SLM Corporation (SLM) Earnings Call Transcript & Summary

So good morning, everyone, and thanks for joining us. We're very pleased to have with us the management of Sallie Mae. For me, personally, this is always an enjoyable presentation because the process of actually separating what is now Navient and Sallie Mae from one another was actually announced at this conference some 7 years ago. The company has become even more dominant private student lender with over 50% market share. And we're very pleased to have with us today Jon Witter, the CEO. Jon joined Sallie Mae less than a year ago. He was the Chief Customer Officer for Hilton and had spent a long time at Capital One prior to that. But he's made a significant impact on Sallie Mae in that relatively short time. And like I said, we're very pleased to have him here. Jon's got some opening comments, after which we'll do a Q&A fireside chat. So Jon, over to you.

Moshe, thank you. And let me start by saying thank you to you, to James, the whole Crédit Suisse team for the invitation to speak here today. And for a really full day of great investor meetings you've planned for us. And let me also start by saying thank you to everyone on the line for their interest in Sallie Mae. We're about a month, Moshe, since we reported our fourth quarter earnings. And I thought what I would do is spend about 10 minutes talking about some of the kind of key messages from those earnings elaborating on them a little bit. But what I want to do with your help is get directly to the questions that are on people's minds. Moshe, as you said, I joined as CEO about 10 months ago. And during that time, I've really come to appreciate and sort of recognize 3 fundamental things. The first is Sallie Mae really does have an outstanding franchise. And we'll talk about that a little bit more. Secondly, that is not only a good franchise through the cycle, but I think it is an incredibly resilient franchise during even the worst of times. And certainly, 2020 has given us a chance to demonstrate that. And third, I really do believe we have a great opportunity to prove what I see as an incredibly powerful, but simple investment thesis as we execute our strategy going forward. So let me touch just briefly on those 3 things. And let me start by talking about the franchise. For those of you who aren't as familiar with our business, the private student lending market is small, but it's a critical part of the overall student lending landscape. We focus on what's called in the industry gap financing, and this is really filling the holes between families of resources, federal grants and loans, school support and all the other tools and vehicles that families have to pay for higher education. To put it in context, the private market represents about $13 billion of annual originations, which is, again, relatively small when you compare it to about $88 billion of federal originations each year and about $477 billion spent on higher education from all sources. Within that private space, though, we are really proud and consider ourselves to be the leading player. We have the top brand and that translates directly into real financial advantage. As just one example, our leading competitor typically sends about 4 to 5x the amount of direct mail that we do and originates about half the volume in a given year. In addition to a great brand, we have really deep and broad relationships with schools. We support about 2,400 institutions, and we appear on about 98% of their preferred lender list. We have really deep credit and underwriting capabilities. As you can imagine, underwriting student loans is difficult, and we do it, we believe, really, really well. And I think that's borne out in the results. We have about an 86% cosigner rate. Our average FICO at origination is about 749. And I think all of that translates to a very, very solid charge-off performance of about 1.2% through the cycle. Enabling that is an incredibly modern and cloud-based technology stack, which is operating at scale. And all of that is supported by what we believe is a strong capital and liquidity position. So really a great franchise. And that franchise, as I think, was probably true with most businesses was really tested during the course of 2020 with all of the disruption from the pandemic. And I am incredibly proud of what the team was able to achieve because I think we fundamentally delivered on a number of important dimensions. First, we delivered our core business. We had through strong credit and reserve performance. We drove GAAP earnings of about $2.25 a share. And just as a sort of interesting little note, that was only about $0.06 less than the midpoint of our original pre-pandemic guidance range. We originated about $5.3 billion of high ROE private education loans. And again, that was down only about 5% year-over-year in spite of all the disruption in the marketplace. We reduced our planned in year operating expenses in 2020 by about $18 million in direct response to the pandemic. And later in the year, we reduced expenses, again, by about another $50 million on a go-forward basis, and that was the result of a more strategic restructuring in the third quarter. Our market share for the fourth quarter increased to 61.5%, and that compares, just as a point of reference, to about 55.6% in the prior year and about 54.4% for the full year due to really shifting competitive landscape and sort of within the private student loan marketplace. Through it all, Sallie Mae remained well capitalized with a 15% total risk-based capital ratio and a common equity Tier 1 ratio of about 14%. Delivering on the core business was obviously really important, but we also did more during the course of 2020. We took actions to focus the balance sheet and our management attention. We sold our Upromise business and our personal loan portfolio again, all with an eye toward reducing risk and making sure we were focusing on the things that we were really good at. We also took some strong steps to thoughtfully allocate capital during the year. In the beginning of 2020, we sold about $3 billion of loans, and we used the proceeds to fund a $525 million accelerated share repurchase program and that reduced our share count by about 14% since the beginning of 2020. We paid a quarterly dividend of $0.03 a share. And later in the year, we issued about $500 million of unsecured debt, and we used a portion of that to tender for about 1.5 million shares of our preferred stock, that was about 37% of the preferred stock outstanding. And that transaction was nicely accretive to our capital position. As we look into 2021, the same strength of franchise positions us well to build on the success we had in 2020. In our core business, we'll continue to focus on top line growth and operating leverage through rigorous expense management. We expect to grow originations, about 6% to 7% during the year, and that really driven by a combination of strong relationships with our schools and enhanced direct-to-consumer marketing efforts. We'll continue to focus on delivering operating leverage through both continued efficiency efforts, but also real disciplined management of our fixed cost base. We'll, of course, continue to focus on the success of our customers, and we're pleased with the performance of our portfolio through the pandemic, and we believe this performance is really a testament to the value of higher education. For those students who are struggling, we will continue to work with those individuals and make sure that they have the tools to succeed. But at this point, we feel we are well reserved for those situations where repayment is not possible. These efforts will lead to earnings growth, and we expect full year GAAP EPS to be between $2.20 and $2.40 a share. As I've said a couple of times, we will continue our commitment to capital return and shareholder value. So we sold about $3 billion of loans in January at a very attractive premium. And we're using those proceeds to fund a $1 billion tender offer that we launched on February 2. Since the launch of the tender, we've been closely monitoring the trading activity, the broader sort of equity market and the activity in our shares and our observations led us to increase our original price range to $14.40 to $16.50. And we, in fact, announced that just yesterday. We believe this is the optimal range to bring in the approximately $1 billion worth of shares that we're looking to repurchase and do that in a highly efficient manner. Just as a point of reference, the revised completion date of the tender offer is scheduled to be March 11. We have an additional $250 million in authorization to buy back shares beyond this initial $1 billion tender offer. And we expect to sell about $1 billion of loans later in the year to fund future share repurchases. So while I'm incredibly excited about 2020 and the outlook for 2021, Moshe and team, I'm even more passionate about the longer-term prospects for Sallie Mae. At the core of it, I believe we have a simple, but incredibly powerful 3-part investment thesis. First, our business has a really attractive earnings profile. As we've talked about a couple of times, the market is growing really nicely, and we expect it to continue to do so, given the importance of higher education and the practical need for a variety of financing mechanisms to meet the unique needs of every customer. And we have a scale position that allows us to turn good origination and top line growth into even better bottom line growth with a continued focus on operating leverage. I believe with disciplined fixed cost management and a continued focus on efficiency efforts, we translate market growth into even higher earnings growth. Secondly, as I hope this past year has shown, we are disciplined capital allocators. Our origination platform is valuable, generating about 6% to 7% a year growth of attractive 20% plus ROE loans. Currently, we're selling a portion of those loans to take advantage of what we see as a real disconnect between the whole loan prices and our stock price, which presents a really nice opportunity to buy back stock in an accretive manner. And as we emerge from the implementation of CECL, our portfolio is expected to generate significant organic capital, which allows us to continue capital return without necessarily having to sell loans. Finally, we are demonstrating the risk resiliency of this business. The two main risks that we see, we believe, are manageable. As the pandemic, I think, has shown, we have a proven ability to manage credit risk; and second, our customer-centric approach and the role that we play in the market really does fit nicely with government programs, and I think positions us well against what might be some perceived regulatory and legislative risk. Now as a management team, as a Board, we are so focused on shareholder value creation that we have built our strategy to match up against these investment -- this investment thesis directly. And as we've talked about a couple of times, we're really focused on four key imperatives: The first is to maximize the profitability and the growth of core business. The single best way for us to create value is to grow our high ROE loan portfolio, leveraging the operating platform and fixed cost base that we already have. This will lead to better bottom line results and incremental value creation. Our second imperative is to optimize the value of our brand and our attractive client base. We have millions of customers come to Sallie Mae's website every year looking for advice and information in addition to loans. Our goal is to build and strengthen these relationships. And we really believe that if we do that, that will not only be accretive to our core business, but it will open up other opportunities for us over time. Our third imperative is to better inform the external narrative about the private student lending marketplace and Sallie Mae, in particular. Student lending is, to put it bluntly, not as well understood as it needs to be. And at Sallie Mae, we think we have an important role to play in addressing future public policy, and we're excited to contribute to those conversations, we think, in a meaningful way. And our final imperative is to maintain a predictable capital allocation and return program to continue to create shareholder value. I am a believer that capital allocation is the best way to create shareholder value. And our program will evolve over time, but our high ROE loans and disciplined expense management approach give us the chance to generate organic capital and return that to shareholders. So Moshe, in closing, I hope you agree that Sallie Mae has interesting and attractive investment thesis. I hope people can start to get a little bit of a sense of how our 4 imperatives directly align and focus on proving that thesis over time. So I appreciate the chance to make a few prepared remarks and happy to take any questions you might have.

Sorry, I just needed to unmute there, Jon. Well, thank you. That was very, very comprehensive. I think the -- maybe one area that's probably so ingrained in you and your team that you didn't mention it, but those loans that you're sold are sold where you retain the servicing. So the customer relationship and that customer base actually does stay with Sallie Mae. And I think that's an important point. And one that I know is also kind of pretty integral to the thesis. So you just wanted to make sure everyone is aware of that. These loans are not sold. You're selling the financial characteristics, not really -- not the customer relationships, right?

Moshe, that's exactly right. We retain servicing rights. That obviously comes with a servicing revenue stream associated with it. That's not big today, but we expect it to become bigger over time. But most importantly, it allows us to guarantee the customer experience, and it allows us to maintain connection with these customers. We know most students go to school for 3, 4, in some cases, 5 or 6 years. And we want to make sure that we retain that relationship for future marketing and customer service opportunities.

Great. And just to kind of -- given that the information about the tender is relatively new and fresh in people's minds. Your objective, I would assume, is to buy those shares, that $1 billion as quickly as possible. You would hope that it gets done in the tender. If it doesn't, I would assume that you -- would you then start buying that stock back to finish that $1 billion? Is that how it works?

Yes. It's a great question, Moshe. And first of all, we're obviously interested in buying in as much and as quickly as we can. As good capital allocators, we want to be thoughtful and balanced between doing what is right and fair for those who tender their shares, but also doing what is right and fair for those that do not. So we're trying to get that balance right. We really are confident that the range that we've set out with $16.50 at the upper end really does provide sort of what we need to bring in the full $1 billion. But if it doesn't, at the end, we will certainly assess and evaluate the best ways to put any remaining capital to work. We haven't yet figured out exactly what that would look like. It would obviously be based on the volume, market conditions, et cetera. But yes, our goal is to return capital as quickly as we can.

Great. Okay. So here you are, the company at its origination and the separation from Navient had done loan sales and also showed kind of improving trends in those games as they did more of it. And this is the second year kind of this phase. Maybe just talk a little bit about how you think about the value of the origination engine, right? The sale market tells us what they think of the value of the assets. How should we think about the value of the origination engine at Sallie Mae?

Moshe, thank you. Look, I -- having spent a lot of time in different parts of financial services, I have never seen an origination engine like the origination engine that Sallie Mae has. To be able to originate 6% to 7% growth a year of 20-plus percent ROE loans is a pretty fabulous thing. And I get asked the question all the time. If these loans are so good, as Jon, you say, as the market says, why, in fact, do you want to sell them? And the answer is we want to sell them because we see this incredible disconnect today between the stock price and the value of those loans, and it's certainly very, very accretive. Our longer-term investment thesis, and I think where we're really trying to go, especially post-CECL, is a world where we can be growing originations, growing the balance sheet and returning significant amounts of organic capital to investors. To me, that's the gold standard of what we should be trying to do. And if we can manage risk really well along the way, that's a great thing. That's the central tenet of our investment thesis. And so I think that's really the long-term value of this origination profile is -- or origination machine platform is to be able to generate that kind of high-quality loan, use it to drive growth in sustainable recurring earnings for the company and generate organic capital that can be returned.

And maybe did you learn anything new and the company as a whole over the course of this year and change that you've been -- that the company has been doing that's affected the strategy. Anything that you've learned about yourselves and also Steve, your CFO, did talk a little bit on the earnings call about the relationship between the stock price and how you think about this, the opportunity to buy loans. Can you kind of talk about that a little bit as well?

Yes. In terms of what we've learned, I think that takes a variety of different forms. And I've touched on some of this already. But I think we really saw during the pandemic, the strength of our relationship with schools. And if you think about it, schools, the institutions that we serve play an important role in sort of distribution and the sales of our product. We are a critical partner for them. They care deeply about long-term commitment to the marketplace. And I think when the going got tough, I think the power of those relationships was really borne out and really proven in a very meaningful way. I think sort of the second thing that we really learned was the sort of growing recognition of the value of these loans. We've been in this business, as you said at the beginning, for 6 or 7 years. These private student loans are very different from the student loans of yesteryear. And I think what I've really come to appreciate is the growing understanding and recognition of the marketplace of just how good these assets are, how valuable they are. And I think you see that in the original loan premiums that we got in 2020, and I think you saw it in the improved loan premiums that we got in 2021. So the value of the assets, I think, is also a real learning. And look, I would say the third learning I had as a new CEO to the company really involve the political risk issue. I think there's just a lot of misunderstanding of the student lending marketplace, what is the role of federal loans? What is the role of private loans? How do we fit with all of these proposals that seem to be sort of thrown around in Washington, D.C. and what's our ability to be successful with each one of those? And I think that's a great story, but it's a story that, candidly, I feel like we, Sallie Mae, need to do a better job of telling.

So in that vein, I mean, since you did bring it up, I've always -- I've had many conversations with investors about the various topics. And I think that most of the proposals could be somewhere between neutral and positive to Sallie Mae. The one that's worth watching is free college, free community college, free college. So maybe could you just talk about that one and how you see the likely outcomes and potential impacts to Sallie Mae's business?

Yes, happy to, Moshe. So I always start by sort of thinking about what are the real problems that policymakers are trying to solve. And I think policymakers are, in my mind, trying to solve two fundamental problems. Number one, is colleges and access to higher education is incredibly important. We see it in the economic mobility stats. We see it in the sort of social justice stats. By the way, you see it in our own credit statistics from the pandemic. We know that access to higher education just puts people on a multigenerational path to better financial success, right? So how do you make that available to people who wouldn't otherwise have it? That's sort of big policy question number one. And second is, what do you do with people who have really gotten overextended, and in particular -- people who have gotten overextended and maybe having completed college. Free college obviously really focuses on the first one. And when you look at the policies, what all the policies or most of the policy proposals really talk about is not free college for everyone at every school. If you look at President Biden's proposal, it is really free state college for families making up to $125,000. And the truth is there are close to 20 states that already have programs like this place in one shape or form or another. And the most prevalent of those is the New York Excelsior Program. So I think that's a great sort of litmus test or proxy for what you might see with a broader free college proposal. And the truth of the matter is, the first year, the Excelsior program was initiated in New York. Sallie Mae's originations in the SUNY system went down by 2%. And every year have grown since then, so we're now well back into the positive. And I think what that really speaks to is our GAAP financing model is serving a fundamentally different need than effectively free tuition for families who are -- who don't have the means to afford that on their own. So this comes back to the broader view that we have. We have always believed that it takes a variety of solutions. We've always believed that the answer for higher education finance is federal, state, school, private and we've always believed that no matter what those federal programs are, there's a really valuable role for us to play in them.