SLM Corporation (NASDAQ:SLM) Q4 2023 Earnings Call Transcript

SLM Corporation (NASDAQ:SLM) Q4 2023 Earnings Call Transcript January 24, 2024

SLM Corporation misses on earnings expectations. Reported EPS is $0.72 EPS, expectations were $0.87. SLM Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and thank you for standing by. Welcome to Sallie Mae 2023 Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Melissa Bronaugh. You may begin.

Melissa Bronaugh: Thank you, Towanda. Good evening, and welcome to Sallie Mae’s fourth quarter 2023 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Pete Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations, financial conditions, and/or cash flows, as well as any potential impacts of the COVID-19 pandemic on our business.

During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2023. This is posted along with the earnings press release and the earnings presentation on the Investors page at salliemae.com. Thank you. And now I will turn the call over to Jon.

Jon Witter: Thank you, Melissa and Towanda. Good evening, everyone. Thank you for joining us today to discuss Sallie Mae’s fourth quarter and full year 2023 results. I’m pleased to report on a successful year and discuss our outlook for 2024. I hope you’ll take away three key messages today. First, we delivered strong results in 2023. Second, our credit performance is in-line with the expectations we laid out in the beginning of the year, and we anticipate that we will experience continued improvement in the coming year. And third, we believe we have strong momentum entering 2024 and are well-positioned to deliver on the investment thesis we introduced approximately a month ago. Let me begin with the discussion of 2023 results.

GAAP diluted EPS in the fourth quarter was $0.72 compared to a loss of $0.33 a share in Q4 of 2022. Our full year GAAP diluted EPS was $2.41 compared to $1.76 in 2022. Without the non-cash write-down of the intangible assets associated with the Nitro trade name and trademark, which Pete will discuss in more detail, GAAP diluted EPS would have been $0.91 for Q4 and $2.59 for the year, well within our guidance expectations for 2023. Private education loan originations for the fourth quarter of ’23 were $839 million, which is up 2% over the fourth quarter of 2022. Consistent with guidance provided on our last earnings call, our full year originations ended at approximately $6.4 billion, which is up 7% over 2022. Application volume also increased year-over-year by 10%.

It has been fueled by a 12% increase in underclass applications. This is especially important given the greater serialization potential and lifetime value of this group. In a year where students returned to campus in record numbers post-pandemic, we are pleased that we were able to maintain our 55% share of the private student loan lending market, according to the most recent industry report. The credit quality of originations was consistent with past years. Our cosigner rate for the fourth quarter of ’23 was 84%, up slightly from 82% in the fourth quarter of ’22. Our average FICO score for the fourth quarter of ’23 was 750, an increase over the fourth quarter of 2022 at 747. For the full year, our originations were 87% cosigned and had an average FICO score of 748, both improvements over the full year 2022.

We remain focused on credit and our path back to normalcy and are pleased that we have seen the expected improvement in performance this year. We ended the year with net charge-offs as a percentage of average loans and repayment of 2.4% and at the lower end of our net charge-off guidance for the year at $375 million. Having assessed the underwriting, programmatic and operational changes made to-date and segmented the performance of our portfolio, we continue to believe that the right net charge-off goal for our portfolio is the high 1%s to low 2% range. Understanding that we won’t see a reversion to those rates immediately, we are happy with the progress made from ’22 to ’23, and expect continued progress from ’23 into ’24, of course, assuming no changes to the broader economic environment.

We did see a rise in delinquencies in the fourth quarter to 3.9%. We believe this is largely a mechanical result of borrowers enrolling in new programs who are in their qualifying period versus a broader worsening of performance. In fact, we are seeing early indicators of the success of our new payment programs, and in December observed the lowest roll-to-default rate in over two years. Turning to capital return. In the fourth quarter of ’23, we repurchased 6 million shares at an average price of $15.43. We have reduced the shares outstanding since January 1 of ’23 by 9% at an average price per share of $15.64, and by approximately 50% since January 1 of 2020 at an average price of $15.93. Before I hand the call over to Pete, I’m pleased to share that last week, we agreed to indicative pricing terms for the sale of approximately $2 billion of private education loans.

We expect the transaction to close in early February. With general market improvements in the consumer-lending segment during the fourth quarter of ’23 as well as the improvements we saw in ABS spreads, we are encouraged by the price that we received, which is in-line with our expectations for the year. We expect to sell additional loans in 2024. Market conditions will dictate the timing of additional sales and volume will be driven by our balance sheet growth targets. We expect our balance sheet growth to be in-line with or slightly above the strategy we shared at our Investor Forum just a month ago, roughly 2% to 3% balance sheet growth in 2024. Pete will now take you through some additional financial highlights of the quarter. Pete, over to you.

Pete Graham: Thanks, Jon. Good evening, everyone. Let’s continue with a discussion of our loan loss allowance and provision. Our total provision for credit losses on our income statement was $16 million in the fourth quarter. The provision build of $86 million was driven almost entirely by volume increases and it was offset by a $69 million reduction associated with the $1 billion loan sale that closed in the fourth quarter. This fourth quarter provision represents a decrease of $182 million from the prior quarter and a $282 million decrease from the year-ago quarter. Net charge-offs for our private education loan portfolio in the fourth quarter were $93 million or 2.4% compared to $116 million or 3.1% in the year-ago quarter.

Full year net charge-offs were $375 million or 2.4%, and at the low end of our guidance for the year. These provisions and net charge-offs in the fourth quarter reduced our private education loan reserve to $1.4 billion or 5.9% of our total student loan exposure, which under CECL includes the on-balance sheet portfolio, plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of $2.2 billion. Our reserve rate continues to improve as compared to 6% in the third quarter of this year and 6.3% at the end of 2022. Private education loans delinquent 30 days or more are 3.9% of loans and repayment, an increase of over 3.7% at the end of the third quarter as well as 3.8% at the end of the year-ago quarter. We believe this uptick in delinquencies is primarily driven by the increase in enrollment in our new loss mitigation programs that Jon discussed earlier, rather than a negative credit indicator.

Year-after-year, our quality loan portfolio generated significant net interest income. For the full year of 2023, we earned $1.6 billion of net interest income, higher than full year 2022. Net interest margin for 2023 was 5.5% compared to 5.3% in 2022. Going into 2024, we continue to expect our NIM to be in the low-to-mid 5% range. The fourth quarter operating expenses were $143 million compared to $167 million in the prior quarter and $138 million in the year-ago quarter. Operating expenses are down from the prior quarter, which was our peak lending season. Total non-interest expenses in the fourth quarter were $202 million compared to $170 million in the prior quarter and $140 million in the year-ago quarter. The increase to non-interest expenses in the fourth quarter relates to the write-down associated with the Nitro trade name and trademark.

We continue to be very pleased with our acquisition of Nitro as it has helped us build a more resilient marketing model and driven down our cost to acquire. Interestingly, as we’ve integrated Nitro and begun to test the effectiveness of their programs and strategies, we’ve seen performance meaningfully better using the Sallie and Sallie Mae names and platforms. For example, in testing performance with one of our affiliate channels, the Sallie Mae brand performed 68% better than the Nitro brand in measurable conversions. We believe that continuing to build on the Sallie and Sallie Mae platforms will accelerate growth. With this decision to stop using the Nitro brand, we determined that the intangible assets associated with the Nitro trade name and trademark will be written down to zero.

As a reminder, this was an intangible asset established using a 10-year life, that would have continued to incur amortization expense of approximately $7 million per year until 2031. The decision to write this asset down this year resulted in a non-cash charge of $56 million, that impacted earnings per share for the quarter by $0.19 and for the year by $0.18. Absent this write-down, non-interest expenses would have been $146 million in the fourth quarter and $629 million for the full year, within our guidance expectations. Finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 21.4% of total assets. At the end of the fourth quarter, total risk-based capital was 13.6%, and common equity tier 1 capital was 12.3%.

Another measure of loss absorption capacity of the balance sheet is GAAP equity plus loan loss reserves over risk-weighted assets, which was a very strong 15.8%. We believe we’re well-positioned to grow our business and return capital to shareholders going forward. Now, I will turn the call back to Jon.

Jon Witter: Thanks, Pete. 2023 was a year of incredible progress. We feel like we’re on the right path to normalizing credit and are happy to finish 2023 with credit performance consistent with our previous expectations. We experienced excellent originations growth in ’23 and expect considerable originations growth in ’24 and ’25, as one of our largest competitors exit the business. We were also able to return meaningful capital to shareholders through the successful loan sale and share buyback arbitrage strategy, and are already seeing positive momentum in this space for 2024. Just over a month ago in our Investor Forum, we introduced an investment thesis built on four principles: first, strong and predictable balance sheet growth; second, strong EPS performance and return on common equity; third, meaningful capital return; and fourth, all within manageable risk.

As we embark on the next year, we expect to deliver on these principles. We believe that meaningful origination expansion, coupled with loan sales to moderate growth and a steadfast focus on expense management will allow for both organic earnings growth and generous capital return to shareholders. It is in this context, I’d like to provide our guidance for 2024. Specifically, we expect full year education loan origination growth of 7% to 8%, total loan portfolio net charge-offs will be between $340 million and $370 million or 2.2% to 2.4% of average loans in repayment, non-interest expenses for the full year of 2024 to be between $635 million and $655 million, and full year diluted non-GAAP core earnings per share between $2.60 and $2.70. In addition, today, we are announcing a new share repurchase authority to buy up to $650 million of common share stock over the next two years.

While dependent on share price, continued planned loan sales and other factors, we expect to repurchase roughly half in 2024 and the remainder in 2025. We expect to continue programmatically buying back our stock over the next few years and look for opportunities to buy more on days when market conditions are favorable. We continue to support our longer-term capital return plans and our clear commitment to shareholder return. With that, Pete, let’s go ahead and open up the call for some questions. Thank you.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Arren Cyganovich with Citi. Your line is open. Please standby. Our first question comes from the line of Arren. Your line is open.

See also 15 Worst Industrial Disasters in the World and 12 Highest Quality Protein Powders of 2024.

Q&A Session

Arren Cyganovich: Hi, can you hear me?

Operator: Yes, we can hear you.

Jon Witter: We can hear you, Arren.

Arren Cyganovich: Got it. Thank you. Sorry about that. So, it looks like you have some modest market share increase, I assume with one of your larger competitors exiting the market this year for next year. Are there any other kind of items of note that you have included in there in terms of like enrollment trends, et cetera, for the ’24-’25 academic year?

Jon Witter: Yeah. Arren, it’s Jon, let me take that. We build up our projections bottom-up and top-down. So, we do a bottom-up analysis where we are absolutely looking at sort of enrollment trends and the like, and we do sort of a top-down analysis, which is more of a share-based approach, and we triangulate those two things together. And this year, those numbers were pretty close. So yes, we do have views around enrollment increases. Yes, we do have views around the effectiveness of our various marketing programs, which we feel have been getting more effective each year over the last several years given both organic investments and the acquisitions we’ve done. And yes, we have assumptions in there around the potential for a competitor to be exiting the space.

I do think the thing that’s important. And I’ll just say it proactively, any exit will likely impact the fall peak season more than it will impact the spring. And so, you may remember from my comments, we believe any market share gains driven by that will likely be spread over two years, not entirely resident just within 2024.

Arren Cyganovich: Yeah, that makes sense. And then, second question on the gain on sale. It looks like the 4Q was a bit lower than normal or whether it has been recently. Was that because it was struck during the third quarter when rates were high? And I believe you said that you expect that to improve in the first quarter sales of the $2 billion.

Pete Graham: Yeah. Arren, this is Pete. That’s right. It’s the timing of when that deal was struck, that was sort of that peak rates, and we’ve seen obviously improvement in the rate environment as we’ve moved into the year. And so, again, as we said in the prepared remarks, it’s largely in line with what our expectations for this year were.

Arren Cyganovich: Got it. Thank you.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is open.

Moshe Orenbuch: Great. Thanks. Maybe, Jon, if you could talk a little bit about how you think about the capital deployment? The $650 million is a nice large number. But given the fact that you’ve already agreed to the first loan sale of the year, can you talk about the pace of that capital deployment over the next 12 or 24 months?

Jon Witter: Yeah. Moshe, happy to, and Pete, jump in if you want to add anything to that. I think if you look back historically, really given the low rate environment, our philosophy has been one of deploying capital very, very quickly, because of the potential impact that that has on NIM. While we do not divulge specific plans or timing around capital deployment, I think you should assume that higher rates give us a bit more flexibility to be thoughtful, strategic, and a bit more opportunistic about how we deploy that capital. And so, I think you should expect, and I think we said this in our comments, that we will take a more programmatic approach. We’ll obviously look to be opportunistic at times where we think market conditions are favorable for buybacks. But I think we also want to make sure that we are being sort of consistent in our approach or reasonably consistent in our approach across that time period.

Moshe Orenbuch: Great. Thanks. And maybe just as a follow-up, I mean, one of the things that we talked about a little around the time of your call last month was kind of the dynamic elements of your plan. Could you talk a little bit about how you would think about, if the market share gains and origination gains later in the year were better than you had — than you kind of included in your forecast? I mean, how do you think about, what you kind of do with that difference? Is it something that you’re more likely to increase the amount of loans sold or increase the amount staying on the balance sheet? Can you talk about just your thought process?

Jon Witter: Yeah, happy to. I think if you go back to our investment thesis, Moshe, number one on that is strong and predictable balance sheet growth. And I think, in my comments, we talked about likely balance sheet growth this year in the 2% to 3% range. I think you should assume that that is going to be sort of the primary determinant of how much loans we sell versus how much we keep on the balance sheet, sort of plus or minus. And obviously, if we end up in a place where market conditions are extremely favorable to loan sales, we might sort of push that a little bit to the lower end. If we found a place where market conditions weren’t as favorable, maybe we push it a little bit to the upper end. But I think our goal, very much as we discussed in the Investor Forum, is to have really measured predictable balance sheet growth, couple that with really strong operating leverage to be sure that we’re driving quite attractive EPS growth, but also returning during that time, significant capital to shareholders.

So, I think that’s how we think about it. It is again, I think, really based on predictable balance sheet growth, as we say in the investment thesis.

Moshe Orenbuch: Great. Thanks so much.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Terry Ma with Barclays. Your line is open.

Q – Terry Ma : Hi. Thanks. Good afternoon. Can you maybe just comment on the credit outlook for this year? It seems like the high end of the range implies not much improvement compared to 2023. So maybe just talk about what gets us — or gets you to the high end versus the low end? And then longer term, how should we think about the timeframe for getting back within your target underwriting levels?