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.

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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?

Jon Witter: Yeah, happy to. I think we’ve tried to give a range, obviously recognizing it’s sort of early in the year, and we continue to be, I think, in a little bit of a volatile sort of economic environment. And I think, of course, want to be sensitive to that. What we have effectively done in building up that forecast is a pretty deep look at sort of the programs, the new programs we’ve developed, the use of those programs, the uptake of those programs, sort of the effectiveness we’ve seen, recognizing some of those are in early days. We have looked at the credit in underwriting changes that we’ve made and sort of the differential performance between loans that we continue to underwrite versus those we don’t. We’ve looked at things like the standard aging and vintaging of our portfolio, understanding that different loans behave differently over time.

And we’ve looked down into the details of those portfolios at things like balances and fixed rate versus variable rate again, knowing that the performance of some of those things is a little bit different. And I think at the end of the day, that’s sort of how we arose, kind of came to the view. I think the thing that would take us to the lower end is if we felt like the programs that we had put in place were slightly sort of better and more effective than we’ve seen in the early days. And I think the things that would take us to the upper end would be sort of the opposite of that. But I think what you ought to take away is we are and continue to be very confident in sort of year-over-year improvement in credit. I think that detailed analysis I described makes us more comfortable, as I said in my talking points, at the high 1%s to low 2%s is really the right place for us to be.

And I think you should expect, and we believe that we’ll see continued performance improvement in ’25, of course, assuming no broader macroeconomic changes, I have to say that. Whether we get all the way back to a normalized level of ’25 or just close, I think it’s a little bit too far out to make that call. But I think we are confident in continued and meaningful improvement.

Terry Ma: Got it. And then, longer term for your market share, how should we think about how that evolves over the next few years as the competitor fully exits?

Jon Witter: Yeah, I think we would — assuming all of those plans that move forward as the media has suggested, I think we would expect that there will be jump on market share for us to compete for, much like there was when [Wells] (ph) made the decision to leave the marketplace several years ago. We will compete for that in exactly the same way that we compete for any other business. We’ll decide which of that business we like versus not, based on credit characteristics, pricing characteristics, all sort of resulting in the expected ROE of those loans. My guess is, we will end up competing for and trying to compete for a good piece of it. But I don’t know that we’ll necessarily compete for all of it. It’s just too early to sort of tell.

But I think our hope is that this does represent a near-term, sort of multi-year, but one-time opportunity to increase share, and we’re excited to compete for that in what is, and I think it continues to be, a nicely competitive marketplace where we expect other competitors to show up and very much compete with equal zeal as we’re competing.

Terry Ma: Got it. Thank you.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

Sanjay Sakhrani: Thanks. I guess question for Pete. Could you just talk about the 2024 assumptions on level of loan sales, like the gain on sale margins, and maybe what you’re assuming in terms of share repurchases in the guidance?

Pete Graham: Yeah, we kind of laid that out at the Investor Forum. In large part, our guidance is pretty similar to that. And in terms of sizing of the overall program this year, again, we’re targeting that sort of 2% to 3% balance sheet growth, and that will determine the ultimate sort of overall level. The $2 billion that we’ve agreed indicative terms on is a good start to that program for the year. And we’ll begin to utilize the capital generated by that, as Jon said, a programmatic approach to share repurchase. And then, when we do a second installment of loan sales at some point later in the year, we’ll build on that as we go.

Sanjay Sakhrani: And then, like that $2 billion that’s been sold already, that’s consistent in the range that you guys articulated at the Investor Forum, sort of like mid singles, little bit higher than that?

Pete Graham: Correct.

Sanjay Sakhrani: Okay. And maybe just on rates — interest rates. Could you just remind us sort of how as rates come down that affects the P&L and sort of what’s been done around rates and what you’ve assumed in the guidance? Thanks.

Pete Graham: Yeah, sure. So, over the course of the last couple of years, we’ve had a little bit of a tailwind on our NIM. Because in the rising rate environment, our loans tend to reprice faster than our liabilities reprice. And that’s why we kind of peaked out where we did in ’23. Our expectation is that, that will start to moderate, which is why our guidance for this year around NIM is lower than where we were last year. And we’re not necessarily taking a position on rates, we’re just acknowledging that we do have some timing disconnects in terms of pricing, and a bias over the course of this year for incrementally lower cost of funding as our liabilities reprice.

Sanjay Sakhrani: How many rate cuts have you factored in here?

Pete Graham: We base our assumptions on kind of forward curves. So, I think the market assumption there is probably five rate cuts.

Sanjay Sakhrani: Okay. So, there’s a punitive impact of five rate cuts in the NIM right now to the extent that doesn’t happen, that should help all else equal?

Pete Graham: Yeah. Perhaps. I mean, again, it’s — anytime you’re forecasting future interest rate, there’s always going to be some level of variability that’s unknowable until it actually happens. We tend to run a fairly balanced book. So, any moves should be kind of gradual and likely within the guidance range that we’ve articulated.

Sanjay Sakhrani: Okay. Great. Thank you so much.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Michael Kaye with Wells Fargo. Your line is open.

Michael Kaye: I was hoping you could dig a little bit more into those new borrower assistance programs that you rolled out and you alluded to. I know it’s early days, but could you just give us some of the early signs of how that’s performing? And secondly, could you talk about how that enhanced recovery strategy, which you recently implemented, how’s that going? Is it going according to plan?

Jon Witter: Yeah, Michael, it’s Jon. Happy to. In terms of the specifics, there’s a few different flavors of programs we’ve developed. And as quick context, you will remember, with the credit administration changes we made several years ago, we moved from having a very effective sort of, but very general forbearance program to a strategy where we had more programs, but much more tailored, much more focused on specific customer needs, that had the advantage of being aligned, and we’ve — I think, that’s at the time with OCC guidance. It also allows us again, to be really efficient and effective in the design of those programs and really test for their effectiveness over time, recognizing that they’re all still pretty new. So, to give you a sense of that, we’ve developed a newer, early to repayment assistance program.

This is specifically designed to help folks who are literally just coming out of school and starting to take on their financial obligations. We’ve developed a term extension and loan modification program that allows us to tailor and offer slightly more combinations of rate and tenure modification, again, really to the idea of specifically tailoring the sort of mod to the unique needs or circumstances of that borrower. And we haven’t done it yet, but we are looking at establishing a more permanent loan modification program for borrowers who are really experiencing longer-term hardship and/or sort of a permanent reduction in their income. And so, hopefully that gives you a little bit of a sense of the kinds of programs. But again, I would put it in the context of very tailored and specific and focused programs as a replacement or a substitute for the more general and flexible program that we had before.

I think we like the results we’re seeing so far, Michael, to answer that part of the question, I think we are seeing, first and foremost, our agents being able to communicate the benefit of these programs to our customers. I think the programs that we’ve developed are largely matching what customers need. We see that because we can see sort of the improved uptake of those programs when we offer it, and we can literally go back and listen to those calls and monitor all of that very closely. It is too early to be able to start to do what we will eventually do, which is the sort of longer-term loss curves of those programs, and whether or not they are generating meaningfully better outcomes or not. That will certainly be a part of the fine tuning that we will do over the quarters ahead.

But obviously the programs have to run their term and then we have to observe behavior and success of customers going forward. I think it is really important to note, our goal here is to work as productively as we can with all of our borrowers, who have fallen on hard times. We recognize that there is a human behind every one of those customers who is struggling with their loans and we want to be as helpful as we can. And we think that this targeted approach is really a great step in that direction.

Michael Kaye: And help with the part about that enhanced recovery strategy. I know you’ve made some changes. How’s that going?

Jon Witter: Yeah. It has continued to perform along our expectations. There’s no update there and we continue to believe that that is the right program and have confidence in that decision.

Michael Kaye: Great. And my second follow-up question is, is there any early signs of increased competition from new and existing players with one of your competitors looking to exit? For example, I saw word that the Carlyle Group purchased $415 million of private student loans and made a strategic investment in a company called Monogram.

Jon Witter: Yeah, Michael, I think it’s sort of too early and not the season to really see the change in competitive intensity. You have to remember, number one, lots of the spring disbursements happen in the very end of ’23 or the beginning of ’24. But they were really set up by the great work that we and our competitors do during the fall peak season. By the way, if you look at the announcement of the competitor in question, they were very clear to articulate that they were going to stop originations on February 1, which we imagine is a nod to that dynamic. They obviously want to see the business that they’ve already committed through to a natural conclusion. I think we’ll really start to sort of understand the change in competitive dynamics as we move into peak season this summer.

As it relates to the Monogram investment by Carlyle, I’m not sure. I read a lot into that. I think there’s been certainly interest by private equity players in all manner of asset generators for a while now. That’s a very clear part of their strategy. What I take away from it is, it is a sign that another really smart and savvy investor, Carlyle, sees the incredible value in this asset class. And I think we view that as, net-net, a positive.

Michael Kaye: Okay. Thanks.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of John Hecht with Jefferies. Your line is open.

John Hecht: Good afternoon, guys. Thanks for taking my questions. I guess going back to Sanjay’s inquiry about NIM, maybe just talking about the asset side, I mean, you do have a mix of some adjustable rate mortgages — or, excuse me, student loans. Can you tell us kind of the cadence of how the assets move, specifically with interest rates?

Pete Graham: Yeah, I would say in large part they’re SOFR based and they’re repricing on a monthly cadence, whereas as I said earlier on, the funding side tends to be more quarterly resets.

John Hecht: And how much of the assets reprice monthly against SOFR?

Pete Graham: The bulk of our floating rate or variable rate loans would be SOFR based.

John Hecht: Okay. And then maybe the second question I have is the provision against unfunded commitments. I think we’re familiar with CECL and how you would provision against a new loan, but maybe can you refresh us about how you provision against unfunded commitments? Because I think the ratio fluctuated this year versus last year in the same period.

Pete Graham: Yeah, I think in general terms, we’re taking a reserve rate and we’re applying it to that commitment. So again, under CECL, we’ve got a fully provisioned for our life of loan expectation for loss and we do that in a programmatic manner for the new commitments. And then as those funds, we transfer balances out and into the overall provision. But when we give statistics around our overall rates, we’re combining those together. So, the rates I was quoting in my prepared remarks included kind of a combined view of provision on the loans on balance sheet as well as the piece related to unfunded commitments.

John Hecht: And do unfunded commitments kind of as a percentage of seasonal originations, are they fairly typical or consistent, or is there some fluctuations in that part of the equation?

Pete Graham: Again, it’s going to be largely dependent on the kind of the serialization. And so we make those commitments largely in the peak season. We’ll fund the first tranche of that as the students are entering the fall semester. And then the other piece will remain as an unfunded commitment until the spring disbursements. Again, that’s — again a generalization based on assume two semesters and most university experiences. We have other programs for different types of schools that might fund slightly differently than that.

John Hecht: Okay. Thanks very much.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Mark DeVries with Deutsche Bank. Your line is open. Mark, check to see if you’re on mute. Mark, check to see if your line is on mute. There is no response. I’ll go to the next participant. Please standby for our next question. Our next question comes from the line of Jeff Adelson with Morgan Stanley.

Jeff Adelson: Hi. Yes, good evening. Thanks for taking my questions. So, just to circle back on this exit from one of your large competitors, understood the potential benefits here to originations, but just also want to understand any of the other potential benefits that could flow through here. Are you contemplating any sort of benefit to your credit as a result of that, or could that be upside? And as we think about the loan sale of that portfolio, is there anything to be thinking about in terms of demand or supply of loan sales and the market impacting your loan sales going forward?

Jon Witter: Yeah. Jeff, we have thought through it, and obviously, we have general industry knowledge and hypotheses about the nature of different competitors and where they sort of favor or disfavor within their buy box and underwriting grades. And I think we can make some educated guesses on that. But at the end of the day, we don’t have the level of insight that I think would allow us to make perfect assessments around sort of the impact that that would have on our credit. I think the general comment I would make is, I think we will continue to stay very true to our credit discipline. We will continue to stay very true to our ROE sort of framework around how we think about the profitability of a loan. But I think it will sort of take a little bit of time to see how that plays through directly, which is why I think we’ve given a range around our origination guidance for the year because it could obviously turn out in slightly more favorable ways or slightly less favorable ways.

But I think all of the outcomes are still favorable ones. Remind me the second part of your question, Jeff.

Jeff Adelson: Yeah. Just as we think about your loan sales, with another $10 billion of sales coming into the market, just any sort of impact to be thinking about their considerations?

Pete Graham: Yeah. Look, the demand for various asset classes, including our asset class, is pretty deep. And our discussions with various parties in the market, we don’t feel like that’s going to impact demand for our loans or for that matter, for asset-backed funding in general as we move into this year.

Jon Witter: Yeah. And in fact, Jeff, I would add, I think anecdotally, we heard when the last major competitor left the space that it actually may have been a net positive for demand for loans because it was a large transaction. It encouraged lots of people to get smart on the space. It encouraged lots of people to allocate resources to the space. And obviously, there could only be one winner of that. So, I think we view it as, at worst, a neutral, probably a slight positive. But again, we feel like the market for the asset class is deep. We feel like it’s matured significantly over the last half decade, and we think there will be lots of positives that come from this.

Jeff Adelson: Okay, great. And just on the $650 million repurchase authorization, I know you talked about doing half this year, half next year. Does that also contemplate the plan you laid out at the Investor Forum in kind of the base case for loan sales? Or is that more of a conservative outlook on your part? Because it does look like half and half is a little bit below what you did this past year.

Pete Graham: Yeah. I mean, it’s roughly in-line. We didn’t say exactly half. We said approximately half. And as I said in my remarks on a prior question, the pace and amount of that will be governed by the loan sales that we do this year. We’re off to a good start with the $2 billion that we’ll close this quarter, and the timing and amounts will be dictated by when we do additional loan sales as we [move through the year] (ph).

Jeff Adelson: Okay. And just one last one for me. On federal loan student loan payments, anything you can update us on what you’re seeing from your borrowers that are making those payments? I think there are still some puts and takes to come here with the new — the full benefit of the new income-driven plan kicking-in in July, but then you have this on ramp expiring later in the year. Just maybe give us a quick update on what you’re seeing, what you’re expecting there?

Jon Witter: Yeah, Jeff, happy to. We track as best we can sort of the performance of our customers who have federal student loans and those who don’t. We don’t know as perfectly who has enrolled in which income-driven repayment program or sort of other programs. But we have a pretty good sense of it. As of the last month, I saw data for, which was pretty recently, we have not yet seen any material divergence in performance between those with or without federal loans. And so, we continue to watch it closely. We recognize that the on-ramp is a powerful tool for customers. We understand that income-driven repayment plans are a powerful tool for federal customers. But as of yet, we’ve not seen anything that would strike us as a material divergence.

Jeff Adelson: Okay. Perfect. Thank you.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Vincent Caintic with Stephens. Your line is open.

Vincent Caintic: Hi. Good afternoon. Thanks for taking my questions. First one, I wanted to get your industry thoughts on the student loan refinancing market on the expectation of five rate cuts, what that would do? And then, for Sallie Mae, specifically, how you’re thinking about maybe any consolidation pressure or your thoughts on the balance sheet growth? Thank you.

Pete Graham: Yeah, I’ll take first crack, and Jon, you could add on if I miss any of the high points. Obviously, the consolidation market is really a rate-driven exercise. And so, as rates are going down, we do expect a return in some respect of the consolidation players. But I think the wild card in it for us is, what impact the new programs in the federal space have on sort of deterring folks from consolidating their loans. Because generally, that’s going to be a big factor in terms of whether someone wants to give up the potential benefits that they might be able to get in the federal programs in order to get an overall lower rate. So, it’s something we’ve got our eye on and certainly we have expectations in our outlook for what consolidations will be, and that’s considered within our guidance. But, yeah, I think that’s one that’s going to have to play out a little bit.

Jon Witter: Yeah. And Vincent, I think the only thing that I would add, and let me preface this the way I always do when I get questions on consolidations, this is obviously not our core business. I’m sure there’s people out there who have deeper insight into sort of the economics of the refi game than we do. But I think if you look at even the sort of rate cuts that are being assumed, that doesn’t take us anywhere back to the kind of uber-low rate environment that I think we’ve been living in for the last 20 years. And you asked me for my opinion, I will give you my opinion. I don’t think we’re going to see that kind of uber-low rate environment ever again. And so, I think you have to realize, there’s an awful lot of recent college grads and there’s an awful lot of, quite frankly, even current college seniors, juniors, and sophomores, who made loans under a much lower interest rate environment than what we’ve seen over the course of the last 18 months.

So, I think when you think about the sort of refi economics, I think you have to look at it through the lens of when did different borrowers make loans, what is the prevailing interest rate when they made those loans, and what are the rates today? We have done and will continue to do manners of those analyses. I agree with what Pete said, there will be some time in the future where consolidations come back and are larger than they are today. But I think we saw a golden age of loan consolidations given the super low rate environment. I think we’ll all have to see if we ever see that kind of golden age again.

Vincent Caintic: Okay. That’s helpful. Thank you. And second question, just on the forbearance programs and actually how we should think about the numbers. So, I guess as these modification programs roll out, should we be expecting that? I guess the forbearance number will increase from this level, and I’m just wondering how that plays out, because usually if we see forbearance, we might be concerned. But if it’s from these new programs that are driving some more success, I just want to anticipate that in advance? Thank you.

Jon Witter: Yeah. Vincent, it’s a wonderful simple answer. A question deserving a simple answer. I’m going to make it slightly more complicated. The answer is, for most customers using what we call hardship forbearance today, which is still allowable under sort of OCC guidance and our program is absolutely geared to that, it is short in duration and highly limited in use. It’s really no longer a substitute, as we’ve used it today or have used it for the last few years for the kind of more tailored and systematic programs that both Pete and I described earlier. There are some of our programs for which forbearance is a part of the recipe, but I think our plan is to sort of break those out separately in our reporting so that you can see those.

But I would not necessarily expect that there would be huge changes in forbearance, because I think we’ve largely operated under the new system for the last two years. And I think at the end of the day, it’s serving a fundamentally different purpose than these other programs at this point in time.

Vincent Caintic: Okay. It’s very helpful. Thanks very much.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Mark DeVries with Deutsche Bank. Your line is open.

Mark DeVries: Hi, can you hear me now?

Jon Witter: Yeah.

Mark DeVries: Okay, great. Thank you. Sorry about that. I had a couple follow-up questions on credit. Just wanted to clarify some of the comments made. Jon, I thought I heard you indicate that part of the reason for the rise in delinquencies is related to some of the enrollment and some of these borrower assistance programs. Did I hear that correctly? And if so, what’s kind of the dynamic there? Are you moving them into a status that has to be treated as delinquent? Is there something else affecting that?

Jon Witter: Yeah. So, it’s really a fairly mechanical answer. When someone enters one of our payment programs, before we can re-age them to current guidelines and standards, say, they have to make, I think it’s typically three qualifying payments. And so, in a past world, we may have collected on that customer. In a past world, they may have gone through to default. In a past world, several years ago, they may have used forbearance and been brought current more quickly. Here we have to see that period of positive pay before we can re-age them. And so, as we parse apart the delinquency data and we look at what portion of it is driven by, what I would call, normal sort of delinquent situations versus which are caused by this phenomena of customers making payments, but waiting to re-age, that’s what we believe has driven sort of the small increase that we talked about.

Mark DeVries: Okay. Got it. That’s helpful. And it sounds like you’re still pretty confident about year-over-year improvement in the charge-offs this year included, whether charge-off comes in at the low end or the high end of that guidance range. Should we expect charge-offs to be kind of higher in the first half of the year and then start trending down in the back half of 2024?

Jon Witter: Yeah. There is a seasonality to our charge-offs, which I think always occurs because — and I think we’ve talked about this on past calls. The most likely time, unfortunately, when a borrower gets into financial distress is pretty soon after they’ve entered repayment. These are young borrowers. They may not have sort of built up any savings at that point. They may be experiencing disruptions, moving into the labor force. They may just not have yet the same financial habits that they would have later in life. And so, we always see a period of seasonality in our results, and I think you should expect that same pattern of seasonality to persist in ’24.

Mark DeVries: Okay. I understood. Thank you.

Jon Witter: You’re welcome. Thank you.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Rick Shane with JPMorgan. Your line is open.

Rick Shane: Hey, guys, thanks for taking my question. Look, historically, this has been an industry that was concentrated amongst three originators. Two have essentially exited the business. There’s been some conversation about new entrants. But at the end of the day, what is the binding constraint in terms of your market share?

Jon Witter: Rick, I think…

Rick Shane: Other than 100%?

Jon Witter: Look, we absolutely continue to face, I think, lots of good competition in this business, Rick. And again, I’m not sure I want to go much deeper in predicting what’s going to happen with the latest set of news. We’ll see that play out over the next couple of months, but there are very formidable smaller, private, and other players that we compete against. And at the end of the day, I think what sort of binds our market share potential is a little bit of competition, it’s a little bit of customer choice, it’s a little bit of different marketing strategies and focusing on different parts of the credit spectrum. At the end of the day, we love our 55% market share. We think there’s an opportunity for it to go up a little bit.

It’s obviously grown nicely over the last three years. But I don’t think anyone should expect that we will be 70%, 80% market share player. I think there will always be good competition in the market, and quite frankly, we welcome that. I think it makes us better when we’ve got great competition out there. I think it’s better for the customers. So, I would expect there to be that limit probably driven by a number of different factors and forces.

Rick Shane: Got it. Okay, that’s helpful. Thank you. Look, Moshe asked a question sort of trying to dimensionalize growth — asset growth prospects. And we’re in this unique window right now where there is a lot of market share up for grabs, gain on sale has improved. And so, potentially the economics are shifting — clearly are shifting to be more favorable than they were at the end of last year or at the end of ’23. When you think about what the priority will be, imagine a scenario where volumes — market share is better than you’re looking for, gain on sale is solid, that gives you the ability to hit the high end of your earnings guidance, but it also potentially gives you the ability to form enough capital to grow beyond your 2% to 3% range.

Conversely, there are going to be times where it’s not going in your favor. Is the priority going to be to solve for earnings and let the growth of assets be the swing factor? Or is it going to be targeting the asset growth and letting earnings fluctuate?

Pete Graham: I think we were pretty clear in the December Investor Forum, we’re going to step into growth over time, where we’re going to be relatively flat this year, our final sort of CECL transition year, and then we’ll grow modestly in subsequent years. And so that framework calls for us to use loan sales as a governor of that balance sheet growth. That’s fully what we intend to do as we embark on this strategy. So, in your scenario of higher originations growth, then at the margins, we might do more loan sales as long as the pricing dynamic makes sense from an economic perspective.

Rick Shane: Got it. So, your priority is to follow that asset growth profile that you laid out in that five-year case as closely as possible, not regardless of conditions, but within a reasonable set of expectations?

Pete Graham: Yeah, I think we said there that to the extent we start to see multiple expansion and we getting rewarded for balance sheet growth. We’ll do a little bit more of that. But if things stay kind of status quo, then we’ll do marginally more loan sales as long as the trade is there and it’s a dynamic evaluation of the value we’re getting in the loan sale market versus the implied valuation for our balance sheet that we’re getting in the equity market.

Rick Shane: Great. I know it’s fun answering questions what’s going to happen in the next 12 months, it’s even harder over the next five years. So, thank you for answering that.

Pete Graham: Sure.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna: Good evening. I had a question that might be a little bit of a follow-up on the topic Vincent was kind of touching on, but from a different angle. One thing that I’m curious about is, you’ve pivoted your kind of mix of originations towards fixed rate, which obviously has benefits as rates move down because it’ll make you more liability sensitive. But I’m curious, at what point do you think about pivoting that strategy? Because originating more fixed-rate loans at peak rates could also make them much more susceptible to consolidations in the future. I’m kind of curious, at what point do you think about pivoting or moving back towards a higher mix of fixed rate originations.

Pete Graham: Yeah, I mean, the pricing dynamic is always something that we have control of at the margins, but I think there’s also a human emotional element in terms of what selections the borrowers are making. And I think the emotional reaction to the dramatic increase in rates over the last year, if you think about during the fall, there was more potential for further increases because inflation had not started to subside yet. So, I think that overall customer choice has been pretty dramatic impact on the mix of origination. I think that naturally will subside as we go into this year, but we’ll be looking at that mix in terms of how we set our pricing grids as we go into peak this year.

Jon Witter: Yeah. And Pete, I think the only thing I would add is, we clearly don’t have the ability to set those pricing grids in isolation. We do that sort of through the lens of our economic models, but we also do that through the lens of competitive realities. And so, the fact is, if fixed rate is what customers want, and if competitors are pricing fixed rate at a level that makes that attractive, there is a certain competitive dynamic that — I think Pete said it well, our ability to influence that is on the margin, but it is much — it is part of the broader competitive set.

Giuliano Bologna: That’s very helpful. And then one quick one, just thinking about the potential for market share gains. I’d be curious, when you think about the kind of depth of the market for loan sales, if you’re able to capture some more additional market share, the numbers based on the midpoint of the 7% to 8% growth is already called $200 million or so above the Investor Forum in ’24?

Pete Graham: Giuliano, you’re fading in and out. Maybe if you could get closer to your mic?

Giuliano Bologna: Sorry about that. Hopefully, it’s a little bit better now. As you potentially gain market share, I’m curious, when you think about the depth of the loan sales market, is there — do you think there’s any limitation to the amount of loans you could sell in any given calendar year at this point, or could market be absorbed by loan sales?

Pete Graham: Yeah. I think the dynamic that we’ve seen over the last half decade is a pretty dramatic search for yielding assets to support pension liabilities, insurance liabilities, and the mutual fund complexes. So, I think there’s a strong demand for student loans. I think we have a pre-eminent ABS platform in this space, and I don’t see any issue in both loan sales or ABS funding to fund balance sheet growth as we sit here now. It’s not infinite, but we don’t need infinite demand for the asset class.

Giuliano Bologna: That’s great. Thank you very much. And I’ll jump back in the queue.

Operator: Thank you. Ladies and gentlemen, I’m showing no further questions. I would now like to turn the call back over to Jon Witter, CEO, for closing remarks.

Jon Witter: Great. Thank you, and appreciate everyone dialing in tonight. Appreciate the interest in Sallie Mae. As always, our IR team is standing by and happy to help follow up on specific questions that folks may have, and look forward to talking to you all again in about three months’ time about our performance in the first quarter. With that, Melissa, I’ll turn it back to you for, I think, a little bit of closing business.

Melissa Bronaugh: Sure. Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today’s call.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.