SLM Q4 2021 Earnings Call Transcript

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Provided by Quartr
January 27, 2022

Key Takeaways

  • Positive Sentiment: Strong 2021 performance: delivered robust results, increased share repurchase goals and dividend, returning significant capital to shareholders.
  • Positive Sentiment: Q4 GAAP EPS of $1.04 was driven by a $1 billion loan sale and reserve release, despite being slightly below the prior year due to unique 2020 events.
  • Neutral Sentiment: Private education loan originations rose 18% year-over-year in Q4 to $737 million and 2% for the full year to $5.4 billion, with credit quality remaining consistent (83% cosigner rate, 749 average FICO).
  • Positive Sentiment: CECL reserve declined to 5.2% of student loan exposure (from 6.4%), reflecting improved economic forecasts and higher prepayment speeds; plans $3 billion in 2022 loan sales with low-teens premiums (~20% of revenue).
  • Positive Sentiment: Announced acquisition of Nitro College to expand digital customer acquisition, aiming for 1.7× enrolled student reach and double parent relationships at close, boosting growth and reducing acquisition costs.
AI Generated. May Contain Errors.
Earnings Conference Call
SLM Q4 2021
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good day, and welcome to the 2021 4th Quarter Sallie Mae 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. As a reminder, this call is being recorded. I would now like to turn the call over to Brian Cronin, Vice President, Investor Relations.

Operator

You may begin.

Speaker 1

Thank you, Michelle. Good morning, and welcome to Sallie Mae's 4th quarter year end 2021 earnings call. It is my pleasure to be here today with John Witter, our CEO and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain Predictions, expectations and forward looking statements.

Speaker 1

Actual results in the future may be materially different than those discussed here. This could be 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, the potential impact of COVID-nineteen pandemic on our business, results of operation, Financial conditions and or cash flows. During this conference call, we will refer to non GAAP measures we call our core earnings.

Speaker 1

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, 2021. This is posted along with the earnings press release on the Investors page at salliemay.com. Thank you. I'll now turn the call over to John.

Speaker 2

Thank you, Brian and Michelle. Good morning, everyone. Thank you for joining us to discuss Sallie Mae's Q4 and full year 2021 results. I'm pleased to report on a successful year in 2021, discuss our plans for 2022 And announce the beginning of an exciting new chapter for Sallie Mae stemming from last night's announced agreement to acquire Nitro College. I hope you'll take away 3 key messages today.

Speaker 2

1st, we delivered strong results in 2021. 2nd, we expect to continue execution against our strategic imperatives and that will drive strong results in 2022. And 3, we will look for creative opportunities to enhance our core business and strategically evolve our company as evidenced by the acquisition of Nitro College. Let me begin with a discussion of the 2021 results. During the year, we maintained a focus on our core business, Executed a capital return program that exceeded our original expectations and rigorously managed expenses.

Speaker 2

Our earnings outlook improved throughout the year based on this focus and an improving economy. As our performance improved, we increased our share repurchase goals and our dividend, further returning capital to shareholders. GAAP diluted EPS in the Q4 of 2021 was $1.04 compared to $1.13 in the year ago quarter. Our strong results were driven by the premium we earned on the $1,000,000,000 loan sale we executed in the quarter and the associated reserve release. These earnings are lower than the prior quarter given 2 unique events that occurred in Q4 of last year.

Speaker 2

You may remember from our earnings call last January, we reduced our Q4 2020 provision by $316,400,000 due to the combined impact of improving pandemic conditions, coupled with the reserve release actually related to our early 2021 loan sale. Private education loan originations for the Q4 of 2021 were $737,000,000 which is up 18% over Q4 of 2020. Consistent with our guidance from our last call, Our full year originations ended at $5,400,000,000 which is up 2% over 2020. Credit quality at origination was consistent with past years. Our cosigner rate for Q4 of 2021 was 83%, flat to the Q4 of 2020.

Speaker 2

And our average FICO score for the Q4 of 2021 was 749 versus 751 in the Q4 of 2020. In the Q4 of 2021, we continued our capital return strategy, 14,000,000 shares at an average price of $18.52 We have reduced the shares standing since January 1, 2021 by 26% at an average price per share of $17.37 We have reduced the shares outstanding since January 1, 2020 by 35% at an average price of $15.52 Steve will now take you through the financial highlights of the quarter. Steve?

Speaker 3

Thank you, John. Good morning, everyone. Let's start where we usually do with a discussion of our loan loss allowance and provision. The private education loan reserve was $1,230,000,000 or 5.2 percent of our total student loan exposure, Which under CECL, you may recall, includes the on balance sheet portfolio plus the accrued interest receivable of $1,200,000,000 And unfunded loan commitments of $1,800,000,000 Our reserve rate is up slightly from 5.1% in the prior quarter, but down significantly from 6.4% in the year ago quarter. Let's now look at the major variables used to calculate our CECL reserve.

Speaker 3

Economic forecasts and weightings are a major input to our model. In the current quarter and the year ago quarter, we used Moody's base S1 and S3 forecasts weighted 40%, 30% 30%, respectively. We can be expected to use this mix going forward, except during extraordinary periods of uncertainty in the economy. A major factor in the sharp improvement in our reserve was the improved economic outlook. The weighted average forecast of college graduate unemployment Over the next 2 years, declined from 3.6% last year to 2.8% in the Q4 of 2021.

Speaker 3

Model inputs such as prepayment speeds are important drivers as well. As we have discussed over the course of 2021, projected prepay speeds have increased, which is another major contributor to the year over year decline The 4th quarter is our lowest in terms of origination volume and new loan commitments. Provision for new unfunded commitments totaled $13,000,000 in the quarter. Loan sales are, of course, important. We sold just over $1,000,000,000 of loans in the quarter, which resulted in a $56,000,000 reduction in our loan loss allowance.

Speaker 3

We booked a negative provision for loan losses of $15,000,000 on our income statement this quarter. This is a result of the reserve release from the loan sale And improved economic environment, offsetting the reserve need associated with new lending commitments and the natural accretion of our discounted Reserved. Let's now discuss our credit metrics, which can be found on Page 9 of our investor presentation. Private education loans delinquent 30 plus days were 3.3% of loans and repayment. This is up from 2.4% in Q3 and 2.8% in the year ago quarter.

Speaker 3

Private education loans and forbearance were 1.9%, down from 2.3% in Q3 of 2021 and 4.3% in the year ago quarter. Let's take a closer look at this. The fact that delinquencies are up when forbearances are down is not a coincidence. Recall that last quarter, we announced that we were transitioning to more stringent forbearance policies. As expected, we are seeing a significant increase in cash resolutions of delinquent accounts In lieu of forbearance, this is obviously a positive.

Speaker 3

However, there is a population of loans that would have received forbearance in the past that are entering delinquency status as a result of the policy change. In addition, included in our November December repay wave were loans that left school during the pandemic and just entered full P and I repayment. These loans are demonstrating higher roles to delinquency And we expect 31 plus day delinquencies going forward throughout the course of 2021 to I'm sorry, 22 to hover in the low 3 percentage area. Let's take a look at charge offs. Private education loan charge offs in the 4th quarter were in line with the projections we made last quarter at 1 point 5.8% in Q4 compared to 1.29% in Q3 and 1.52% in the year ago Quarter.

Speaker 3

Full year charge offs were 1.3% in 2021 compared to 1 point 2% in 2020. Going forward, we expect private education loan charge offs To increase to about 2% in quarter 1 of 2022 and then decrease over the remainder of 2022, Totaling 1.75 percent for the full year. We believe we are very appropriately reserved for this outlook. A few other comments. As you all know, the payment holiday on the federal loan program Has been extended through May of 2022.

Speaker 3

As we have discussed on prior calls, we believe this has been beneficial to many of our borrowers as they hold both private and federal loans. Our positive credit performance demonstrates that our borrowers are engaged in good payment habits and servicing their loans effectively. However, we do expect that customers on the financial margin will be negatively impact when federal payments ultimately resume. However, I will reiterate that while credit outlooks can change, We believe we are very well reserved for the current economic outlook. Now let's turn to net interest margin, which You can find on Page 7.

Speaker 3

The net interest margin on our interest earning assets was 5.13% in Q4. This is up from both the prior quarter and the year ago quarter. Full year NIM was unchanged from the prior year at 4.81%. Looking forward, we believe that our NIM will remain Just over 5% for the full year of 2022. Let's now talk about loan sales.

Speaker 3

We plan on selling $3,000,000,000 of loans in 2022. We'll sell $1,000,000,000 in the first quarter and $2,000,000,000 in the Q3 of the year. So let's put this into perspective. Our loan portfolio is just under 50% fixed rate and just over 50% floating rate. We sell representative samples of our portfolio when we conduct loan sales.

Speaker 3

Interest rates have increased approximately 50 basis points Since we conducted our last sale, the impact on the present value of the cash flows is about a point on the fixed component of the portfolios. If you accept that the value of the variable rate side of the portfolio Is unchanged due to rate hikes that leads to roughly a 0.5 point decline in the premiums we would earn all things being equal. While the ultimate price will be determined by the auction, we have confidence in the low double digit premiums We have included in our guidance when we ultimately execute our loan sales. A little more color on this. We expect gain on sale revenue to comprise just over 20% of our Pre tax but post provision revenue in 2022.

Speaker 3

The balance is projected to come from our core business, 70% from our net interest income and 10% from the release of the CECL reserves on the portfolios we will sell. This means that just 20% of our revenue is subject to the volatility of the markets in the form of gain on sale. Let's turn to OpEx. 4th quarter non interest expenses were $125,000,000 compared to 141 $1,000,000 in our seasonally high 3rd quarter and $124,000,000 in the year ago quarter. Expenses are down from I'm sorry, full year operating expenses in our core student loan business Declined 2% year over year despite dispersed volume and loan service being up 2%.

Speaker 3

Our unit cost to service declined an impressive 7%, while our cost to acquire Ticked up marginally in what turned out to be a competitive year. We will absolutely continue to focus on driving servicing and acquisition costs lower and continue to gain efficiencies from our operation. Finally, let's look at our liquidity and capital positions, which are strong. We ended the quarter with 21.3 percent liquidity as measured against our total assets. At the end of the 4th quarter, Total risk based capital was 14.5 percent and common equity Tier 1 capital was 14.1%.

Speaker 3

GAAP equity plus loan loss reserves, which is a ratio we'd like to call out in the post CECL world, was a very strong 15.8% of our risk weighted assets. Our balance sheet remains solid and we are very well positioned to continue to grow the business and return capital to shareholders going forward. Back to you, John.

Speaker 2

Thanks, Steve. Let me wrap up with a brief description of the political environment, a discussion of the Nitro acquisition and an outlook view for 2022. Overall, the political environment remains constructive with the Biden administration and Congress focused on simplifying the Public service loan forgiveness process, increasing Pell Grants, offering free community college and increasing funding for HBCUs. As discussed previously, we support these types of efforts as they target assistance to those who need it most and are complementary to our business. As hopefully you've all Last night, we announced that we signed a definitive agreement to acquire Nitro College.

Speaker 2

This acquisition is an We have partnered with Nitro College for nearly 5 years and have gotten to know the team very well. The partnership has grown significantly in the last few years. To give you some perspective on this, the growth we experienced in 2021 versus 2020. In 2020, Nitro originated $19,000,000 or disbursed $19,000,000 and in 2021 that grew to $60,000,000 We expect originations through this channel to grow substantially over the next several years, increasing growth and lowering our cost to acquire. Nitro generates these results leveraging a robust and low cost acquisition engine that sources customers through organic channels and a strong base of marketing partnerships.

Speaker 2

These customers are drawn to Nitro for their content, tools and other resources Valuable for families navigating the path to college. This customer acquisition engine added to our own Meaningfully increases the quantity and quality of our customer reach. For example, the number of customers that we are actively engaged with Is projected to increase dramatically. We estimate that on day 1, we will have a direct 1.7 times the number of enrolled college students. And lastly, we estimate that we will have a direct relationship with 2 times the number of parents of college age students compared to today.

Speaker 2

We expect these numbers will continue to grow and by 2023, We expect to have a relationship with 50% of college bound high school seniors the high school senior population. Along with this platform, we are excited to welcome to Sallie Mae a talented team of professionals with industry knowledge and real entrepreneurial drive. Combining and expanding the planning tools and content each company independently possesses will make the combined company a true destination for everyone navigating their journey to, through and immediately after college. This increases our customer reach and the depth of our customer connection and loyalty. Our first priority is to leverage this enhanced position to drive growth and reduce CTA in our core business.

Speaker 2

We also expect that this platform will allow us This would obviously be valuable to our current credit card and deposit businesses as well as being potentially attractive to other product partners. We will look to close this transaction by the end of the Q1 and of course that's subject to all the customary approvals and closing conditions. Let me conclude by discussing our guidance for 2022. We expect that the full year diluted non Private education loan origination growth of 8% to 10%. We expect our non interest expenses for the 1st year Full year 2021 to be between $555,000,000 $565,000,000 and we expect our total loan portfolio Net charge offs will be between $255,000,000 $275,000,000 In addition, Today, we are announcing a new share repurchase authority to buy up to $1,250,000,000 of common stock over the next 2 years.

Speaker 2

While dependent on share price and other factors, we expect to repurchase roughly half of that authority in 2022 and the remainder in 2023. We will continue to programmatically buyback our stock over the next 2 years and look for opportunities to buy more on days when market conditions are favorable. We believe the premiums for our loans and favorable market conditions will persist and continue to support our longer term capital return plans and reinforce our clear commitment to shareholder capital return. With that, Steve, let's open up the call for questions. Thank you.

Operator

Our first question comes from Sanjay Sakhrani with KBW. Your line is open.

Speaker 4

Thanks. Good morning and good quarters. So Steve, maybe you can just give a little bit more color on the premium on Loan sales, I appreciate what you provided. But I just want to make sure I understand other factors that might Play into that premium. If the perception around rate increases changes for whatever reason, does that seem to have an impact on those Premiums or and what other factors might have an impact on the premiums that you're assuming?

Speaker 4

And then at current valuations, what's the threshold Of that premium rate, where it makes sense and where it doesn't today? Thanks.

Speaker 3

Sure. Thank you, Sanjay. All great questions. So look, basically, the biggest drivers to the premium on our loan sale Is the underlying level of interest rates and the credit spreads on top of the Base swap market rates. What basically, I want to make a couple of points here.

Speaker 3

So Interest rates are very important. However, acceptance of the asset and knowledge of how to model it is also Extremely important. Sanjay, you might want to go on mute. I'm getting a lot of interference here. Thank you very much.

Speaker 3

So look, the student loan asset class is no longer an esoteric asset class. There is an awful lot of interest in this asset from investors. And I will point out that Our last auction basically drew coverage of 8 times the amount of assets that we were attempting to sell. So very strong demand for Sallie Mae portfolios. I will also point out that while interest rates are very important, Interest rates grew substantially or increased substantially between our January sale and our October sale, yet our premium Increased significantly as you pointed out in your note.

Speaker 3

And I think what drove that is acceptance and knowledge of our portfolio's performance and how to model it and the more history that we have on things like Losses and prepay speeds, which are the other factors that are as important as interest rates, I think helps investors price and accept this asset class for their investment portfolios. So we are in constant touch With end buyers of these portfolios and we know that there continues to be a significant Demand for the passive class. Did I leave anything out, John? Yes.

Speaker 2

The only thing I would add, Sanjay, to the second part of your question, the way we think about it and I think we've said Before, we are really looking at this as a great strategy to take advantage of this arbitrage between Great. Yes, loan premiums and obviously sort of multiple in valuation. Yes, so we have looked at that. We have basically plotted out what we believe is a kind of green, yellow, red zone as it relates to loan premium and valuation. We have not publicly disclosed that nor do I think it's appropriate for us to do to.

Speaker 2

But I think what we've said very clearly on the last Paul, we don't believe we are close to entering that yellow zone. And so something would have to change pretty dramatically Here in terms of valuation or premium for us to believe that that arbitrage didn't make sense.

Speaker 4

Great. Thank you. And one follow-up question, John, maybe for you on the Nitro College acquisition. It seems like a good complementary product for you guys. Just one on their revenues.

Speaker 4

Obviously, a lot of their revenues come from marketplace lender referrals, right? And that might The impact that Sallie Mae is behind them going forward. So how should we think about the accretion From this acquisition, if those dry out? Thanks.

Speaker 2

Yes. Look, it's a great question, Sanjay. First of all, I think important to say we really respect and value the current Nitro business model. Our very strong intent is to remain or keep that intact. We'll obviously look forward to getting to know them better and work more directly with them in the months ahead as we go through this 1st peak season.

Speaker 2

Yes. And my guess is our strategy and approach may evolve over that period of time, but we really like the Nitro brand. We really like the Nitro business model And are very committed to making sure that at first we start by doing no harm and really sort of enhance and protect the trajectory Of that franchise. Look, I think at the end of the day, we've done a bunch of work understanding risk And we've done a bunch of work understanding opportunity. On the risk side, I think our sense is if Yes.

Speaker 2

Potential lending partner decides they don't want to work with the combined companies going forward. I think we feel like there are opportunities for us to Pass those leads off to other lenders, with little or no degradation by the way including us. So there's a potential for some growth there. We're not looking for that to happen. But if that were a decision that one of those partners made, we think there's a good opportunity to retain That revenue and we also think that there is significant synergy value ahead and that takes in my mind a couple of different forms.

Speaker 2

We know there are some very direct hard dollar cost synergies. For example, we will no longer have to pay The referral fee to Nitro that we had previously paid on the originations that they're giving to us, we know that there is also a category Cost saves that I would put into the sort of avoided bucket. We know they are building technologies and capabilities that we have and vice versa And the opportunities to share those and avoid otherwise required investment, I think is quite strong. We think there's opportunities To enhance the pull through rate on the loans that they send to us through better integration of our platforms and lead and marketing efforts And to really make sure that what is already a very high quality channel for us becomes even more high quality. And look, I think there's no doubt that our plan is to dramatically grow the nitro channel going forward.

Speaker 2

And I think we expect to be able to achieve a growth rate on that channel that's probably better and higher than what they could have achieved on their own. So we've of course modeled all of that. We've looked at all of that as a part of our diligence. We think that this is in its Sole, a strategic acquisition, but it's one of those rare strategic acquisitions that I think has a very strong And very hard nosed business case, really rooted in the core business today. So we feel like we got the old proverbial double word Score on this one, something that's going to really accelerate our strategic journey, but I think also ring the cash register along the way.

Speaker 4

Great. Thank you very much.

Operator

Our next question comes from Michael Kaye with Wells Fargo Securities, your line is open.

Speaker 5

Hi, good morning. I was hoping you could dig further into your net charge off guidance. For example, how much was the uplift year over year coming from that forbearance policy change? How much is coming from the end of the federal student loan payment clause? And how much is more general credit normalization?

Speaker 5

You also mentioned that repayment wave impact. And also, does it seem to safe to Say that the NCOs could come down meaningfully in 2023, barring any changes in the economy.

Speaker 3

Sure. Happy to discuss all of that, Michael. So look, there isn't an awful lot of The charge offs from the termination of the federal loan payment holiday. We think consumers balance sheets Are in very good shape. Americans behaved very sensibly over the course of the pandemic and used their excess cash To pay down credit card balances, mortgage balances, auto balances, etcetera.

Speaker 3

So we think consumers are in very good shape. And we would also note that college graduates, both recent and new, are also seeing significant increases In their pay packages. So we think young adults are in very good shape to handle their student loan payments going forward With or without the federal loan holiday, turning to the other factors, I mean, I don't want to try and Cut this into basis points from the additional factors, but The increase in delinquencies from the changes in forbearance practices It was probably roughly half of the increase in delinquency that we saw from Q3 to Q4 And the repay wave, with basically, the dropouts from the pandemic is probably an additional The rest of that increase. What we think is going to happen is that charge offs will absolutely Peak in the Q1 of the year and trend down throughout the course of the year and get back to Roughly where they've been hovering, which is around well, actually a little higher than the 1.3% they were doing in 2021 End the year around 1.5%. So we think there are a couple of temporary factors Impacting the delinquency buckets right now that will run through the system pretty quickly.

Speaker 3

And we think we are very well reserved for the outlook that we have based in the 2022 outlook. And I will point out that the guidance that we gave for net charge offs in 2022 is pretty much where we started Off 2021, so there is absolutely a little bit of catch up in the lingering effects of the pandemic that is filtering into 2022 from 2021. But when we look At the performance of our portfolio, overall, we feel very, very good about what we're seeing.

Speaker 5

Okay. That's very helpful. Second question was, I wanted to get some thoughts on student loan refi market. As we were mentioning, the payment holiday supposedly ending in May. We also got a major student loan refi competitor getting approved for the bank charter, which potentially make them more dangerous, but rates are moving higher.

Speaker 5

So I wanted to see if you could share your perspective on the student loan refi market and maybe see if you have any sort of Amit, how much of your portfolio could be refi'd in 2022?

Speaker 2

Yes, Michael, it's John. Let me take a crack at that and I'll let Steve, sort of chime in if he likes. First of all, I think you need to sort of go back and start with where we've been historically. And I think Our view is that the refi business has been a relatively persistent Constant. And I would sort of call it

Speaker 5

a

Speaker 2

modest disruption to our business. We of course don't like losing any customers to anybody. But it really hasn't sort of accelerated in the way that I think many people predicted it would have A number of years back and I think it's sort of in our minds gotten to the place where it's sort of viewed as a necessary cost of business. And We've talked pretty extensively on these calls before about sort of the cannibalization math and sort of our efforts Try to find opportunities to proactively sort of manage and self consolidate our own business. The sort of double edged sword of having such a high ROE product that we have is you need to be really good and really precise in those self to make it both a good activity for customers and a good activity for shareholders.

Speaker 2

To me, the real question is, has anything dramatically changed from that experience looking forward? Technically changed from that experience looking forward. And yes, obviously, the payment holiday is one thing, But I would point to a couple of others on the flip side of the ledger. 1, if there was ever any doubt in the mind of students About the value of having the federal government hold their loans. I think they learned that during the pandemic with The federal payment holiday and potential ongoing discussion of some limited federal loan forgiveness.

Speaker 2

So I think in many respects people have come to understand that there's actually a real cost of not having the government hold those federal loans And consolidating. Secondly, you mentioned it, interest rates are rising. That has both a customer Marketing, but I think it also has an underlying economic effect. For the customer, a lot of these hold fixed loans. And so therefore, the value proposition of refinancing is not as strong if the loans were originated during a lower rate environment.

Speaker 2

By the way, we see That in most sort of situations where people are thinking about refinancing their debts. And I think by the way it's also true that the margins on this product will get squeezed continue to get squeezed By the higher interest rate environment. And I think this was something that we viewed as a pretty marginal margin product historically. And you don't have to model or assume too much in terms of rate increases for that to get squeezed to the point where it makes Justifying the marketing and acquisition expenses sort of even harder. So I think we put all of that Together and I don't think we're anticipating that consolidations will be less the cost of our business, but I don't think we're sitting here believing that the dynamics We've seen historically are going to change.

Speaker 2

As it relates to the competitive question you asked, we don't really want to talk about specific competitors. Certainly, someone becoming a bank has certain advantages in terms of funding costs. It also has disadvantages in terms of regulatory costs and most importantly capital costs. And I think if you start to look at minimum capital requirements Against a low and shrinking margin loan category, it could very well be that the capital implications Are more important than the funding cost benefits of that kind of a change. So I don't think we're really viewing that As a major risk for us going forward.

Speaker 2

And I think it's worth noting of the players that we see engaged heavily in the refi space, Historically, most of them have been non banks, which I think lends credibility to the fact that it's just hard to make that capital calculation go around. So Hopefully, that gives you a few perspectives. But obviously, I think we're viewing at this very much as a sort of a steady as she goes type of outlook Okay. Now barring something changing in that environment.

Speaker 5

Okay. Does Steve have any sort of estimates what he's expecting for How much of your portfolio can be refi ed in 2022?

Speaker 3

Michael, I don't think we expect to see a whole lot more in To refi away than we have seen in 2021, it's been very steady. Seasonality to the numbers and it's been very steady.

Speaker 5

Okay. Thank you. Thank you, Paul.

Operator

Our next question comes from Mark DeVries with Barclays. Your line is open.

Speaker 6

Thank you. Can you talk a little bit about your assumptions around the 8% to 10% origination guidance this year? Are you expecting some of the headwinds you face this Cheer, we'll get resolved.

Speaker 2

Yes. It's John, Mark. Thanks for that. Look, I think, we have tried To incorporate into that all of the known things, we have not gotten over our skis in unknown or speculated things. So We've looked really long and hard at what happened in originations last fall.

Speaker 2

That's a really important barometer. And of course, We were glad to see some of the growth coming back into the market after the pandemic. We've of course looked at what we think is going to happen With the ending of the HEERF programs, we talked about this pretty extensively on the last call, but you'll remember there is a very large amount Of aid given for universities and colleges for direct financial assistance to students, That program, I think, by statute has to come to an end here, this spring. So we've absolutely sort of, assumed that. And then we've applied to that sort of the natural market growth rates and so forth that we would expect as part of any of our outlook development processes.

Speaker 2

What we've not included, just to say it explicitly, is if there is an unexpectedly large Snap back in enrollments that come from the end of the pandemic. So depending on what numbers you want to look at, We know that from the beginning to the end of the pandemic, enrollments in schools were down mid single digits Versus a pretty flat to slightly upward trajectory before that. We have assumed that enrollment growth continues from kind of where it's Fin, but we've not assumed that kind of a snapback because we've just not seen it yet in the numbers. So obviously, if enrollment Trends are very, very different than historical patterns coming out of the pandemic, then you might expect to see something different.

Speaker 6

Okay, got it. And then turning to buybacks, I mean, I think you indicated you expect to use about half of the authorization In 2022 and half next year. The question is, why not get a little bit more aggressive than that, just considering how well capitalized you are even after Thinking about the CECL phase in?

Speaker 2

Yes. Look, it's a great question. And I think if there's one thing I hope Steve and I have demonstrated to you is that we and our Board are really committed to the notion of capital allocation and capital return. I think that's pretty clearly evidenced by the fact that bought back 35% of the company in the last 18 months. But I think with that, what we really learned last year, Mark, during The tender offer is that the governor for us is really how quickly can we put capital to work.

Speaker 2

So just to remind you all, About a year ago, we put in place a $1,000,000,000 tender. It was what 42% subscribed. It led to a great year in terms share repurchase, but we recognize that there's an upper limit to how quickly we can return capital and have it be done efficiently. And by the way, don't forget, we love our loans and we want to keep as many of those on balance sheet as we can, while really being aggressive on capital return. And so I think we're trying to get that balance right.

Speaker 2

It's a little bit of science. It's a little bit of art. But I think you can rest assured if we see opportunities for us to be on the margin, more aggressive on capital return, I think We will always try to do that, of course, with an eye towards always making sure we're well capitalized in the eyes of our investors and regulators.

Speaker 6

Okay. Makes sense. Thank you.

Speaker 5

Yes.

Operator

Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is open.

Speaker 7

Great, thanks. I guess, I was hoping maybe You could talk about your views kind of on a multiyear basis as to the loan sales. I mean, how do you think about That $3,000,000,000 is it do you think about it over time as a percentage of originations that's coming down? Like how do you think about it, particularly In the comments, in terms of the levels of capital that you've got and are generating, just give us a framework as to how to think about that over the next couple of years.

Speaker 2

Yeah, Moshe happy to. And look again, let me sort of rewind the tape and remind everyone where we've been. Our real sort of mid term strategy here and remember the loan sales in my mind are just that A midterm strategy. We are not trying to become a long term originate and sell company, but I think we are really trying To both manage and take advantage of 2 different factors. Number 1 is the arbitrage disconnect between valuation and loan premiums.

Speaker 2

And then the second is obviously the capital implications of CECL phase in and the effect that that would have on our ability to return capital, all other things being equal. So for the next couple of 2, 3 years, we've got both of those things at play. And the first one will be at play for however long market conditions persist. I think what we have said pretty I think what we have said pretty clearly is we want to be as aggressive as we think we can And returning capital to shareholders, recognizing that these are really high quality loans And our long term strategy is to retain and hold most of them on balance sheet, while generating organically capital that we can return to investors in a very meaningful measure. So I think what we have said And a very meaningful measure.

Speaker 2

So I think what we have said historically is people should expect a flattish balance sheet. My guess is over the next couple of years, it will be flattish to slightly increasing balance sheet. So that suggests Probably a pretty consistent level of loan sales over the next few years as we've guided to for next year. But of course, each year, we will evaluate that based on market conditions. We'll evaluate that based on What we think is our ability to return capital efficiently and effectively in our broader longer term plan.

Speaker 2

Yes. I think we've set a pretty clear sort of precedent for how we're thinking about it and doing it. And I think until one of those two factors Changes, the arbitrage opportunity and or CECL basin, my guess is you should expect on average more of the same.

Speaker 7

Got it. Thanks. Just as a follow-up, The discussion on the competitive dynamic, I think it's probably fair to say that both of the major competitors that you See, and the loan consolidation market actually do need to put those loans over time into the capital markets even if they hold them on balance sheet Have a bank for 6 months. So it's I guess the question is, does it really change the dynamic that much As they need to do that, plus I think one of your competitors had been kind of targeting Private student loans during the moratorium. So I guess maybe can you kind of reflect on both of those points?

Speaker 3

Sure. So look Moshe, at the end of the day, yes, you're right. The asset backed market is where these players are going to fund them. One is retaining them on balance sheet, but the fact of the matter is the increase in basically The cost of medium term swaps has increased about 100 basis points over the last 6 or 8 months, And that has had a direct and offsetting impact on the NIM in those portfolios. And the gain on sale players are confronting the exact same impact measured In a different way, the comment about the player originating a whole bunch of private student loans just doesn't Through the refi market doesn't really add up based on what we've seen happen in our portfolio since we're probably 50% of the volume out there.

Speaker 3

I don't know where they would have gotten the other $4,500,000,000 $5,000,000,000 And volume, so that one doesn't add up. But yeah, really, I mean that the capital markets are the driver of What these players can ultimately get done at a reasonable margin or gain on sale.

Speaker 6

Okay. Thanks, Steve.

Operator

Our next question comes from Matthew Harwood with Jefferies. Your line is open.

Speaker 8

Hi, I'm on for John Hecht. First question is, with interest rates expected to rise this year, How many rate hikes are you putting in your model? And how would more or fewer hikes impact your expectations?

Speaker 3

So great question. And the answer to that is very simple. What we put into Our model is basically the forward curve. So what the market says is going to happen is what we put into our models. As you may recall from our interest rate sensitivity presentations in our 10 Qs, We are very well balanced.

Speaker 3

We didn't publish 1 this quarter because we didn't do the Q, but our position hasn't changed dramatically. I think based on the Q3 Q, if there was 100 basis point shock in market rates, our earnings at risk Increased very modestly. I think the number was 2%. So we are very well positioned for The current market expectations of a rise in interest rates, you read the headlines this morning, it seems like the market is expecting 5, rate hikes. I think that that's probably pretty much already priced into The swap and the government bond market, so something dramatic, I think, would have to happen from here in order for The 5 year slot market increased from 1.5% yield up to, I don't know, 1.75%, 2%.

Speaker 3

But we think we are Very well positioned for what comes down the pike in terms of interest rates.

Speaker 8

Okay, thanks. It does. As a follow-up, on your expectation for an 8% to 10% pickup in originations this year, Is that what the market expectation for growth is? Or are you accounting for some share gains as well? And if so, where are you gaining share?

Speaker 2

Yes. I think it is our base assumption is that we are going to Share player, obviously, there's not huge opportunities for us to increase share to a large, large amount. But I think what we have demonstrated over the last 6 quarters is pretty consistent and steady share gains during that time. I don't think we've announced Steve yet market share for the Q4 of last year, but up through the last quarter that we announced it. And look, I think we do that based on Really quite frankly good old fashioned hard work.

Speaker 2

We spend a lot of time thinking about application throughput and yield. Unique to the private student lending business, the certification process with schools is very important. So we spend a lot of time working with our school partners To make sure that loans are not getting caught up in their systems and that those loans are being certified and dispersed, We do a lot of work with students educating them on sort of what they can use their student loans for. Surprisingly, many students don't know that they can use their student loans for related travel and supplies and Fees and they end up putting those on more expensive credit cards. So there's opportunities for us to actually on the margin expand the pie slightly By crowding out other more expensive, less customer friendly sources of funding and financing.

Speaker 2

And I think I would just say, Matthew, there's no one silver bullet in any of that. What I think we've learned is You need to work all of those angles. And if you do that and you do that well, you can maintain your share and you can grow it modestly on the margin. And again, I'd look back over the last six quarters for our experience at donut.

Speaker 8

Great. Thanks for taking my questions. Yep.

Operator

There are no further questions. I'd like to turn the call back over to CEO, John Witter, for any closing remarks.

Speaker 2

Great. Well, thank you everyone for dialing in. Michelle, thank you for your help today. We appreciate your interest in Sallie Mae, obviously, Brian and the whole IR team are here and at your disposal to answer any questions. And we look forward to continuing the dialogue and talking again next Quarter, if not before.

Speaker 2

With that, Brian, I think I'll turn it back over to you for some last minute business. Great. Thank you, John. Thank you for your time and your questions today. A replay of this call and the presentation will be available on the Investors page at salliemay.com.

Speaker 1

If you have any further questions, feel free to contact me directly. This concludes today's call. Thank you.

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