SLM Corporation (SLM) Q4 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the 2021 Fourth Quarter Sallie Mae Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Brian Cronin, Vice President, Investor Relations. You may begin.

Thank you, Michelle. Good morning, and welcome to Sallie Mae’s Fourth Quarter and Year-End 2021 Earnings Call. It is my pleasure to be here today with Jon 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. 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-19 pandemic on our business, results of operations, financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures, we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2021. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I’ll now turn the call over to Jon.

Thank you, Brian, and Michelle. Good morning, everyone. Thank you for joining us to discuss Sallie Mae’s fourth quarter and full year 2021 results. I’m pleased to report on a successful year in 2021, discuss our plans for 2022, and announced 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 three key messages today. First, we delivered strong results in 2021. Second, we expect to continue execution against our strategic imperatives, and that will drive strong results in 2022. And three, 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. 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 fourth quarter 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 billion loan sale we executed in the quarter and the associated reserve release. These earnings are lower than the prior quarter, given two unique events that occurred in Q4 of last year. You may remember from our earnings call last January, we reduced our fourth quarter 2020 provision by $316.4 million 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 fourth quarter of 2021 were $737 million, which is up 18% over the fourth quarter of 2020. Consistent with our guidance from our last call, our full year originations ended at $5.4 billion, which is up 2% over 2020. Credit quality at origination was consistent with past years. Our cosigner rate for fourth quarter of 2021 was 83%, flat to the fourth quarter of 2020. And our average FICO score for the fourth quarter of 2021 was 749 versus 751 in the fourth quarter of 2020. In the fourth quarter of 2021, we continued our capital return strategy, repurchasing 14 million shares at an average price of $18.52. We have reduced the shares outstanding 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?

Thank you, Jon. 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 $1.23 billion, or 5.2% of our total student loan exposure, which under CECL, you may recall, includes the on-balance sheet portfolio plus the accrued interest receivable of $1.2 billion and unfunded loan commitments of $1.8 billion. 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. 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% and 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 two years declined from 3.6% last year to 2.8% in the fourth quarter of 2021. 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 in the reserve. The fourth quarter is our lowest in terms of origination volume and new loan commitments. Provision for new unfunded commitments totaled $13 million in the quarter. Loan sales are, of course, important. We sold just over $1 billion of loans in the quarter, which resulted in a $56 million reduction in our loan loss allowance. We booked a negative provision for loan losses of $15 million 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 reserve. 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 with 3.3% of loans and repayment. This is up from 2.4% in Q3 and 2.8% in the year ago quarter. Private Education Loans in 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 positive. 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 and December repay wave were loans that left school during the pandemic and just entered full P&I repayment. These loans are demonstrating higher roles to delinquency, and we expect 31-plus day delinquencies going forward throughout the course of 2021 – I’m sorry, 2022 to hover in the low three percentage area. Let’s take a look at charge-offs. Private Education Loan charge-offs in the fourth quarter were in line with the projections we made last quarter at 1.58% [ph] in Q4 compared to 1.29% in Q3 and 1.52% in the year ago quarter. Full year charge-offs were 1.3% in 2021 compared to 1.2% in 2020. Going forward, we expect Private Education Loan charge-offs to increase to about 2% in quarter one of 2022 and then decrease over the remainder of 2022, totaling 1.75% 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. 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. 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. We plan on selling $3 billion of loans in 2022. We’ll sell $1 billion in the first quarter and $2 billion in the third quarter of the year. So, let’s put this into perspective. Our loan portfolio was just under 50% fixed rate and just over 50% floating rate. We sell representative samples of our portfolio when we conduct loan sales. 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 the 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 pretax, but post provision revenue in 2022. 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. Fourth quarter noninterest expenses were $125 million compared to $141 million in our seasonally high third quarter, and $124 million 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%. 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% liquidity as measured against our total assets. At the end of the fourth quarter, total risk-based capital was 14.5%, and common equity Tier 1 capital was 14.1%. 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, Jon.

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 seen, last night, we announced that we signed a definitive agreement to acquire Nitro College. This acquisition is an opportunity that both enhances our core business and creates potential new future opportunities. We have partnered with Nitro College for nearly five 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 million, or disbursed $19 million. And in 2021, that grew to $60 million. 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. 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 one, we will have a direct relationship with seven times the number of college-bound high school seniors than we have today. Similarly, we estimate that we will have relationships with 1.7 times the number of enrolled college students. And lastly, we estimate that we will have a direct relationship with two times the number of parents of college-age students compared to today. 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. We also expect that this platform will allow us to more efficiently and effectively compete in other product areas relevant to students and their parents. 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 first quarter, 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-GAAP core earnings per share will be between $2.80 and $3 a share. We are expecting Private Education Loan origination growth of 8% to 10%. We expect our noninterest expenses for the first year – full year 2021 to be between $555 million and $565 million. And we expect our total loan portfolio net charge-offs will be between $255 million and $275 million. In addition, today, we are announcing a new share repurchase authority to buy up to $1.25 billion of common stock over the next two years. 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 buy back our stock over the next two 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 Instructions] Our first question comes from Sanjay Sakhrani with KBW. Your line is open.

Thanks, good morning and good quarter. 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. It’s 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? And then at current valuations, what’s the threshold of that premium rate where it makes sense and where it doesn’t today. Thanks.

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. 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. 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 eight 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. 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 asset class. Did I leave anything out, Jon?

Yes. 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 this before, we are really looking at this as a great strategy to take advantage of this arbitrage between [indiscernible] loan premiums and obviously, sort of multiple valuation. 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. But I think what we’ve said very clearly on the last couple of calls is we don’t believe we are close to entering that yellow zone. And so something would have to change pretty dramatically from here in terms of valuation or premium for us to believe that, that arbitrage didn’t make sense.

Great. Thank you. And one follow-up question, Jon, maybe for you on the Nitro College acquisition. It seems like a good complementary product for you guys. Just one on their revenues. Obviously, a lot of their revenues come from marketplace lender referrals, right? And that might be impacted if Sallie Mae is behind them going forward. So, how should we think about the accretion from this acquisition if those dry up? Thanks.

Yes. Look, it’s a great question, Sanjay. First of all, I think it’s 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 first peak season. 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 a 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. We know there are some very direct per 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 of 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. 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.

Great, thank you very much.

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

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 close, and how much is more general credit normalization. You also mentioned that repayment wave impact. And also, does it seem safe to say that the NCOs could come down meaningfully in 2023, barring any changes in the economy?

Sure. Happy to discuss all of that, Michael. So look, there isn’t an awful lot of expected 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 user excess cash to pay down credit card balances, mortgage balances, auto balances, et cetera. 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 was probably roughly half of the increase in delinquency that we saw from third quarter to fourth quarter, 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 first quarter 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, and 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. 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 and 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, good about what we’re seeing.

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 holidays supposedly ending in May. We also got a major student loan refi competitor getting approved for the bank charter, which could potentially make them more dangerous, but rates are moving higher. So, I wonder to see if you could share your perspective on the student loan refi market and maybe see if you have any sort of estimate how much of your portfolio could be refi-ed in 2022.

Yes. Michael, it’s Jon. 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 a 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 to 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-cannibalization activities to make it both a good activity for customers and a good activity for shareholders. To me, the real question is, has anything dramatically 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. One, 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. 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 the lower rate environment. 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. 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. 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 nonbanks, 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, barring something changing in that environment.

Okay. Does Steve have any sort of estimates what he’s expecting for – how much of your portfolio to be refi-ed in 2022?

Michael, I don’t think we expect to see a whole lot more in 2022 refi rate than we have seen in 2021. It’s been very steady. The seasonality to the numbers and it’s been very steady.

Okay, thank you. Thanks for your color.

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

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 faced this year will get resolved?

Yes. It’s Jon, 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 SKUs in unknown or speculated things. So, we’ve looked really long and hard at what happened in originations last fall. 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. What we’ve not included just to say it explicitly is, if there is an unexpectedly large snapback in enrollment 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 been, 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 than you might expect to see something different.

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 kind of thinking about the CECL phase-in?

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 we’ve 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. So just to remind you all. About a year ago, we put in place a $1 billion tender. It was what 42% subscribed. It led to a great year in terms of 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. 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’ve demonstrated 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.

Okay, make sense. Thank you.

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

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 billion, is it a – 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. Can you just give us a framework as how to think about that over the next couple of years?

Yes. Moshe, happy to. And look, again, let me sort of rewind the tape and remind everyone where we’ve been. Our real sort of midterm 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 two different factors. Number one is the arbitrage disconnect between valuation and loan premiums. 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 two, three 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 clearly is we want to be as aggressive as we think we can in 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 historically is people should expect a flat-ish 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. So, 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 phase-in, my guess is you should expect, on average, more of the same.

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 in 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 of a bank for six 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 could you kind of reflect on both of those points.

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 six or eight 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 a player of 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, I don’t know where they would have gotten the other $4.5 billion or $5 billion in volume. So that one doesn’t add up. But yes, really, I mean the capital markets are the driver of what these players can ultimately get done at a reasonable margin or gain on sale.

Okay. Thanks, Steve.

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

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?

It’s a 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. We didn’t publish one this quarter because it went into the queue, but our position hasn’t changed dramatically. I think based on the third quarter queue, if there was a 100 basis point shock in market rates, our earnings at risk increase 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 five 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 five year spot market increase from 1.5% yield up to, I don’t know, 1.75% [ph] quarters 2%. But we think we are very well positioned for what comes down the hike in terms of interest rates. I hope it helps.

It does. As a follow-up, 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?

Yes. I think it is – so our base assumption is that we are going to retain share and then we look for opportunities where we can modestly grow it. As a 50% plus market share player, obviously, there’s not huge opportunities for us to increase share to a large amount. But I think what we have demonstrated over the last six quarters is pretty consistent and steady share gains during that time. I don’t think we’ve announced Steve yet market share for the fourth quarter of last year, but up to the last quarter that we announced it. And look, I think we do that based on, really, quite frankly, good old-fashioned hard work. 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. 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 in doing that.

Great, thanks for taking my questions.

Yep.

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

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. With that, Brian, I think I’ll turn it back over to you for some last-minute business.

Great. Thank you, Jon, and 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 salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today’s call. Thank you.

This concludes the program. You may now disconnect. Everyone, have a great day.