SLM Corporation (SLM) Earnings Call Transcript & Summary

Thank you, everyone, for being here. I know it's been a long day, and we're getting to the end of day 2. I was looking at Pete and Melissa's schedule. You've had a really busy day.

Full day, yes.

Full day. So I want to thank you for being here, Pete Graham from Sallie Mae.

And usually I like to start these with a quick company description. I think for Sallie Mae, everybody knows the name, but sometimes there's some misperceptions around the company. So maybe give us a 30,000-foot view of what Sallie Mae is all about.

Yes, sure. So company has been in the student loan space for an extended period of time, obviously started as a government-sponsored entity and then became a private company. The current construct of Sallie Mae was spun out of Oldco in 2014. So almost 10 years now as a public company. Focused solely on the private student lending market. Pretty significant player in that market in terms of market share. And the thing to keep in context though is the lending space, the funding for college, is really dominated by the federal government. So if you think about funding for higher education, it's probably approaching $0.5 trillion. And the private lending space is probably $12 billion to $15 billion, in that kind of a range, in terms of market size. So there's a big pie of which we're a small part, and then we have a pretty good market share within that small slice of the pie that is private lending.

Okay. And the delivery channel for it, the...

So we've got boots on the ground in terms of a really great sales force that's I think probably the best in the industry, out interacting with the colleges, with the student aid offices. But then we've also built a pretty strong digital origination channel through the acquisition of Nitro that we did a couple of years ago. So we've got a good balance of sort of in-person interaction with that sort of client base, but then also direct interaction with the end borrowers.

Okay. Great. And like all sessions, if anyone has questions, feel free to raise your hand, and we'll get those handled. One of the -- it's maybe more of an annoyance or a smaller item, is there's been some misperceptions of the company over time. And I know when Jon took over, he wanted to close some of these gaps. Do you feel there still are some misperceptions and gaps you need to close as a company?

Well, I think the biggest one probably historically is the confusion over interaction with the federal program. I think when people talk about federal student loan reform, it's easier to just shorten that to student loan reform and confusion about how things in that part of the spectrum would impact our business. So that's been something that we've spent a lot of time educating folks on. I think more recently probably the misperception was more around what happens after the CECL phase-in. We had a very distinct strategy around holding the balance sheet flat, utilizing loan sales to sort of manage capital through that time period and return capital to shareholders. And there was some question in the marketplace about what happens next. And I think you saw that confusion in the marketplace last year. That's why we did the Investor Forum in December to kind of lay out a framework for how to think about the company over this next phase.

Okay. Great. I do want to get into that in a second, but maybe just go over your overall expectations for 2024. I know there's differences in how you guide in different items. But I think you give pretty good guidance in terms of the frameworks. So let's talk about '24, and then we'll get into maybe the medium-term view.

I'd rather flip it around and talk about the forum first, because that really laid the groundwork. Even though we did our best to caveat and simplify it so that it could not be construed as multiyear guidance, it does give a good sort of analytical framework for how to think about what's possible for this business. I think one of the misperceptions that was there in the marketplace was that the continued loan sales versus growth of the balance sheet were mutually exclusive kind of phenomena. And what we tried to lay out there was a more balanced framework that said we're going to begin after 2024 to grow the balance sheet modestly. And we're going to utilize loan sales to moderate that rate of growth. So as a result of that, we continue to have a meaningful amount of capital generated from loan sales for share repurchase. The guidance that we gave for this year was largely in line with that -- year 1 in that framework from the investor forum, with the one notable exception of, at that time, the Discover exit was merely a rumor, and so it wasn't baked into those assumptions. As a result, our guidance for originations for this year of 7% to 8% growth is a little bit larger than what we had envisioned there. Earnings per share of $2.60 to $2.70 per share. Our credit guidance in terms of net charge-off, again, we had improvement in credit through the course of last year. Our guidance for this year, the midpoint of the range is 2.3% net charge-off rate, which again is continued improvement over what we saw last year, and we continue to believe that, over the longer term, the right sort of target for us to get to is high 1%s, low 2% net charge-off rate. We don't give guidance on overall provisioning levels, but if you think about that migration and improvement in net charge-off, we would expect that the overall reserving rates, barring some other sort of macro event, would continue to move in a positive direction as well. And then on the expense side, in the framework we talked about getting to a longer-term goal of 2:1 operating leverage as we start to grow the balance sheet. And the guidance that we gave for expenses this year is a step in that direction, but a step in that direction.

Just for those that aren't familiar, just take a second and kind of describe what's happened over the last couple of years in terms of the loan sales and the magnitude of the repurchase shares?

Sure. Sure. So beginning in 2020 when we implemented the new CECL accounting, that was, rough order of magnitude, a $1 billion charge to capital for implementing that on a GAAP basis. The regulatory framework allowed us to phase that in over time. The final sort of transition adjustment for CECL is January of 2025. And so there was an acknowledgment by the team then that having that amount of capital come into the system wouldn't allow us to meaningfully grow the balance sheet and continue to have return of capital to shareholders, as well as valuation of the stock was really disconnected from the value that we were seeing in the loan sale marketplace for valuing of premiums on the loans. And so over the last few years, we've generally held the balance sheet flat and have executed loan sales that generated a significant amount of capital. We've executed on a share repurchase program that was funded by those loan sales that essentially bought back half the outstanding share count since 2020.

Yes. It's amazing. It's amazing. And we're now in this phase where you're transitioning to more balance sheet growth.

I think it's a very balanced transition though. We're going to step into growth in a very modest fashion. The framework we laid out in December was kind of mid-single digit to moving to upper single-digit growth of the balance sheet, which, when you couple that with the 2:1 operating leverage that we talked about on expenses, generates -- gets to generating double-digit earnings per share growth for organic growth. And we still have a meaningful amount of loan sales that we're doing that provides another pocket of capital for shareholder return.

Okay. Okay. Good. I think Melissa doesn't like the phrase tax on CECL tax, but CECL chunk, last CECL payment, CECL phase out. What translation...

[indiscernible] adjustment.

Okay. Just in plain English, what is that?

Yes. So as I said, the implementation of CECL for us was a roughly $1 billion charge, reduction of equity and increase of GAAP loan loss reserves. The regulators appreciated the fact that if all the banks that were implementing CECL didn't get some kind of adjustment, there would be on paper some issues around capital adequacy. And so they came up with a phase-in approach. So each year, a ratable portion of that adjustment comes into our risk-weighted capital calculations. And so it allowed for a multiyear build of capital versus the GAAP treatment, which was a day 1 implementation charge to equity.

Last one is done in '25.

Yes. Last one is January of '25.

Okay. Okay. Great. On loan sales, you made a disclosure about the most recent loan sale gains. Can you talk a little bit about that and how it compares to the last -- the one that you did just prior to that?

Yes. So the -- the environment in the latter part of last year, obviously, rates were still envisioned to be peaking and hadn't really moved into an outlook for rate reduction, coupled with just sort of overall environment in the ABS market towards the end of the year. I think there was a little more of a risk-off kind of mentality for transactions in the latter part of the year. So all that kind of weighed on the absolute level of premium that we got on the last transaction that we did last year. And our anticipation was that coming out of the gates this year that the market backdrop was going to be more favorable. So as we sort of left for the holiday break, we said to ourselves, we want to be ready to go in January if market conditions are favorable. They indeed were. And the ABS markets opened up very strong, led as always by some of the auto issuers, and we were a fast follower in that context. And so we're very happy with the execution that we got on the sale. We had a good level of interest in the competitive process. And the premium levels were better than they had been in the previous one, as we disclosed in the 10-K, kind of mid- to high single digit.

Mid- to single digits. Yes. Okay. Is that -- and you'd assumed a lower level of gains.

That's pretty consistent with what we had laid out in the analytical framework in December at the margins.

Yes. Yes. Okay. Okay. Good. Good. the shift from buybacks to maybe other forms of capital return, like special dividends and normal dividend. How do you guys think about that [indiscernible]?

Yes. We kind of laid that concept out in the context of a 5-year framework where we're kind of had a significant build of capital available for distribution. I think there's a theoretical sort of construct around, well, at some point you get to diminishing returns of you're reducing your liquidity and your float too much. To me, that's more a theoretical point and one that we'll evaluate when we get to that point. I don't think that's anything in context of this year and one that we'll continue to think about and be mindful of as we move forward.

Okay. There used to be this game over the upper limit on price for the buyback, and I think when it was more -- when it was a bigger part of the equation. And the balance sheet really wasn't considered -- balance sheet growth wasn't considered part of the plan. But do you still talk about the upper limit on price? Or is it price and liquidity? Or what are the factors that you think about?

Again, we're approaching this in a very balanced fashion. We do still have a sort of a pricing tool that we use to evaluate relative level of premium versus implied value based on stock price, and that will continue to be a governor for us about whether we believe an individual transaction is priced appropriately. But our plan is to continue to do the loan sales to sort of moderate the level of growth that we've got in the balance sheet, and that will fund an ongoing share buyback program.

Okay. So we don't get the super secret model here today?

It's capital asset pricing theory. So like everybody's seen it, they learned it in school.

I think you should keep buying it back. This sounds exotic, but when I called into your strategic call, I was in Paris, but it was with a client -- with a company, but it was in the middle of the night. So it wasn't that much fun at all. But I encouraged you to buy back more stock on that [indiscernible].

Well, again, I think the one difference that you'll -- maybe the approach that we'll have this year is to just be more programmatic about the share buyback, as opposed to in prior years, with the stock being severely undervalued, we were trying to put as much money to work as fast as we could. And so we were in and out of the market, which caused some volatility as well. Our approach this year is going to be to be more programmatic and fund those programs as we complete the loan sales. So we completed the sale on February 1, and that funds the first tranche of our share buyback for the year.

Okay. You can see it all coming together with the stock. I mean it's...

The momentum feels pretty good. Yes.

Yes. That's good. How do you think about capital targets and capital ratios and what really matters to Sallie Mae?

Yes. I think, look, we've always run with a very conservative balance sheet. The internal targets we've set are buffers versus the Basel III thresholds, and we've consistently run at an excess to those. And that's no different in this framework that we've laid out. We maintained pretty similar levels of relative capital levels over that framework, and that's how we're going to run the business.

Okay. Okay. Good. Talk a little bit about the funding plan of the company, kind of the transition that's taken place over time and how you think about that going forward?

Yes. So we're generally funded with deposits, roughly 80% deposits, 20% ABS. And I think as we begin to grow the balance sheet, we'll -- I mean, it's not a targeted 80-20 mix, but that's roughly kind of how we've run the place, and I think that's largely how we'll continue to fund growth in the balance sheet. We've got a great ABS program and pretty strong investor appetite for that. And that's supplemented by, when we're doing the loan sales, in large part the buyers are using our shell to securitize after the fact. So I think that program is going to continue to build on its success. On the deposit side, we continue to make investments in our deposit gathering capabilities, and I think over time, you'll likely see us at the margins shift more to traditional retail versus brokered, yes. But brokered will still be a significant part of the deposit gathering that we do.

Significant part of some of the bank discussions are on net interest margin trajectory and how interest rates matter. How do you -- do interest rates really matter in terms of your margin outlook? And how do you...?

Yes. We historically have been a pretty evenly matched book in terms of the originations. We're roughly 50-50 fixed versus floating. Over the last couple of peak cycles, borrowers have chosen to do much more fixed rate, call it 90% fixed rate versus floating, just out of kind of, I think, an emotional safety concern of they see rates continuing to go up and go up and they want some certainty around their loan pricing. Our expectation is that, as the rates environment normalizes, we'll shift back to more of kind of a 50-50 origination mix. So on balance right now, we're probably a little liability sensitive, which is probably okay in an environment where we expect rates likely will be moderating some. But as a general rule, we're not taking a position and we're a pretty matched book. So it's more about velocity and trajectory than it is about overall level of rates.

Okay. Okay. Good. On credit, I don't want to say -- hiccup is maybe the wrong word. Talk about some of the changes you made in credit last year and kind of what changed and why, and how is it going so far?

Yes. So we had a spike in credit in '22 as we made changes in our credit collection practices to bring our use of forbearance more in line with OCC guidance. And so that's an example of our philosophy of getting out ahead of what we think could be regulatory pressure around things. We certainly made those changes in anticipation of there being a desire from our regulators to operate more in line with those guidelines. And as a result of that, those changes had a spike in credit in 2022. Over the course of last year, we made changes in terms of the operation itself, staffing, scheduling and the like, that improved throughput in the operation. We made changes in our programs available to borrowers. So we rolled out some new loan modification programs in the latter part of last year and, as a result of that, had an improving sort of overall credit last year. And we believe that will -- that trend will continue, and it's baked into our guidance for net charge-offs for this year. I would say on the programs themselves, it's still kind of early days. We really just rolled that out in the fourth quarter, but the early signs are that those are going to operate as intended. And again, that's all baked into our guidance for credit for this year.

Okay. And the guide is basically a path down to the high 1%, low 2% ...?

Yes. So our -- the midpoint of our range that we guided to for this year is 2.3%. So that will be an improvement over last year and, again, on a journey to get down to the low -- high 1%s, low 2%s.

Okay. Good. Very helpful. We're, I guess, several months into the federal student loan payment moratorium ending. Any observations that you would make on that? Any impact in terms of how you see credit trending in your [ board ]?

Yes. We have the ability to see which of our borrowers have loans, federal loans and who doesn't. We don't necessarily have a whole lot more data than that. When we look at performance of borrowers with federal loans versus those without, we don't see any measurable difference in performance between the two. So although it's still early days, we haven't seen anything that would give us cause for concern in terms of the resumption.

Yes. That's interesting. Okay. The forgiveness programs that are sometimes batted around in the media, does that have any impact on how your borrowers think about it? Do they call you up and say, "I don't have to pay my loan back"?

No. Look, I think there's a difference there, because like we had early on in COVID some hardship forbearance, but then we very quickly turned back on payment requirements. So like our borrowers have been required to pay all through all of the federal forbearance period. So I think they kind of know that we're different than the federal program is. To the extent that they do get some sort of forgiveness and it creates liquidity for them, I mean that's always a good thing, right? But as I said, we haven't seen any real meaningful difference in terms of credit performance of those with federal loans and those without.

Probably some interesting calls into a call center.

There's always interesting calls into a call center.

Large competitors leaving the market, Discover and Wells, I guess we can say, but give us the competitive environment, how it sits today and kind of how you expect some of this to evolve over time?

Sure. So the exit of a major competitor, this is the second one in a couple of years. And so look to the prior exit to say what do we think is going to happen this time. When that prior competitor exited, there were private equity-backed competitors that stepped into the void and took some significant amounts of market share. We picked up share as well. And I think that's probably what's going to happen this time as we go into peak. It's going to be a -- continue to be a competitive environment. There's new players in the space in terms of -- there's been some PE investments into the space, smaller competitors. And I think that's going to provide capital for them to be aggressive. Some of the existing private players have grown to pretty significant market share, consistent with the market share of those exiting. So I think it's going to be -- it's going to be a good competitive environment, but we believe we'll take our share.

Okay. What drives the market share shifts? Is it pricing, service, your brand?

I think it's probably pricing and brand are the 2 things. And we have the predominant brand. And so pricing at the margins is going to be a deciding factor. And so it's always going to be a competitive pricing market and one that there are always competitors out there for price discovery when people are thinking about who do they want to take their loan from.

Okay. And you have churn every year and new students coming through and things paying off. But any market -- and the market is growing, Any limitations on your market share in your view?

I think there's always natural limitations on market share. Again, in an environment like this where there's so much demand for credit assets and there's capital flowing into the space, there will always be competitors that are going to be competing on price. And I think that's going to be a natural governor on market share for any one competitor.

Okay. Good. I just want to touch on a couple more topics here, but just spending priorities for the year, and Jon talked about this kind of fixed versus variable concept on expenses. Give us some thoughts on that.

Yes. So we've made some investments over the past years, both acquisitions like Nitro that gives us more of a digital front end and has allowed us to sort of bring in-house some of the digital marketing capabilities and lower our cost of acquisition. We've also made investments in technology for the operation, and we'll continue to make investments in technology for the operation that will allow us to create more self-service opportunities for borrowers that will shift us to more of a fixed investment technology that's then scalable as we think about both growing our own balance sheet, but we're also utilizing that same technology and servicing for the off-book portfolios that we continue to service for others.

Okay. Acquisition opportunities, what's the company's philosophy? And are there a number of opportunities out there that could fit, it's just a matter of being selective? Or what kind of things get [indiscernible].

Yes. I think Jon's been pretty clear in articulating kind of his philosophy around acquisitions. We've got a very mission-focused company, and we want to stay true to that. So as a result of that, he oversaw a divesting of some diversification plays that really weren't focused on our core student focus in education. And the acquisitions that we have done under Jon's tenure have met a few criteria, one, that they're small in size, that they really fund themselves by benefit to the core. They have to be, again, mission focused in our core space and provide some benefit either through lowering costs to the core or some functionality that deepens that relationship with the students. And then I think the third piece of that is really just they have to have some kind of interesting optionality that we might be able to capitalize on in the future. And I think if you think about the acquisitions we've done, they've fit that criteria. So we don't have anything in the hopper currently, but that's the approach we'll take towards M&A.

Okay. Last call for questions, if -- go ahead.

Yes. With the exit of Wells and Discover, can you just maybe talk about the opportunity for Sallie Mae get more selective on underwriting standards longer term and how that might impact that long-term loss view of high 1s to low 2s?

Yes, sure. Well, we certainly have made changes to our underwriting criteria over time. That's one of the changes that we made last year during peak season as a reaction to some of the performance we saw in 2022. It's something we do every year. So we'll continue that philosophy. I think in general, the Discover book was a pretty high-quality credit quality originations. And so I think there is an opportunity for us to really be targeted around what volume we are trying to take. I don't think that changes our view on the overall loss profile of the business or the target long term. I think it's still kind of that high 1s, low 2s.

Okay. Anything else you feel like we haven't covered?

No, I think we hit all the high points here, pretty consistent with the conversations we've had over the course of the day as well.

So I like -- the model looks great going forward. And I really appreciate it. Thanks for being here, Pete.

Appreciate it. Thanks for the time.