SLM Corporation (SLM) Earnings Call Transcript & Summary

So thank you for joining us this afternoon at the UBS Financial Services Conference. My name is Jill Shea, U.S. Consumer Finance Analyst with UBS. We are pleased to have Jon Witter, CEO of Sallie Mae, with us here today. Off the heels of fourth quarter earnings and an updated strategy announced in December, we have a lot to dig into this afternoon. So thank you so much for joining us, Jon.

Jill. Great to be here. Thank you.

So where's Pete?

I've gotten that question a fair amount this morning, our new CFO, Pete Graham, unfortunately, threw his back out. And so we have given him a couple of days off to recuperate, but I know he would have wanted to have been here.

Okay. Sorry to hear that about Pete. But thank you for being here. So for starters, I thought we could start by talking through some of the growth dynamics that you highlighted at your Investor Forum this past December. And perhaps we can start with the pace of growth in 2024. So with fourth quarter earnings, you noted that your balance sheet growth would be in line to slightly better than the strategy you laid out in December. So you're calling for the 2% to 3% balance sheet growth, which was up from the flattish that you had outlined prior. Can you just talk about the factors playing into your piece of balance sheet growth and how you think about loan sales this year?

Yes, sure, happy to. And maybe to put it into a larger context, while we are almost done with our CECL phase and we do have 1 more CECL phase in payment in January of 2025. And so that is obviously a commitment of capital to the tune of roughly $225 million. And for those of you who haven't been tracking us, it's really been those CECL dynamics that have, in part, led us to maintain some of the flat balance sheet during this implementation period. You're right, during the Investor Forum in December, we called for a flattish balance sheet, a horribly specific term. And I think we thought at the time that, that would be about 1.9%. And really, I think a couple of things have changed since then. But really the most notable is, obviously, we've had the announced exit of a major competitor from the space. And I think that has caused us to fine-tune on the margin, our origination expectations for the year, in addition to just the normal tightening up of consolidation and other assumptions that we do at year-end. And so that's pushed our balance sheet growth number up a little bit. And while we don't guide to it, I think it's probably safe to assume that, that would also push up on the margin, our level of anticipated loan sales this year.

Okay. That makes sense. And then perhaps turning to 2025, the Investor Forum number included balance sheet stepping up to the 5% in year 2. So with 2024 piece shaping up a little bit better, can you just talk about the range of balance sheet growth that you would be comfortable with in 2025?

Yes, Jill, it's obviously way too early to be giving 2025 guidance. And I think the Investor Forum materials are probably sort of the best early indicator -- rough indicator that I would point people to. But maybe it's worth spending just a minute or two talking about what we're trying to achieve because I think that may be more useful for folks in terms of estimating kind of how we would likely respond to changing market dynamics. So we like the strategy we laid out in December for 3 reasons. Number one, post-CECL, we really like the opportunity to pivot back to balance sheet growth and the organic growth that comes with it. And I think, our sort of view of it is, if we can get sort of mid to upper single-digit balance sheet growth, if we can couple that with the right level of operating leverage, that we can turn that growth into low double-digit EPS growth, and that's pretty attractive. So we like the balance sheet sort of growth aspect of it. With that said, as we look at our performance, specifically measured in both absolute and relative TSR, at different time periods over the last 3.5 years, we really like the performance we've put up, and we see the power of a committed to and strong capital return program. And so we wanted to have that in our plan as well. And then finally, we felt like a moderate balance sheet growth approach, really, to a certain extent, sort of derisk the strategy. If you think about it, increasing funding quickly, always add strain to the economics, increasing the size of the balance sheet quickly always adds a little bit of strain to capital. So we felt like this moderate balance sheet growth really allowed us to do that with a great deal of sort of risk confidence. So when you put all of that together, I think that's the balancing act that we're trying to get right. We want to maintain that healthy balance sheet growth, and we wanted to step up to that upper single-digit level at a pretty sort of a regular pace. We do want to maintain really strong capital return again to give a nod to the strategy that served us so well. But we want to do all of that in a way that we know that the rest of the company can absolutely continue to perform as we expect it to.

Great. So maybe turning to market dynamics and competition. You alluded to this earlier, but there's a recent exit of a large player, which we all know about. Can you talk about the competitive landscape and current market dynamics? We've seen Carlyle acquiring a small stake in a player. Can you update us on what you're seeing in the marketplace currently?

I think we continue to believe that we compete in a sort of nicely and appropriately competitive marketplace. There's obviously a couple of other sort of larger players, there's many smaller players. But I think it's also important to put private student lending in the context of the overall funding decision set for families. Yes, they can use a private student loan to do GAAP funding, GAAP financing, but many of those families have other access to capital as well, be it home equity loans, savings or other means. And so we really take a holistic view of the competitive set. And while the competitor in question was a really able competitor, and we had a lot of respect for them in the marketplace, and I think we certainly view that there is opportunity that will be created for the other players as they exit, we don't know that it will change. We don't think it will change the competitive dynamics sort of all that extensively.

Can you just talk about maybe teasing that out a little bit. Can you just talk about the cadence and pace of growth as we think about fall and into 2025 with the exit of the player?

I think it's important to remember that our business is both a cyclical one, but it also follows the academic, not calendar year. So the big sort of peak season, as we call it, is really over the summer as families prepare to send their students off to school in the fall. And the spring semester, which really starts in December and into sort of the early part of January, maybe early February, that really tends to follow very closely the performance of that fall season. So if you think about the dynamics of a hypothetical large competitor leaving the space, this competitor in question stayed in the market through the early part of February. I think they completed their academic year probably in the sort of same high-class way we've come to expect from them. And I think we really didn't feel or wouldn't have expected to feel any benefit of that in the spring time frame. The fall will be different. And I think we expect to compete rigorously for that business in the fall, as I'm sure our other competitors were as well. Conversely, next year, 2025, the spring will follow this fall. And so I think we will see a knock-on effect next spring. But next fall, fall of '25 will be a little bit more normalized year-over-year because of the effect we saw this fall. So I think what that practically means is any sort of market share or volume gains will be divided into 2 calendar years, sort of modest gains this year and likely modest gains next year.

Okay. That's very helpful. Perhaps turning to a bigger picture question around the macro with all the commentary on growth withstanding, what's your view on the macro from your seat? And how do you think the economic and rate outlook plays over the next year or two?

Yes, it's a great question. And I know there's a lot of companies that are experiencing macroeconomic conditions at sort of different times and in different ways. I think from my chair, it feels like we are perhaps dangerously close to doing something that maybe a year ago, we all scoffed a little bit at, which was executing a soft landing. And we certainly look at the macroeconomic data and whether you're talking about jobless claims or you're talking about economic growth or whatever the measure, it seems like you sort of have 1 measure that's a little bit better than expected, and 1 that's a little bit worse. And the tennis match, the tennis volleying seems to go back and forth. I will tell you from our chair, we have seen a nice stabilization of credit over the course of last year and into this year, that's certainly reflected in our guidance, and we expect that to continue. So we don't see anything from our perspective that leads us to a different macroeconomic conclusion, then we might actually pull off this kind of a soft landing. But obviously, it is an uncertain environment and I'm sure it will continue to evolve dynamically.

Okay. And perhaps switching gears to the capital allocation strategy, with the balance sheet growth and loan sales strategy, you're positioned to return a meaningful amount of capital to shareholders. You announced the $650 million share buyback with a roughly 50-50 split in '24 and '25. With balance sheet growth expected to be a little slower in '24 versus '25, it would seem the buyback opportunity might be a little bit greater in '24. So can you just talk us -- talk to us about the share buyback dynamics and the factors at play that influence your pace of buyback over the next 2 years?

Yes. I think all other things being equal, that's right. I think the 1 big driver that leads to the more equal split this year and next year is the 1 last CECL catch-up payment that we make in January of 2025. And I think absent that, we would look for a slightly more aggressive share buyback this year. But I think, when you incorporate that, the roughly 50-50 mix, I think, tends to make a fair amount of sense.

Then perhaps turning to alternative forms of capital return. You've bought back nearly 50% of your shares outstanding since the beginning of 2020. And at some point, you've noted that buybacks would had hit a diminishing return and affect the flow. So maybe a 2-part question here. Over what time horizon do you think you might hit that inflection point in terms of the buyback and diminishing returns? And then the second part to that question would be exploring other alternative uses of capital. You mentioned the special dividend or acquisitions. Maybe you could provide some color there.

Yes, happy to. And I think there's two in my mind, sort of preferred sources of capital return for shareholders. Number one, we obviously like share buybacks. We've done quite a bit of that. I would expect share buybacks to continue to be among our most preferred means of returning capital to shareholders. We also, as we grow the balance sheet and start to grow organic earnings, we also very much like the idea of an appropriately sized and growing dividend really off of the back of that organic growth. We think that's the right way to do that. So I think growing organically drive dividend and share buybacks, really leveraging the loan sales that is sort of the preferred. I think our comments in the investor forum really came from a question, we very much appreciate that there may reach a point where there are liquidity questions or other concerns, which would make share buybacks a less good option. I can't really predict when that might happen. But I think if it did, I think what I would want investors to know is we would continue to remain very committed to shareholder capital return. We just might do it in a different way, and it could be through any of the normal suspects that you talk about. Acquisitions are a really different story for us. And we've done a couple of small acquisitions, and each of them has had 3 unique characteristics that I think we would almost certainly stick to going forward. Again, I can't promise, but hard for me to imagine. Number one, they were very tangibly and immediately accretive and beneficial in hard dollar terms to our core business, right? That's how we justified the acquisition. That's why we did it. That's why we paid for it. These were not speculative acquisitions. These were not betting on new lines of business. These were things that we knew would show up in our core business numbers next year and in fact, they have. The second is we wanted all of them to be relatively small in size. And I'm a big believer that we've got a great core franchise, produces a ton of capital, there will be great uses of that capital, I would not want to take acquisition risk when there are so many other ways for us to deploy our capital. So number two, they're relatively small in size, really, as a manner of derisking sort of the acquisition. And third, they all have a little bit or an element of sort of option value to them. They all have some little interesting option businesses, all related to education, all sort of accretive to the brand that could become interesting over time. So for example, I think we've talked about this publicly, the last acquisition we did was for the sort of materially all assets of the entity Scholly. And they have a great scholarship hosting business. They have a great little sort of advertising and partnerships business. And those are all things that if they were good for Scholly with a smaller customer base might be really good for us as a combined company with a larger customer base. So we don't see acquisitions as a major use of capital going forward, at least as we sit here today. And I do think it's likely that any acquisitions we did do in the future would meet all 3 of the conditions I just mentioned.

Okay. That's very helpful. Perhaps just a question on the dividend. You mentioned the dividend ratio could increase over time. Can you just talk about your thought process there in terms of increases? Any targets that you have in mind?

We don't have sort of targets or thoughts absent what has already been shared. But I think what is clear to us is we want to make sure we are appealing to as large a prospective investor base as we can. We think we have a really valuable, a really special franchise, and we want to make sure that our strategy is as inclusive of all the different investor perspectives out there as it can be. We know that there's a lot of investors out there that value organic growth. I think we've talked about that pretty extensively. And with that organic growth, we know that there's a lot of investors out there that really value a growing dividend. And I think those 2 go together very, very sort of seamlessly and easily. So I think what folks should expect, all other things being equal, is as our earnings -- organic earnings grow, I think our first sort of thought would be to use that capital to either grow the balance sheet further and/or sort of increase the size of the dividend. And my guess is, each year, we'll do a little bit of both. Increasing the balance sheet makes it easier for us to grow the dividend the following year. But we want to make sure that this is not a game of -- always have -- in delayed gratification. We want to make sure we're also sort of paying investors in the near term.

Okay. Thanks for that. So perhaps stepping back and looking at the overall guidance. On the fourth quarter earnings call, you had relative upside to what you had mentioned in December. So can you touch on your degree of comfort with the guidance, the level of conservatism baked in there? So broadly speaking, can you just touch on the upside opportunities versus the downside risk?

Yes. Jill, Happy to. When we put the guidance out, which was only a few short weeks ago, and I think we haven't closed more than 1 month of business since then. We put out guidance that we thought was pretty middle of the road, sort of middle of the fairway type of guidance. And I think we still very much believe that. I've gotten a number of questions of, if the Fed lowers rates more slowly? If they do it more quickly? What are the impacts of that? And I think what's important to remember is we really do try to run a very matched book in terms of assets and liabilities. And so while we can have small and short-term headwinds and tailwinds, those tend to be a bit more on the margin as opposed to sort of major drivers of guidance. So I think sitting here in late February, I think candidly, the guidance we put out is sort of still kind of our guidance. We think that is indicative of the likely scenarios that we will see going forward. I think, of course, we'll continue to look at that through the lens of continued loan sale premiums, changing interest rate expectations, and look forward to talking more about it on the first quarter earnings call. But I think at this point, we feel like it's in the right ballpark.

Okay. Great. So shifting to credit quality. You saw improvement in 2023, and you're expecting more improvement into 2024, and drivers of that -- some of that improvement are the various programs that you've implemented throughout the year and the most recent rolled out in November. Can you provide some color on the performance of these new loan modification programs? And is there anything notable that you're seeing in these early trends?

Yes. Maybe I'll sort of even start by backing up a little bit. We had credit performance at the end of '22 that really did not meet our expectations. And we took it as an opportunity to really look pretty holistically about sort of how we run that part of the business and what we could do differently. And there were really 3 major things that we implemented as a result of that. And by the way, none of these should be surprising. We do some element of all of these things every year. But number one, we look -- took a long hard look at sort of our operational standards and norms and processes and try to figure out, are there ways for us to really tighten that up, and whether that was staffing, whether that was training, whether that was systems or tools, the team did a wonderful job of driving, really, material change there. And I would say that those changes are now probably fully implemented and sort of indicative of our current run rate or embedded in our current run rate. The second thing we did, as you said, is we implemented new loss mitigation programs. And I think it's important to remember, when I joined the company 3.5 years ago, our primary loss mitigation program was a forbearance program. And that was a really broad, really flexible and really effective program. We made the decision for, I think, some really good reasons to move our use of forbearance to be completely in line with OCC guidance on the use of forbearance and student lending. We thought, and my philosophy, is always to want to stay a step ahead of sort of expectations, and we thought that was the right and the prudent thing to do. But what we had to do then is to say how do we sort of replace within the regulations and the guidelines? This is very broad and flexible program with things that are every bit as effective in helping customers kind of get their financial foot underneath them. And so what we did is we basically built a series of far more tailored programs, much more linked to individual use cases or needs, and they, in sort of combination, along with still a small and focused forbearance program, really are the replacement for that overall program. I would say, we came out of the gates post-forbearance changes with a pretty good start. And I think we've learned a lot over the last 1.5 years and have continued to add new programs and to enhance those programs. And my guess is there'll always be an element of sort of optimization that goes on in those programs. To their effectiveness, to your question, it is still early days. But I think when we look at metrics like sort of early payment success rates and so forth, those are all in line to modestly better than what we hoped at this stage. But again, early stages. So no one's going to sort of declare mission accomplished. And then third, just for the sake of completeness, I think we've also talked a lot about every year, we go through a program of tightening up our underwriting. And looking at the places where our underwriting models outperformed and underperformed, and we really tried to learn from each of those experiences, and we've done, given our '22 disappointment, slightly more of that over the last few years. But again, not a huge amount. But it's been powerful, and we've implemented those changes. And while the operational changes may be sort of 100% in that run rate, and the program changes may be -- and I'm making these numbers up a little bit, [ 3/4 ] of the way into our run rate, getting close to 100%, I think the underwriting changes are really just starting to get traction, and that's because of the deferred nature of our product. When you're making loans to first and second and third and fourth year college students, it takes a little while for those underwriting changes to work their way through the system. But when you put all of those together, it's them in combination that gives us real confidence in the path back to normalcy that we've described.

Perhaps just on that underwriting changes, your cosigner percentage is up a little bit. Your FICO scores were up a little bit. Can you just dig into some of those underwriting changes that you've made around the edges?

The changes that we've been made. Our credit and operations teams would describe as sort of the edges of the edges of the corners. These are not kind of wholesale changes nor should they be, given the maturity of our underwriting models. So there's not 1 sort of big change that we've made. And we obviously do track cosigner rate and FICO scores. I'm not sure if those changes, because there are only a couple of percentage points, are indicative of the underwriting changes we've made or it's just the normal volatility and noise that we've seen in the system. But I think the underwriting changes tend to be a bit more nuanced than just FICO or cosign. Both of those rates tend to be pretty high for us across the board.

And then digging into the net charge-off outlook, your base case assumption at your Investor Forum was for net charge-offs of 2.25% in year 1 and 2% in years 2 through 5. And you've mentioned that you're targeting 1% to low 2% range over time. So given some of these changes that you've made, what do you see as the most likely path of net charge-offs over the next year or two?

Yes. I think the midpoint guidance that we've given for this year is right around 2.3%. I think that represents a meaningful improvement from last year. And I think we would, given what I just said around the 3 drivers of performance, I think we would expect to see another very material sort of pavement of improvement next year. Whether it gets all the way to the 2% or just aren't close, again, I think we're a little too far away from giving specific guidance. But I think we continue to feel confident that that's the right destination and we're not years and years away from getting to that point.

That's great to hear. So I'll pause and see if there's any questions from the audience. I'll just remind the audience, there's a microphone in the room. So if you have any questions, feel free to raise your hand. And so perhaps shifting to the net interest margin. You touched on it a little bit, but the guidance calls for the NIM to be in the low to mid-5% range versus the 5.5 in '23. And at the time, the forward curve included about 5 cuts. And the outlook goes for rates is very fluid, so it would be helpful to hear your view on the NIM, assuming the Fed delivers for your cuts, I think you touched on it a little bit, but there's some puts and takes. But perhaps you can walk us through the pressures or opportunities on the NIM if we get fewer cuts.

Yes. I think, again, the real benefit of the approach we've taken in our funding model is we do not feel the need to stretch for yield enhancement within our funding base. We love the quality of our assets. We love the return on those assets. And what that allows us to do is to be extremely balanced and matched in what we do, both in terms of duration, but also, quite frankly, in terms of just the overall amount of funding and liquidity that we have on the balance sheet. Think about that in deposits. And by the way, like never what I have felt better about that than perhaps, I don't know, in March of last year, when I looked at our deposit franchise, and it was mid-90s or higher insured. And I think, rightsized relative to our asset base. And it also meant that the liquidity portfolio that we had was also incredibly rightsized and appropriate for that model. And kudos to the finance team who I think executed all of that for us. So we do have, within a year, the potential for some modest headwinds or tailwinds. But I think they are really modest. And I think it comes down to -- just to give you an insight, just more the rate at which our assets and our liabilities reprice, is it monthly? Is it quarterly? Like how does -- how do those dynamics work as opposed to a broader positioning that would really drive a material change in NIM for the year. So again, we like the NIM guidance that we've put out. We still think that is the most appropriate. We'll, again, reevaluate that as we get into the preparation for first quarter earnings. But I think it's really more the pace and the steepness of the reductions, even more so than the exact timing that led to some of the headwinds we felt last year and could lead to some impacts this year.

Okay. Turning to expenses. In December, you had mentioned OpEx was going to grow 2% to 3% over the next 2 years, and then an assumption that the expenses would grow at 60% of revenues through years 3 through 5. You've made it clear that disciplined expense growth is a priority. Can you just provide some color in terms of how you plan to execute on that expense growth? And then longer term, how should we think about operating efficiency of the company?

Yes. It's a great question. And let me start by saying, I am sure we have efficiency opportunities in our company like everyone does. And one of the things that we try to instill with our leaders is a focus on getting better every year and sort of doing the hard work that they need to do to make that kind of a key part of the priorities. But with that said, I think the biggest opportunity for us and really the unique opportunity for us is really through fixed cost amortization. And you're right, we are right now is 60%, or maybe even a little bit higher fixed cost business. By the way, fixed costs don't grow at 0%, but they tend to grow slower than volume. And I think the real sort of discipline for us is how do we make sure that as our volumes grow, which is certainly embedded in the plan that we laid out in December, that we do not let those expenses grow faster. And I think that will take a couple of forms. I think that will take a focus on efficiency in the core business because obviously, if we can find opportunities here and there, those are places that kind of give us a little bit of headroom to perhaps invest, even within that operating leverage goal. I think it comes from really disciplined budgeting. And I think it comes from a ruthless prioritization around projects and initiatives and spend so that we are not biting off more than what the company can sort of realistically chew. Now, I will say, obviously, if there is a critical piece of spend that we have to do for risk or regulatory or an undeniably fabulous business opportunity, all rules are meant to be broken. But I think we view operating leverage as core to the investment thesis we've laid out. And again, if you can get mid- to upper single-digit balance sheet growth and get that operating leverage, that leads to really attractive organic earnings growth. And that to us is really the payoff pitcher.

No telling on that statement. So the strategy of the loan growth and operating leverage should provide the basis for the stronger recurring EPS performance and return on equity. So drilling down on both those pieces, what type of EPS growth do you think you can generate over the longer term? And what's your degree of confidence around the consistency of that. And then in terms of stronger ROEs, where do you think returns can go from here?

Yes. Again, I would focus people back to the Investor Forum materials that we put out in December. I think what that said to me, and it was pretty exciting is under the assumed set of factors and conditions. And again, we always want to be careful about things like giving 5-year guidance. That's obviously impossible to do. But if you look at the assumptions that we've laid out, I think they're pretty d*** reasonable assumptions. You're talking about originations growth each year, smack-dab in the middle of single digits, not at the upper end that we've seen more. I think we've leaned into the operating leverage over a couple of years. I think we've got a level of loan sale premium that we're really anchored off of last fall's loan sales, which were during a pretty tumultuous time in the marketplace. I think you can literally just sort of go down the list level of basically assumes no market share growth above what we might see from the exit of a competitor. And actually, even in the Investor Forum, we didn't even have that in there. And so those numbers, I think, are really pretty conservative. And what it shows you is sort of high single, very quickly double-digit EPS growth, which, again, I don't think we view as being, again, under the right set of circumstances, sort of a pipe dream. I think it shows really strong overall aggregate capital return, which goes hand in hand with the EPS growth. Remember, we're trying to sort of get to both of those things. And I think it talked about return at the company level, return on sort of common equity in sort of the low to mid-30% range. So again, hard to give anything that even resembles 5-year guidance, and we won't do it. But I was pretty impressed looking at that set of assumptions, gauging them in their totality and looking, especially as we get through the last year of CECL, what could that mean. And I think we found that internally to be pretty exciting.

Great. Well, thank you so much for joining us today. We're so happy to have had you here today. So thank you.

Yes. Thank you.