SLM Corporation (SLM) Earnings Call Transcript & Summary

Great. Thanks, everyone, for joining us. We're very pleased to have with us Sallie Mae and Pete Graham, he's CFO. Sallie is the dominant private student lender. And has been a disciplined originator and has been a seller of loans, which is something that strategy that has generated significant capital to both build the capital base and significant capital return to investors. So Pete, welcome.

Yes. Good to be with you.

So maybe kind of pulling up, there is undergraduate enrollment has been has actually to increase for the first time really since COVID, yet there also are delays in the FAFSA. How do you think about the current peak season?

Yes. So origination -- or sorry, applications enrollments were up in the fall of last year. Indications are that, that trend is continuing into this year. So that overall backdrop is positive in terms of sort of return to growth. And then inflation and cost of education has always run significantly higher than overall broader economy inflation. So I think that's all supportive in terms of the backdrop for the need for our product, if you will, in the funding school. The FAFSA issues that we started the year with, I think, have subsided somewhat. So that if you look at the data around backlog in the FAFSA process. It's much lower now than it was a few months ago and continuing to trend in a good direction. So the schools aren't completely caught up, but they're in a much better place than they were 2, 3 months ago. We've been anticipating that and preparing for kind of a compression of the peak origination season this year. And we're ready to deal with that as we start to move into peak season there. But we feel like it's more just a delay to getting started as anything that's going to impact the overall volume for this year.

Right. And you've talked a little bit publicly about your thoughts about the second largest competitor leaving. Kind of just give us your current thinking as to how that will impact your peak season?

Yes. Again, we included anticipated volume growth from that exit into our guidance for the year. We anticipate that, that will be an above sort of trend line originations profile for this year and next, just given the way that our business follows the academic calendar as opposed to a regular calendar. We'll see the impact of that in our originations during peak this year, and then we'll get another bump next year as the second funding on those commitments gets made. Nothing really new to report in terms of what we anticipate happening in the market. We believe it's going to be a competitive environment. But I think a disciplined competition as we go into peak this year. The ranges, we feel like we're well positioned to capture our fair share of that market opportunity, and are looking forward to that this year.

Very good. So -- last October, the loan repayments restarted after several years of a pause. What we can see from the outside is that borrowers are paying pretty close to the levels comparable to before the pandemic, not quite, but close. When you look at this, how has it impacted your borrowers? Anything that you've seen from a credit performance, those -- presumably many of your borrowers do have a federal loan.

Yes, the majority of our borrowers do have federal loans as well. We see that in the underwriting at the origination of the loans. So over time, we don't get any additional information about whether they're in any kind of income-driven repayment plan or the like in the federal space, but we do know which borrowers have federal loans and which don't, and we monitor performance of those cohorts against each other. We have not seen any indication of a difference in sort of credit performance between those with and without federal loans. So I think it's all baked into performance to date, and I think it's all baked into the guidance that we've given our growth.

Got you. And before we get into kind of Sallie Mae specific questions, maybe 1 other kind of general topic, and that is kind of regulatory -- various regulatory issues. I think on the 1 hand, you certainly got the concept -- the ongoing concept of federal loan forgiveness and the SAVE program, can you talk a little bit about how you see that impacting Sallie Mae, if at all, on the demand side and certainly on the credit side as well?

Yes. I think the backdrop around the forgiveness programs has really created, in our view, kind of a bipartisan focus on the need for reform of the federal system. And both sides have floated different policy proposals around that. I think there are some common elements there that I think are things that are going to get support around really directing VA to those who need it most and think about that in the context of expansion perhaps of [ grant ] programs, additional support for historically black colleges and universities. And an overall focus on limiting over borrowing in the federal space. I think those are all things that we would support, and we think are complementary to our business and I think are good practice. And I think nothing is likely to happen in an election year, but I think there's good by [ partners ] and support for some of these ideas to maybe get reform going post the election regardless of who wins.

Got it. And you mentioned kind of election. One of the things that had come up in prior elections hasn't really been too big a deal at the federal level has been free college. We did note earlier this week that Colorado passed a bill that would allow for 2 years of free college for anyone earning up to $90,000. It's a little higher than the typical income levels. Any thoughts about that Colorado program, whether it's something that could apply in more states? And if so, how you think about that impacting Sallie Mae's business?

Yes. Again, I think broadly, these programs are going to be targeting the most needy folks and that isn't necessarily the cohort of folks that become our customers. I think in general, to the extent whether it's federal or state programs are focused on enabling those that have the most need to go to college, that's complementary with our view of responsible in funding in the student market.

Yes. I mean when we saw that it sort of had come to the conclusion that it was probably an attractive program, but might be a little expensive to apply in a lot of other states. Can you talk a little bit about capital markets levels kind of went about -- you've done -- you did a securitization relatively recently. And obviously, you're selling loans likely twice a year. Can you talk a little bit about what the investor appetite has been and how that kind of influences your thoughts as we go for into the second half and likely another loan sale?

Yes. The overall market appetite for the asset class is very strong. We were very pleased with the first loan sale that we did this year that closed in February. We subsequently did an ABS funding that you referenced that was 3x oversubscribed, and we ended up upsizing the transaction and tightening pricing in the course of getting that funding done, which is indicative of strong investor demand. We're happy to be able to share that right before the Memorial Day weekend, we closed this -- a $1.5 billion second loan sale for the year. Can't comment on pricing really because the secondary sort of securitization take out of that is that's going to be little bit here over the next [ few ] year or so, but a lot more share over the second quarter.

Got it. so that would make it a second quarter -- the second quarter event then.

Correct. Correct. Yes.

Good to know. Thank you for that.

That's breaking news, shared here.

Yes. That's right. All right. So 1 of the things that's been very kind of interesting about Sallie Mae is the performance of borrowers through the pandemic, the performance of the company from a credit standpoint through the pandemic and not to rehash that entire situation. But it kind of ended up with elevated credit losses in 2022 and now credit losses are, I would say, they're moving sideways, we hope, with a slight down trajectory. One of the things that you've done recently is started in very late 2023 and continuing now is kind of -- is various forbearance and modification programs. And can you kind of give everyone a little bit of a backdrop on those efforts. What you're trying to accomplish and where they stand and how they're going to affect Sallie Mae over the course of the next several quarters?

Sure. Happy to do that. I think it's important to maybe rewind the tape a little bit to that 2022 time. There were a number of factors that drove that sort of increased credit losses in that time frame. But the primary reason was our change in practice to cease using broad forebearance sort of meeting borrower stress and that caused an acceleration of credit losses during that time period. Beginning in the latter part of last year, we implemented new loan modification programs that were -- is sort of more tailored that are compliant with the OCC guidelines around these types of programs. And we began to roll those out in kind of November, December time frame last year. We now have the first cohort of folks that enrolled in those programs have completed their prepayments and have re-aged into performing status -- feel good about the sort of success rate that we're seeing there, although it's not 100%, it's still a pretty strong success rate indicative of a well-designed program. We want to continue to monitor that and see continued performance of people that have enrolled and see those trends continue. We want to look for the folks that have completed those payments and sort of re-aged into performing status. Do they continue to perform under the modified terms of their agreements. So those are things that we want to have more than 3, 4 months of performance to really declare victory. But early indications are that those programs are performing as intended and helping the borrowers that need to be held. On the forbearance side, we do have some elevated percentage of forbearance, but that's largely driven by expanded usage of early repayment assistance and an expanded sort of grace period. So the highest period of stress that we see in our portfolio is when students are graduating and going into the workforce and getting established and starting their sort of financial journey, post college. So that's why our programs have a 6-month grace period built into the loans before repayments required to start. And we have an expanded an additional 6 months that folks can tap into if they need that for delays and job starts and the like. And so we've had an increased usage of that starting in the fourth quarter of last year and through into this year. But again, we feel like that program is performing as intended. The overall level of hardship forbearance that happens later in the loan life cycle has been relatively stable at about 1% of loans. So again, we feel like we've got well-designed programs that are meeting the borrower need and ultimately will help us get to the overall position on net charge-off that we've signaled were on a journey to get back to, which is kind of the high 1s, low 2% annualized net charge-off rate. We're feeling good about the guidance we gave for this year. That was a step in that direction and performance on credit was good in the first quarter. That trend has continued into the second. We'll see what the full second quarter looks like and expect to share more as we really serve this.

Right. And certainly, it's in contrast to many other consumer lenders who are seeing their credit loss numbers increase. That rate of increase often is slowing, but it's still it's still higher. So kudos there. You sort of answered this already, but maybe in this extended grace program, I think you said that it's primarily new borrowers? Are there any other types of borrowers that...

It's only targeted and available to those that are new in repayment. So it's just a tack on to the 6 months that's built into the program already.

Got you. Okay. All right. So I guess, when you put all of that together, as we get into the second, we should start to see increased exits from the program kind of offsetting some of the inflows of new borrowers taking advantage.

Yes. I think we'll -- we anticipate we'll start to see a normalized level of that as we move into the latter part of this year.

Yes. So we talked about this -- the exit of the largest player Discover a little bit. Maybe just kind of flesh out the competitive environment. It's the second time in 4 years that the #2 player has actually left the industry. When you get past #3, you don't see too many significant players. I would say there's a couple of players that have kind of half raised their hand about getting into the market. Just talk a little bit about the competitive dynamic as you're into the peak season this year.

Yes. I think broadly, what we're seeing in the student loan space, we've seen in other pockets of banking where when the -- when the bank, when the traditional banks exit, private equity back into these sort of step into that space. And we saw that with the Wells exit that enabled really the ramp-up of college job what we view now as 1 of our main competitors along with Citizens. So we think those will be the competitors that are our primary competitors, but there's probably some smaller players that will look to take market share as well. We think it's going to be a very balanced but competitive market as we go into repeat this year.

Got you. Okay. Maybe as we kind of talk about, you did sort of already preview this by saying you're confident maybe increasingly so about your 2024 guidance given some of the positive things that have gone on. Maybe we could talk about some of those. I mean, we are in a period where, I guess, if we had gone back 6 months or 4 or 5 months when you gave the guidance, expected interest rates to be declining, they're not. Talk a little bit about what borrowers are doing and what you're doing in response to that?

Yes. So the last 2 peak seasons, our originations have skewed very heavily towards fixed rate. And I think in a rising rate environment, borrowers were choosing the certainty of fixed rate for the potential for a high degree of variability in the floating rate product. And as a result of that, that has skewed our overall portfolio to be much more heavily weighted towards fixed rate balances. So in a declining rate environment, where funding will reprice, that's a net positive for us. In the front end of the curve, we're slightly asset sensitive. So the slower rate of decline in rates and sort of when we set out our guidance, that was based on a plan that called for, I think, 5 or 6 rate cuts this year. Obviously, now we're looking at far fewer later in the year. So I think on balance, that's supportive of NIM, not compressing in maybe the way that we had thought at the margins. I think over the longer term, we get into a more declining rate environment, and that will have a positive impact in terms of cost of funding. At some point, could spur an increase in consolidation-related early repayment. But I think there's been some comments by folks in that space that it would need to be 100 basis points or more of rate decrease per year before they start to see any meaningful increase in that part of the market. So again, I think it's something we'll continue to monitor, but it will be some time before that becomes a reality.

Yes. I mean I think that that's been 1 of the areas of improvement in the kind of value of the Sallie Mae loan has been the difficulty in your competitors kind of consolidating some of those away and probably a little bit -- hasn't probably gotten the publicity perhaps that it deserves. It's been a tremendous development. But clearly, something that is still a ways away from coming back in force.

I think that's right. I think at the margins also with the optionality in the federal programs around the potential for safety valves if things go wrong for borrowers through the programs that the administration has rolled out, that can bring a different calculus in, so it's not just a rate base focus on whether to consolidate or not, time will tell whether that changes behavior or not.

Right. I should have mentioned this, if there are questions from the audience, you can either -- I think there's a link that you can collect to have them sent directly to me or you can you can e-mail them to me, [email protected], a little bit of a mouthful. So if you can use that link, it'd probably be better. In terms of -- we were talking a little bit about margins, deposit pricing. You've had a small decline in your savings account pricing. I would say anything that you would tell us to be aware of deposit pricing. I mean, as you said, fewer rate cuts this year, kind of any -- anything we should be aware of?

No. I think it's just -- it will be reactive to the overall movement in Fed funds rate. We are among a group of interest rate base deposit gatherers. So we have a process to monitor what our competitors are doing. And we tend to be sort of middle of the pack in terms of the overall rates that we're putting out there. Sometimes we're on the first stage of offerings, if it's a specific [ tenure ] that we need to gather deposits in, but largely, we're kind of middle of the pack, we're never the highest.

Yes. What I'd like to kind of talk about with our remaining time is kind of capital and you basically repurchased half of the company since this current round of the strategy of sale of loans and stock buyback. Obviously, that also kind of coincided with the CECL deferral. And that's almost done now -- you've got 1 more installment left at the beginning of 2025, but essentially done. The company, you have spoken about this at length really since the latter part of last year. Maybe just talk a little bit about how you're thinking about loan sales and capital return, and then we kind of talk about the form of that capital return after that.

Yes, sure. So we laid out that 5-year framework in the December Investor Forum. And really, what that said was we'll be relatively flat this year, anticipating the CECL -- final CECL transition adjustment in January of next year. And then we'll begin to grow modestly after that. So in the order with the originations sort of machine that we have, we need to maintain a pretty significant level of loan sales in order to keep the rate of balance sheet growth in single digits. So the guidance we sort of laid out there for the framework we laid out there is kind of 6% -- 5%, 6%, 7% kind of growth over a multiyear period with loan sales sort of being the tool to balance that out. This year, we've given guidance around 2% to 3%, [ due to ] balance sheet growth. We've now completed loan sales with in anticipation of what we think is going to happen in peak, if we get through peak and originate more than what we anticipated, then we could have a decision to either carry a little bit higher rate of growth on the balance sheet this year or do another loan sale later in the year. It just gives us a flexible framework to sort of manage that through time. What I would say is beginning next year and beyond, I don't see a scenario where we get to zero loan sales or double-digit rates of growth of the balance sheet. I think we'll use the framework to sort of be balanced in both directions, be opportunistic around loan sales when pricing is most favorable to us. And our anticipation is that we will start to get a chain valuation multiple as we start to demonstrate solid growth of the balance sheet as well. So.

Right. I've always thought that the existence of loan sales also puts a little extra discipline from both an underwriting standpoint to pricing standpoint on the company. So just love out there the view that having some of it is probably good all the time. When you sort of alluded to this and back in December also talked about a rising kind of dividend payout ratio. How do you think about the buyback now that you -- the stock price is somewhat higher. I mean you obviously like the valuation to be better, but the stock price is higher. And how do you think about the mix of that capital return between dividends and buyback as we go forward?

Yes. The framework we laid out, which is what we intend to follow as we move forward in time here is that growth of the balance sheet will fund a growing dividend in accordance with that over time. And share repurchase will largely be confined to capital generated through the long sale process. Now there's a theoretical argument that at some point, we get to issuing returns in terms of share buyback and the outstanding flow of the stock, et cetera. If and when we feel like that becomes an issue, we can revert to special dividends or the like to deal with that sort of pressure on outstanding flow -- stock, but I don't -- like it hasn't been an issue so far. It will be a happy circumstance [ in ] something we had.

I don't -- I certainly don't disagree. And I think it is a testament, I think, to the strength of that strategy. And to be perfectly honest, the fact that the first loan sale was able to use that and deploy that capital into a temporarily significantly depressed stock price. So it certainly had even better results. We are pretty much out of time and have not -- don't have any outstanding questions from investors. So what I will do is congratulate Pete and the Sallie Mae team on the loan sale that they just announced. And thank him for his participation. Thank you so much, Pete.

Yes. Great to be here with you and look forward to seeing you again soon.

Thank you. Take care.