Salliemae(SLM) - 2022 Q3 - Quarterly Report

Part I. Financial Information Financial Statements This section presents SLM Corporation's unaudited consolidated financial statements as of September 30, 2022, including balance sheets, income statements, and cash flow statements Consolidated Balance Sheet Highlights (Unaudited, in thousands) | Metric | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $4,846,754 | $4,334,603 | | Loans held for investment, net | $19,622,302 | $20,341,283 | | Total assets | $29,139,088 | $29,221,899 | | Deposits | $21,276,748 | $20,828,124 | | Total liabilities | $27,156,860 | $27,072,188 | | Total equity | $1,982,228 | $2,149,711 | Consolidated Statements of Income Highlights (Unaudited, in thousands, except per share) | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $369,510 | $357,518 | $1,107,350 | $1,027,416 | | Provisions for credit losses | $207,598 | $138,442 | $336,193 | $(17,648) | | Net income | $75,172 | $72,840 | $546,057 | $854,248 | | Diluted earnings per common share | $0.29 | $0.24 | $2.03 | $2.59 | Notes to the Financial Statements This section provides detailed disclosures on significant accounting policies, investments, loans, credit losses, borrowings, equity, and regulatory capital Note 1. Significant Accounting Policies The company's interim financial statements adhere to U.S. GAAP, reflecting the Nitro College acquisition and early adoption of ASU 2022-02 - On March 4, 2022, the company acquired the assets of Nitro College to expand digital marketing capabilities and reduce customer acquisition costs, resulting in goodwill of $51 million and identifiable intangible assets of approximately $75 million[20] - The company elected to early adopt ASU No. 2022-02 prospectively from January 1, 2022, eliminating accounting guidance for Troubled Debt Restructurings (TDRs) and enhancing disclosure requirements for certain loan modifications, with an immaterial impact on financial statements[23] Note 2. Investments The investment portfolio includes trading and AFS securities, with AFS investments totaling $2.43 billion and $216 million in unrealized losses due to rising interest rates Available-for-Sale Investments Composition (As of Sep 30, 2022, in thousands) | Security Type | Amortized Cost | Estimated Fair Value | Gross Unrealized Losses | | :--- | :--- | :--- | :--- | | Mortgage-backed securities | $394,753 | $323,072 | $(71,682) | | U.S. government-sponsored enterprises and Treasuries | $1,928,886 | $1,804,647 | $(124,239) | | Other securities | $316,317 | $296,516 | $(19,801) | | Total | $2,643,540 | $2,427,540 | $(216,001) | - The decline in the fair value of AFS securities from December 31, 2021, to September 30, 2022, was primarily driven by the rising interest rate environment and is not considered credit-related, with the company intending and able to hold these securities until recovery[32] Note 3. Loans Held for Investment The loan portfolio, primarily private education loans, totaled $19.6 billion as of September 30, 2022, with $3.29 billion in loan sales generating $325 million in gains Loans Held for Investment, Net (in thousands) | Loan Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Private Education Loans, net | $18,980,852 | $19,625,374 | | FFELP Loans, net | $641,450 | $692,954 | | Credit Cards, net | $0 | $22,955 | | Total | $19,622,302 | $20,341,283 | - In the first nine months of 2022, the company sold approximately $3.29 billion of Private Education Loans to unaffiliated third parties, resulting in recognized gains of $325 million[41] Note 5. Allowance for Credit Losses The allowance for credit losses reached $1.19 billion, with a $336 million provision for the nine months ended September 30, 2022, reflecting increased charge-offs and policy changes Allowance for Credit Losses Activity (Nine Months Ended Sep 30, 2022, in thousands) | Metric | Private Education Loans | Total | | :--- | :--- | :--- | | Beginning Balance | $1,158,977 | $1,165,335 | | Total Provisions | $(2,852) | $(2,479) | | Net Charge-offs | $(269,289) | $(272,209) | | Ending Balance | $1,190,427 | $1,194,238 | - Charge-offs increased in Q3 and the first nine months of 2022 compared to 2021 due to changes in credit administration practices that imposed stricter requirements for forbearance, elevated losses from borrowers who took a "gap year" during the pandemic, and strain on collections from increased activity and staffing shortages[60] - As of September 30, 2022, 87% of the gross Private Education Loan portfolio had a cosigner, and 45% had a FICO score at origination of 750 or greater[73] Note 8. Deposits Total deposits increased to $21.3 billion by September 30, 2022, with a significant rise in weighted average interest rates due to market conditions Deposit Composition (in thousands) | Deposit Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Money market | $11,053,370 | $10,473,569 | | Savings | $947,870 | $959,122 | | Certificates of deposit | $9,274,941 | $9,394,001 | | Total Interest-Bearing | $21,276,181 | $20,826,692 | Note 9. Borrowings Total borrowings decreased to $5.5 billion by September 30, 2022, including a $575 million ABS transaction and $344 million in unconsolidated VIE exposures Total Borrowings (in thousands) | Borrowing Type | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Unsecured borrowings | $988,182 | $986,138 | | Secured borrowings | $4,534,129 | $4,944,852 | | Total | $5,522,311 | $5,930,990 | - On August 9, 2022, the company executed the $575 million SMB Private Education Loan Trust 2022-C term ABS transaction, accounted for as a secured financing, with notes priced at a weighted average SOFR equivalent cost of SOFR plus 1.76%[106] Note 11. Stockholders' Equity The company repurchased 30.7 million shares for $553 million and paid a $0.11 per share dividend in Q3 2022, with $736 million remaining for repurchases Share Repurchase Activity | Period | Shares Repurchased (in actuals) | Average Price per Share | | :--- | :--- | :--- | | Three Months Ended Sep 30, 2022 | 1,191,544 | $14.14 | | Nine Months Ended Sep 30, 2022 | 30,721,944 | $18.00 | - The company paid a common stock dividend of $0.11 per share in Q3 2022, an increase from $0.03 per share in Q3 2021, with total dividends for the first nine months of 2022 at $0.33 per share compared to $0.09 in the prior year period[134] Note 14. Regulatory Capital Sallie Mae Bank remains 'well capitalized' with all regulatory capital ratios, including 13.3% Common Equity Tier 1, significantly exceeding minimum requirements Sallie Mae Bank Capital Ratios (As of Sep 30, 2022) | Ratio | Actual | Minimum Requirement + Buffer | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 13.3% | > 7.0% | | Tier 1 Capital | 13.3% | > 8.5% | | Total Capital | 14.6% | > 10.5% | | Tier 1 Leverage | 10.6% | > 4.0% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's analysis of financial performance for Q3 and the first nine months of 2022, covering key drivers, strategic initiatives, and financial condition - The company is focused on strategic imperatives including maximizing its core private student loan business, optimizing its brand, and maintaining a rigorous capital return program[175] - Strategic actions in 2022 include the acquisition of Nitro College to enhance digital marketing, the sale of $3.29 billion in Private Education Loans, and the decision to exit and sell the credit card business to focus on core strategies[175][176][179] Results of Operations Q3 2022 net income was $75 million (up from $73 million), driven by net interest income and loan sale gains, while nine-month net income decreased to $546 million due to higher credit loss provisions - Q3 2022 vs. Q3 2021: Net interest income rose by $12 million due to a 24-basis point increase in net interest margin as assets repriced faster than liabilities in a rising rate environment, partially offset by a $70 million increase in the provision for credit losses[184] - Nine Months 2022 vs. 2021: Net income decreased by $308 million, largely due to the provision for credit losses swinging from a negative $18 million in 2021 to a positive $336 million in 2022, with gains on loan sales also decreasing by $78 million[186] Financial Condition The net student loan portfolio decreased to $19.6 billion, with delinquencies rising to 3.7% due to policy changes and economic pressures, while the allowance for credit losses was 5.92% Private Education Loan Credit Quality Indicators | Metric | September 30, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Delinquencies as % of loans in repayment | 3.7% | 2.4% | | Forbearance as % of loans in repayment & forbearance | 1.4% | 2.3% | | Net charge-offs as % of avg. loans in repayment (annualized, Q3) | 2.67% | 1.29% | - The increase in delinquency rates is attributed to changes in credit administration practices implemented in 2021 that tightened forbearance requirements, as well as economic strain on borrowers and the company's collection teams[219] Liquidity and Capital Resources The company maintains strong liquidity with $7.0 billion in cash and investments, stable $21.3 billion deposits, and a 'well capitalized' bank subsidiary, supporting $2.2 billion in loan commitments - Total primary liquidity sources, including unrestricted cash and available-for-sale investments, stood at $7.0 billion at September 30, 2022[233] - The company has $2.2 billion of outstanding contractual loan commitments to be funded during the 2022/2023 academic year, with a corresponding reserve of $108 million for expected credit losses[258] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk using EAR and EVE analyses, showing low sensitivity with a +100 basis point rate shock increasing net interest income by 0.6% and decreasing EVE by 2.0% Interest Rate Sensitivity Analysis (As of Sep 30, 2022) | Scenario | Earnings at Risk (EAR) - Shock | Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +300 Basis Points | +1.8% | -6.0% | | +100 Basis Points | +0.6% | -2.0% | | -100 Basis Points | -0.7% | +1.8% | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Based on an evaluation as of September 30, 2022, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[275] Part II. Other Information Legal Proceedings The company is subject to various claims, lawsuits, and regulatory inquiries in the normal course of business and cooperates with all such requests - The company is subject to various claims and legal actions in the normal course of business and cooperates with requests from state attorneys general and other administrative agencies[278] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.2 million shares at $14.14 per share in Q3 2022, with $736 million remaining for future repurchases under existing programs Share Repurchases (Q3 2022, in thousands) | Month (2022) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July | 0 | N/A | | August | 0 | N/A | | September | 1,192 | $14.14 | | Total Q3 | 1,192 | $14.14 | - As of September 30, 2022, approximately $736 million remained available for purchase under the company's share repurchase programs[281]