Welcome to the Sallie Mae Third Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Melissa Bronaugh, Head of Investor Relations. Please go ahead.

Thank you, Madison. Good evening, and welcome to Sallie Mae's Third Quarter 2024 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 due to a variety of factors. Listeners should refer to the discussion of those factors in 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 various external factors on our business. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements to reflect events or circumstances that occur after today, Wednesday, October 23, 2024. Thank you. And now I'll turn the call over to Jon.

Thank you, Melissa and Madison. Good evening, everyone. Thank you for joining us today to discuss Sallie Mae's third quarter results. I hope you'll take away three key messages today. First, we had a very successful peak season. Second, we remain encouraged by the sustained improvements we are seeing in our credit performance. And third, we believe we are well positioned to deliver strong results for the year by continuing to drive our business and serve our customers. Let me begin with a discussion of peak season results. Last quarter, we hypothesized that the FAFSA form delays would elongate peak season but not have a material impact on demand. While this shift in peak season timing has played out as we expected, we outperformed even our own estimates with originations growth of 13% in the quarter compared to the year ago period. Private education loan originations for the third quarter of '24 were $2.8 billion and our new unfunded commitments in the quarter were $3.9 billion. In total, our committed volume increased almost $1 billion or 17% and when compared to the prior year quarter. This wraps up a very successful 2024 peak season, and year-to-date, through the end of September, we have seen 9% growth in total originations. Turning to the quarter's results. GAAP net loss per common share was $0.23. These results were lower than the prior year quarter, primarily due to the allowance that we were required to build for new commitments, which was significant this quarter due to our peak season success. We were also pleased to see our credit performance continue to improve. Private education loan net charge-offs in Q3 of 2024 were $77 million, representing 2.08% of average private education loans in repayment. Credit quality of originations continued to show improvement. Cosigner rates increased to 92% in Q3 of '24 from 90% in the year ago quarter, and the average FICO score at approval for Q3 of '24 was 754 versus 749 in the year ago quarter. Our enhanced payment programs are helping our borrowers who need assistance establish positive payment habits. We were pleased to see the usage of loan modification programs stabilize throughout the quarter. September enrollment was down $50 million compared to August, a trend we anticipate will continue. We continue our capital return strategy in the third quarter, repurchasing 5.3 million shares at an average share price of $21.58. We have reduced the shares outstanding since we began this strategy in 2020 by 52% at an average price of $16.16. Additionally, we are excited to announce that we will be increasing our fourth quarter common dividend from $0.11 per common share to $0.13, which will be paid in December. Pete will now take you through some additional financial highlights of the quarter.

Thank you, Jon. Good evening, everyone. Let's continue with a discussion of key drivers of earnings. For the third quarter of 2024, we earned $653 million of interest income, $12 million higher than the second quarter of 2024 and $1 million higher than the year ago quarter. Our net interest margin for the quarter was 5%, lower than both the previous and year ago quarters. We expected to see NIM compression in 2024 as funding rates caught up to our asset yields, and this is what drove the majority of the decrease. We continue to believe over the longer term that a range of low to mid-5% is the appropriate NIM target. Our total provision for credit losses was $271 million in the third quarter of 2024, up from $198 million in the third quarter of 2023. Our successful peak season volume was the main driver for the increase of provision in the third quarter. The allowance for losses on our private education loans at the end of the third quarter was $1.4 billion, and including the allowance for our unfunded commitments equaled $1.5 billion of total reserve. As seen in the table on Slide 7 of the earnings presentation, the total allowance as a percentage of the ending portfolio exposure, which includes the balance of funded loans plus unfunded loan commitments and accrued interest receivable was 5.84%, down from 5.9% in the second quarter of 2024 and 5.99% in the third quarter of 2023. We believe we will continue to see incremental improvement in our reserve rate over the coming quarters as we realize the benefits of our loan modification programs and improvements in the credit quality of originations. Net charge-offs for our private education loan portfolio in the third quarter of 2024 were $77 million or 2.08% of average loans and repayment. This represents a 45 basis point reduction from the year ago quarter and an 11 basis point reduction from the prior quarter. Private education loans delinquent 30 days or more were 3.6% of loans and repayment, an increase from the prior quarter but down from the year ago quarter. As we continue to monitor the performance of loans in our enhanced loss mitigation programs, we remain pleased with the level of success. We believe that it will take some time to understand the new seasonality of these programs. But as we mentioned last quarter, delinquency for those borrowers exiting the first wave of our extended grace program were in line with our expectations, and we're pleased to share that this positive performance has continued. Additionally, through the monitoring of borrowers qualifying for loan modifications over the previous quarter, we remain encouraged that just over 80% of borrowers with modified loans successfully made their first three payments. I do want to mention a procedural refinement made to our loan modification programs in the third quarter, which caused an uptick in loan modification volumes. However, this change did not have a material impact on overall delinquencies, and in fact, we observed a decline in late-stage delinquencies quarter-over-quarter and year-over-year. We continue to believe that our loss mitigation programs are helping our borrowers manage through periods of adversity and establish positive payment patterns. Third quarter noninterest expenses were $172 million compared to $159 million in the prior quarter and $170 million in the year ago quarter. Third quarter noninterest expenses were up only slightly over the year ago quarter despite dramatically higher levels of originations, which carry meaningful variable costs. Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 19.9% of total assets. At the end of the third quarter, total risk-based capital was 12.9% and common equity Tier 1 capital was 11.6%. Another measure of the loss absorption capacity of the balance sheet GAAP equity plus loan loss reserves over risk-weighted assets, which was a strong 15.9%. We continue to believe that we're well positioned to continue to grow our business and return capital to shareholders going forward. I'll now turn the call back to Jon.

Thanks, Pete. I hope you share my belief that we had strong performance in the third quarter and that we are well positioned to continue that trend through the close of 2024. We are excited about the origination growth this peak season and how that positions us to continue to execute on the goals we set out for this year. With that in mind, let me conclude with the discussion of 2024 guidance. The originations growth that we saw in the third quarter was higher than expected, and we believe that this trend will continue through the remainder of the year. This success has led us to revise our guidance for private education loan origination growth. We now expect to see 8% to 9% growth for the year. Additionally, with continued positive credit performance, we are tightening the expected range for total loan portfolio net charge-offs to between $325 million and $340 million or as expressed as a percentage of average loans and repayment, between 2.1% and 2.3%. At this time, we are reaffirming the 2024 guidance that we communicated on our last earnings call for GAAP diluted earnings per common share and noninterest expense. With that, Pete, let's open up the call for some questions. Thank you.

Our first question will come from Sanjay Sakhrani with KBW. Following that, we will take a question from Terry Ma with Barclays.

So I think you called out that over the long term, the mid- to low 5% range is still kind of the right target for NIM, but as we think about kind of the short and intermediate term and the impact of the most recent round of rate cuts and potentially some more rate cuts up ahead, like can we see NIM dip below 5%? And what's the kind of time frame to get back to that long-term target?

Yes. I think, again, we've had this dynamic of our borrowers choosing predominantly fixed-rate in the last two sort of peak origination seasons. And our funding rates, particularly the deposit rates will reprice with changes in rates. And so we've had continued pressure on the increase in funding rates as term deposits that we put on at a lower rate environment reprice in the higher rate environment. That's the dynamic we've seen through this year and for the compression of NIM. I'd say over the first part of next year, we'll continue to kind of see the tail of that longer-term deposits that were put on three and five years ago repricing in this new environment. But we're also seeing deposits that we put on a year ago reprice at a lower rate. So on balance, I think we'll see some pressure in the beginning part of next year. But as we move through the year, I think that will start to normalize. And so again, from a longer-term perspective, we think that 5% to mid-5% range is the right target.

Got it. Okay. And then I appreciate the color on the modification programs and the reserve commentary. But as I look at kind of delinquencies this quarter, it ticked up quite a bit, particularly in the 30- to 59-day bucket. Any color on what's going on there? How much of that was attributed to seasonality or anything else?

Yes. Again, I think the thing that we’re mostly focused on is the later-stage delinquency buckets and the roll to default. And those trends have been improving as we’ve utilized the new programs to help borrowers who are in need of assistance. And so we feel really comfortable about performance of those programs and don’t have any concerns with regards to early-stage movements in delinquency.

And we will take our next question from Sanjay Sakhrani with KBW.

I apologize for being disconnected earlier. Pete, could you clarify, and I apologize if this has already been covered. When we consider the full-year numbers in relation to consensus, this quarter showed some weakness due to higher provisions and possibly a lower net interest margin. As we look ahead to the fourth quarter, do you think the reserve rate could decrease and that provisions will help us reach the full-year target? I'm trying to understand those dynamics better.

That is likely the main factor we expect to see ongoing improvement in the overall reserve rate. We mentioned this in my prepared remarks, noting that it has decreased compared to last year and also from the previous quarter. We believe that due to the ongoing improvements in net charge-offs and the enhanced credit quality of new originations, this trend will likely continue in the upcoming quarters.

And as far as like the NIM's progression from here? like into next quarter maybe?

Yes. Again, I touched on that in the prior call or the repricing that we're seeing in the deposit book, we've probably got another quarter or two of some of the lower rate term deposits we put on three and five years ago that will come up for reprice. But we've also, at the same time, got one-year term deposits that we put on a year ago that are going to be priced at a lower rate. And then the other sort of wildcard is originations in the fourth quarter and any carryover from peak. To the extent that we have continued outperformance, there's always a potential for a smaller loan sale later in the year if we have a higher rate of growth than what we're currently anticipating, we've got to manage our capital position in January of next year as we take the kind of the final CECL transition adjustment into our regulatory capital.

Got it. And just my follow-up is on the reclassification of the federal loans held for sale. I mean can you just talk about the decision to sell and how we should think about that impact?

Yes. Thanks for asking that question. The FFELP program at spin was probably close to $4 billion was a significant part of the overall profile of the business. Over time, that has run off and really got down to like a $0.5 billion number. It’s noncore. It creates a lot of operational complexity. And so we pursue the strategy of trying to find another home for that, for those assets. We were happy to be able to find a buyer, and we expect to close the transaction in the fourth quarter.

And we will take our next question from Mark DeVries with Deutsche Bank.

Yes. First, just to follow up on that last point. Should we expect any kind of gain or loss on the disposition of those FFELP loans?

No. When we moved that into held for sale, we took a slight mark to move to lower cost or market. So we got close to par in total for the transaction.

Okay. Got it. And then just thinking about this quarter's originations, do you think the volumes you did reflect the new run rate market share in kind of a post-Discover world? Or is there still a lot of jockeying going on with share that could be gained or lost?

Yes, Mark, it's Jon. I'll take that one. As a quick reminder out there, third quarter of last year, the competitor who has chosen to leave the sector probably had market share somewhere between 14% and 15%. Those are some of our internal numbers. Others might have slightly different numbers, but that's probably pretty good. Our sense is if you look at sort of the likely market growth, if you look at us getting sort of roughly our market share of their market share and you think about the 13% originations growth that we saw in the first quarter, it feels like we got our share and even a little bit more than that. Again, we'll know the final numbers as we see sort of the formal market share reports and studies that will come out in the months ahead. But we feel really, really good about what we were able to do from kind of capturing our share and building that momentum. And I think that was clearly, in part, competitive dynamics, the exit of this player. But I think it's also a testament to the improvements that we've made in our originations and marketing capabilities to be able to go in there and compete well for it. Now make no mistake, every quarter, every peak season, we'll have to recompete for that share. So we feel great about what we've done, but we will continue to go hard after now protecting our share and sort of continuing to make that kind of a core part of our growth expectations going forward. So yes, I think you can probably think of it as sort of a change to run rate. But I think we will know more about how that shakes out as we start to understand more fully the market share and sort of volume growth numbers that we saw during this peak. But again, we've got to go rewin that every quarter going forward.

Got it. That's helpful. And then just do you have any updated observations on payment behavior you may be observing from your borrowers who may also have direct loan balances that went into repayment in recent months?

Yes. Mark, I'll take that one, too. Our ability to sort of study this precisely is limited by what we can glean from things like the bureaus and the publicly available data. We do a pretty, I think, sort of sophisticated approach of looking at our borrowers who have federal loans and those who don't and try to sort of analyze kind of divergent payment patterns by cohort over time. As of yet even with coming to an end of the federal payment holiday, we have not seen anything that leads us to believe that the federal payment sort of resumption is causing an issue on our customers. And while I think it is fair to say that most of our customers have federal loans, I think it is also fair to say that lots of people have federal loans who are not our core customers and would probably not satisfy our underwriting conditions. So I'm not making a comment about the broader federal program and what the average federal customer is able to do. But I think we have a pretty creditworthy set of customers. I think they're performing well, and we've not seen any evidence at this point of anything that causes us any material concern.

Nate Richam, your line is open.

Sorry. Originations were up pretty nicely year-over-year and expenses were up only very modestly. And I think that speaks in part to your customer acquisition, your direct origination costs. You touched on it a bit before, but can you expand a bit about the improvements you've made there? And like to what extent you can further improve efficiencies and other digital marketing capabilities?

Yes. You're talking about origination expenses there?

Yes, and customer acquisition costs.

Yes, of course. I believe the most significant aspect is that historically, our company has held a very strong competitive edge in customer acquisition. We maintain excellent relationships with our school partners and are included in nearly all of their preferred lists. When we categorize our schools and examine our focus areas, we find even stronger connections with the fastest-growing institutions. For several years, we have been investing in our digital capabilities, similar to many companies. The most notable change in recent years is our shift towards a more organic search and content-driven marketing approach. We aim to attract customers organically through various strategies without relying solely on paid digital marketing for customer acquisition. We then work diligently to retain and engage these customers not just throughout their first academic year but also in the subsequent years. This organic strategy, along with our customer engagement efforts, is one of the primary ways we differentiate ourselves in the market. We do have strong relationships with schools and a well-known brand in our industry, plus we've made the right marketing technology and investment choices over the past few years. However, I believe it is the content-led strategy and engagement model that sets us apart and creates exciting opportunities for the future.

Great. That's helpful. And then just like thinking into 2025 and the prospect for further Fed rate cuts, how are you thinking about consolidation activity? And is there like a certain level on the interest rate where you think there could be more of an inflection on that rate going forward?

Yes. Certainly, it’s our expectation that as the rate environment moves down that, that will create an opportunity for consolidation to pick up. Our belief is that we won’t go back to the peak levels that we saw a few years ago when rates were ultra low. Anecdotally, I’ve heard that folks are saying 100 basis points or more of rate decline would really be needed for a meaningful uptick in their consolidations business. So I think that’s probably a good proxy for when we start to see some of that activity start to pick up.

And we will take our next question from Rick Shane with JPMorgan.

I want to explore further the points Sanjay made regarding the perception of stronger earnings growth, especially since you confirmed your guidance. There was a mention of a potential small sale in the fourth quarter. When considering that sale, should it be about the same size as the difference between your actual volume and prior expectations? This could impact your asset growth goals. Is that a helpful way to approach this?

Yes. To rephrase what I mentioned earlier, we had previously projected a balance sheet growth of 2% to 3% for this year. With increased originations, we are likely approaching the higher end of that range, possibly exceeding it. If the performance does not align with our expectations in the fourth quarter, we have options to fulfill our earnings per share guidance for the year. Currently, I believe another loan sale is a possibility, but it is not our top priority.

Understood. We recognize that stronger volume can positively impact the business but may distort earnings in the short term, which requires consideration. However, it's important to note that gaining market share and growing the business is undoubtedly beneficial. In this context, it is noteworthy that maintaining guidance without acknowledging the potential for an optical distortion due to strong growth suggests that this is not a direction you plan to take.

Yes, Rick, it’s Jon. Look, I think we’re talking about hypotheticals here, which is always a little bit difficult. I think we were pretty clear in the investor forum last year that we like balance sheet growth, but we like sort of predictable, stable balance sheet growth. But with that being said, all other things being equal, we’d rather have a little more balance sheet growth than not. And so I think if we thought that we had a really attractive level of balance sheet growth and it involved us disappointing on earnings, I think we would be open to having that discussion with you all and our investors and so forth. That’s just not where we are today. I think as Pete has said really clearly, we are reaffirming our guidance because we continue to believe that we’re going to see nice improvement in our overall reserve rate. And I think the point that Pete was really making is if we do start to see growth even above what’s been expected today, that this is a pressure-valve strategy that allows us and that we can consider, but we’ve not decided to do that. So again, I would go back to what we talked about in the investor forum last December. We like balance sheet growth. We agree with your point. Good, high-quality organic growth is a really attractive thing. That’s a key part of the strategy that we’re trying to deliver. We just want to make sure we are being thoughtful in optimizing all the constraints. And loan sales is a potential part of it. Again, I reiterate what Pete said, it’s not our first priority right now. And again, we think we have other performance in the business to point to.

We will now take a question from Jeff Adelson at Morgan Stanley.

Pete, I appreciate the color you've given on the modification program so far. But just wanted to make sure we understood, what was the driver of this procedural refinement on the modifications? I know the Q gave some color on that, but just wondering if you could put it in your own words. And was that the entirety of the reason of why your early-stage buckets did increase this quarter? And I know you've also in prior quarters given us that excluding modifications DQ rate, which I think was running around 50 bps lower than the total DQ rate in prior quarters. So could you maybe just give us an update on that number as well?

The procedural change I mentioned relates to when we recognize a loan modification as effective. Initially, we required borrowers to make three qualifying payments before their loan modification was deemed effective. This created some operational complexity and confusion for borrowers, so we decided to revise that process in the recent quarter. Now, once a borrower completes the Q&A process, gets evaluated for their ability to pay, and accepts a loan modification, they are immediately considered to be in a loan modification. They still need to make the three qualifying payments to potentially re-age their current status. This adjustment contributed to the increase in loan modifications this quarter, as many borrowers who would have been in the qualifying periods were pulled forward. However, this change did not affect the delinquency metrics since those borrowers were already categorized in their respective buckets; it was mainly about the reported number of loan modifications for the quarter.

Okay. So was there anything else that maybe was driving the early stage this quarter?

Nothing other than normal seasonality, no.

Okay. And are you guys still thinking about a reasonable target of the high 1% to low 2%? And just given that your charge-offs have come in at the low end and even slightly outperformed the low end this quarter, as we're thinking into next year, is there a chance that you could see something below 2%?

At this juncture, we’re still thinking that, that’s the right long-term level for us to be at. Again, we’ll have some variability in that quarter-to-quarter. We’re certainly pleased that we’ve gotten there faster, if you will, this year than what we had anticipated. But for now, we’re not ready to change our overall guidance with regards to long-term target.

And we will take our next question from Jon Arfstrom with RBC Capital Markets.

Pete, regarding the early stage delinquencies, I think you're suggesting to focus on year-over-year comparisons rather than sequential ones. That's the correct perspective to have.

Correct.

Yes, Jon, just to go a little bit deeper on that. We know that our customers come into repayment in two primary sort of waves throughout the course of the year based on when they graduated. We know that the most likely time for folks to have especially minor financial distress is when they're first coming into repayment. And so you do see these kinds of seasonalities because our business is not one where we have sort of consistent entry into P&I each of the 12 months, it is lumpy. And so I do think the year-over-year metrics are the right metrics to look at.

Yes. Okay. And you're signaling that things are potentially getting a little bit better, Pete, comfortable enough to tell us that you think reserves could trend down. Can you give us any clues to what you're thinking in terms of what's possible there, kind of the pace and timing of some of those reserve percentage of clients?

I would highlight the year-over-year improvement as noted in the investor presentation. If you examine the trend from the second quarter to the third quarter, you’ll see a positive trajectory. While I won’t specify a number, we believe that this trend will persist due to the ongoing effects of our modification programs and their influence on net charge-offs. Although this does not translate directly into the CECL reserving process, it will eventually be reflected in our reserves. Additionally, we adjusted our underwriting criteria last year to make our credit standards more stringent, and the loans we've originated over the past year are of higher quality compared to our previous portfolio. As these loans season, they will also contribute to the overall reserves.

Okay. Fair enough. And then just one more if I could. It's probably in here, but I couldn't quite figure it out. But can you give us deposit rates on kind of your new money that you're bringing in and how that compares to your average, how big that gap is?

It's somewhat challenging to generalize this because there's a distinction between demand deposits and term money. I would say that market rates have shifted anywhere from 25 to 50 basis points over the past quarter, depending on the duration. We typically position ourselves in the middle of the range among rate-based deposit gatherers. This approach has helped us benefit from repricing during the past month and quarter. We anticipate that this trend will continue, and as the Fed's rate cut cycle progresses, deposit rates are likely to adjust quickly again.

And we will take our next question from John Hecht with Jefferies.

Most of my questions have already been asked and answered. I’d like to follow up on the last question regarding the deposit markets and pricing. Could you discuss how you are positioned in that area, specifically the maturity profile of your brokered deposits and your ability to respond to market changes?

Yes, sure. I got an early question on sort of NIM pressure that I touched on that a little bit. Again, we term out our deposits in order to manage the sort of duration gap between the longer-dated assets that we originate in our funding profile. We do have some remaining primarily brokered term deposits that we put on three and five years ago that will come up for repricing over the next six to nine months. And those will obviously reprice at a higher rate, but at the same point, we've got in that same mix of our total deposit book things that we put on a year ago that will reprice at a lower rate. So again, I think we'll have some NIM compression as we move to and through the first half of next year. But I believe we'll start to normalize after that and feel pretty comfortable with the longer-term commitment we made around NIM target of the lower mid-5% range.

I apologize if you already addressed this, but you clearly exceeded expectations for originations this quarter and are raising the guidance for the year. Can you explain how much of the increase in guidance is due to gaining market share from Discover's exit compared to overall advancements in the market?

Yes, John, it’s probably a little premature. We’ll start to get some of the market studies here in the next month or two. But as a quick reminder, I think the competitor you referenced last year, Q3 had a market share probably in the range of between 14% and 15%. We’re a little bit north of the 50% market share player. So if you start to think about normal expected volume growth, originations growth, in sort of the mid-single digits and you start to think about getting 50%, 55% of 14% to 15% share, eyeball volumetrically, that seems pretty consistent with the 13% volume growth that we saw this quarter, maybe even a little bit sort of – 13% might even be a little bit better. So again, we don’t know yet. We’ll get the full studies and the full data, but there’s nothing in the, what I’ll call, simple math that leads us to believe that we did not fare well during this peak season. And of course, we’ll report out on any trends as we learn them around share.

This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Jon Witter for closing remarks.

Thank you, Madison. I appreciate your time and your help today, and thank you, everyone, for dialing in. We continue to really appreciate your interest in Sallie Mae and I hope you are as excited about the successful peak season as we are, and we look forward to talking to you in about three months and talking about that close to the year and guidance for 2025. With that, Melissa, I'll turn it back over to you for some closing business.

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.

Thank you. This concludes today's Sallie Mae Third Quarter 2024 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.