted along with the earnings press release on the investors page at sallimay.com. Thank you and now I'll turn the call over to John .
Speaker 4: Thank you, Melissa and Tawanda. Good morning, everyone. Thank you for joining us today to discuss Sally Mae's first quarter 2023 results. I'm pleased to report on a successful quarter and progress towards our 2023 goals.
Speaker 4: I hope you will take away three key messages today. First, we delivered strong results in the quarter. Second, our balance sheet and liquidity position are solid despite disruption in the larger banking industry. And third, we believe we have momentum for continued positive performance throughout the rest of the year.
Speaker 4: Let's begin with the quarter's results.
Speaker 4: GAAP diluted EPS in the first quarter of 2023 was 47 cents per share as compared to 45 cents in the year-ago quarter. Our results for the first quarter were driven by a combination of strong business performance as well as improvements in credit trends.
Speaker 4: private education loan originations for the first quarter of 2023, or $2.4 billion, which is up 12% over the first quarter of 2022.
Speaker 4: This quarter marked our highest level of originations in the company's history.
Speaker 4: Q1 freshman originations were also the highest in the company's history, with 27% of originations coming from this group of students.
Speaker 4: As we have mentioned previously, underclass originations have higher lifetime value to us due to greater serialization opportunity. So this trend is especially encouraging for future peak seasons.
Speaker 4: This is a strong start to 2023 and is tracking better than our plan for the year.
Speaker 4: We are also happy to communicate that for the full year 2022, we were able to increase our market share by 90 basis points over a full year of 2021. Our market share is 58% of the full private student lending marketplace.
Speaker 4: Credit quality of originations was consistent with past years. Our co-signer rate for the first quarter of 2023 was 89% versus 88% in the first quarter of 2022. Average FICO score for the first quarter of 2023 was 746.
Speaker 4: versus 748 in the first quarter of 2022.
Speaker 4: We are also encouraged about the improvements we have seen in credit trends for the first quarter of 2023. Net private loan charge-offs in Q1 were $83 million, representing 2.11 percent of average loans in repayment. This is down 104 basis points.
Speaker 4: from the fourth quarter of 22 and ahead of where we expected, but still elevated compared to 1.89% in the year-ago quarter.
Speaker 4: During our fourth quarter 2022 earnings call, I mentioned that we were already seeing improvements in delinquency and default trends in our January results.
Speaker 4: Those improvements have continued into February and March. For Q1 of 2023, we saw the lowest entry rate into delinquency since the first quarter of 2022. Spanish bronze
Speaker 4: And in March of 2023, the lowest role to default rate in over a year. This improvement is driven by a number of factors.
Speaker 4: We believe we are seeing the continued normalization of the transient factors we discussed last year. We also believe we are starting to see the benefits of operational and strategic changes we made starting last year.
Speaker 4: You may also remember that we discussed seeing elevated levels of delinquency and charge-offs in narrow pockets of our portfolio toward the end of 2022. We have continued to closely monitor the performance of those loans over the quarter and have not seen similar elevated levels expand into other parts of our portfolio.
Speaker 4: With that said, we acknowledge that three months of improved performance does not yet constitute a sustained trend.
Speaker 4: Additionally, the economic environment is uncertain and general economic worsening is still a possibility. We will continue to monitor these trends and adjust our expectations around credit normalization for the full year as appropriate. Following the recent turbulence in the banking sector, we thought it prudent to provide additional commentary about funding and liquidity.
Speaker 4: Despite the disruption in the larger banking industry, our balance sheet and liquidity position remain strong.
Speaker 4: We ended the first quarter of 2023 with liquidity of 19.7% of total assets.
Speaker 4: marketable securities make up a portion of our approximately
Speaker 4: $66 billion liquidity portfolio, and at the end of Q1 of 2023, our unrealized loss in that portfolio totaled $155 million. In the unlikely event we had to sell this portfolio and recognize losses, we would incur a regulatory capital charge of approximately 50 basis points.
Speaker 4: Deposits have been very stable for Sallie Mae. Balances at the end of Q1 of 2023 were slightly higher than at the end of both the fourth quarter of 2022 and the first quarter of 2022. At the end of Q1 2023, our uninsured deposits made up only 2% of our deposit base.
Speaker 4: Additionally, during the quarter, we were able to execute an ABS funding transaction at spreads that came in about 23 basis points better than our previous transaction completed in 2022. Our Treasury team continues to effectively manage interest rate risk and has grown our net interest margin from 5.29% in the first quarter of 2022.
Speaker 4: of private education lives.
Speaker 4: so we are able to discuss the transaction. We expect the transaction to close in early May of 2023. Given general bank valuation trends, I'm confident our investors will agree that completing a larger sale earlier in the year is the prudent thing to do. We were able to reach this preliminary agreement with our buyer at prices consistent with the assumptions in our 2023 guidance.
Speaker 4: Our plan is to use the gain and capital release from the sale to buy back stock at current levels to create shareholder value, and minimize the impact of more capital on our NIMS.
Speaker 4: We expect to do so while maintaining prudent capital and liquidity levels, recognizing the uncertain macroeconomic environment. Our assets continue to be in demand from a deep pool of well-informed loan buyers.
Speaker 4: As such, we expect to execute future loan sales at attractive premiums. We expect to sell an additional 1 billion of loans this year, likely in the third quarter.
Speaker 4: Steve will now take you through some additional financial highlights of the quarter. Steve?
Speaker 5: Thank you, John . Good morning, everyone. I'll continue this morning's discussion with a detailed look at the drivers of our loan loss allowance.
Speaker 5: A discussion of some key performance metrics, finally, our strong liquidity and capital position. Private education loan reserve, including reserve for unfunded commitments.
Speaker 5: was $1.5 billion or 6.3% of our total private education loan exposure, which under Cecil includes the on-down sheet portfolio, plus the accrued interest receivable of $1.3 billion and unfunded loan commitment.
Speaker 5: of another $684 million. Our reserve at 6.3% of our portfolio is unchanged from the prior quarter.
Speaker 5: We incorporate several inputs that are subject to change from quarter to quarter when preparing our allowance for loan losses. These include Cecil Model inputs and Ovala's deemed necessary by management. Economic forecasts and waiting drive quarter to quarter movement and the allowance.
Speaker 5: In the current and year-ago quarters, we used Moody's base S1 and S3 forecasts weighted 40%, 30% and 30% respectively.
Speaker 5: We expect to use this mix going forward except during extraordinary periods of uncertainty.
Speaker 5: Despite concerns about the health of the economy, the forecasts provided by Moody's are remarkably stable.
As an example, the weighted average forecast for college graduate unemployment is virtually unchanged from the prior quarter at 2.64%.
Pre-pay speeds in Q123 were essentially unchanged compared to Q422, resulting in no meaningful reserve requirement changes. However, pre-pay speeds were lower than the year ago quarter, which is a contributor to the year-over-year change in the reserve.
We continue to view slower pre-paced speeds as a real positive, as our assets are expected to stay on a book's floor.
While the first quarter is a large disbursement quarter for students funding the spring semester, many of these loans were reserved for at the time of commitment in the fall of 2022.
Provision for new unfunded commitments totaled $56 million in the quarter.
Our total provision for loan losses, booked on our income statement this quarter, was $114 million.
As John mentioned, we saw improvements in many of our credit metrics this quarter, so I wanted to spend some time looking at these in more detail.
They can be found in our invested presentation on page 7. Private education loans, the Lincoln 30 plus days.
with 3.4% of loans and repayment down from 3.77 and Q422 as well as from 3.5% in the year ago quarter.
We do expect 30-plus state delinquencies to continue to improve compared to the prior year, but remain in the mid-3% range for 2023.
Private education loans and forbearance were 1.4% at the end of the quarter, a decrease from 1.8% at the end of Q422, and unchanged from the year ago quarter.
We do believe we are appropriately staffed across all of our collection buckets and we have seen agent effectiveness improve as agent tenure increases as evidenced by an increase in loss mitigation program usage which is a big positive.
Net charge-offs for the portfolio are 2.11% in the first quarter.
compared to 3.15 and Q422 and 1.89 in the year ago quarter.
As John mentioned earlier, while we are encouraged by this short decline, we will look for sustained improvement before we adjust our outlook on net charge offs and the reserve for the full year of 2023.
John has already reported on our solid NIM performance. The increase to NIM is the result of our conservative funding approach.
the predictable asset performance and consistent origination quality.
Because we have raised long-term funding through asset backed securities and broker deposits.
The amount of funding we are required to raise each year is very manageable.
We also continue to benefit from a rising rate environment because our interest earning assets reprise faster than our cost of funds.
The interest rate sensitivity tables and how attend Q measure earnings over a two-year period. And while we remain asset sensitive over the first full-year period, we refer to a slightly liability sensitive position in the second full-year period.
This is a static analysis, however, and assumes no additional loan sales. If we continue our current loan sales strategy, which we expect to do, we remain asset sensitive.
At this stage of the rate cycle, we are comfortable with the position and could easily edge it with derivatives if our outlook or strategy changes.
Lastly, MIM can be seasonal, quarter to quarter, and is heavily influenced by liquidity built associated with PICCs and disbursements.
And we expect full year 2023, MIM to be comparable to a slightly higher and full year 2022.
Regarding the loan sale that we expect to close in May, we did have new bidders included in the process and expect additional participants to come to the table.
Regarding the loan sale that we expect to close in May, we did have new bidders included in the process and expect additional participants in future loan sales.
This demonstrates the attractiveness of our assets, even in the most volatile environments.
Income tax expense for the first quarter was $37 million.
representing an effective tax rate of 24%, which is slightly below the expected annual run rate of 25%.
Consistent with guidance, first-quarter operating expenses were $155 million. Elevated from both Q422 at 138 million and 132 million in the year ago quarter.
$4.1 million of the year-over-year increase was driven by one-time reorganizational costs. Roughly $6 million of the increase of the year-ago period relates to higher FDIC assessment fees. We do expect our FDIC assessment fees to be higher in 23 than in 22.
This increase is due partially to the benefit we received in 2022 related to the late application of the change in TDR counting that made the 2022 assessment lower, and partially driven by changes to industry and company specific factors.
We consider this part of the cost of having access to high quality low cost and stable funding.
Volume increases in our originations, servicing, and collections operations account for $5.5 million of the increase in operating expenses over the year-ago quarter.
The remaining $7.4 million increase relates to both our absorption of the effects of the current inflationary environment as well as the increase in our staffing levels over where they were in Q1 2022. And this includes the costs related to our nitro acquisition.
which occurred in early March of 2022.
Finally, our liquidity and capital positions are strong. As John referenced, we ended the quarter with a liquidity of 19.5%.
0.7% of total assets.
substantially higher than the year ago liquidity of 17.2.
And at the end of the first quarter, total risk-based capital was 13.3%, common equity to year 1, 12%, and gap equity plus loan loss reserves over risk-weighted assets. An important measure, post-ceasal, was a very strong 15.7%.
As we are phasing in the CECL impact to regulatory capital at the beginning of each year, we absorb 25% of the adjusted transition amount, which of course impacts our capital ratios.
We have now phased in 50% of the transition, with the remaining 50 to be phased in in January .
of 24 and 25. In closing, we believe we are well positioned.
to grow our business and return capital to shareholders going forward. I'll now turn the call back to John .
business and return capital to shareholders going forward. I'll now turn the call back to job. Thanks, Dave.
I hope you agree that we executed well in the first quarter and share my belief that we are well positioned to continue that trend throughout 2023. We are excited about the loan sale that is pending settlement and are eager to put our loan sale share buyback arbitrage to work in the second quarter while our stock is trading at what we believe to be a significant discount.
In addition to our origination growth in the first quarter, Steve also mentioned the continuation of slower prepayment speeds, both of which are positives for balance sheet growth and interest income as we look toward the second quarter of the year. We will continue to focus on operational execution.
expense management and NIM to drive results. Let me conclude with the discussion of 2023 guidance. As I mentioned earlier, we are encouraged by both the successful Q1 origination season, as well as the positive trends we are seeing with credit performance. We are optimistic that these things will lead to a
successful 2023. However, just as we were cautious about building our reserve in the fourth quarter of 2022, we remain cautious in our guide for the year.
Thus, we are reaffirming the 2023 guidance that we communicated on our last earnings call for all key metrics. With that Steve, let's open up the call for some questions. Thank you.
wait for your name to be announced. To withdraw your question, please press star 1-1 again.
Please stand by while we compile the Q&A roster.
Our first question comes from the line of Michael Kay with Wells Fargo. Your line is open. Your line is open.
Good morning on the loan cell. I know you plan to sell three billion but I just wanted to check on the openness to selling more. Sounds like there's pretty good demand and giving away the stock prices.
I was just wondering what the appetite to do potentially more than that. Good morning, Michael. It's John , and thanks for your question. Our plan at this point contemplates an additional $1 billion of loan sales, but I think if there's one thing that hopefully we've demonstrated over the last couple of years.
It is our belief in sort of the power of capital allocation and the arbitrage strategy that we have underway. So every year we continue to assess sort of the depth of the market, the premium, sort of the state of our arbitrage grid.
And I think you can have confidence that if we see an opportunity to create significant shareholder value by adjusting our plan, we will look and our board will look favorably on doing that. But again, at this point, what we have in our plan is an additional window.
And you know, you know, it was a really strong quarter, you know, out performance on, you know, all your outlook items. I'll surprise you, Lefty Guidance Unchanged particularly on the credit out performance, you know, even originations. You know, what's holding you back from increasing the guidance? I know it's early in the year, but...
Is it more conservatism early on? Is it more concerns about the macro?
Michael, I think it's a good question. It's obviously something we debated extensively internally. You know, I think our view is exactly what you just said. It is early in the year. The economic environment is uncertain and there's obviously the potential for that to have an impact on.
and you know very happy with what we were seeing. We just felt it prudent to see a little bit more sustained performance before we updated guidance.
Okay, thank you so much.
Okay, thank you so much. Thank you. Please stand by for our next question.
Our next question comes from the line of Moshi Orenberts, which credits with your line is open. Good!
Take to see if you are mute.
Sorry about that. Can you hear me now? We can hear you much. How are you? Great. All right. Thanks. Thanks. So you had mentioned, you know, kind of 12% origination growth and kind of the highest level that you've seen the high freshman origination.
There are some players that are out there trying to enter. I can think of a couple, some of which have long histories and student lending that have been entering the in-school market. Could you talk a little bit about what drove the success now and how we should think about that for the balance of the year? The year.
You know, there are some players that are out there trying to enter. I can think of a couple, some of which have long histories and student lending that have been entering the in-school market. Could you talk a little bit about what drove the success now and how we should think about that for the balance of the year? The year.
Sure Moshe, happy to. And obviously want to be a little bit sensitive in that we have investors on the call, but I'm sure we also have some competitors on the call as well. I think we have outlined for the last couple of years the investments that we have been making in our marketing and origination.
machine and whether that's significant investments in technology, whether that's significant investments in data and analytics, and whether that is significant investments in expanding the channels and the effectiveness of the channels that we use.
effectiveness of our marketing through those levers. But I think also importantly to do so in a way that gives us greater control over cost and inflation over time. So we are encouraged by both the trends that we are seeing in volumes and in the composition of those volumes, but we're also encouraged by the trends that we're seeing. May 28abe13illo.com Thanks again.
in our cost to acquire metrics, especially in the general inflationary environment right now that so many digital marketers are experiencing. So, you know, I think it is those things that are really driving sort of the results that we are seeing, in addition to the things that we have always had, which are just a really strong brand, great relationship.
the schools and the like, all of which we continue to invest heavily in. At this point, as I said in my remarks, we are slightly ahead of our plan for the year. I would certainly view origination's growth as a potential opportunity for us going forward. But as I said a few minutes ago to Michael, I think so much of that is driven by peak season.
You know, we want to see a little bit how, you know, the second quarter shapes out in the early sort of run up to peak is looking before we change guidance for the year.
Got it, thanks. Recognizing that you didn't want to say anything about the premium that you're going to get on the loan sale, but could you talk about how much capital is freed up in total kind of taking into account the capital on the loans, the after tax reserve, and the premium kind of together? Give us some sense for that, Steve. Steve.
Yeah, sure. BOSHA. As you can see, we have 13.3% total risk-based capital on the balance sheet. I think that gives you a pretty good indication of how much capital we will free up. When we free these loans for more balance sheet, we have a 6.3%
Lone loss reserve and we sell representative samples of our pool so that gives you pretty good indication of considerable amounts of reserve that we will free up with this loan sale. And look regarding the premium, I think John gave you very good indication by saying that it's within.
You know the range of what we assumed when we put together our guidance. So it's a very nice and respectable premium that we earned on this loan sale. So you can expect us to be back in the market to buy back stock in a reasonable fashion in the near term.
Steve, touch quickly on the tax adjustment of those just for anyone who's doing the math for the first time. Yeah, sure. So there's no tax impact on the capital release and of course the provision goes through the income statement so that will be tax effect.
We've touched quickly on the tax adjustment of those just for anyone who's doing the math for the first time. Yes, sure. So there's no tax impact on the capital release and of course the provision goes through the income statement so that will be tax effect. That's what the premium does.
Thanks so much. Thank you. Please stand by for our next question. Our next question comes from the line of Sanjay Sakharini with KBW. Your line is open. Thanks. Good morning. May I ask the first question on the loan sale?
There was any risk in terms of not being able to do the cell.
Having looked Sanjay, it was a very incredibly volatile period that we were operating in. It base rates are a very important part of the premium since 55% of these loans are a fixed rate.
But, you know, we started the process shortly after we released earnings, and the process typically takes four to six weeks, as I've said many times in the past. The buyers of these loans now understand.
the performance of the credit and the cash flows of these portfolios very well. We debated whether or not internally we should hedge the fixed rate component of the process to give ourselves a little bit of insurance. We chose not to.
The process worked out very well for us. Rates continue to be favorable for future loan sales and John and I probably discuss daily whether or not we should hedge that component of the process. That's probably the biggest.
Wildcard credit is a pretty well known factor and cash flows are pretty well understood by buyers as well. Sanjay, I would also just add and I think Steve said it exactly right. But if you look back over now the three years that I've been here and we've been executing the strategy for about that same...
of could we get the loan sale done. And certainly there may come a day and there may come an economic situation where the volatility is so great that it can happen. So I'm certainly not guaranteeing that there could never be a case where that happens. But I will tell you, I have been impressed.
by sort of the resilience of these markets, even during quarters where there was a lot of things happening more broadly and globally. And I think this quarter, you know, you always worry when you're having some of the kinds of factors that we're seeing, but I think at the end of the day, you know, the interest, you know, sort of may have taken a day or two off, but rebounded very quickly exactly.
Yes Sanjay, I'll take that one. Look, I think as we said on the last call, you know, we took the performance in the fourth quarter, you know, as a real opportunity for us to sort of step back and, you know, challenge ourselves in an area that has had historically worked very well and very predictably for our company.