Hello. Thank you for standing by, and welcome to Sallie Mae Q1 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Melissa Bronaugh, you may begin..

Thank you, Towanda. Good morning, and welcome to Sallie Mae's First Quarter 2023 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 the call up for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This can be due to a variety of factors.

Listeners should refer to the discussion of those factors on 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 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 Form 10-Q for the quarter ended March 31, 2023. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you.

And now I'll turn the call over to Jon..

Thank you, Melissa and Towanda. Good morning, everyone. Thank you for joining us today to discuss Sallie Mae's first quarter 2023 results. I'm pleased to report on a successful quarter and progress towards our 2023 goals. I hope you will take away three key messages today. First, we delivered strong results in the quarter.

Second, our balance sheet and liquidity position are solid, despite disruption in the larger banking industry. And third, we believe we have momentum for continued positive performance throughout the rest of the year. Let's begin with the quarter's results.

GAAP diluted EPS in the first quarter of 2023 was $0.47 per share as compared to $0.45 in the year ago quarter. Our results for the first quarter were driven by a combination of strong business performance as well as improvements in credit trends.

Private education loan originations for the first quarter of 2023 were $2.4 billion, which is up 12% over the first quarter of 2022. This quarter marked our highest level of originations in the company's history. Q1 freshman originations were also the highest in the company's history. -- with 27% of originations coming from this group of students.

As we have mentioned previously, under class originations have higher lifetime value to us due to greater serialization opportunity. So this trend is especially encouraging for future peak seasons. This is a strong start to 2023 and is tracking better than our plan for the year.

We are also happy to communicate that for the full year 2022, we were able to increase our market share by 90 basis points over full year of 2021. Our market share is 58% of the full private student lending marketplace. Credit quality of originations was consistent with past years.

Our cosigner rate for the first quarter of 2023 was 89% versus 88% in the first quarter of 2022. Average FICO score for the first quarter of 2023 was 746 versus 748 in the first quarter of 2022. We are also encouraged about the improvements we have seen in credit trends for the first quarter of 2023.

Net private loan charge-offs in Q1 were $83 million, representing 2.11% of average loans and repayment. This is down 104 basis points from the fourth quarter of '22, and ahead's of where we expected, but still elevated compared to 1.89% in the year ago quarter.

During our fourth quarter 2022 earnings call, I mentioned that we were already seeing improvements in delinquency and default trends in our January results. Those improvements have continued into February and March.

For Q1 of 2023, we saw the lowest entry rate into delinquency since the first quarter of 2022 and in March of 2023, the lowest roll to default rate in over a year. This improvement is driven by a number of factors. We believe we are seeing the continued normalization of the transient factors we discussed last year.

We also believe we are starting to see the benefits of operational and strategic changes we made starting last year. You may also remember that we discussed seeing elevated levels of delinquency and charge-offs in narrow pockets of our portfolio toward the end of '22.

We have continued to closely monitor the performance of those loans over the quarter and have not seen similar elevated levels expand into other parts of our portfolio. With that said, we acknowledge that 3 months of improved performance does not yet constitute a sustained trend.

Additionally, the economic environment is uncertain and general economic worsening is still a possibility. We will continue to monitor these trends and adjust our expectations around credit normalization for the full year as appropriate.

Following the recent turbulence in the banking sector, we thought it prudent to provide additional commentary about funding and liquidity. Despite the disruption in the larger banking industry, our balance sheet and liquidity position remains strong. We ended the first quarter of 2020 with liquidity of 19.7% of total assets.

Marketable securities make up a portion of our approximately $6 billion liquidity portfolio and at the end of Q1 of 2023 and -- our unrealized loss on that portfolio totaled $155 million. In the unlikely event we had to sell this portfolio and recognize losses. We would incur a regulatory capital charge of approximately 50 basis points.

Deposits have been very stable for Sallie Mae. Balances at the end of Q1 of 2023 were slightly higher than at the end of both the fourth quarter of 2022 and the first quarter of 2022. At the end of Q1 2023, our uninsured deposits made up only 2% of our deposit base.

Additionally, during the quarter, we were able to execute an ABS funding transaction at spreads that came in about 23 basis points better than our previous transaction completed in 2022.

Our treasury team continues to effectively manage interest rate risk and has grown our net interest margin from 5.29% in the first quarter of '22 to 5.7% in Q1 of 2023. In February, we stated that we expected to sell $3 billion of loans in 2023 with sales likely to take place in the second and third quarters.

We are pleased to share that we have agreed to pricing terms for the sale of approximately $2 billion of private education loans. So we are able to discuss the transaction. We expect the transaction to close in early May of 2023.

Given general bank valuation trends, I'm confident our investors will agree that completing a larger sale earlier in the year is the prudent thing to do. We were able to reach this preliminary agreement with our buyer had prices consistent with the assumptions in our 2023 guidance.

Our plan is to use the gain in capital release from the sale to buy back stock at current levels to create shareholder value and minimize the impact of more capital on our NIM. We expect to do so while maintaining prudent capital and liquidity levels, recognizing the uncertain macroeconomic environment.

Our assets continue to be in demand from a deep pool of well-informed loan buyers. As such, we expect to execute future loan sales at attractive premiums. We expect to sell an additional $1 billion of loans this year likely in the third quarter. Steve will now take you through some additional financial highlights of the quarter.

Steve?.

Thank you, John, and good morning, everyone. I'll continue this morning's discussion with a detailed look at the drivers of our loan loss allowance, a discussion of some key performance metrics finally, our strong liquidity and capital position.

The private education loan reserve, including a reserve for unfunded commitments, was $1.5 billion or 6.3% of our total private education loan exposure which under CECL includes the on-balance sheet portfolio plus the accrued interest receivable of $1.3 billion and unfunded loan commitments of another $684 million.

Our reserve at 6.3% of our portfolio is unchanged from the prior quarter. We incorporate several inputs that are subject to change from quarter-to-quarter when preparing our allowance for loan losses. These include CECL model inputs and overlays deemed necessary by management.

Economic forecasts and weightings drive quarter-to-quarter movement in the allowance in the current and year-ago quarters, we used Moody's base S1 and S3 forecast slated 40%, 30% and 30%, respectively. We expect to use this mix going forward, except during extraordinary periods of uncertainty.

Despite concerns about the health of the economy, the forecast provided by Moody's are remarkably stable. As an example, a weighted average forecast for college graduate unemployment is virtually unchanged from the prior quarter at 2.64%.

Prepay speeds in Q1 '23 were essentially unchanged compared to Q4 '22, resulting in no meaningful reserve requirement changes. However, prepaid speeds were lower than the year ago quarter, which is a contributor to the year-over-year change in the reserve.

We continue to view slower prepay speeds as a real positive as our assets are expected to stay on our books for longer. While the first quarter is a large disbursement quarter for students funding the spring semester, -- many of these loans were reserved for at the time of commitment in the fall of '22.

Provision for new unfunded commitments totaled $56 million in the quarter. Our total provision for loan losses booked on our income statement this quarter was $114 million. As Jon mentioned, we saw improvements in many of our credit metrics this quarter. So I wanted to spend some time looking at these in more detail.

They can be found in our investor presentation on Page 7. Private education loans delinquent 30-plus days with 3.4% of loans in repayment, down from 3.77% in Q4 '22, as well as from 3.5% in the year ago quarter. We do expect 30-plus day delinquencies to continue to improve compared to the prior year but remain in the mid-3% range for 2023.

Private education loans in forbearance were 1.4% at the end of the quarter, a decrease from 1.8% at the end of Q4 '22 and unchanged from the year ago quarter.

We do believe we are appropriately staffed across all of our collection buckets, and we have seen agent effectiveness improve as agent tenure increases as evidenced by an increase in loss mitigation program usage, which is a big positive.

Net charge-offs for the portfolio were 2.11% in the first quarter compared to 3.15% in Q4 '22 and 1.89% in the year ago quarter. As Jon mentioned earlier, while we are encouraged by this sharp decline we will look for sustained improvement before we adjust our outlook on net charge-offs and the reserve for the full year of 2023.

Jon has already reported on our solid NIM performance. The increase to NIM is the result of our conservative funding approach, the predictable asset performance and consistent origination quality.

Because we have raised long-term funding through asset-backed securities and brokered deposits, the amount of funding we are required to raise each year is very manageable. We also continue to benefit of a rising rate environment because of our interest-earning assets reprice faster than our cost of funds.

The interest rate sensitivity tables in our 10-Q measure earnings over a 2-year period and while we remain asset sensitive over the first full year period, we revert to a slightly liability-sensitive position in the second full year period. This is a static analysis, however, and assumes no additional loan sales.

If we continue our current loan sales strategy, which we expect to do, we remain asset sensitive. At this stage of the rate cycle, we are comfortable with position and could easily hedge it with derivatives if our outlook or strategy changes.

Lastly, NIM can be seasonal quarter-over-quarter and is heavily influenced by liquidity builds associated with peak season disbursements, and we expect full year 2023 NIM to be comparable to but slightly higher than full year 2022.

Regarding the loan sale that we expect to close in May, we did have new bidders included in the process and expect additional participants in future loan sales. This demonstrates the attractiveness of our assets even in the most volatile environments.

Income tax expense for the first quarter was $37 million, representing an effective tax rate of 24%, which is slightly below the expected annual run rate of 25%. Consistent with guidance, first quarter operating expenses were $155 million, elevated from both Q4 '22 at $138 million and $132 million in the year ago quarter.

$4.1 million of the year-over-year increase was driven by onetime reorganizational costs. Roughly $6 million of the increase over the year ago period relates to higher FDIC assessment fees. We do expect our FDIC assessment fees to be higher in '23 than in '22.

This increase is due partially to a benefit we received in '22 related to the late application of a change in TDR accounting that made the '22 assessment lower and partially driven by changes to industry and company-specific factors. We consider this part of the cost of having access to high quality, low cost and stable funding.

Volume increases in our originations, servicing and collections operations account for $5.5 million of the increase in operating expenses over the year ago quarter.

The remaining $7.4 million increase relates to both our absorption of the effects of the current inflationary environment as well as the increase in our staffing levels over where they were in Q1 2022, and this includes the costs related to our Nitro acquisition, which occurred in early March of 2022.

Finally, our liquidity and capital positions are strong. As John referenced, we ended the quarter with liquidity of 19.7% of total assets substantially higher than the year ago liquidity of 17.2%.

And at the end of the first quarter, total risk-based capital was 13.3%, common equity Tier 1 12% and GAAP equity plus loan loss reserves over risk-weighted assets, an important measure post CECL was a very strong 15.7%.

As we are phasing in the CECL impact to regulatory capital at the beginning of each year, we absorbed 25% of the adjusted transition amount, which, of course, impacts our capital ratios. We have now phased in 50% of the transition with the remaining 50% to be phased in, in January of '24 and '25.

In closing, we believe we are well positioned to grow our business and return capital to shareholders going forward. I'll now turn the call back to Jon..

Thanks, Dave. I know if you agree that we executed well in the first quarter and share my belief that we are well positioned to continue that trend throughout 2023.

We are excited about the loan sale that is pending settlement and are eager to put our loan sale share buyback arbitrage to work in the second quarter, while our stock is trading at what we believe to be a significant discount.

In addition to our origination growth in the first quarter, Steve also mentioned the continuation of slower prepayment speeds, both of which are positive for balance sheet growth and interest income as we look toward the second quarter of the year. We will continue to focus on operational execution, expense management and NIM to drive results.

Let me conclude with the discussion of 2023 guidance. As I mentioned earlier, we are encouraged by both the successful Q1 origination season as well as the positive trends we are seeing with credit performance. We are optimistic that these things will lead to a successful 2023.

However, just as we were cautious about building our reserve in the fourth quarter of '22, we remain cautious in our guide for the year. Thus, we are reaffirming the 2023 guidance that we communicated on our last earnings call for all key metrics. With that, Steve, let's open up the call for some questions. Thank you..

[Operator Instructions]. Our first question comes from the line of Michael Kaye with Wells Fargo..

On the loan sale, I know you plan to sell $3 billion, but I just wanted to check on the openness to selling more. It sounds like there's pretty good demand and given where the stock price is I was just wondering what's the appetite to do potentially more than that..

Michael, it's Jon, and thanks for your question. Our plan at this point contemplates an additional $1 billion of loan sales. But I think if there's one thing that hopefully we've demonstrated over the last couple of years, is our belief in the sort of the power of capital allocation and the arbitrage strategy that we have underway.

So every year, we continue to assess sort of the depth of the market, the premium, sort of the state of our arbitrage grid. And I think you can have confidence that if we see an opportunity to create significant shareholder value by adjusting our plan we will look and our Board will look favorably on doing that.

But again, at this point, what we have in our plan is an additional $1 billion..

And it was a really strong quarter, outperformance on all your outlook guidance. I was surprised you left the guidance unchanged, particularly on the credit outperformance even originations what's holding you back from increasing the guidance? I know it's early in the year, but is it more conservatism early on? Is it more concerns about the macro..

Michael, I think it's a good question. It's obviously something we debated extensively internally. I think our view is exactly what you just said. It is early in the year.

The economic environment is uncertain, and there's obviously the potential for that to have an impact on credit and as I think you and many others who have followed us for a long time know and understand originations are heavily influenced by peak season, which has less to have -- which has yet to happen.

So while I think we are very encouraged and very happy with what we are seeing we just felt it prudent to see a little bit more sustained performance before we updated guidance..

Our next question comes from the line of Moshe Orenbuch with Credit Suisse..

Sorry about that.

Can you hear me now?.

We can hear you Moshe.

How are you?.

Great. All right. So you had mentioned kind of 12% origination growth in kind of the highest level that you've seen the high freshman origination there are some players that are out there kind of trying to enter, I can think of a couple some of which have long histories in student lending that have been entering the in-school market.

Could you talk a little bit about what drove the success now and how we should think about that for the balance of the year?.

Sure, Moshe. Happy to. And obviously, we want to be a little bit sensitive in that we have investors on the call, but I'm sure we also have some competitors on the call as well.

I think we have outlined for the last couple of years, the investments that we have been making in our marketing and originations machine and whether that's significant investments in technology, whether that's significant investments in data and analytics and whether -- or whether that is significant investments in expanding sort of the channels and the effectiveness of the channels that we use, and I would look to sort of both partnerships, but I would also look to things like our acquisition of Nitro.

I think we have a basis and a belief that there are real tangible things that we can do to both increase the effectiveness of our marketing through those levers. But I think also importantly, to do so in a way that gives us greater control over cost and inflation over time.

So we are encouraged by both the trends that we are seeing in volumes and in the composition of those volumes, but we're also encouraged by the trends that we're seeing in our cost to acquire metrics, especially in the general inflationary environment right now that so many digital marketers are experiencing.

So I think it is those things that are really driving sort of the results that we are seeing. In addition to the things that we've always had, which are just a really strong brand, great relationships with schools and the like, all of which we continue to invest heavily in.

At this point, as I said in my remarks, we are slightly ahead of our plan for the year. I would certainly view originations growth as a potential opportunity for us going forward. But as I said a few minutes ago to Michael, I think so much of that is driven by peak season.

We want to see a little bit how the second quarter shapes out in the early sort of a run-up to peak is looking before we changed guidance for the year..

And recognizing that you didn't want to say anything about the premium that you're going to get on the loan sale. But could you talk about how much capital is freed up in total kind of taking into account the capital on the loans, the after-tax reserve and the premium kind of together. Give us some sense for that, Steve..

Yes, sure, Moshe. So as you can see, we have 13% total risk-based capital on the balance sheet. I think that gives you a pretty good indication of how much capital we will free up when we see these loans from our balance sheet. We had a 6.3% loan loss reserve, and we sell representative samples of our pool.

So that gives you a pretty good indication of a considerable amount of reserve that we will free up with this loan sale. And look, regarding the premium, I think Jon gave you a very good indication by saying that it's within the range of what we assumed when we put together our guidance.

So it's a very nice and respectable premium that we earned on this loan sale. So you can expect us to be back in the market to buy back stock in a reasonable fashion in the near term..

And Steve touch quickly on the tax adjustment of that just for anyone who's doing the math for the first time..

Yes, sure. So there's no tax impact on the capital release. And of course, the provision goes through the income statement. So that will be tax effective..

As with the premium..

As with the premium. Yeah..

Our next question comes from the line of Sanjay Sakhrani with KBW..

Maybe first question on the loan sale. Obviously, very positive. Steve, could you just talk about how the prospects of that sale sort of migrated across the quarter? Because I'm sure it wasn't even because of all the banking stuff that was happening and obviously the rate movements.

But I'm just curious if at any point during the quarter, there was any risk in terms of not being able to do the sale..

I mean, look, Sanjay, it was a very incredibly volatile period that we were operating in. Base rates are a very important part of the premium since 55% of these loans are a fixed rate product. But we started the process shortly after we released earnings, and the process typically takes 4 to 6 weeks.

As I've said many times in the past, the buyers of these loans now understand the performance of the credit and the cash flows of these portfolios very well. And we debated whether or not internally, we should hedge the fixed rate component of the process to give ourselves a little bit of insurance.

We chose not to, and the process worked out very well for us. And rates continue to be favorable for future loan sales, and John and I probably discuss daily whether or not we should hedge that component of the process. And that's probably the biggest wildcard.

Credit is a pretty well-known factor and cash flows are pretty well understood by buyers as well..

Sanjay, I would also just add, and I think Steve said it exactly right. But if you look back over now the 3 years that I've been here and we've been executing the strategy for about that same amount of time.

My recollection is there's been a couple of quarters before this, where we likewise saw some really industry-driven or economic-driven sort of volatility in the marketplace. And I think in each one of those quarters, there were always questions of, could we get the loan sale done.

And certainly, there may come a day, and there may come an economic situation where the volatility is so great that they can't happen. So I'm certainly not guaranteeing there could never be a case where that happens.

But I will tell you, I have been impressed by sort of the resilience of these markets even during quarters where there was a lot of things happening more broadly and globally. And I think this quarter, you always worry when you're having some of the kinds of factors that we're seeing.

But I think at the end of the day, the interest sort of may have taken a day or 2 off, but rebounded very quickly exactly as we have seen during other periods of volatility..

It's quite positive. Steve, I think I also heard -- you got -- you mentioned it seems like the operational issues seem to be resolving themselves in the tenor of the average collector has improved. Are there any more milestones that we need to be thinking about? And have every -- I assume everything has stabilized there..

Yes, Sanjay, I'll take that one. Look, I think as we said on the last call, we took the performance in the fourth quarter as a real opportunity for us to sort of step back and challenge ourselves in an area that had historically worked very well and very predictably for our company. We have implemented a bunch of changes.

But quite frankly, there are, I think, additional ideas and changes that the team is working on that we think will make us both more effective and able to take just better care of our customers and continue to do that in a really cost-effective and attractive way. And so I think you should expect that we will continue to work at this.

And it's always hard to talk about long-term charge-off trends because they're so reliant on the broader economic sort of environment. But I think we view this as a good step, a good first step. But hopefully, there's more to come..

Our next question comes from the line of Rick Shane with JPMorgan..

Look, one of the things that obviously stands out in the quarter is the NCO rate. And when we look at recoveries, strong recoveries contributed to that. You've talked about operational changes.

I'm curious when you look at the improvement in recoveries, was that a function of exclusively of the operational changes -- or were there increased sales of charge-off loans?.

No, Rick, there was nothing unusual going on in terms of recoveries and our process regarding loan sales is literally to sell half as they charge off and then sell the remainder 6 months after we worked the remainder for 6 months and then sell what is left.

If anything, I think there's probably room for recoveries to improve in future quarters as we have had significant charge-offs in the back end of 2022.

I think the big improvement in performance is related to the fact that the transitory effects that we spend a considerable amount of time talking about in the '22 results have worked their way through.

And just as a reminder, that was the [indiscernible] population, which has pretty much completely worked its way through the portfolio, and we think that there was an acceleration of defaults from the changes in our forbearance policies. And I think a lot of that acceleration has now run its scores. We can't validate that 100%.

And look, our collection unit improve their performance sharply and a shout out to that for helping us improve our performance here.

Anything you'd like to add to that, Jon?.

Our next question comes from the line of Jeff Adelson with Morgan Stanley..

Understood that you guys have yet to close on this $2 billion of loans being sold in early May. But I guess just been trying to think about how this compares to the last year, you did in October.

Can you maybe talk a little bit about some of the puts and takes of what your buyers liked about this deal versus last year? What they didn't like? Just trying to get a sense of how that compares to the recent deal you did..

Sure, Jeff. I'll try and take a crack at that. But like we literally sell representative of pools of our assets. So what we put in front of buyers from process to process is essentially the same pool of loans. The field of buyers continues to grow and evolve and I don't think there were any pros or cons different to the sale from any previous sale.

I think what we are seeing quite simply is a population of potential buyers that are gaining a more thorough understanding of the asset class. And we'll look forward to continue to participate each time that we come to the market. I mean the credit performance is basically the same.

The cash flows are all the same and the one wildcard as we discussed earlier in the conversation is the underlying interest rate environment. And that's just the fact of the marketplace that we're operating..

Thanks, Steve, just to answer or to finish that, I think the interest rate environment was pretty close to where it was at the last sale, maybe slightly higher.

Is that correct?.

It was almost identical by the time we close the sale..

And then you saw a really nice result for originations this quarter, obviously, with some of the freshman benefit coming through. Just wanted to keen a little bit on the Nitro -- the Nitro benefit you're getting there.

Can you help us understand maybe how much of your flow is coming through that channel at this point? And maybe what your expectations are for that going forward?.

Yes, happy to take that. And unfortunately, one, I don't think we've disclosed the specific volumes that come through there. And two, Nitro is becoming so integrated with the rest of our digital marketing that it is oftentimes hard in a sort of a multi-touch world to know what was impacted by Nitro versus what was not.

But I think I'll offer a couple of thoughts. Number one, I think what Nitro does a great job of is establishing relationships with customers customer-initiated high-quality, trust-based relationships before they are necessarily looking for a private student level.

And that allows us to cultivate those relationships that allows us to build trust and affinity to the brand and it allows us through insights that we have to anticipate when a customer might start to look for a private student loan and to be there kind of at the right time with the right offer and communicating them with them in the right way.

So the strategic value of that customer acquisition machine, I think, is very powerful for us. The reason it's hard to separate is sometimes that call to action is branded Nitro. Sometimes that call to action is branded Sallie Mae. But at the end of the day, it's all driven by the positive customer acquisitions that comes through.

I think you should expect even beyond Nitro for us to continue to invest in that kind of sort of content generated acquisition models going forward. We think it's highly effective. We think it is really attractive from a cost and CTA perspective.

And we think it allows us to own and to establish customer relationships much earlier in the life cycle, which means we're not having to compete as much in Google auctions and the like to get access to customers that we would want to talk to. So we like all of that strategically.

I think what I would feel comfortable saying is the Nitro deal has surpassed our expectations from the deal economics that we set out a year ago and we are very happy with the performance of the overall deal..

[Operator Instructions]. Our next question comes from the line of Mark DeVries with Barclays..

Jon, I think you mentioned that you saw a continuation of the improved delinquency trends from January and February and March.

Any update you can provide us on what you've seen so far in April?.

No. We have not disclosed anything for April. And honestly, when you look at the normal patterns of operations, they are as is the case in many collection shops, very back-end loaded to the end of the month. So anything that we gave you, even with just a few short days left in the month be far from a complete picture.

So I would point you to we do issue data quarterly and monthly on credit trends. We think those tend to be pretty good rough indicators of where we're going. And so I would point anyone who's interested to those releases, which we do over time..

Got it. And then, Steve, I think you mentioned that you remain asset sensitive can think about hedging that.

Can you talk a little bit more about your thinking around that given that the Fed now appears to be kind of nearing the end of their tightening cycle?.

Sure. Great question, Mark. And let me tell you what our approach is. And our approach is essentially to lock in a steady net interest margin on our portfolio. So did we think interest rates were going to rise? Yes, we did, but that wasn't the primary motivation for us laying in more fixed rate funding.

The primary motivation for that was the fact that the component of our loans that borrowers that were choosing fixed rates continued to increase. So I talk about the asset sensitivity or liability sensitivity, it kind of tends to go between plus 2%, minus 2%.

So we aren't really making any interest rate bets, but just trying to maintain a good steady spread on the portfolio. But to your point, we may or may not be at the end of a interest rate cycle. And if it does look like rates are going to continue to decline, we might very well but -- I'm sorry, rate does look like rates are going to continue to rise.

We would put on some forward starting pay fixed swaps, for example. But right now, our exposures are pretty limited, and there's not a lot to do prior to the next peak lending season, which is nice to be in a seasonal business like this. So we get to watch how things unfold through the summer here.

But our primary goal is to lock in a good, solid, consistent net interest margin and not to play what the Fed is going to do it..

And if I could just squeeze in one last question.

I was hoping to get a little bit of color on the nature of the buyers for your loans? And what I'm trying to understand is -- like how sensitive are they to volatility in funding markets? Or are these like insurance companies who just hold them as whole loans and don't care what's going on in the ABS markets? Or do you have buyers you really do and really had to hit pause as they were thinking about the deal in the first quarter?.

So the end buyers of basically the residuals and the more subordinated classes of what ends up being of the portfolios that end up being securitized or very large credit funds and to your point, insurance funds. And look, they are absolutely sensitive to the rises and rising and falling interest rates and they price their bids accordingly.

So that is a fact of life. It's something that we focus on here, like I mentioned earlier, John and I continue to review whether or not we should be hedging future loan sales, and we absolutely have the ability to do that. But we are very much susceptible to the interest rate environment..

Our next question comes from the line of John Hecht with Jefferies..

Actually, Mark just asked my -- one of my questions just a moment ago on the characteristics of the buyers. But I guess I have a couple of marginal questions. Number one, forgive me if you had comments on this. I'm juggling a few different earnings this morning.

But any thoughts on kind of the pain -- the kind of the clipping of the payments moratorium and how that affects second half demand and broadly speaking, credit quality.

And then the second question would be if you can kind of -- obviously, positive commentary with NIM expansion year-over-year, but maybe deconstruct how you think deposit betas trend and where kind of the yields go over the course of the year as well..

Yes, John, I'll take the first question. I'll turn it over to Steve for the second question. First of all, I would just remind everybody that post COVID -- we worked very hard to end our disaster forbearance program.

We worked very hard with our customers to encourage them back into good, regular payment sort of patterns and habits -- and so that is a track record that has now been, I think, well established over the last 2, 2.5-plus years, even while the federal loan pause has been in place and folks have had a different federal experience.

And so I think through that lens, we feel great about the payment habits of our customers, we continue to feel great about things like the refreshed FICO scores of our customers and the general sort of quality of our underwriting and credit administration practices.

With that said, I think both of the major sort of federal policies being discussed today would have a net positive on sort of repayment and kind of creditworthiness. Certainly, any type of loan forgiveness has a, on average net impact on our customers, the majority of whom also have federal loans.

And certainly, anything that moves to income-based repayment would have a sort of a strong positive credit impact on us. We've done some work and have talked, John, in the past that we think the sort of restarting of federal loan payments is probably sort of a modest detractor.

But we don't see it as having a really material impact on creditworthiness for sort of the things and the reasons I've talked about. And we certainly don't think it has any type of a long-term impact on originations. We think the reasons customers seek out us are very different from why they seek out a federal loan.

We think they're very complementary and think they will continue to be complementary in the longer term. John, I would add just one other bonus topic. I think it is our hope that all of the discussion around the federal program really shines a bright light on the fact that there are real issues with the Plus program.

And I think we are starting to see evidence in the sort of political dialogue that there is an appreciation on both sides of the aisle that there is a need for smart and sensible reform to make sure that students both have access to and ability to complete college, but that the federal program does not put families in an untenable position from a debt load perspective.

And we think longer term, any sensible reform to the Plus programs almost certainly has a positive impact on our business, and we look forward to being productive and constructive part of those dialogues..

Yes. Regarding our deposit betas, -- thank you for the question. So look, our bank is in a very strong position. I'd like to repeat that we ended 2022 with 97% insured deposits. That's now up to 98% insured deposits based on our disclosures.

You can see that we had just $600 million of uninsured deposits, and that was largely centered in our retail/Internet deposits, just $200 million of those deposits left over the course of a very interesting quarter regarding the banking industry.

I guess we should take that as a compliment that people feel so strongly about the strength of Sallie Mae Bank. And by the way, in the retail deposit market, Sallie Mae Bank does have a very strong reputation. The fact of the matter is the vast majority of our deposits are either term or the pricing is locked in.

And that leaves just about $6 billion of our retail deposits that are market-based money market deposits. We have seen extreme stability on that front even through the months of March and into April.

Our deposit betas are continuing to run sort of in the low percent-ish sort of ZIP code throughout the Fed rate rising cycle even through the most recent one. And we have -- we're not in the big fundraising season right now and our pricing is not very aggressive and with the pack of competitors that we compete with.

And what we're seeing is inflows of deposits into the bank over the course of April. And we feel very good about the position that we're in and expect that we already commented on NIM earlier in the conversation. But I guess you missed it because you're on the other call, I'll repeat that our net interest margin tends to be seasonal.

It declines during periods in liquidity for our big disbursement periods and then rises after that, we expect our net interest margin to come in for the full year, slightly higher than where it was in 2022. And we feel very good about having a net interest margin that has a five handle on. So the outlook is very good for 2023..

Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back to Jon..

Thank you very much, Towanda. I appreciate your help this morning. Thank you, everyone, on the call for your participation and interest in Sallie Mae.

It goes without saying that the entire IR team is here and standing by to answer any additional follow-up questions and provide whatever resources we can as you digest the quarter and look forward to the end of the year. With that, I will hand it back to Melissa for some closing business..

Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call..

Thank you for your participation. You may now disconnect..