Q3 2023 SLM Corp Earnings Call

Okay.

Good day and thank you for standing by welcome to the third quarter 2023, Sallie Mae earnings 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 a question. During this session you will need to press star one on your telephone.

You will hear the message of dicing. Your hand this race to withdraw your question. Please press star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Melissa Brunner. Please go ahead.

Thank you Carmen good morning, and welcome to Sallie Mae's third quarter 2023 earnings call. It is my pleasure to be here today with John Winter, our CEO Steve.

Mcgarry, our CFO and Pete Graham So we'll fix it.

Steve as our next CFO beginning October 27.

After the prepared remarks, we will open the call for questions.

Before we begin keep in mind, our discussion will contain predictions expectations and forward looking statements.

Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors listeners should refer to the discussion of those factors on the Companys Form 10-Q, and other filings with the SEC for Sallie Mae. These factors include among others results of operations and finance.

Condition and our cashless.

During this conference call, we will refer to non-GAAP measures, we call our core earnings a description of core earnings.

All reconciliations to GAAP measures and our GAAP results can be found in our Form 10-Q for the quarter ended September 30th 2023. This is posted along with the earnings press release on the investors page at Sallie Mae Dot com.

You and now I'll turn the call over to John.

Thank you Melissa and Carmen Good morning, everyone. Thank you for joining us to discuss Sallie Mae's third quarter results.

I hope you'll take away three key messages today first we had a successful peak season highlighted by increased under glass demand.

Second we remain on track to deliver around the midpoint of our full year 2023 EPS guidance.

And third we are excited about the ongoing prospects of the company.

Circular as we start to look past the end of our seasonal phase in period.

Let me begin with the discussion of loan sales.

You will remember last quarter, we had expected to commence our next loan sale at the beginning of September and closed in the third or early in the fourth quarter, depending on buyer preferences and market conditions.

We are pleased to report that we were able to sell 1 billion of loans and our latest transaction, which closed on October 13th.

We have not changed the midpoint of our EPS guidance, which confirms that we were able to execute the loan sale at prices consistent with our full year 2023 expectations.

We plan to use a portion of the gain and capital released from the sale to buy back stock, while maintaining prudent capital and liquidity levels.

As a reminder, we began the loan sale and share repurchase strategy a little over three years ago to take advantage of the price disconnect between loan sale premiums and our equity valuation.

And also to help manage capital during the seasonal phased in period.

We believe the program has been very successful we have bought back approximately half the company and have generated absolute and relative total shareholder returns during that time that have meaningfully outperformed certain key indices and competitors.

While successful we've always described this as a medium term strategy that would evolve over time.

While we believe there is still opportunity to take advantage of the loan sale and share buyback arbitrage. It is also exciting to think about the organic EPS growth and capital generation capability of the business.

We contemplate pivoting to grow our balance sheet.

We will continue to consider the appropriate level and timing of loan sales and our pivot to balance sheet growth as we develop guidance for 2024.

Turning to the quarter's results GAAP diluted EPS in the third quarter of 2023 was 11 cents compared to 29 in the year ago quarter.

These earnings are lower than the prior year quarter, given that we sold 1 billion of loans in the third quarter of 2022 that generated 75 million in games.

At the loan sale, we just closed in October been completed in the third quarter.

It would have added approximately 31 cents to our third quarter 2023, GAAP diluted EPS.

Private education loan originations for the third quarter of 2023 were $2 5 billion, which is up 4% over Q3 of 2022.

This wraps up a successful 2023 peak season.

Through the end of September we have seen 9% application growth over the same period in 2022.

And the most application volume since prior to the pandemic.

This has been fueled by a 10% increase in underclass applications.

Which is especially important given the greater serialization potential and lifetime value of this group.

Credit quality of originations was consistent with past years.

Our costar and our rate for Q3 of 2023 was 90% up slightly from 89% in Q3 of 2022.

Average FICO score at approval for Q3 of 2023 was 749 versus 747 in Q3 of 2022.

We continue to focus on credit and our path back to normalcy and are pleased that our annual.

Annualized net charge offs as a percentage of average loans in repayment for the first nine months of 2023 to four 4% and remains lower than our plan for the full year.

We saw entry rates to delinquency decline in September and observed continued improvement in our later stage delinquency buckets throughout the quarter.

We have implemented a number of programs over the last several quarters to assist our customers, but recognize that there are more ways in which we can help borrowers who are facing financial difficulties.

We are continuing to develop new programs and fine tuned existing strategies to help delinquent customers regain their financial footing.

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 discussion of our loan loss allowance and provision.

The private education loan reserve was one $5 billion or 6% of our total student loan exposure, which under seasonal concludes on balance sheet portfolio plus the accrued interest receivable of $1 billion in unfunded loan commitments of another two 4 billion.

Our reserve rate continues to improve as compared to six 2% in the second quarter of this year and six 3% at the end of 2022.

Let's now look at the major variables used to calculate that our allowance for credit losses under Cecil.

Economic forecasts and weightings drive quarter to quarter movement in the allowance we continue to use Moody's base S. One and S through forecasts.

You did 40% 30%.

That respectively.

We expect to use this mix going forward.

Prepay speeds in Q3, 2023 were essentially unchanged compared to the prior quarter, resulting in no meaningful reserve requirement changes related to this metric. However, prepay speeds were lower than the year ago quarter, which was a contributor to the year over year change in the reserve.

We continue to view or slower prepay speeds as a real positive.

<unk> are expected to stay on our books for a longer period of time.

New commitments are also important for calculation Q3 is our peak lending season, and we added three $3 billion to unfunded commitments, which required a provision of $153 million.

Parison, we added $1 $5 billion in unfunded commitments in Q2 of this year.

And $3 1 billion in the year ago quarter, which required a provision.

$58 million and $163 million respectively.

Our total provision for credit losses on our income statement was $198 million in the quarter.

An increase of $180 million from the prior quarter, but a decrease of $10 billion from the year ago quarter.

This quarter's reserve increase was driven almost entirely by strong volume increases.

I was mentioning.

<unk> disbursements and unfunded commitments have increased over the third quarter of 2022.

But the reserve rate has decreased.

Again, a positive sign and another indication of the improvement in credit as John has already mentioned.

Private education loans in forbearance or one 4% at the end of the quarter slight increase from one 2% at the end of Q2, but unchanged from the year ago quarter.

Private education loans delinquent 30, plus days were three 7% of loans in repayment that is flat compared to 2023 and the year ago quarter.

In the quarter net charge offs from private education loans were $95 million, resulting in an annualized charge off rate of two 5% down from two 7% in Q2, and two 7% in the year ago quarter as well.

As John already mentioned the annualized net charge off rate for the first nine months of 2023.

Fans of two 4% and continues to be better than our internal expectations.

NIM for the quarter came in at a strong five 3% up from 5% to 7% in the year ago quarter.

Our portfolio has continued to benefit from a rising rate environment with our interest earning assets repricing faster than our cost of funds over the past year.

We do expect our NIM will remain in the low to mid 5% vicinity for the full year of 2023.

Third quarter operating expenses were $167 million compared to $150 million in the year ago quarter.

Roughly $8 million of the decrease over the year ago period relates to higher FDIC assessment fees.

As we have mentioned in previous quarters, the increase to the FDIC assessment fee was expected.

The cost of having access to high quality low cost stable funding.

The remainder of the increase was caused by several factors, including higher originations more loans on our balance sheet due to the slowdown in consolidations and an increase in staffing versus Q3 of 2022, and our collection center and finally, the absorption of general.

Inflationary pressures.

Finally, our liquidity and capital positions remained strong we ended the quarter with liquidity of 19.

Percent of total assets at.

At the end of the third quarter total risk based capital was 12, 9% common equity tier one stood at 11, 7%.

I would also like to point out that GAAP equity plus loan loss reserves over risk weighted assets was a very strong 15.

We remain positioned to grow our business and return capital to shareholders going forward.

Back to you John Thanks, Dave.

Before we turn to guidance as Melissa mentioned at the opening of the call Steve and I are joined today by Pete Graham beginning Tomorrow will become Sallie Mae's next Chief Financial Officer.

Before offering Pete the opportunity to say a few words I'd like to thank Steve for his many years of service and countless contributions to Sallie Mae and for his commitment to ensuring pete's successful transat transition.

Unknown Executive: Good day, and thank you for standing by.

Melissa Bronaugh: Welcome to the third quarter, 2023 Sally May Earnings Call. At this time, all participants are in a listen-only mode.

Unknown Executive: After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will hear a message advising your hand is raised. To withdraw your question, please press star 1-1 again.

<unk> been a most trusted advisor and more importantly, a great friend to me during my time here at Sallie Mae and I know he has played that same role for so many others during his years at the company.

I'm not alone in wishing him the best in his upcoming retirement and look forward to celebrating him appropriately over the next several months as he continues to be with us in an advisory capacity with that it's my pleasure to introduce you to Pete Graham.

Unknown Executive: Please be advised that today's conference is being recorded.

Melissa Bronaugh: I would now like to hand the conference over to your speaker, Melissa Bronaugh, please go ahead. Thank you, Harmon.

Melissa Bronaugh: Good morning, and welcome to Sally May's third quarter, 2023 Earnings Call.

Thank you John Steve and everyone on the Sally team, who have been helping me transition into opening.

Melissa Bronaugh: It is my pleasure to be here today with Jon Witter, our CEO, Steven McGarry, our CFO, and Pete Graham, who will succeed Steve as our next CFO, beginning of October 27th. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind, our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's form 10Q and other filings with the FEC. For Sally May, these factors include, among others, results of operations, and financial conditions, and or cashless.

So many families that Sallie Mae serves access to higher education was critical to buy personal career journey.

Most of the parent of two college graduates so it feel a particularly deep connection to the company's mission.

Steve has built a talented team since joining mid September I've had the opportunity to work alongside them and benefit from their experience and deep knowledge of the company and more broadly student lending.

I'm thrilled to be joining a team the powers confidence and students and families. While at the same time driving meaningful growth continued efficiency and long term value for shareholders.

I look forward to getting to know the Sallie Mae investment community.

<unk> weeks and months ahead, I will turn it back to you Joe.

Melissa Bronaugh: During the course of the year, I would like to ask a question. In the conference call, we will refer to non-gap measures we call our core earnings, a description of core earnings, a full reconciliation to gap measures, and our gap results can be found in the form 10Q for the quarter-ended September 30th, 2023. This is posted along with the earnings press release on the investors page at Sally May.coff.

Thanks, Pete let me conclude with a discussion of 2023 guidance.

While there have been several moving pieces throughout the year. We are pleased that our earnings outlook for the year is largely in line with our original expectations as such we are narrowing the range for diluted non-GAAP core earnings per common share to between $2 55, and $2 65.

Jon Witter: Thank you, and now I'll turn the call over to Jon. Thank you, Melissa and Carmen.

Jon Witter: Good morning, everyone. Thank you for joining us to discuss Sally May's third quarter results. I hope you'll take away three key messages today. First, we had a successful peak season highlighted by increased underclass demand. Second, we remain on track to deliver around the midpoint of our full year 2023 EPS guidance. Third, we are excited about the ongoing prospect of the company, in particular, as we start to look past the end of our season period.

The midpoint still around two six days.

As I mentioned earlier. This morning, we are absolutely thrilled with the results of a successful peak season in terms of quality quantity and cost to acquire and as such we're revising the range for origination growth for the year, we now expect 6% to 7% origination growth for the full year of 2023.

As Steve and I. Both discussed we are also pleased with the continuing stabilization of credit and are committed to continuing our journey back to full normalcy.

Jon Witter: Let me begin with the discussion of loan sales. You will remember last quarter, we had expected to commence our next loan sale at the beginning of September and close in the third or early in the fourth quarter, depending on buyer, preferences, and market conditions. We are pleased to report that we were able to sell one billion of loans in our latest transaction, which closed on October 13th. We have not changed the midpoint of our EPS guidance, which confirms that we were able to execute the loan sale at prices consistent with our full year 2023 expectations.

Overall gross charge offs are slightly better than expectations year to date, and we expect that we will finish the year slightly better than our original 2023 outlook.

As you might remember in the second quarter of 2023, we implemented a new recovery strategy for defaulted loans shifting more of our effort in house as opposed to selling loans sooner to third parties.

Net impact of this change is that we expect to receive higher recoveries, but at a slightly later point in time.

This timing impact has caused us to revise our outlook on recoveries for the full year of 2023.

Jon Witter: We plan to use a portion of the gain and capital released from the sale to buy back stock while maintaining prudent capital and liquidity levels. As a reminder, we began the loan sale and share repurchased strategy a little over three years ago to take advantage of the price disconnect between loan sale premiums and our equity valuation and also to help manage capital during the season period. We believe the program has been very successful.

We now expect total loan portfolio net charge offs to be in the upper end of our original range and are tightening our guidance to $375 million to $385 million.

Jon Witter: We have brought back approximately half the company and have generated absolute and relative total shareholder returns during that time that have meaningfully outperformed certain key indices and competitors. While successful, we have always described this as a medium term strategy that would evolve over time. While we believe there is still opportunity to take advantage of the loans sale and share buyback arbitrage, it is also exciting to think about the organic EPS growth and capital generation capability of the business as we contemplate pivoting to grow our balance sheet. We will continue to consider the appropriate level and timing of loan sales and our pivot to balance sheet growth as we develop guidance for 2024.

We still expect that net charge offs expressed as a percentage of average loans in our repayments to be approximately two 5% or slightly better driven by growth in our portfolio over the year.

We now expect that our non interest expenses will finish the year slightly above our original guidance and expect to end the year between 625% and $630 million.

Several factors contributed to this performance chief among them meaningfully higher originations growth, which coupled with a slowdown in consolidations has increased variable expenses.

That along with the acquisition of Scali and other inflationary pressures inform the decision to increase non interest expense guidance for the full year of 2023.

While it's too early for us to declare a specific 2024 guidance.

<unk> undoubtedly on your mind as expense trajectory for 2024 and beyond.

As context, approximately 40% of the growth in noninterest expense. This year was driven by a significant increase in FDIC fees.

Jon Witter: Turning to the quarter's results, gap deluded EPS in the third quarter of 2023 was 11 cents compared to 29 cents in the year ago quarter. These earnings are lower than the prior year quarter given that we sold one billion of loans in the third quarter of 2022 that generated 75 million in gains. At the loan sale, we just closed in October, been completed in the third quarter. It would have added approximately 31 cents to our third quarter 2023 gap deluded EPS. Private education loan originations for the third quarter of 2023 were 2.5 billion, which is up 4% over Q3 of 2022.

While we cannot speak for the FDIC, we do not anticipate our FDIC premiums continuing to grow at this rate in the future.

Expenses related to certain investments in our restructurings, while individually de minimis work collectively meaningful and represent approximately 20% of the non interest expense growth in 2023, we.

We do not view these expenses as being embedded in our future run rate.

It is also worth noting that the inflationary pressures, we felt a year ago have somewhat abated as such we anticipate noninterest expense growth in the future will be more consistent with longer term historical averages.

Of course, we will provide more detail unexpected expense growth in January when we offer earnings guidance for 2024.

Jon Witter: This wraps up a successful 2023 peak season. Through the end of September, we have seen 9% application growth over the same period in 2022 and the most application volume since prior to the pandemic. This has been fueled by a 10% increase in underclass applications, which is especially important given the greater serialization potential and lifetime value of this group. Credit quality of originations was consistent with past years. Our co-signer rate for Q3 of 2023 was 90% up slightly from 89% in Q3 of 2022.

The results we posted this quarter demonstrate that we are continuing to execute the business plan. We have outlined for investors. We are focusing on strengthening our core business and maximizing the value of our brand. We are excited about the loan sale that settled earlier. This month and are planning to put our loan sale share buyback arbitrage to work in the fourth.

While our stock is trading at what we believe to be a significant discount.

As we look forward to the end of the year, we will continue to focus on operational execution and expense management and NIM to drive results with that Steve Let's open up the call for some questions.

Jon Witter: Average FICO score at approval for Q3 of 2023 was 749 versus 747 in Q3 of 2022. We continue to focus on credit and our path back to normalcy and our pleas that are annual annualized net charge off as a percentage of average loans in repayment for the first nine months of 2023 is 2.44%. We have been able to implement and remain lower than our plan for the full year. We saw entry rates to delinquency decline in September and observed continued improvement in our later stage delinquency buckets throughout the quarter.

Thank you and as a reminder to ask a question simply press Star one one on your telephone to withdraw press star one again, please standby, while we compile the Q&A roster.

Okay.

Alright, and our first question comes from the line of Michael Kaye with Wells Fargo. Please proceed.

Hi, Good morning, I wanted to see if you could go over the provision expense for unfunded commitments looking at page 33 net 10-Q.

The percentage of our vision.

On unfunded commitments as around three 5% taken $116 million divided by $3 3 billion. This is way down from over 6% rate last year. We think this dynamic began last quarter or two with the percentage being weighed down. So I wonder if you could explain the step down of what does the change in <unk>.

Jon Witter: We have implemented a number of programs over the last several quarters to assist our customers, but recognize that there are more ways in which we can help borrowers who are facing financial difficulty. We are continuing to develop new programs and fine tune existing strategies to help delinquent customers regain their financial footing.

<unk> and also can you talk about that are there provision items also in that team's schedule.

That jumped to $37 million versus mid single digits in Q1, and Q2 was that due to the lower prepayment speeds.

Steven McGarry: Steve will now take you through some additional financial highlights of the court. Steve? Thank you, Jon.

Steven McGarry: Good morning, everyone. Let's continue with the discussion of our loan loss allowance and provision. The private education loan reserve was $1.5 billion or 6% of our total student loan exposure, which under Cecil includes the on balance sheet portfolio plus the accrued interest receivable at $1.4 billion. Our reserve rate continues to improve as compared to 6.2% in the second quarter of this year and 6.3% at the end of 2022. Let's now look at the major variables used to calculate our allowance for credit losses under Cecil.

Michael you really got down into the weeds there.

I don't have that schedule in front of me what I have is I have that the reserve for unfunded commitments was 153 million box were four 6% compared to five.

5% in the prior year's quarter, there were no accounting changes and our seasonal process or procedures. What we are seeing here is an improvement in credit and a lower reserve due to the tightening that John referenced.

In his prepared remarks, and that we mentioned during the second quarter earnings call as well.

Steven McGarry: Economic forecasts and weightings drive quarter to quarter movement in the allowance. We continue to use Moody's base S1 and S3 forecasts, weighted 40%, 30% and 30% respectively. We expect to use this mix going forward. Pre-pay speeds in Q3 2023 were essentially unchanged compared to prior quarter resulting in no meaningful reserve requirement changes related to this metric. However, pre-pay speeds were lower than the year ago quarter, which is a contributor to the year over year change in the reserve.

Yes.

In terms of the real detailed questions you have there.

And again.

This is my last call. So thanks for serving that one up why don't we take that offline with Melissa following recall.

That $153 million, it's really broken up into two pieces, there's like a $150 million to $116 million just on provision on new commitments.

And then as a separate other provision items in that like jumps around drastically quarter to quarter. This one thing very high.

Putting that item to the side like I said when I do my calc that provision rate on the unfunded commitments by $3 3 billion is way down that percentage.

Steven McGarry: We continue to view slower pre-pay speeds as a real positive as our assets are expected to stay on our books for a longer period of time. New commitments are also important to the calculation. Q3 is our peak lending season and we added $3.3 billion to unfunded commitments which required a provision of $153 million. In comparison, we added $1.5 billion in unfunded commitments in Q2 this year and $3.1 billion in the year ago quarter, which required a provision of $58 million and $163 million respectively.

So youre, saying you think it's just the cost of credit improvement.

Yes, absolutely.

Alright, so our underwrite indeed.

The need for reserve declined.

As a function of that and we're more than happy to get into the detailed questions, but let's do that offline.

Okay. Thanks.

I wanted to talk about the share repurchases, obviously with the loan sale closed in Q2 four.

Bond My tower, you have about $324 million left in your share repurchase authorization. The character for a total for the year by $581 million. So that leaves about $224 million that should we assume you complete that.

Steven McGarry: Our total provision for credit losses on our income statement was $198 million in the quarter, an increase of $180 million from the prior quarter, but a decrease of $10 million from the year ago quarter. This quarter's reserve increase was driven almost entirely by strong volume increases. It is worth mentioning that both disbursements and unfunded commitments have increased over the third quarter of 2022, but the reserve rate has decreased. This is again a positive sign and another indication of the improvement in credit that John has already mentioned.

Macarthur entering $24 million in Q4.

Yes, Michael we do not give specific guidance on the pace of our share repurchases I think the way that I would think about it is yes that was a sort of a longer term share repurchase authorization. I think we will continue to repurchase shares as we see fed given conditions and valley.

<unk> levels in the marketplace.

And at whatever point, we run through that we will have run through that.

Okay alright, thank you.

Steven McGarry: Private education loans and forbearance were 1.4% at the end of the quarter. Slide increase from 1.2% at the end of Q2, but unchanged from the year ago quarter. Private education loans, the link when 30 plus days were 3.7% of loans and repayment. Private education loans were 1.2% at the end of Q2, but unchanged from the year ago quarter, is flat compared to 2023 and the year ago quarter. In the quarter, net charge offs for private education loans for $95 million, resulting in an annualized charge of rate of 2.5% down from 27 in Q2 and 27 in the year ago quarter as well.

Thank you one moment for our next question. Please.

And he comes from the line of Sanjay <unk> with <unk>. Please proceed.

Thank you good morning, Steve Congratulations it's been a pleasure working with you.

Maybe first question might be for John and Steve I guess, a two part question number one is.

Feels like next year could be a pretty meaningful.

Year for you guys, because the competitive dynamics seem to be working in your favor.

<unk> heard at least a couple of big players kind of talk about moderating growth in this space I'm. Just curious how you guys are tactically preparing for that would you lean in to share gains and then secondly.

Steven McGarry: As John already mentioned, the annualized net charge off rate for the first nine months of 2023. Fans of 2.44% and continues to be better than our internal expectations. NIM for the quarter came in at a strong 5.43% up from 5.27 in the year ago quarter. Our portfolio has continued to benefit from the rising rate environment with our interest earning assets, repricing faster than our cost of funds over the past year. We do expect our NIM will remain in the low to mid 5% vicinity for the full year of 2023.

I think one of the large players as contemplated the sale of their portfolio I'm. Just curious if you've heard the same and what you might want to do there.

Participate if not.

Yes, Sanjay let me, let me take each of them to the extent that that I can.

We.

We absolutely want to take advantage of all of the high quality growth that we can possibly take advantage of in the marketplace.

I'm doing this from memory, but I think we have grown market share every quarter or may be say, one since I joined the company where data has been available and I think we will continue to look for opportunities to grow market share.

Steven McGarry: Third quarter operating expenses were $167 million compared to $150 million in the year ago quarter. Roughly 8 million of the increase over the year ago period relates to higher FDIC assessment fees. As we have mentioned in previous quarters, the increase to the FDIC assessment fee was expected and part of the cost of having access to high quality low cost stable funding. The remainder of the increase was caused by several factors, including higher originations, war loans on the balance sheet, due to slow down and consolidations and increase in staffing versus Q3 of 2022 in our collection center. And finally, the absorption of general inflationary pressures.

At the end of the day I think there's various levers we can pull for that we've talked a lot about.

Just the overall strength of our school teams and relationships with the universities. We serve I think we've talked at great length about the enhancements and the improvements that we've made to our marketing and commercial engines and I think those have only been strengthened through the recent acquisitions of Nitro and Skylake and no doubt I think I've said this on.

The last call.

We appreciate that.

That there may be competitors out there that have other things on their mind right now.

We're certainly happy to take advantage of that opportunity to these that we can.

Lots of other good competitors out there, who arent distracted right now and they are competing just as hard as they always have and we view them as being really good solid competitors that we take seriously so.

Steven McGarry: Finally, our liquidity and capital positions remained strong. We ended the quarter with liquidity of 19.3% of total assets. At the end of the third quarter total risk based capital was 12.9%. Common equity tier 1 stood at 11.7%. I would also like to point out that gap equity plus loan loss reserves for risk-winning assets was a very strong 15.3%. We remain positioned to grow our business and return capital to shareholders going forward.

We will approach next year the exact way that we've approached the last couple of years, which is we're going to make sure that we have.

Staffing and the resources to go after all of the great share that we can we're going to have to serve and take care of as many customers as fit within our buy box.

I think at the end of the day, the sort of market share will sort of play it out for for itself.

In terms of the sale of the portfolios.

Jon Witter: Back to you, John. Thanks, Dave.

I'm sure I have heard all the same rumors that you have heard I have not heard anything declarative.

Jon Witter: Before we turn to guidance, as Melissa mentioned at the opening of the call, Steve and I are joined today by Pete Graham to begin in tomorrow will become Sally May's next two financial officer. Before offering Pete the opportunity to say a few words, I'd like to thank Steve for his many years of service and countless contributions to Sally May and for his commitment to ensuring Pete's successful transition. Steve has been a most trusted advisor and more importantly, a great friend to me during my time here at Sally May and I know he has played that same role for so many others during his years of the company. I am not alone in wishing him the best in his upcoming retirement and look forward to celebrating him appropriately over the next several months as he continues to be with us in an advisory capacity.

We are not really in the business of buying other people's portfolios, We think our real core competency is sort of the marketing and the.

The origination of these high quality assets.

I would never say never.

But you can imagine that buying another portfolio of hypothetically speaking brings with it all kinds of operational regulatory and Reputational risk.

And so we would factor all of that into any decision for what we were going to do.

And at the end of the day I think we believe our best use of.

Resources is forming new customer relationships not by an existing customer relationships, but again.

Pete Graham: With that, it's my pleasure to introduce you to Pete Graham. Thank you, Jon. Steve and everyone on the Sally team who have been helping me transition into company. Like so many families that Sally may serve, access to higher education was critical to my personal career journey, and I'm also the parent of two college graduates. So I feel a particularly deep connection to the company's mission. Steve has built a talented team since joining mid-September, I've had the opportunity to work alongside them and benefit from their experience in deep knowledge of the company and more broadly student lending.

I don't think we would ever cut anything off absolutely, but it would be a higher bar for us to think about something like that.

Thank you and I guess as a follow up question and this might be sort of related a little bit, but you talked about possibly pivoting to growing the balance sheet in 2024.

I'm just wondering tactically how should we consider the P&L impact.

Will the strategy be to minimize implications to EPS.

EPS or grow EPS, maybe you could just help us think about a little bit as we look to 2024.

Pete Graham: I'm thrilled to be joining a team that powers confidence in students and families, both at the same time, thriving meaningful growth, continued efficiency, and long-term value for shareholders. I look forward to getting to know the Sally May investment community in the upcoming weeks and months ahead. I'll turn it back to you. Thanks Pete.

Yes, Sanjay we have not made a decision on that and I think there is as many different sort of ways that one my time pace and sequence a return to balance sheet growth as yes, there our imaginations to sort of drained them up.

I think the big thing that we are trying to balance right now is.

Jon Witter: Let me conclude with the discussion of 2023 guidance. While there have been several moving pieces throughout the year, we are pleased that our earnings outlook for the year is largely in line with our original expectations. As such, we are narrowing the range for diluted non-gap core earnings per common share to between $2.55 and $2.65 with the midpoint still around 260.

We really do believe in the longer term and now actually not so long term and the real organic EPS growth and capital generation capability of this franchise and we've talked pretty extensively about the impact that <unk> had on us for the last couple of years, we've talked about.

Sort of the reasons why we did the loan sale and share arbitrage strategy was in part to manage that capital, but ultimately we view a great way to enhance our valuation improve our multiple and reward shareholders is to start to drive good old fashion organic balance sheet growth in the high quality earnings that comes from.

Jon Witter: As I mentioned earlier this morning, we are absolutely thrilled with the results of a successful peak season in terms of quality, quantity, and cost to acquire. As such, we're revising the range for origination growth for the year. We now expect 6 to 7 percent origination growth for the full year of 2023. As Steve and I both discussed, we are also pleased with the continuing stabilization of credit and are committed to continuing our journey back to full normalcy.

Pat.

With that said.

We always want to recognize.

The power of the arbitrage strategy that I think we've demonstrated over the last three years and while the rate environments are.

A little bit.

Non conducive right now to that the equity markets absolutely are and so I think we are continuing to think through what is that right timing Bal.

Jon Witter: Overall, gross charge-offs are slightly better than expectations year to date, and we expect that we will finish the year slightly better than our original 2023 outlook. As you might remember, in the second quarter of 2023, we implemented a new recovery strategy for defaulted loans, shifting more of our effort in-house as opposed to selling loans sooner to third parties. The net impact of this change is that we expect to receive higher recoveries but at a slightly later point in time.

Balancing the desire to be opportunistic and to understand the value creation of.

Additional loan sales and share buybacks in the near term with a desire to get to balance sheet growth in the longer term.

We've not made any decisions on that as I said in my talking points. We certainly expect to have our next sort of installment of those thoughts.

As a part of the 2020 for guidance.

Jon Witter: This timing impact has caused us to revise our outlook on recoveries for the full year of 2023. We now expect total loan portfolio net charge-offs to be in the upper end of our original range and our tightening our guidance to 375 to 385 million. We still expect that net charge-offs expressed as a percentage of average loans and repayments to be approximately 2.5 percent or slightly better driven by growth in our portfolio over the year.

But I think I would just conclude with a statement of the obvious when I got here three years ago January of 2025, and our last <unk> payment.

Seemed like a very long time away when we talk to you next for earnings and guidance that last payment will be less than 12 months away and so it is absolutely the right and appropriate time, and our multiyear planning context for us to start to think about what that looks like and again, we look forward to sharing more of that information with you.

In the quarters ahead.

Jon Witter: We now expect that our non-interest expenses will finish the year slightly above our original guidance and expect to end the year between 625 and 630 million. Several factors contributed to this performance, chief among them, meaningfully higher originations growth, which coupled with the slowdown in consolidations has increased variable expense.

Thank you.

Thank you one moment for our next question. Please.

It comes from the line of Rick Shane with Jpmorgan. Please proceed.

Thanks, everybody for taking my questions and Steve I. This is not gratuitous in any way, but we really we will Miss you and appreciate all the conversations over the year. So thank you.

Jon Witter: Francis. That along with the acquisition of scholarly and other inflationary pressures informed the decision to increase non-interest expense guidance for the full year of 2023.

Thank you Bill.

Sorry, I didn't mean to interrupt.

I wanted to delve in a little bit more on the.

Gain on sale in the in the Q there is a reference to low mid single digits.

Jon Witter: While it's too early for us to declare specific 2024 guidance, the question undoubtedly on your mind is expense trajectory for 2024 and beyond. As context, approximately 40% of the growth in non-interest expense this year was driven by significant increase in FDIC fees. While we cannot speak for the FDIC, we do not anticipate our FDIC premiums continuing to grow at this right in the future. Expenses related to certain investments and restructurings, while individually diminimous, we're collectively meaningful and represent approximately 20% of the non-interest expense growth in 2023.

There was a comment on the call about 31 cents impact this quarter that implies roughly $100 million pre tax.

But that's obviously net of provision can you talk about.

Sort of the mix between gain on sale and provision.

Leif associated with that so we can dimensionalize, what the gain on sale would be a little bit more closely.

Rick I think it's pretty straightforward I think the release was pretty close to the 6% that we.

Carry on our balance sheet as we release say.

As we sell a representative sample and the balance of that should be.

Jon Witter: We do not view these expenses as being embedded in our future run rate. It is also worth noting that the inflationary pressures we felt a year ago have somewhat evaded. As such, we anticipate non-interest expense growth in the future will be more consistent with longer term historical averages.

The gain on sale again, we like to not to be too precise because buyers are in the process of distributing.

All the securities involved in that transaction, so very habit.

Great that's it for me.

Jon Witter: Of course, we will provide more detail on expected expense growth in January when we offer earnings guidance for 2024.

We'll catch ups and thank you guys.

Thanks, Rick.

Thank you one moment for our next question.

Jon Witter: The results we posted this quarter demonstrate that we are continuing to execute the business plan we have outlined for investors. We are focusing on strengthening our core business and maximizing the value of our brand. We are excited about the loan sale that settled earlier this month and are planning to put our loan sale, share a pieback arbitrage to work in the fourth quarter, while our stock is trading at what we believe to be a significant discount. As we look forward to the end of the year, we will continue to focus on operational execution, expense management, and NIM to drive results.

Comes from the line of Jeff Adelson with Morgan Stanley. Please proceed.

Alright, Thanks for taking my questions and Steve just wanted to say congratulations.

<unk>.

Just on credit.

The net charge offs do seem like they're starting to stabilize again in this two 5% range.

Your year to date is coming in line with your expectations or better but.

Part of the year were so much better.

So as we think about the next 12 months from here are you expecting kind of a similar shape of seasonality, where the first half of the year improves.

Unknown Executive: With that, Steve, let's open up the call for some questions. Thank you. In a free reminder, to ask the questions, simply press star-1-1 on your telephone to withdraw. Press star-1-1 again. Please stand by while we compile the Q&A roster. All right.

On the back of some of the dynamics you discussed before and.

Just in light of the fact that delinquencies are actually improving year over year are you still thinking you can kind of get down towards this low to high one over the next several years and that's kind of a part of that and the second part of your question. What are you seeing on the student loan repayments starting this month.

Michael Kaye: Our first question comes from the line of Michael K with Wells Fargo. Please proceed.

Michael Kaye: Good morning.

Michael Kaye: I wanted to see if you could go over the provision expense for unfunded commitments. Looking at page 33 and at 10Q. I count the percentage of provisions on unfunded commitments as around 3.5%. You know, taking 116 million divided by 3.3 billion. This is weighed down from over 6% rate last year. You know, looks like this dynamic began last quarter, too, with the percentage being weighed down.

We read or indications on how that's potentially hitting the book right now.

Yes, Geoff it's John.

Try to handle those two and Steve feel free to jump in if I Miss anything on the sort of delinquency and charge off trends there.

There is absolutely sort of seasonality quarter to quarter and I think.

That is really driven by the fact that there is always an earlier spike of delinquencies and charge offs related to sort of the early months after people enter repayment.

Michael Kaye: So one of you could explain the step down of what's the change in accounting. And also, can you talk about that other provision items also when that team schedule that jumped at 37 million versus, you know, mid single digits in Q1 and Q2. Was that due to the lower prepayment speeds? Michael, you really got down into the weeds there. I don't have that schedule in front of me. What I have is I have that the reserve for unfunded commitments was $153 million or 4.6% compared to 5.35% in the prior years quarter.

And our customers enter repayment largely not exclusively but largely in sort of two major waves of years. So there is absolutely a seasonality effect there.

If we talk to or if you talk to our operations team I think what they would say is.

Those seasonality effects have changed slightly with the change in credit administration practices.

But I think there are largely pretty consistent and I think the basic shape of them will probably play out in a pretty consistent fashion year in and year out.

Michael Kaye: There were no accounting changes in our Cecil process or procedures. What we are seeing here is an improvement in credit and a lower reserve due to the tightening that John referenced in his prepared remarks and that we mentioned during the second quarter earnings call as well. Yeah, in terms of the real detailed questions you have there.

If I think about the larger question of sort of path back to normal say.

I think you will remember from the beginning of this year. Our view was most of the changes we were putting in place that we thought would have a longer term effect on charge off rates were going to happen in the second half of the year and I think as we discussed last quarter those are.

Underwriting changes every year, we always tightened our buy box based on the.

Michael Kaye: And again, this is my last call. Thanks for serving that one up.

The most recent performance data we have we certainly did that this year in light of the different experience we had last year.

Michael Kaye: Why don't we take that offline with Melissa following the goal? Okay, you know, that 150 three million is really broken up into two pieces. There's like a hundred 1516 million just on provision on new commitments. And then there's a separate other provision items. And that like jumps around, you know, drastically quarter to quarter. This one's very high. But you know, putting that item to the side. Like I said, you know, when I do my Calc that provision rate on the unfunny commitments that 3.3 billion is way down that percentage. So you're saying if you think it's just because of credit improvement. Yeah, absolutely. We've never on the right and need to reserve to climb the as a function of that.

As we've talked about we've also put in place a whole series of what I would describe as pre delinquency programs.

So this is a service programs for customers based on our risk profile to be helpful to them, even before they've reached delinquency I think we've talked a lot about sort of the programs. We've put in place again largely in the second half of the year around.

New assistance programs.

It could be sort.

Interest payments, they could be term extensions and alike.

And then we've obviously talked on this call about the enhanced recovery.

Sort of changes that we've made I think we're just starting to see the effects of those things play out now.

Michael Kaye: And we're more than happy to get into the detailed questions, but let's do that offline. Okay, thanks.

And I think some of them not even at all we've gotten more changes that are going to go into place I'm sure in the fourth quarter and more fine tuning that will happen next year.

Michael Kaye: I wanted to talk about the share repurchases. Obviously that the loan sale, you know, got it closed to for you know, by my talent, you have, you know, about 324 million less in your share repurchase authorization. The calculation account for total for the year about 581 million. So at least about the wrench and 24 million less. Should we assume you complete that that entire through into 24 million to 4.

So I think we feel there is more opportunity for us to continue to drive.

Our long term charge off rates down obviously, recognizing they can fluctuate with economic conditions.

I don't think we have any reason to believe that getting back to the sort of high ones low twos.

Isn't in our future.

Youre right I think it will take another year or two to sort of get fully there, but I think we expect to continue to make good progress next year again.

Michael Kaye: Yeah, Michael, we do not give specific guidance on the pace of our share repurchases. I think the way that I would think about it is, you know, that was a, you know, sort of a longer term share repurchase authorization. I think we will continue to repurchase shares as we see fit given conditions and valuation levels in the marketplace. And, you know, at whatever point we run through that, we will have run through that. Okay. All right. Thank you.

Unknown Executive: One moment for our next question, please.

Knowing that the macroeconomic condition can have an effect one way or the other that's hard for us to predict.

In terms of student loan repayment.

If you remember the federal program has just restarted.

It has the.

The year long on ramp program and I think we've talked pretty extensively about that.

Really generous changes to payment programs that are available now to sort of borrowers.

We have seen really no impact of that whatsoever in our results.

Sanjay Sakhrani: Any comments from the line of Sanjay Sakrani with KBW, please proceed. Thank you.

And as we continue to be good students of sort.

Sanjay Sakhrani: Good morning, Steve. Congratulations. It's been a pleasure working with you. Maybe, maybe first question might be for John and Steve. I guess two part question. The number one is, feels like next year could be a pretty meaningful year for you guys because the competitive dynamics seem to be working in your favor. You know, you've heard at least a couple of big players kind of talk about moderating growth in this space. I'm just curious how you guys are tactically preparing for that.

The academic research there has been a number of studies that have come out recently that I think have sort of further dimension the potential impact of the restart and said it's pretty de Minimis.

We will continue to watch this closely but I think at this point, we don't view it as a material risk.

Our performance here over the sort of foreseeable future.

Okay.

Great. Thanks, and just if I could follow up on the expense color you discussed earlier.

Sanjay Sakhrani: Would you lean in to share gains? And then secondly, I mean, one of the large players has contemplated a sale. They're portfolio. I'm just curious if you've heard the same and what you might want to do there. Participate if not. Yes, Sanjay. Let me, let me take each of those to the extent that that I can. You know, we, we absolutely want to take advantage of all of the high quality growth that we can possibly take advantage of in the marketplace.

A couple of moving parts. There I know you talked about 40% from FDIC growth this year not repeating 20% from other so it seems like 40% we will potentially repeat next year.

Fair to say about that.

It looks more like a mid single digit growth rate of expenses next year and then.

I just wanted to confirm your view on longer term expense growth rate you said in line with historical was that something more like a <unk>.

Hello, double or high single digit growth rate or where do you think about that.

Sanjay Sakhrani: And I'm doing this from memory, but I think we have grown market share, you know, every quarter, maybe save one since I joined the company where data has been available. And I think, you know, we will continue to look for opportunities to grow market share. At the end of the day, I think there's, you know, various levers we can pull for that. We've talked a lot about just the overall strength of our school teams and relationships with the universities we serve.

Yeah.

Great question, and again I want to be really specific I think its too early Jeff for us to operating kind of specific guidance here, but.

We tried to dimension that so that folks could get a sense of it.

I think what.

<unk> says is but for the FDIC expense and but for the other 20%.

I think our expense growth this year would have been in the mid single digits.

And I think Thats really sort of the result of the direct inflationary expenses that we experienced and I think the whole economy experienced over the last 18 months.

Sanjay Sakhrani: I think we've talked at great length about the enhancements and the improvements that we've made to our marketing and commercial engines. And I think those have only been strengthened through the recent acquisitions of nitro and scholarly. And no doubt, I think I said this on the last call, you know, we, we appreciate that, you know, that there may be competitors out there that have other things on their mind right now. And, you know, we're certainly happy to take advantage of that opportunity to the extent we can.

And some of the sort of more permanent changes that we have elected to make and staffing for a variety of reasons.

Sanjay Sakhrani: We also have lots of other good competitors out there who aren't distracted right now and they're competing just as hard as they always have. And we view them as being really good solid competitors that we take seriously. So we will approach next year the exact way that we've approached the last couple of years, which is, you know, we're going to, you know, make sure that we have the staffing and the resources to go after all the great share that we can.

I think we were pretty clear in saying, yes, those inflationary effects have somewhat abated, we're not back to a normal level of inflation, yet, but we're certainly in a very different ZIP code than we were at this time last year.

So I would say, it's sort of low to mid single digit expense growth is what I would consider to be a more historic norm.

And again, I think we'll be a little bit paying attention to you know how does the inflationary environment continue to evolve over the next couple of months before we set guidance, but I think we would certainly hope to have a very different growth rate next year than we did this last year.

Sanjay Sakhrani: We're going to look to serve and take care of as many customers at fit within our buy box. And I think at the end of the day, the sort of market share will sort of, you know, play it out for for itself. In terms of the sale of portfolios, you know, I'm sure I have heard all the same rumors that you have heard. I have not heard anything declarative. We are not really in the business of buying other people's portfolios.

Yeah.

Okay, great. Thank you so much for taking my questions.

Yes, I appreciate it.

Thank you one moment for our next question.

Aaron.

<unk> with Citi. Please proceed.

Thank you and congratulations Steve it's been a fun 18 years working with you.

Sanjay Sakhrani: You know, we think our real core competency is sort of the marketing and the, you know, the origination of these high quality assets. I would never say never, but you can imagine that buying, you know, another portfolio hypothetically speaking brings with it all kinds of operational regulatory and reputational risk. And so we would factor all of that into any decision for what we were going to do. And at the end of the day, you know, I think we believe our best use of resources is forming new customer relationships, not buying existing customer relationships. But again, you know, I don't think we would ever cut anything off absolutely, but it would be a higher bar for us to think about.

The.

The stronger originations.

You had it was.

You mentioned the applications.

Sanjay Sakhrani: Thank you.

Is that something demographically that has happened or maybe you could talk a little bit about.

Whether or not youre, taking additional share in the marketplace.

Yes, Aaron we don't have at the latest quarter share data yet so it's sort of hard for me to comment on that.

But I don't think it is a demographic issue I think it is at least in large part the continued maturation and sort.

Sort of demonstration of the strategy, we've been employing so.

If you go back a couple of years I think we've talked at great length about a couple of things. We've made I think some really important investments in our.

Jon Witter: And I guess the follow-up question, and this might be sort of related a little bit, but you talked about possibly pivoting to growing the balance sheet in 2024. I'm just wondering tactically, how should we consider the PNL impact? You know, will, will the strategy be to minimize implications to EPS or grow EPS? Maybe you could just help us think about a little bit as we look to 2024. Yeah, Sanjay, we have not made a decision on that.

Marketing and technology stacks.

But I think the biggest change that we've made recently is really doubling down on what we think of internally as our content based strategies and.

At the end of the day, if we can help customers with questions answers, yes services insights for things that are beyond student loans still related to their student journey, but beyond student loans, we start to form that relationship and I think that allows us to.

Jon Witter: And I think, you know, there's as many different sort of ways that one might time pace and sequence, a return to balance sheet growth as, you know, there are imaginations to sort of dream them up. You know, I think the big thing that we are, you know, trying to balance right now is, you know, we really do believe in the longer term and now actually not so long term. In the real organic EPS growth and capital generation, capability of this franchise.

Sort of open up the top of the funnel to a lot more customers and so I think what we've seen is as opposed to relying strictly on.

Really the old days direct mail sort of the old days paid search what we're really trying to do here is to borrow a page out of what some of the very best marketers are doing and saying we want to attract customers to our brand through more organic and content based channels. Yes. That's obviously a wide open strategy and we get lots of <unk>.

Jon Witter: And we've talked pretty extensively about the impact that Cecil has had on us for the last couple of years. We've talked about, you know, sort of the reasons why we did the loan sale and share arbitrage strategy was in part to manage that capital. But ultimately, we view, you know, a great way to enhance our valuation, improve our multiple and reward shareholders is to start to drive good old fashioned organic balance sheet growth and the high quality, you know, earnings that comes from that with that said, you know, we always want to recognize the power of the arbitrage strategy that I think we've demonstrated over the last three years.

Customers, who come in and so it's not surprising that we're seeing really great growth in applications.

And then what I'm also pleased about is I think we're continuing to show real discipline in our underwriting by only selecting those customers that we really think hit our buy box and can generate the kind of high ROE loss adjusted ROE that we would be looking for in our business. So yeah.

It is absolutely I'm sure somewhat a function of the broader competitive set but it is also I'm sure in large part due to the changes in strategy we have made in.

Jon Witter: And while the rate environments are, you know, a little bit non conducive right now to that, the equity markets absolutely are. And so I think, you know, we are continuing to think through what is that right timing, you know, balancing the desire to be opportunistic and to understand the value creation of, you know, additional loan sales and share buybacks in the near term, you know, with the desire to get to balance sheet growth and the longer term.

And we feel great about those results.

Thanks, and maybe you could talk a little bit about the consolidations away from Sallie Mae they still remain pretty low it sounds like you didn't have too much in terms of Prepays is there an expectation that youll start to see a bit of an increase in that now that we have.

Loans on the government side starting to require payments.

Jon Witter: So we've not made any decisions on that, you know, as I said in my talking points, we certainly expect to have our next sort of installment of those thoughts as a part of the 2024 guidance. You know, but I think I would just conclude with, you know, the statement of the obvious, you know, when I got here three years ago, January of 2025 and our last Cecil payment seemed like a very long time away.

Okay.

I'll take that so look consolidations is very much a ray.

<unk> game and given the you know the.

Structure of interest rates right now, it's very very difficult to under contract.

<unk> that are outstanding on the federal loan program in the federal loan program.

Benefits of that program in terms of income based repayment and other forms of forgiveness just richer over time. So we think that people will think twice about consolidating their federal loans, even that beneficial interest rates. So we are not anticipating a ramp up and consolidation.

Jon Witter: When we talk to you next for earnings and guidance, you know, that last payment will be less than 12 months away. And so it is absolutely the right and appropriate time and a multi year planning context for us to start to think about what that looks like. And again, we look forward to sharing more of that information with you, you know, in the quarters ahead.

Sanjay Sakhrani: Thank you.

Unknown Executive: One moment for our next question, please.

Or a increase in prepayment speeds and we note that down very sharply year to date, but we will see what the future brings.

Yes, Aaron if I, just sort of add on to what to what Steve said I think we've sort of thought about there being two segments of people who might refinance.

Rick Shane: May comes from the line of Rick Shane with JP Morgan, please proceed.

Rick Shane: Thanks everybody for taking my questions and Steve, I, this is not gratuitous in any way, but we really will miss you and appreciate all the conversations over the years, so thank you. Thank you.

There are people out there who are looking to lower their total cost of that pay off their loans quicker.

And move on to the next chapter of their financial life. The rate environment makes refinancing of loans problematic for that group for a period of time 345 years from now if we're in a higher for a longer phase and then see lower rates, maybe that changes, but I think thats a long term path back.

Rick Shane: Sorry, I didn't mean to interrupt. I wanted to delve in a little bit more on Gain On Sale in the queue. There's a reference to low mid single digits. There was a comment on the call about 31 cents impact this quarter. That implies roughly $100 million pre-tax, but that's obviously net of provision. Can you talk about sort of the mix between gain on sale and provision relief associated with that so we can dimensionalize with the gain on sale?

Consolidation volume.

The other as Steve said, our people who are looking to lower payments.

He might have high balances and are looking to squeeze a little bit of extra space out of their budget totally agree with what Steve said, if you're in that group. The income based repayment or income driven repayment programs from the federal government are a far richer benefit than anything that you would see from.

Rick Shane: That would be a little bit more closely. Rick, I think it's pretty straightforward. I think the release is pretty close to the 6% that we carry on our balance sheet as we release a as we sell a representative sample and the balance of that should be, you know, that the gain on sale. Again, we like to not to be too precise because providers are in the process of distributing all the securities involved in that trend. So there you have it.

From a refinance options. So we're not in the refinance business you know it could be that others have better or different strategies or views on the segments of customers, but I think when we look at those two things together, we don't see a return to normalcy coming anytime in the immediate future.

Thank you.

Thank you and as a reminder to ask a question simply press star one on your telephone.

Rick Shane: Great. That's it for me and we'll catch up soon. Thank you guys. Thanks, Rick. Thank you. One moment for our next question.

We have a question from the line of Jordan Hymowitz with Philadelphia Financial. Please proceed.

First.

First question.

You haven't seen the final market share numbers, yet, but have you noticed the number two or number three competitors pulling back on the market as well.

Jeffrey Adelson: Cons from the line of Jeff Adelson with Morgan Stanley, please proceed.

Jeffrey Adelson: Thanks for taking my questions and Steve, just wanted to say congratulations. Just on credit, the net chargeoffs do seem like they're starting to stabilize again in this 2.5% range. I know your year today is coming in line with your expectations are better, but the earlier part of the year was so much better. I guess as we think about the next 12 months from here, are you expecting kind of a similar shape of seasonality where the first half of the year improves on the back of some of the dynamics you've discussed before.

I mean, if you could say like how much is those guys pulling back and how much is the market growing causing your growth that would be helpful.

Jordan I don't have those numbers in front of us and I certainly don't have them for peak season, which is the I.

I think the most relevant sort of part of this question because I, obviously fall enrolments are.

Really really the question here and will drive next springs investments.

I think though sort of a little bit more broadly during.

During the pandemic, we absolutely saw universities try to hold costs constant we absolutely saw them minimize the rate of growth in fees I think were back to a more normal enrollment and price increase sort of environment for universities.

Jeffrey Adelson: And, you know, just in light of the fact that the winquencies are actually improving your year, you're still thinking you can kind of get down towards this low to high one over the next several years. And that's kind of a part of that, the second part of the question.

Jon Witter: What are you seeing on the student loan repayments starting this month, any early read or indications on how that's potentially hitting the book right now? Yeah, Jeff, it's John. I'll try to handle those two and Steve feel free to jump in if I miss anything. You know, on the sort of delinquency and chargeoff trends, there is absolutely sort of seasonality quarter to quarter. And I think, you know, that is really driven by the fact that, you know, there is always an earlier spike of delinquencies and chargeoffs related to sort of the early months after people enter repayment.

So I would guess.

The growth we have seen is a combination of both growth and market and growth in share, but we will have the market share numbers in the fourth quarter and as we will always do happy to share those publicly once we have them.

Okay.

As you consider reducing or eliminating pick your gain on sale next year do you still think the student lending is 30% ROE business and especially in an environment, where most financial return to heading towards single digits.

Jon Witter: And, you know, our customers enter repayment largely not exclusively, but largely in sort of two major waves a year. So there's absolutely a seasonality effect there. And I think if, you know, if you talk to our operations team, I think what they would say is those seasonality effects have changed slightly with the change in credit administration practices. But I think they're largely pretty consistent. And I think the basic shape of them will probably play out in a pretty consistent fashion year in and year out.

I mean, Jordan, we continue to underwrite and originate at where to hold these loans and low in the low to mid twenties, 30% is a little bit of a stretch but the returns on this asset class are extremely high.

Those that are in the business right now.

Okay.

Just leave it there.

I've been following your company since 98 and Steve.

Had a tremendous amount of respect for you, but I do think it's time to get the funds out of there.

Jon Witter: Yeah, if I think about the larger question of sort of path back to normal say, you know, I think you will remember from the beginning of this year, you know, our view was most of the changes we were putting in place that we thought would have a longer term effect on charge offerings. We're going to happen in the second half of the year. And I think as we discussed last quarter, you know, those are, you know, underwriting changes every year, we've always tightened our buy box based on, you know, the most recent performance data we have.

Yeah.

Yes.

Yes.

Yes.

Yes.

Okay.

Okay.

Jordan, we're going to assume that was your last question yes.

Take care guys. Thank you welcome.

Thank you and this concludes the Q&A period, I will turn it back to John for his final comments.

Jon Witter: We certainly did that this year, you know, in light of the different experience we had last year. I think as we've talked about, we've also put in place a whole series of what I would describe as pre delinquency programs. So this is, you know, service programs for customers based on risk profile to be helpful to them. Even before they've reached delinquency, I think we've talked a lot about sort of the programs we put in place again largely in the second half of the year around.

Thank you very much Carmen Steve I'll again say, thank you for all your years of service I really do look forward to the next couple of two three months, saying goodbye appropriately and I'm sure a lot of our investors who want to follow up with you one on one but again. Thank you for everything you've done and your friendship and camaraderie over my last three and a half years here.

Also thanks to everyone on the call for your interest in Sallie Mae as always if there is a specific follow up questions. Our IR team is here to help and assistance and we look forward to your calls and with that Melissa I will turn it back to you for a little bit of closing business.

Jon Witter: We had new assistance programs and those could be, you know, sort of interest payments. They could be, you know, term extensions and the like. And then we've obviously talked on this call about the enhanced recovery sort of changes that. We've made. I think we're just starting to see the effects of those things play out now. You know, and I think, you know, some of them not even at all. We've gotten more changes that are going to go into place.

Yes.

Thank you for your time and questions today, a replay of this call and the presentation will be available on the investors page at Sallie Mae Dot Com. If you have any further questions feel free to contact me directly.

Today's call.

And with diabetes and gentlemen, you may now disconnect.

Jon Witter: I'm sure in the fourth quarter and more fine tuning that will happen next year. So I think we feel there is more opportunity for us to continue to drive, you know, our long term charge off rates down, obviously recognizing they can fluctuate with, you know, economic conditions. And I don't think we have any reason to believe that getting back to the sort of, you know, high ones low twos, you know, isn't in our future.

[music].

Okay.

Okay.

Jon Witter: I think you're right. I think it will take, you know, another year or two to sort of get fully there. But I think we expect to continue to make good progress next year again, you know, knowing that the macroeconomic condition can have an effect one way or the other. That's hard for us to predict.

Jon Witter: In terms of student loan repayment, you know, if you remember the federal program has just restarted, you know, it has, you know, the year long on ramp program. And I think we've talked pretty extensively about the, you know, really generous changes to payment programs that are available now to sort of borrowers. We have seen, you know, really no impact of that whatsoever in our results. And as we continue to be good students of, you know, sort of the academic research.

Jon Witter: You know, there's been a number of studies that have come out recently that I think have sort of further dimension, the potential impact of the restart and said it's pretty dimenimous. And, you know, again, we will continue to watch this closely. But I think at this point, we don't view it as a material risk to our performance here over, you know, the sort of foreseeable future.

Jeffrey Adelson: Great. Thanks.

Jeffrey Adelson: And just if I could follow up on the expense color you discussed earlier, a couple of moving parts there. Now, you talked about 40% from FDSU growth this year, not repeating 20% from other. So it seems like 40% will potentially repeat next year. It is a fair to say that that kind of looks more like a mid single digit growth rate of expenses next year. And then I just want to confirm your view on longer term expense growth rate.

Jeffrey Adelson: You said in line with the historical is that something more like a low double or high single digit growth rate or what do you think about that? Yeah, great question. And again, you know, I want to be really specific. I think it's too early Jeff for us to offer any kind of specific guidance here, but we tried to dimension that so that, you know, folks could get a sense of it. And, you know, I think what, you know, that says is but for the FDIC expense and but for the other 20%.

Jeffrey Adelson: And, you know, I think our expense growth this year would have been in the mid single digits. And I think that's, you know, really sort of the result of the direct inflationary expenses that we experience. And I think the whole economy experience over the last 18 months. You know, and some of the sort of more permanent changes that we have elected to make and staffing for a variety of reasons. I think we were pretty clear in saying, you know, those inflationary effects have somewhat abated.

Jeffrey Adelson: We're not back to a normal level of inflation yet, but we're certainly in a very different zip code than we were at this time last year. So I would say, you know, sort of low to mid single digit expense growth is what I would consider to be a more historic norm. And again, I think we'll be a little bit paying attention to, you know, how does the inflationary environment continue to evolve over the next couple of months before we set guidance. But I think we would certainly hope to have a very different growth rate next year than we did this last year.

Jeffrey Adelson: Stuart. Okay, great.

Unknown Executive: Thank you so much for taking my questions. Yes, I appreciate it. Thank you.

Unknown Executive: One moment for our next question.

Aaron Cyganovich: And it comes from Aaron Cyganovich with CT. Please proceed. Thank you. And congratulations, Steve. It's been a fun 18 years working with you. The stronger originations that you had, was that? You know, you mentioned the applications up, you know, is that something demographically that has happened or maybe you talk a little bit about, you know, whether or not you're taking additional share in the marketplace? Yeah, Aaron, we don't have the latest quarter share data yet.

Aaron Cyganovich: So it's sort of hard for me to comment on that. But I, I don't think it is a demographic issue. I think it is, you know, at least in large part, the continued maturation and sort of demonstration of the strategy we've been employing. So, you know, if you go back a couple of years, I think we've talked at great length about a couple of things. You know, we've made, I think some really important investments in our, you know, in our marketing and technology stacks.

Aaron Cyganovich: But I think the biggest change that we've made recently is really doubling down on what we think of internally as our content based strategies. And, you know, at the end of the day, if we can help customers with questions, answers. You know, services insights for things that are beyond student loans still related to their student journey, but beyond student loans. We start to form that relationship. And I think that allows us to, you know, sort of open up the top of the funnel to a lot more customers.

Aaron Cyganovich: And so, I think what we have seen is, as opposed to relying strictly on, you know, really the old days, direct mail, sort of the old days, paid search. You know, what we are really trying to do here is to borrow a page out of, you know, what some of the very best marketers are doing and saying, we want to track customers to our brand through more organic and content based channels.

Aaron Cyganovich: Yeah, that's obviously a wide open strategy and we get lots of customers who come in. And so it's not surprising that we're seeing really great growth and applications. And then what I'm also pleased about is I think we're continuing to show real discipline in our underwriting by only selecting those customers that we really think had our buy box and can generate the kind of high ROE's lost adjusted ROE's that we would be looking for in our business.

Aaron Cyganovich: So, you know, it is absolutely I'm sure somewhat a function of the broader competitive set, but it is also I'm sure in large part due to the changes in strategy we've made and and we feel great about those results.

Aaron Cyganovich: Thanks. And maybe we could talk a little bit about the consolidations away from selling it. They still remain pretty low. I'm like you didn't have too much in terms of prepay. Is there an expectation that you'll start to see a bit of an increase in that now that we have loans on the government side, starting to require payment. So, I'll take that. So, look, consolidation. Jones is very much a rate game and given the structure of interest rates right now, it's very, very difficult to undercut the rates that are outstanding on the federal loan program, the federal loan program, the benefits of that program in terms of income based repayment and other forms of forgiveness, just get richer over time.

Aaron Cyganovich: So we think that people will think twice about consolidating their federal loans even at beneficial interest rates, so we are not anticipating a ramp up in consolidations or an increase in repayment speeds and, you know, we know they're down very sharply year to date, but, you know, we will see what the future brings. Yeah, Aaron, if I just add on to what Steve said, I think we've sort of thought about there being two segments of people who might refinance.

Aaron Cyganovich: There are people out there who are looking to lower their total cost of debt, pay off their loans quicker, you know, and move on to the next chapter of their financial life. The rate environment makes refinancing of loans problematic, you know, for that group for a period of time. Three, four, five years from now, if we're in a higher for longer phase and then see lower rates, maybe that changes, but I think that's a long-term path back to consolidation volume.

Aaron Cyganovich: You know, the other is Steve said are people who are looking to lower payments, you know, they, you know, might have high balances and are looking to squeeze a little bit of extra space out of the budget. Totally agree with what Steve said, if you're in that group, the income-based repayment or, you know, income-driven repayment programs from the federal government are far richer benefit than anything that you would see from, you know, from a refinance option.

Aaron Cyganovich: So, you know, we're not in the refinance business, you know, it could be that others have, you know, better or different strategies or reviews on the segments of customers. But I think when we look at those, they two things together, we don't see a return to normal city coming, you know, anytime in the immediate future.

Aaron Cyganovich: Thank you.

Unknown Executive: Thank you, and I'm sorry, Minder, to ask the question, simply press star 11 on your telephone.

Jordan Hymowitz: We have a question from the line of, are Jordan Himowitz, with Philadelphia Financial, please proceed. Thanks, first question. You haven't seen the final market share numbers yet, but have you noticed the number two and number three competitors pulling back in the market as well?

Jordan Hymowitz: I mean, if you could say like how much is those guys pulling back and how much is the market growing causing your growth, that would be helpful. Jordan, I don't have those numbers in front of us, and I certainly don't have them for peak season, which is the, you know, I think the most relevant, you know, sort of part of this question to that obviously fall enrollments are sort of really, really the question here and we'll drive next spring's investments.

Jordan Hymowitz: You know, if I think though, sort of a little bit more broadly, you know, during during the pandemic, we absolutely saw universities try to hold cost constant, we absolutely saw them, you know, minimize the rate of growth and fees. I think we're back to a more normal enrollment and price increase sort of environment for universities. So I would guess, you know, that the growth we have seen is a combination of both growth and market and growth and share, but we will have the market share numbers in the fourth quarter and, you know, as we will always do happy to share those publicly once we have them. Okay.

Jordan Hymowitz: And as you consider reducing or eliminating, pick your war again on sale next year, do you still think the student lending is a 30% RRE business, and especially an environment where most financial return to any towards single digits? I mean, Jordan, we continue to underwrite and originate at where to hold these loans in the low to mid-20s, 30% is a little bit of a stretch, but the returns on this asset class are extremely high to those that are in the business right now.

Jordan Hymowitz: Okay, and I'll just leave it in that I've been following your company since 98 and Steve, I've had a tremendous amount of respect for you, but I do think it's time to get the fuck out of there. Yeah. Jordan, we're going to assume that was your last question. Yes. Take care, guys. Thank you.

Unknown Executive: Welcome, Pete. Thanks. Thank you.

Melissa Bronaugh: And this concludes the Q&A answer period. I will turn it back to John with her for his final comments. Thank you very much, Carmen. Steve, I'll again say thank you for all your years of service. I really do look forward to the next couple of two, three months, saying goodbye. I'm sure a lot of our investors will want to follow up with you one on one, but again, thank you for everything you've done and your friendship and camaraderie over my last three and a half years here.

Melissa Bronaugh: Also, thanks to everyone on the call for your interest in Sally May, as always, if there's a specific follow up questions, our IR came here to help and we have assistance and we look forward to your calls. And with that, Melissa, I will turn it back to you for a little bit of closing business. Thanks. Thank you for your time and questions today. A replay of this call in the presentation will be available on the investor's page at Sally May dot com. If you have any further questions, feel free to contact me directly.

Melissa Bronaugh: This concludes today's call.

Unknown Executive: And with that, ladies and gentlemen, you may now disconnect.