Salliemae(US:SLM)2023-02-22 16:00Part I Business Sallie Mae specializes in private education loans, funded by deposits and ABS, operating under strict regulation Key Business Metrics (2022) | Metric | Value | | :--- | :--- | | Private Education Loan Originations | $6.0 billion | | Private Education Loans Held for Investment, Net | $19.0 billion | | Sallie Mae Bank Total Assets | $28.3 billion | | Sallie Mae Bank Total Deposits | $21.6 billion | | Total Asset-Backed Securities (ABS) Funding | $4.2 billion | | Number of Employees | ~1,700 | - The company's primary business is originating and servicing Private Education Loans, which are not government-guaranteed. In 2022, originations grew by 10% compared to 202112 - Sallie Mae maintains high credit quality for its loan portfolio. For loans originated in 2022, the average FICO score at approval was 747, and approximately 86% of these loans were cosigned16 - The company is exiting its credit card business to focus on core strategies, with $29 million in credit card receivables held-for-sale at year-end 202221 - In 2022, Sallie Mae acquired Nitro College to enhance digital marketing capabilities and expand its role as a broader education solutions provider31 Risk Factors The company faces credit, interest rate, liquidity, regulatory, operational, and spin-off risks in the higher education loan market - Concentration Risk: The business is highly concentrated in Private Education Loans, making it vulnerable to disruptions in the higher education market and competition from the federal government's Direct Loan program102 - Credit Risk: The company bears full credit exposure on its unsecured private loans. Defaults could be driven by economic conditions, rising interest rates, and unemployment, potentially requiring a material increase in the allowance for credit losses106107 - Interest Rate & Liquidity Risk: The business is highly dependent on net interest income and is exposed to risks from interest rate changes and a mismatch between asset and liability maturities. Funding is heavily reliant on obtaining deposits and executing asset-backed securitizations110122 - Regulatory & Political Risk: The company operates in a highly regulated environment. Changes in consumer protection laws, increased CFPB oversight, or new federal programs for "free" college or loan refinancing could materially impact the business141157159 - Operational & Cybersecurity Risk: The business depends on secure IT systems for processing large volumes of transactions. A breach of its systems or those of its third-party vendors could lead to significant financial, legal, and reputational exposure164167 - Spin-Off Risk: The company has exposure to Navient's creditworthiness due to indemnification obligations from the 2014 spin-off. If Navient is unable to fulfill these obligations for pre-spin-off liabilities, Sallie Mae could face higher-than-expected costs190191 Unresolved Staff Comments The company reported no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments205 Properties The company owns its headquarters and leases five other facilities for administrative and loan servicing functions, all deemed adequate for business goals Principal Owned and Leased Facilities | Location | Function | Ownership | Approx. Square Feet | | :--- | :--- | :--- | :--- | | Newark, DE | Headquarters | Owned | 160,000 | | New Castle, DE | Loan Servicing Center | Leased | 125,000 | | Indianapolis, IN | Administrative Offices | Leased | 115,000 | | Sterling, VA | Administrative Offices | Leased | 27,000 | | Salt Lake City, UT | Sallie Mae Bank | Leased | 17,000 | | Newton, MA | Administrative Offices | Leased | 14,000 | Legal Proceedings The company faces legal and regulatory inquiries, including indemnification disputes with Navient from the pre-2014 spin-off and ongoing CFPB investigations - Navient is legally obligated to indemnify SLM for liabilities arising from the conduct of pre-Spin-Off SLM. However, Navient has suggested SLM may be responsible for indemnifying Navient for certain liabilities, which SLM disputes200202 - In January 2022, Navient settled with 40 state attorneys general regarding pre-spin-off conduct. SLM was not a party to the settlement and contributed no relief201 - The Bank is cooperating with an ongoing CFPB investigation and a Multi-State Investigation related to pre-spin-off activities, for which Navient is leading the response203 Mine Safety Disclosures This section is not applicable to the company's business - Not applicable205 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SLM common stock trades on NASDAQ, with the company actively repurchasing shares and paying quarterly dividends Q4 2022 Common Stock Repurchases | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | Oct 2022 | 4,519 | $15.66 | | Nov 2022 | 2,488 | $16.90 | | Dec 2022 | 2,529 | $16.65 | | Total Q4 2022 | 9,536 | $16.25 | - Under the 2022 Share Repurchase Program, the company repurchased 38.2 million shares for $669 million during the year. At year-end, $581 million of capacity remained under the program, which expires January 25, 202468213 - The company paid quarterly cash dividends of $0.11 per common share for each quarter of 2022, totaling $0.44 for the year206 Selected Financial Data Selected 2022 financial data shows decreased net income and EPS due to higher credit loss provisions, offset by stable assets and improved net interest margin Selected Financial Data (2020-2022) | (in millions, except per share data) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating Data | | | | | Net Interest Income | $1,489 | $1,395 | $1,480 | | Net Income | $469 | $1,161 | $881 | | Diluted EPS | $1.76 | $3.61 | $2.25 | | Net Interest Margin | 5.31% | 4.81% | 4.81% | | Balance Sheet Data | | | | | Total Assets | $28,811 | $29,222 | $30,770 | | Total Deposits | $21,448 | $20,828 | $22,666 | | Total Stockholders' Equity | $1,727 | $2,150 | $2,563 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes 2022 net income decline to higher credit loss provisions, offset by increased net interest income and loan sale gains, maintaining strong capital Impact of COVID-19 on Sallie Mae COVID-19 impacts in 2022 included increased delinquencies, higher 'gap year' loan losses, and the company's election of CECL regulatory capital transition - Private Education Loan delinquencies increased to 3.8% of loans in repayment at year-end 2022, up from 3.3% in 2021. This was attributed to the end of the COVID-19 disaster forbearance program, new credit administration practices, and operational challenges222 - The company experienced $59 million in higher-than-expected losses on loans to students who took a "gap year" during the pandemic and began repayment in late 2021 and early 2022223 - The company elected to use the optional regulatory capital transition for the CECL standard, deferring the full capital impact. The phase-in began on January 1, 2022, and will continue at a rate of 25% per year through 202574223 Key Financial Measures Key financial measures include net interest income, loan sale gains, and credit loss provisions, with funding primarily from deposits and asset-backed securitizations - In 2022, the company sold $3.34 billion of Private Education Loans, resulting in gains of $328 million. These loan sales are used to manage asset growth, capital, and liquidity234 - The allowance for credit losses is a key metric reflecting management's estimate of lifetime expected losses. It is affected by loan growth, economic forecasts, and risk factors like loan status, seasoning, and the presence of a cosigner235 - The company is transitioning its variable-rate products from LIBOR to SOFR. As of Q2 2021, new variable-rate loans are indexed to SOFR, and new ABS issuances began using SOFR in Q3 2022242 Strategic Imperatives In 2022, strategic imperatives included the Nitro College acquisition, significant loan sales and securitizations, facility renewals, substantial share repurchases, and exiting the credit card business - Completed the acquisition of Nitro College on March 4, 2022, to expand digital marketing capabilities and reduce customer acquisition costs244 - Sold $3.34 billion of Private Education Loans and executed a $575 million term ABS transaction accounted for as a secured financing245247 - Repurchased 40 million shares of common stock for a total cost of $708 million under its authorized share repurchase programs249 Results of Operations GAAP net income and diluted EPS significantly decreased in 2022, driven by higher credit loss provisions and lower loan sale gains, partially offset by increased net interest income GAAP Earnings Summary (2021 vs. 2022) | (in millions) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $1,489 | $1,395 | $94 | 7% | | Provision for Credit Losses | $633 | $(33) | $666 | 2,018% | | Gains on Sales of Loans, net | $328 | $548 | $(220) | (40)% | | Total Non-interest Income | $335 | $632 | $(297) | (47)% | | Total Non-interest Expenses | $559 | $520 | $39 | 8% | | Net Income | $469 | $1,160 | $(691) | (60)% | - The primary driver for the decrease in 2022 net income was the significant increase in the provision for credit losses, which was affected by slower prepayment rate assumptions and higher expected future losses related to credit administration changes and operational challenges253 - Non-GAAP "Core Earnings" diluted EPS was $1.76 in 2022, compared to $3.67 in 2021. This non-GAAP measure primarily excludes unrealized mark-to-market gains and losses on derivatives that do not qualify for hedge accounting260 Financial Condition As of year-end 2022, total assets and the net loan portfolio slightly decreased, while total deposits grew, and the allowance for credit losses and delinquencies increased Loan Portfolio Composition (Net) | (in thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Private Education Loans, net | $19,019,713 | $19,625,374 | | FFELP Loans, net | $607,155 | $692,954 | | Credit Cards, net | $0 | $22,955 | | Total Loans Held for Investment, net | $19,626,868 | $20,341,283 | - Private Education Loan originations totaled $6.0 billion in 2022, an increase from $5.4 billion in 2021. 86% of 2022 originations had a cosigner, with an average FICO score of 747279281 Private Education Loan Credit Quality | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Delinquencies as % of Loans in Repayment | 3.8% | 3.3% | | Forbearance as % of Repayment & Forbearance | 1.8% | 1.9% | | Net Charge-offs as % of Avg. Loans in Repayment | 2.55% | 1.33% | Liquidity and Capital Resources The company maintains strong liquidity and capital, funded by deposits and liquid investments, with Sallie Mae Bank exceeding all 'well capitalized' regulatory requirements - Primary sources of liquidity at year-end 2022 included $4.6 billion in cash at Sallie Mae Bank and $2.0 billion in available-for-sale investments311 Sallie Mae Bank Regulatory Capital Ratios (as of Dec 31, 2022) | Ratio | Actual | Minimum Requirement (with buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 12.9% | > 7.0% | | Tier 1 Capital | 12.9% | > 8.5% | | Total Capital | 14.2% | > 10.5% | | Tier 1 Leverage | 10.3% | > 4.0% | - Sallie Mae Bank declared $700 million in dividends to the parent company in 2022, which were primarily used to fund share repurchase programs and stock dividends328 Critical Accounting Policies and Estimates The Allowance for Credit Losses (ACL) is the most critical accounting estimate, calculated under the CECL standard using a vintage model with economic forecasts, prepayment speeds, and recovery rates as key assumptions - The Allowance for Credit Losses is the most critical accounting estimate, calculated using a discounted cash flow, vintage-based model under the CECL standard351353 - The model relies on significant assumptions, including economic forecasts, prepayment speeds, and recovery rates. The company uses a two-year reasonable and supportable forecast period before reverting to historical averages353 - The company elected to early adopt ASU No. 2022-02, which eliminates the accounting guidance for Troubled Debt Restructurings (TDRs) and enhances disclosures for loan modifications to borrowers experiencing financial difficulty, effective January 1, 2022359 Risk Management The company employs a 'three lines of defense' risk management approach, overseen by the Board and management committees, addressing six major risk categories - The company uses a "three lines of defense" governance model: 1) Business units own the risk, 2) The Risk Management function provides oversight, and 3) Internal Audit provides independent assurance364 - Six major risk categories are identified and managed: Strategic, Credit, Market, Liquidity, Operational, and Compliance370 - Board-level committees (Financial Risk, Operational and Compliance Risk, Audit) and management-level committees (Enterprise Risk, Credit, ALCO) oversee the risk management framework and ensure compliance with the company's risk appetite366368 Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk using EAR and EVE models, indicating low sensitivity to rate changes and a positive asset-liability funding gap managed through derivatives Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Scenario (Rate Shock) | % Change in Net Interest Income (24-Month EAR) | % Change in Economic Value of Equity (EVE) | | :--- | :--- | :--- | | +300 Basis Points | +3.0% | -9.5% | | +100 Basis Points | +1.0% | -3.2% | | -100 Basis Points | -1.1% | +3.1% | | -300 Basis Points | -3.7% | +6.2% | - The company's primary market risk is interest rate risk. The analysis indicates a low sensitivity to rate changes based on static balance sheet assumptions383386 Financial Statements and Supplementary Data This section incorporates by reference the company's consolidated financial statements and the Report of the Independent Registered Public Accounting Firm, which are detailed in Part IV, Item 15 - This item references the consolidated financial statements of SLM Corporation, which are included from page F-2 onwards in the report396404 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reported no changes in or disagreements with its accountants on accounting and financial disclosure - Nothing to report396 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, a conclusion affirmed by the independent auditor - Management concluded that disclosure controls and procedures were effective as of December 31, 2022397 - Management concluded that internal control over financial reporting was effective as of December 31, 2022. This assessment was audited by KPMG LLP, which concurred398 Other Information The company reported no other information - Nothing to report399 Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Proxy Statement - This information is incorporated by reference from the Registrant's 2023 Annual Meeting of Stockholders proxy statement399 Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - This information is incorporated by reference from the Registrant's 2023 Annual Meeting of Stockholders proxy statement400 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership and related matters is incorporated by reference from the company's 2023 Proxy Statement - This information is incorporated by reference from the Registrant's 2023 Annual Meeting of Stockholders proxy statement401 Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's 2023 Proxy Statement - This information is incorporated by reference from the Registrant's 2023 Annual Meeting of Stockholders proxy statement402 Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2023 Proxy Statement - This information is incorporated by reference from the Registrant's 2023 Annual Meeting of Stockholders proxy statement403 Part IV Exhibits, Financial Statement Schedules This section lists consolidated financial statements, notes the omission of inapplicable schedules, and provides a list of exhibits filed or incorporated by reference - The consolidated financial statements of SLM Corporation are included in Item 8403 - All financial statement schedules have been omitted because they are not applicable or the required information is already included in the financial statements or notes405