SLM Corporation (SLM) Earnings Call Transcript & Summary

Okay. I think we're live. So welcome, everyone. My name is Terry Ma, I'm the U.S. consumer finance equity analyst. I'm pleased to be joined on stage by Pete Graham, CFO of SLM Corp., otherwise known as Sallie Mae. So welcome, Pete.

Yes. Great to be here.

Yes. Thanks for coming. So maybe we'll just jump right into it. I was going to start with peak origination season. Obviously, you guys filed the 8-K this morning. I took a brief look at it, it looked pretty promising. So maybe just talk about how it's shaped up so far?

Yes, again, I think it's unfolding the way we had anticipated, the sort of FAFSA delays that we talked about earlier in the year. Our expectation was that the peak season this year would be delayed start and then compressed into the back end of the originations period, and that's tended to play out. You saw the inter-quarter monthly originations numbers that looked really strong. I would say also September, month-to-date, normally in September we would see a tail off of activity as folks are largely done by this point normally, and we've continued to see pretty strong origination activity into the month of September. So we feel good about the overall originations story for this year, feel good about our guidance that we've got out for the full year.

Got it. That's helpful. And maybe just to take a step back, can you maybe just give -- I was speaking with some international investors that were less familiar with FAFSA, maybe just explain briefly kind of what the issue was and what's kind of been corrected for it?

Sure. So the overall financial aid process for colleges starts with a federal form that's -- the acronym for that is FAFSA -- the education department rolled out a new tech program for FAFSA that was supposed to simplify that process this year. And the rollout of that was less than optimal, caused a significant delay in terms of the student loan offices or student aid offices being able to give out final packages to students as to what their aid offers were going to be, which is a key decisioning for students in terms of which college to choose and also, as it pertains to our business, what the gap financing need is going to be that our product fills.

Got it. Okay. Maybe just going back to the origination guide. You guys had reiterated last quarter fiscal year '24 origination guide. It was going to be up 7% to 8% year-over-year. First half originations were up 6%. Based on your 8-K today, I think quarter-to-date it was up about 10% year-over-year. So I guess, to the extent that the FAFSA delay is a nonissue, which it sound like that's the case, how do you think about kind of growing the balance sheet versus doing another loan sale?

So I guess there's a high-end scenario over and above our expectations that could provide an opportunity for another loan sale this year. If that were to come to pass, it would be smaller in size than what we typically would do. However, our base case is that we're largely done with loan sales for the year. We're probably in all likelihood going to trend towards the high end of the balance sheet growth guidance that we gave for the year for the year. One other thing that I'll highlight that we commented in the second quarter earnings call is that our EPS guide for the year contemplated originations at the high end of our guidance range in terms of the CECL provisioning for the year. So it kind of all fits together in terms of the FAFSA delay and the impact on originations is all baked into our originations guidance, and we believe we're probably in the high end of the range.

Got it. So maybe you can just expand on kind of the factors that are driving you to maybe just retain more of the originations for the balance sheet and maybe just also touch on what kind of the demand for loan sales look like based on the recent deals that you have done and the current environment today?

Yes. So the overall framework that we rolled out last December at our Investor Forum really called for a return to modest growth of the balance sheet after we complete the final CECL phase, and which will happen in January of next year. And that's still our sort of guiding framework for how we think about the long term. For this year, we gave a guidance of 2% to 3% growth in the balance sheet. And as we move forward in time, we'll probably tend to be at or slightly higher than the growth rates that we had in the overall investor framework. So for next year, call that 5% to 6% kind of balance sheet growth. And we'll continue to use loan sales to balance the rate of growth of the balance sheet. In terms of the overall market backdrop for the loan sales, the demand for our product has been very strong this year. The premiums that we got on the two loan sales this year were above our expectations coming into the year. And the market continues to be very strong. So the Discover sale actually creates additional demand for the asset class. You've got investors that did a lot of work to be part of that process. And then the ones that don't win still want to put money to work in the asset class because they've done the work to be ready to do that. So that's net positive going into next year. That, coupled with a declining rate environment, I think, is largely supportive of continued strong demand for the product and good gain on sale premiums.

Got it, and that's helpful. Just to switch gears and maybe just touched on -- touching on competition. You mentioned Discover, it's exited the market, obviously. What's the level of competition been like as you've kind of progressed through this lending season? And what are you kind of seeing from other lenders?

Yes. So it's been a rationally competitive market. What we've seen as the banks have exited our space, we've had private equity-backed players step into the market. Pricing has been largely rational as we've gone through this. We have seen some of the competitors pay a little more in marketing spend to get placement on the search engines and the like than maybe what we would have done. We've been very disciplined around making sure we're hitting our return thresholds on both pricing as well as marketing spend. So balanced pricing market, we're very comfortable with the originations we've done and the ROEs we'll generate on that.

Got it. That's helpful. And then just switching gears and maybe just touching on credit. In your July trust data, it showed early stage delinquencies are up month-over-month. Could you maybe just provide some color on what's driving that?

Sure. I think what we're seeing is some seasonality that has really 2 key drivers. One is kind of the normal seasonality we would see from the winter repayment wave exiting the grace period. The other factor at play here is the extended grace from the prior payment wave, where people are completing their extended grace in the second quarter, kind of May, June time frame. Some of those borrowers as they exit extended grace might need some additional assistance. And I think at the margins that's impacting that data. Nothing that really causes us any concern about our overall guide for net charge-off rates for this year as well as our longer-term guide on high-1%, low-2% net charge-off rates on a normalized basis.

Got it. That's helpful. And then maybe just on the unemployment picture. We had a worse-than-expected trend 2 months ago, improved a little bit this past month. Can you maybe just talk about kind of -- have you seen any early signs of higher unemployment kind of manifest itself in kind of like the repayment rates that you've seen?

Yes. So I think one thing to note, distinguishing us from other consumer lenders, is the more determinant rate really is the college grad unemployment rate, which has been, although it has deteriorated, it's been more resilient than the overall unemployment rates. Again, the programs that we've rolled out in terms of providing borrower assistance for those that need, I think, are operating as we intended them to. So we feel really good about the trajectory we're on in terms of overall credit and don't see anything that gives us any level of concern.

Got it. And you mentioned you still feel pretty comfortable about your long-term charge-off guide in the high-1s to low-2s. How much of that is actually contingent upon the success of your loan mod programs?

The loan mod programs are a big factor in that -- again, just kind of rewinding the tape a little bit -- we made significant changes back in 2022 to our credit collection practices and ceased the use of broad forbearance at that time. And so we rolled out these new programs last year. We've got some progress to date under our belts and feel like they're performing very well. One of the kind of key things that we look to is the level of overall program usage kind of pre-COVID -- call it 2018, 2019 -- versus now is roughly the same level. But we've transitioned from programs that required no payment to programs that require payment of some sort. So on balance, that's good for us in terms of payment flows, but it's -- importantly, it's also good for the borrowers because it puts them on a path towards financial stability early in their credit journey.

Got it. Is there an aspect where these kind of loan mod programs sort of kind of delay the path to migrate back to that long-term range because you're essentially just freezing certain waves of borrowers and the delinquency buckets?

Yes. Again, that's a temporary phenomenon. So just kind of reiterating how these programs work, if a borrower interacts with us and indicates that they are in some sort of stress, we go through a very sort of structured Q&A process to ascertain their situation, and that will then drive the offer of modification that's provided to them in order to -- so they qualify and they go into that modification program. They remain in the whatever aging bucket they're in, in terms of delinquency, until they make 3 payments under the new modified terms, at which point they cure and they come back out into performing status. So for instance, in the 30-day delinquencies in July, you have people that are coming out of their normal grace period as well as people from the prior payment wave coming out of extended grace. There might be some portion of those folks who still need some additional assistance and go into mod programs. They're going to stay and the delinquencies will stay at an elevated state until they complete those 3 programs. But on the long term, that normalizes out.

Okay. That's helpful. Just to switch gears and maybe let's talk about NIM, your EPS guidance range for the year contemplated low to mid-5s in NIM for the year. The market is pricing in probably about 3 cuts for this year compared to about 5 at the time you gave the guide. So does the low to mid-5s NIM still feel right to you?

Yes. Again, we updated our guidance at the midyear and I think the 3 rate cuts were probably implied in that guide. I think more broadly, as we look forward, we will generally benefit from a declining rate environment. Our loan book is somewhere between 70% and 75% fixed rate. We're funding ourselves in the deposit and ABS markets. And so while we do have some term product in the deposit space, we do have a large portion of that which is in the sort of not termed out. And so as the rates go down and deposit rates adjust, that's going to be a net positive for us as we move through time in that rate cycle.

Got it. Maybe just to switch gears and talk about the decision again of portfolio growth versus loan sales. At your Investor Forum, you laid out this 5-year framework for kind of tilting the portfolio back to growth with some continued [indiscernible] loan sales. But you also indicated that if the company does see portfolio growth being rewarded by the market to a higher valuation, you may consider more growth versus sales. So kind of where do you sit in that growth over sale equation right now, taking into account maybe just your current valuation and also the demand you're seeing for loan sales?

Yes. So that dynamic was really the underpinning of the 5-year framework that we laid out in December. A reminder that that sort of pivot to growth was really focused on '25 and beyond, because we've got the final CECL transition coming up in January that kind of hampers our ability to grow in advance of that. I think over time, the framework gives us some optionality to be reactive to market conditions. We will continue to kind of grow the balance sheet at a modest pace, and that will generate organic earnings growth that we anticipate will feed a growing dividend. Our expectation is over time that we will start to get a multiple re-rating as we demonstrate that growth track record. But in the meantime, the loan sale gives us the optionality to be reactive to market conditions and continue to utilize that to fund share repurchase, both in the interim but over the longer term.

Got it. And just staying on the topic of share repurchase. Last quarter, seemingly, there was a lot of focus on the buybacks. You maintained your $650 million guide, split roughly between 2024 and 2025, so any color you can give on just the cadence we can expect for the rest of the year or maybe even just talk more broadly about your appetite for additional buybacks at this share price and valuation?

Yes. So one of the things that we set out to do as we came into this year was really to change how we were going to market, so to speak, with the share repurchase programs. In prior years, when our stock was severely undervalued, our goal was to put the loan sale premiums to work as quickly as possible following loan sale. Now that our -- our share price has normalized quite significantly since then, and the overall rate environment isn't as punitive in terms of drag on NIM for carrying cash on balance sheet, that allowed us to be more programmatic as we approach the loan sales this year. And so what we said we were going to do, and what we have been doing, is as we complete a loan sale we'll put in place a program with the proceeds. And so the first loan sale that we closed in February, we put a program in place, and that was running. As we closed the second loan sale in May, we put an additional program in to layer it on top of that, again with the goal of being in the market every day at the margins, when prices are trending below a trailing volume level of price that we would buy a little bit more, and when they're above buy a little bit less, but in general being programmatic while at the same time being sensitive to overall price moves in the stock. And so the expectation you should have is when you see the next quarter's results, the share repurchases will have a fully loaded 2 programs running during the third quarter, and that would be more indicative of, I think, what people were expecting in terms of run rate buybacks.

Got it. That's helpful color. Maybe just to pivot back to the rate cut topic, I want to just ask about maybe your outlook on the potential for consolidation activity to kind of pick up again with rate cuts. Again, like I think the market is pricing in 3 rate cuts for the rest of the year and as many as 9 through next year; debate about whether or not we get that.

9 seems like a lot.

It does seem like a lot. What's the outlook for consolidation activity?

Yes. So we've been operating for the last 6 or 8 quarters in a historically low level of consolidation, just given the dramatic increase in rates and the fact that the math doesn't necessarily work for that product at such high rates. Our expectation is, as we move forward and we get in the 100, 150, 200 basis point rate differential from where we sit now, that we will start to see an increase in consolidation activity. Our expectation is that over that time period we'll start to normalize back to a more historic norm of consolidation activities, but our base case outlook is that we don't go back to the level that we saw a couple of years ago when the rates were at their dramatically low points and the whole consolidation industry was really ramping up.

Got it. Consolidation risk seems so long ago. But can you just remind me and investors, I guess, what normalized consolidation activity is?

I don't have a specific dollar or percent from here. I think the message I would give is we've managed through peak consolidation, and we don't think that we're going to be going back to peak consolidation. So our outlook for the business is that it's something that's eminently manageable from our side.

Got it. And back during peak consolidation activity, there was talk of kind of exploring kind of defense mechanisms or measures against consolidation. Kind of where do you kind of stand with that now?

We continue to look at that and evaluate it. The trade-off is always does the benefit outweigh the cannibalization you have on your own book. And in an ideal world, we'd develop scoring that allows us to target the exact person that would consolidate away and offer them an intermediate product to prevent that. But so far, we haven't cracked that code.

Got it. That's helpful. And maybe just to switch gears and talk about just potential policy actions, and with the election coming up, any thoughts on -- depending on who's in the White House -- what that could mean for just private student lending?

Yes, sure. I think the -- in our view, the sort of outcome of the presidential race isn't really that impactful to our industry, to our business. I do believe that the amount of focus in the prior couple of years on the various forgiveness programs and the like has really created an awareness of the need for reform in the federal program. In our view, and I think in the view of many, it tries to do too much for too many people, and it doesn't do enough for the people that truly need the help. I think the other element of the discussion is that when the federalization of student lending happened back during the Obama administration, it was a pay-for for other things in the federal budget. And I think with the realization of the amount of sort of the loss rates and the forgiveness, it's no longer a pay-for. And so I think that there is a growing consensus on the Hill that there's some need for federal reform. I think regardless of who wins the White House, there's likely to be a focus on that in Congress in the coming years. And there are various proposals out there, caps in the PLUS programs on the federal side, coupled with increased Pell Grants, aid to HBCUs, that largely would on balance be net positive in terms of the private lending sector.

Got it. Maybe just staying on the topic in terms of the caps on the PLUS program that would, of course, obviously increase in need for gap financing, like how do you think about the addressable market in terms of what Sallie is willing to kind of target and underwrite in the PLUS program?

Yes. Again, I think there's a balance there, right, because there's some of that uncapped borrowing that would be taken up by expansion of free money in the federal programs. On balance, the additional funding that would come into our space, I don't think that there are limits on our ability to go after that volume. We would be constrained, as we are now, by rate of growth of our balance sheet. I think there's plenty of demand for loan sale. And so we'll take the available volumes there and we'll balance the growth of our balance sheet in the manner that we've laid out.

Got it. And even you touched on just the various loan forgiveness programs and even the SAVE program, which it seems like it's been held up in the courts. That's -- I think we've spoken in the past about it a bit, how impacts the federal program. And I think most of your borrowers both have loans with Sallie Mae and also federal loans, which the SAVE program should only mean it's a probably like modest credit positive for Sallie. So I guess, to the extent that the SAVE program is no more, how do you think about how that impacts the credit outlook?

Yes. Again, I think, as you pointed out, roughly 80% of our borrowers have some sort of federal loan as well. The -- we've tracked performance of our borrowers with and without federal loans and have not seen any meaningful difference in performance of those borrowers. As you point out, on balance, to the extent there's a forgiveness or some sort of ability for, under the federal programs, to not have to repay balances owed, that would be net positive in terms of liquidity and credit for those same borrowers who remain obligated to pay back the private loans they have with us.

Okay. We have about 10 or 15 minutes left, so I'm just going to pause and see if there are any questions from the audience. Okay, I'll keep going. So I want to talk about market share. And do you have -- I guess we decided to go to the audience response questions, so maybe we'll just do that first. Over next year do you expect your position in Sallie to: 1, increase; 2, decrease; or 3, stay the same? And you can please just register the response using the controller in front of you. [Voting] So 50% increase and 33% stay the same. So pretty bullish. So back to my question. Do you have an aspirational target for market share? I think last reported metric you were in the 50s and is there some sort of natural limitation or ceiling to what the market share can be?

I don't really think about it in that regard. I think that we have the ability, because of the commercial presence that we have, we've got relationships at the schools that we want to have relationships with, over 2,000 schools across the country. We've got a dedicated sales force that's out there interacting with those schools on a regular basis. So we've got that in addition to the digital sort of outreach and origination capabilities that most of our competitors are relying on. We're focused on maximizing the amount of originations we can that hits our return thresholds. And as the overall market grows, we'll take as much of that as we can. I don't think there's an upper limit. We don't think about it in terms of trying to capture a specific target of market share, we just look to get the most volume we can that meets our return thresholds in every peak season.

Got it. And you touched a little bit on the competitive dynamics currently with Discover having exited. I guess have you seen any new entrants trying to take up more share? Or maybe just even talk more broadly about the barriers of entry in private student lending.

Well, I think that there aren't barriers to entry per se. And I think what you've seen, as -- whether it's Wells or Discover as they've exited the market, in addition to us picking up some share, you've also seen private backed players enter the space. And so there's been a number of moves of private equity entities buying smaller originators in the space over the last year. Our expectation is those entities will have good year-over-year growth from a very small number and will continue to be a factor in the market on a go-forward basis. I think they're -- back to the point on the loan sale front, there's a strong demand for the asset class. There's a good level of understanding in the private credit space of the asset class. And so that's going to be supportive of competitors that have more of an originate-to-sell model participating in the space on a go-forward basis. I think on balance, it's good for the -- it's good for the industry. Competition is always good. And again, we're focused on making sure that we maximize the amount of originations we do that meets our return thresholds.

Got it. Just to switch gears, can you maybe just talk about your funding outlook, and also any competitive dynamics you're seeing on the deposit side?

Sure. One of the sort of underlying factors for the framework that we laid out last year to have a moderate rate of growth of the balance sheet was really to balance the capital requirement that that entails, just given the capital required at the bank to manage the sort of regulatory view on growth rates. So [ we're ] keeping that at a modest pace. And then the other factor that is stress on deposit gathering and managing our ability to fund that rate of growth on the balance sheet. Our deposit program is a rate-based deposit gathering program. We compete in that market with some players that have much bigger marketing budgets and tech investment budgets than what we have, and so we're largely a follower in that market. We maintain our appropriate positioning in terms of rates on offer. We tend to be a follower of great movements in that deposit gathering space as opposed to a leader. And generally, our pricing is kind of middle of the pack on any of the products that we offer.

Got it. Helpful. Maybe just taking a step back and thinking longer term, are there any kind of products that make sense for Sallie Mae where your customers can potentially continue to kind of grow with you? I know you've kind of explored credit card in the past. But how should investors kind of think about that?

Yes. So we exited a couple of diversification plays that had been put in place prior to the current leadership team. I think we've been very clear about our desire to be very mission-focused on our consumers. So again, we're all about powering confidence in students and their families as they go to, through and immediately beyond higher ed. Our core product is definitely mission aligned in that regard. I think there's an opportunity for us over time to develop other products that will interface with consumers on that journey. The 2 acquisitions that we did, the Nitro and Scholly acquisitions, provide a base for us to begin to do that. Our initial focus with those acquisitions has been to optimize throughput and generation of originations into the core business. But I think we're at a point now where we'll begin to test into other opportunities to interact with that consumer base. So more to come on that maybe as we move into next year.

Got it. Okay. So those are kind of the opportunities. Maybe just to round out the discussion, can you maybe just talk about just key risks that you're focused on? Like what keeps you kind of up at night? Is it overall macro, credit risk, defending your market share? Just maybe talk about that.

I mean I feel like all of the risks that are out there are eminently manageable. We're on a good trajectory in terms of normalizing of credit and have been really pleased with the performance of the new programs we rolled out year-to-date. I feel confident about the revised guide that we gave on net charge-offs for this year, which the low end of that range is kind of at the top end of the long-term range that we talked about. So again, barring any broader macro environment trends, we feel like we're on a good trajectory in the coming years to attain that overall net charge-off rate. I think on balance, a declining rate environment is going to be net positive for us in terms of our NIM and the trajectory and how we get there, as long as it's a measured sort of movement as opposed to an abrupt change in rates. I think it's manageable, the trajectory as to how we get to that ultimate landing spot. So I sleep pretty well every night. I think we've got more tailwinds in the business than we have headwinds. I think the overall economic environment and credit environment, while it might be challenging for some in consumer unsecured space, it's not a concern for us. We have not seen any measurable signs of stress in our borrower base that our programs haven't been able to address.

Great. Helpful. We have just a few minutes left. I'll turn it over and see if there's any Q&A from the audience one last time. We have one back there?

I guess can you talk about if there's been any changes in payment prioritization for consumers in these newer vintages versus what you saw pre-pandemic? You're seeing one of your consumer peers give pretty poor guidance this morning, and so I'm just wondering if the payment prioritization is still the same as what you saw during the pandemic?

Yes, I'm not sure I have a view on necessarily prioritization of payments. I would say that our delinquency experience, the programs that we've rolled out and our ability to assist those that are in some kind of stress has been working as intended. I think the other element is we're catching these borrowers at the start of their credit journey as opposed to somewhere in the middle of their credit lives. And so to the extent -- what we see in our book is the highest level of stress is in that period immediately after graduation as they're starting to transition into sort of their next phase of their lives and start their working careers. And so these programs are very tailored at meeting those borrowers in that initial period of stress, and we believe they're working very well.

Any more questions? I think we'll end it there. Thank you very much.

Thank you.