SLM Corporation (SLM) Earnings Call Transcript & Summary

Good afternoon, everybody. I'm Jon Arfstrom with RBC Capital Markets and pleased to have SLM Corporation, also known as Sallie Mae, with us this afternoon. Steve McGarry, the Chief Financial Officer is here for our fireside chat. And maybe let's just start this out, Steve. Once you do a quick introduction of yourself and then we can get into the corporate introduction. I think it's important for you to share a little bit of your history with the company before we get into the questions.

Sure. Happy to, Jon. Steve McGarry, CFO of Sallie Mae. I've been with the company for longer than I'd like to remember. I've been the CFO since we split the company out of the old Sallie Mae Corp. back in May of 2014. Prior to that, I've done a number of different things, all within the finance organization, basically. I was in the Investor Relations role for some of the more exciting moments of Sallie Mae's history. I came out of that to lead our funding and finance organization. And I joined the company back in 1997 as a portfolio manager in corporate finance back when we were a GSE. So I've worn many hats and enjoyed the high points and the low points, both with Sallie Mae.

That's great, Steve. And I know you have a lot of shareholders that have been around for a while. You have others that are there for the balance sheet optimization that we'll get into. But what I found is there's still some misunderstanding of exactly what your role is as a company. And we'll also get into some of the long-term objectives. But just give us the 30,000-foot view of the market, what you do, why you're important? And just help us understand that.

Sure. Absolutely. So look, the college finance business or put differently, there's about $450 billion spent every year on higher education. The federal loan program provides these days about $85 billion of that funding. And then the rest comes from parent contributions, savings, scholarships, grants and that kind of thing. And then there's a little sliver left of $15 billion that's provided by Sallie Mae and our fellow private student lenders, and it's the last bit of [ GAAP ] financing, and we think it's very important to help a considerable amount of people achieve their ever important degree higher education. We're still very big believers in the value proposition of a college degree. And I think that's really highlighted today where we're seeing very high demand for recent college graduates and they're earning better salaries that they have been able to command in years. And I'm sure many of you are experiencing the same thing that we are here at Sallie Mae. It's very difficult to recruit and retain qualified college graduates as [ per ] job market. So very, very important.

Yes, we're experiencing the same thing. And Steve, I'm in the parent contribution phase of the college education journey, times 3. But I used your product and I appreciated many years ago. But also touch a little bit on distribution. How is the product distributed? And talk about your relationships with the schools.

Sure. So look, Sallie Mae is the leader in the higher education private student loan business. We have a market share of 57%. We hit a new high in 2021, which was very good to see when the numbers were finally gathered and reported. But the industry hasn't changed all that dramatically over the last decade or so. We boast the largest sales force in the higher education finance industry. They cover over 2,400 colleges and universities. We are on 98% of the lender lists that exist in the business, and they're important colleges, select a couple of lenders that they will put on a list and steer their students to. So what we call Sallie Mae Direct is people that come directly to our website because of their brand awareness or are introduced to us by their college Financial Aid Officer. That comprises roughly 65% of the originations that we do in any given year. And then the balance, the remaining 35% comes from our very active participation in direct-to-consumer and digital marketing properties. And this is what everybody is familiar with, e-mail, stale mail, pop-up ads and, of course, the omnipresent Google search techniques. So we do it all, and we try and continue to maintain and managing both Sallie Mae Direct and our digital marketing capabilities.

Okay. Great. And your market share is astounding. I mean it really is in financial services, and it actually went up. Is there -- would you attribute that just to the market disruption and the changes in the marketplace? Or is there something else happening that you would attribute that to?

So I like to think that it's the quality of Sallie Mae's approach to higher education finance business. It is a fact that one of our biggest competitors, Wells Fargo exited the business over the last several years and 2021 was the first year that they were completely absent from that marketplace. They had a market share as high as 20%. And right before them exiting, it was down to as low as the single digits, but that has been a chunk of business that many, many people were vying for, and we like to think that we got at least a reasonable share of that business as they exited the marketplace. But look, it continues to be a very competitive market. We're competing with the likes of Discover and Citizens Financial, our 2 prominent competitors. And then there are always new entrants looking to get into the business because the student loan -- the private student loan supports a very high return on equity, if done properly, and it is also viewed as sort of a gateway or a potential Type 1 of very high-quality future consumers of financial services in the name of college graduates. So it is a competitive marketplace, and we continue to make all the right moves to maintain our share. One of our focuses year in and year out is to make sure that not only do we have the best pricing and product offerings, but we also need the best delivery system. And what I mean by that is, we need to have an excellent application portal that eliminates breakage points along the way and gets the borrower from approval to disbursements without a whole lot of interruption in that process. So we are continually investing -- reinvesting in our online servicing platform, in our mobile apps, and of course, the entry way to all this, our website, we want to make sure that it is best-in-class and attractive to potential borrowers and easy to navigate once they arrive on our website.

Okay. Good. And I'll just remind people on the call, we are -- if you have questions, you can send them and we'll ask Steve these questions. But I did want to touch a little bit on -- you talked about the value of your borrowers. And how do you guys think about your business model longer term in terms of starting the relationship with the student loan and then turning it into something larger, longer term? Touch a little bit on that for us.

Sure. So look, we -- first and foremost, we are a private student lender. That is our core business and everything that we do is focused on being our very best in that arena. We -- our focus today is to build the products that consumers of higher education really need as they navigate their journey. So what do I mean by that? We've always had excellent tools on our website that help borrowers figure out, for example, how to figure -- how to file a [ pass ] reform that gets them financially -- tools that help them figure out what college they should attend, where they can get their best return on investment or, for example, how they can obtain the scholarship or a grant. So our focus at this point in time is really on building those capabilities to attract consumers of higher ed directly to our website. And I'll take this as an opportunity to talk briefly about an acquisition that we just recently made and completed of a company called Nitro College. We were doing business with Nitro College's partner, where we were sourcing leads from them and originating a meaningful amount of private education loans. But when we looked closer at them, we realized that they were already being successful in building the kind of properties that we really aspire to. So we formed a relationship with them, and we actually just closed on that transaction last Friday. The team from Nitro are now joining the organization. And our goal is for them to not only increase our effectiveness in digital marketing, but also to help spread their entrepreneurial spirit and approach to the business throughout the Sallie Mae organization. So we're very excited about the Nitro team joining the company. The longer game that you are talking about -- I think you're hinting at, do we expect to diversify our product offerings at any point in time? And what I would say on that, Jon, is we really are focused on the core business and that is where the value is. But we do have 2 products that we want to see if we can grow organically, one being our Sallie Mae credit card, which we introduced just for the pandemic and have pretty much put that on standstill over the last couple of years. But as we integrate Nitro into our operation, we do want to explore growing credit card on an organic basis by sourcing our clients directly to the website as opposed to spending huge amounts of money acquiring customers and suffering the J-curve. The other area of interest to us immediately is a nice little product that we own, which is called SmartyPig, which is a goal saving product that gets very, very good grades from the financial -- personal financial advisors out there. So those are the 2 immediate areas where we would focus on growing outside of private student loans. But really, our first and foremost focus is in our core business and being the very best at that in terms of originations, service and so on and so forth.

Okay. Okay. Good. Let's talk numbers a bit, Steve. I appreciate that. And you've talked about 8% to 10% origination growth for the year. How are you feeling about that? What kind of early trends are you seeing? I know that was relatively recent, but just give us an update on how you're feeling about that.

Sure. So look, it is early on in the year, obviously. We have January and February already on the books. And what I can say about that is that we think that we are very much on track to meet our 8% to 10% loan origination guidance for the full year. We are expecting significant growth in the back end of the year, and that will be driven by 2 very important factors. The first is that a lot of the or the vast majority of the coronavirus financial support that came from the federal government and distributed directly to colleges and universities has now run its course. But we also think that we're going to see quite a bit of normalization in the college and university fund. So to put that into perspective, for the last 2 academic years, we actually saw declines in enrollment. We think that, now that we are getting back to a sense of normalcy regarding the pandemic that we will see students returning to campus and that we'll get back to it, but albeit very slow growth, but loan growth is expected to be 1% to 2% over the long term, 1% to 2% growth is certainly a lot better than the same declines in enrollment. So we do think that we are very much on track for our loan origination guidance. And look, as we sit here today, it's obviously a very uncertain environment that we find ourselves in, but we think that we are in a position to affirm all of the guidance that we have out there. So we guided to $2.80 to $3 a share for non-GAAP core earnings per share. We think we are absolutely on track to hit that number. And if I may, I'll talk a little bit about the loan sale marketplace while we're talking about -- that guidance has embedded in it us selling $3 billion of loans. And it's good to report that the ABS market is open for business. We saw a [indiscernible] deal, settle or close off of our platform today, and we've also seen a number of auto and credit card companies announce that they are going to be coming to market. So based on what we're seeing in the capital markets, we think that we are very confident that we would be able to hit the numbers that we need to hit in order to fulfill our EPS guidance through the loan sale market. And again, we've seen a lot of volatility in interest rates, and we have told investors that we think our NIM will come in just north of 5% for the full year. We think we are very much on track to meet that expectation. And if you take a look at the interest rate sensitivity tables in our 10-K, which we published a few weeks ago, you'll see that in a rising interest rate environment, we would actually expect to very slightly increase our earnings [ pie ], the number is 1.5%. So given all the volatility in the marketplace, it's nice to be able to state that we think that we're in pretty good shape to hit the guidance that we just set some 6 weeks ago.

Yes. Obviously, you touched on this, but the environment is different over the last 2 weeks. And I think you originally expected to sell about $1 billion in loans in the first quarter. Is that -- that's correct?

That is right. So we talked about selling $1 billion of loans in the first quarter and coming back in the back half of the year and selling an additional $2 billion of loans. Our expectation is that over the next several days, we will start our process where we market our loan portfolio and to give you a little bit of detail on that, what we will do is invite a half a dozen or perhaps a few more institutions, whether they be investment banks that are adept at modeling student loan cash flows and securitization trusts, to participate as well as several end buyers of student loan portfolios, and that would be insurance companies and fixed income money managers. So basically, what we do is provide them with a portfolio tape. They have an opportunity to model out cash flows at current market into environment and decide on what the payment plan portfolio would be [ worth ]. The process typically takes several weeks. Our goal would be to basically have a committed transaction before we certainly release earnings in late April. Whether or not it settles in the end of the first quarter or the beginning of second quarter, we're really kind of indifferent to that. What we think is still important is that we can affirm that we do think that we're still in a position to hit that full year EPS guidance.

Yes. Okay. Just [ has a ] gut feel that you've had great credit quality, and obviously, as you mentioned earlier, students are employed. So that's tracking very well, and it's hard to find people. Does this volatility actually push people to a product like yours in the fixed income markets? Or do you think that this volatility impacts all asset classes equally? Do you actually have an advantage in this kind of a market?

So it's a great question, and I'm glad you asked them the way that you did. One of the reasons why I think we've been successful with our loan program -- loan sale program is that my team in the capital markets area has done a really great job of working with investors to help them model the cash flows and understand the credit quality embedded in these portfolios. And we do have many, many years of performance history going back to 2010 and beyond. So I think your premise is correct that, given the fact that we have a very high-quality and cosign portfolio, the credit risk embedded in these kind of portfolios is very manageable and actually is probably one of the factors that contributes less as opposed to more than ultimate premium or buying some of the more important variables, might be [ prepaid speeds ], for example. But yes, we have rock solid credit quality and it's tried and true and proven over many economic environments.

Okay. So the message is, to do what you need to do to maximize the price, it's first quarter, it could fall into the second quarter, but we should know by Q1 earnings. That's in a nutshell what you're trying to say.

Yes. Absolutely.

Okay. Great. A couple of more things I want to talk about, obviously, interest rates and it seems like we're going to get a hike very soon. But are you -- would you -- you touched on a little bit, would you call yourself agnostic to the level of interest rates? Do you feel like you can manage through it regardless of what the Fed does? Or do you want higher interest rates for your business model?

So we're -- our goal is to lock in a NIM, not to particularly benefit from a rising or a falling interest rate environment. So we've got a portfolio that's basically 50% fixed rate and 50% variable rate. And our goal is to lock in the longest term funding available to be able to manage to a stable and solid net interest margin. We're not in the business of predicting interest rates, where they're going. And the last time we were in this environment, interest rates would go on their way to rising. We went into the coronavirus pandemic, and they were 0 before you even knew it, and even in a rising rate environment that's been tempered by more [indiscernible]. So our goal with the portfolio is to lock in a stable net interest margin through the [indiscernible] volatility.

Okay. Good. And we've got a few minutes left, and I guess it wouldn't be complete without discussing the buyback and how you're feeling about that. And you've talked about another 25% of your market cap, you'd like to knock out over the next couple of years. And seeing some volatility in your stock, how much capacity do you have? What kind of timing do you want us to think about in terms of your ability to execute? And how do you close that gap, Steve?

Sure. So look, the buyback -- the Board approved the $1.25 billion buyback that we announced in January. And we mentioned that we're penciling in $600 million for 2022, $600 million for 2023. The buyback is contingent upon the loan sales and freeing up capital and the reserve and the gain in order to do that buyback at $17 a share. The stock is very, very attractive compared to where it was just a short few days ago. So depending upon the timing of the loan sales, we will -- and where the stock price is at that point in time, we will accelerate or not the buyback. In the plan, we're basically a go along [ by ] $50 million a month being in the market every single day kind of thing, but we certainly have the ability to call [indiscernible] in a rising or declining share price environment.

Okay. And then just on capital. If you could touch on that, your CET1 is 14%. You have got a little bit of CECL phase-in headwind. Can you talk a little -- help us think through in terms of where you'd like to be on capital and what that phase-in impact is?

Sure. So the way we map out our capital levels in the 2022 plan is if we execute as expected and buy back $600 million of capital, we will actually end the year with capital levels -- total risk-based capital levels closer to 15% and 14%. And if the economy and our CECL reserve is behaving well, we could likely spend more as opposed to less -- spend more than $600 million, but maintaining appropriate capital levels is so important, focus on that constantly and continue to take in the current environment that we are in. It will be interesting to see where the economic forecasts go with the crisis that's taking place in Eastern Europe. So we will watch that very carefully and make the right informed decision.

Yes. Okay. We just have about a minute left. But just on that topic, how do you think through higher food and energy, some of this uncertainty when you map out your qualitative layering of your reserve? I know you changed that to normal, but is there a tendency or a thought process that the risk is rising to a level where you have to reassess that?

So in terms of the CECL reserve, I think most of those impacts will be picked up in the economic forecasts that we use. So unless there is something glaring, I don't think we will resort to a management overlay for the CECL reserve. And the model is designed very well to incorporate the 3 movie scenarios that we use the base case in improving in a deteriorating scenario. So I think we will capture that appropriately with the CECL model. I will say that we have been in the private student lending business with LIBOR at 6% and LIBOR at 0%. By and large, our borrowers were able to perform at both higher rates and lower rates. So it would take something really, really significant to have a negative impact on our credit performance in terms of interest rates, which I think is where we'll see the shorthand for inflation reflected. So we feel pretty good about the environment that we currently see unfolding, but obviously, uncertain times.

Yes. Okay. Fair enough. Well, Steve, thanks for the time today, and thanks to Brian as well for having you guys attend the conference and good luck with the rest of the day and the meetings. We just really appreciate you being here.

Thank you. We are very happy to have the opportunity to meet with investors. We have had many constructive meetings already today and look forward to several more before the day is over. Thank you, Jon.

Okay. Thanks, Steve.