SLM Corporation (SLM) Earnings Call Transcript & Summary

We're on our second fireside chat of the day. I have Jon Witter here from Sallie Mae. Thank you for being here, Jon. Just appreciate it very much. I know you have a full day of meetings, and you've already been busy.

Great day of meetings. Thank you for all your help in getting those arranged and thrilled to be here.

Yes. Thank you. And like all sessions, this is open for Q&A. So to the extent anyone has questions, put your hand up, and we'll pass a microphone and get your questions addressed. I think intuitively, we all know, we all know the name Sallie Mae, but sometimes, I think you have to explain to people what exactly Sallie Mae is and what they do or what you do. Can you just give us a 30,000-foot view of Sallie Mae?

Sure. So Sallie Mae is a 45-year-old company, but the current version of it is really, call it, 10 or 12 years old now since our spinout from our sister company, Navient. We are exclusively a private student lender. And what that really means for the majority of our customers is we provide what we term gap financing. So when we talk to a customer, our advice is get all the free money you can, and that could be from family support, or it could be from scholarships or financial aid. Next, get all the subsidized money you can. And if at the end of the day, you still have a need, we are here to help you sort of fill that gap to help you both realize the dream of access to and completion of your higher education journey. What that means sort of practically for us is our average loan is, call it, roughly $12,000, $13,000 a year -- I'm sorry, $12,000 or $13,000. An average customer might have 1.5 or so loans with us. Typically, it takes a customer 5 or 6 years to pay back that loan. So all those, I think, indicate pretty good customer success with the product. And when we do sort of the survey research, we find that we get good marks from our students in terms of powering that access to a better higher education experience than what they would have otherwise.

You've done a lot over the last few years since your arrival and just kind of walk through your proudest accomplishments, what you've done, and then we can kind of set the table for how you see things in the future. But just talk a little bit about what you've done in the last several years.

Yes. Thank you for that. And it's been an eventful 4.5 coming up on 5 years now. I was one of the sort of COVID CEOs that started in the midst of all of that. I tend to think of Sallie sort of entering now that kind of its second strategic phase since I joined. And the first strategic phase was really dominated by a desire to drive tangible shareholder return while we were implementing our CECL phase-in approach or process. And so I realized pretty early on that we could not simultaneously grow the balance sheet, phase in CECL and return capital to shareholders, and capital return is something that I believe incredibly strongly in. So that first phase was really dominated by maintaining a flat balance sheet, selling loans, making our CECL contribution payments and using excess capital generated from that to buy back stock, which was an especially good deal at the time given some market disconnects that we saw between the value of our loans and the underlying value of the equity. And we loved how that strategy worked. We bought back, rough justice, 50% of the company over the first, call it, 4 years, generated total shareholder returns that when we compare it to any of our peer companies or indices, we're incredibly proud of internally and felt like that was just a great recipe again for tangible shareholder value creation. A year ago in December, we sort of started to move into Phase 2 of that strategy. And our last CECL payment wasn't until this last January, but we could start to see the light at the end of the tunnel. And so what we laid out then was really a plan around sort of moderate but accelerating balance sheet growth and continued loan sales to sort of manage or to taper that level of balance sheet growth, still a heavy reliance and sort of focus on shareholder return, but also a desire to start to show really nice attractive organic balance sheet-generated EPS growth. And if you look at last year's results, if you look at this year's guidance, we're sort of a year ahead of the framework model that we had put out a year ago in December. So we're incredibly sort of proud of sort of the early work and the focus on the core business, the simplification, the getting out of noncore businesses. We're really, I think, excited about pivoting back to growth now and see that having a lot of potential for us here over the next couple of years.

Okay. Good. We'll get into the loan sale in a second, but I also wanted to just ask about the administration and regulation. The past administration, there was a lot of talk about forgiving student loans, and sometimes that would impact how people view your company. How do you think about the current administration? What do you think changes? And what should investors keep in mind?

Yes. It's always hard to sort of compare and contrast the priorities of one administration to the next. I always start with kind of what is Sallie's view of kind of what's going on in the federal marketplace. And if we were in charge for a day, what would our view be? And I think for a number of years now, we've had the perspective that the federal program does too much for too many and not enough for those who really need it. And so if you unpack that a little bit, the fact that you have ununderwritten and virtually uncapped levels of federal borrowing, I think it's been shown categorically by all kinds of independent groups that drives both cost of attendance, inflation, and it also drives pretty material overborrowing typically by people who really can't afford overborrowing. So the too much for too many, I think, is pretty clear. I think likewise, the not enough for those who really need it is also clear. If you go back to what I said at the beginning, how we talk to our customers, get all the free money you can, get all the subsidized money you can. If you are a student who has no family support and no access to what I'll generally refer to as free money and you're paying the entire freight of your education with loans, there is virtually no job on the backside of that, that will allow you to comfortably service those loans, especially in the early years. And so we view lending as a healthy part of an overall financing picture. But in our view, it can't be the only part. And so when you look at the sort of grants and programs that the federal government has, we would argue there's just not enough of that free money for folks who really need it, who would not have access to higher education otherwise. We think the current administration is very focused on sort of potentially capping and limiting sort of the -- let's not do too much for too many part of the equation. We hope they don't lose sight of the fact that there will be students out there that also need other forms of assistance. And when we think about our conversations on the Hill today and with the administration, we continue to emphasize both parts.

It could be an opportunity.

It could be an opportunity, certainly.

Yes, yes. Okay. If you go back to the strategic vision that you laid out, just paint a picture about what you think is possible and what's optimal for the company as you look forward.

Yes. Look, our recipe, I've joked with a few people already this morning, like we try to say exactly what we're going to do. We try to keep it really simple, and then we try to go deliver that. And I think if you go back to what we laid out a year ago, December, it was basically sort of mid-single-digit origination growth, sort of a slight tapering of loan sales over time, which drove sort of increasing balance sheet growth. Last year, we grew 2% to 3% on the balance sheet, our first year. By the way, we sold sort of a lower-yielding portfolio. If you actually factor that out, the growth was actually north of 5%. But like this year, I think we've called for sort of 5% to 6% growth and sort of accelerating from there, sort of the operating leverage story. And when you put all of that together, I think the investment thesis that we're really excited about is sort of mid- to upper single-digit balance sheet growth, operating leverage, which starts to translate into low to medium double-digit EPS growth with still really significant capital return, both in the form of share buybacks, but also in the form of, hopefully, over time, a growing dividend if sort of the plan continues to materialize. So we like that formula. We think there's something in that for just about everybody, and we think it's a great and tried and true way of driving shareholder value.

It's like a financial investor nirvana. I think it was [ a gift ].

Last time I checked, that's who owns the company, and that's -- those folks and our customers are who we're here to serve.

Okay. Let's talk a little bit about the loan sale. When it was initially announced, the K wasn't out, and we had -- you've disclosed a little bit about the gains. Talk a little bit about how much you moved, what the gains look like and your plan for the proceeds.

Yes, a couple of billion dollars of loan sales, very, very, very high single-digit premiums. If our CFO were here, he would say it easily rounds to double digits, but we'll keep it straight on what it is.

With a straight face.

With a straight face. And look, I think the uses of that capital are exactly what we laid out, continue to sort of support the expected growth in the balance sheet, but then obviously to continue with share buybacks through the course of this year. Last year, we spent a little bit less than half of our sort of stated authorization. My guess is this year, we'll spend, rough justice, the other half. And a little bit of that will be based on market dynamics. We always try to buy sort of slightly below the weighted average trending price in the marketplace. So if you get a year like last year where the price is moving steadily up and to the right, you might buy back a little bit less. If you get a little more volatility, you might buy back a little bit more. But I think investors should hear that we remain quite committed to share buybacks and believe it's a really important value lever for us going forward.

How do you go through that process of determining the balance sheet growth going forward versus selling future pools of loans?

We did a fair amount of modeling back around the investor forum to kind of get that right balance. And we took into account a bunch of different factors. We looked at what we thought were reasonable levels of capital return. We looked at what we thought was sort of the underlying implications on the EPS growth rates we wanted to create. We looked at, quite frankly, what were the impacts on the other parts of our business. The faster we grow the balance sheet, for example, the faster we have to grow our deposit funding or other sources of funding to match that and go along with it. And when we put all of that in sort of the mix master, this idea of sort of accelerating -- modest but accelerating balance sheet growth came out the other side. So I think we said in the investor forum this year might look like 5%, next year might look like 6%, kind of capping out at about 8%. And that seemed to be the sweet spot of all the different factors that we were trying to optimize for.

Okay. Talk a little bit more about your funding strategy. You just alluded to it. And obviously, if you're selling less, more on the balance sheet, funding becomes more important. Talk about your funding strategy and how you go about that.

Yes. We have, I think, fortunately, a very sort of diversified and straightforward funding strategy. We access the securitization markets. We use brokered deposits. We use retail deposits. And I think folks should expect that the funding strategy going forward will look a lot like the funding strategy in the past, unless something unexpected changes in the marketplace, which obviously we don't anticipate. I think we're conscious of how quickly we grow the asset side of the balance sheet because the thing that really, I think, accelerates your cost of funding is when you have to grow that funding very quickly. If you can grow that funding at a steady, modest and predictable pace, you can maintain the economics and the growth trajectory there in a pretty good equation. And so that was part of why we like the idea of moderate balance sheet growth, so not to strain either the economics or the operations of that part of the business.

Okay. What are you seeing on deposit pricing now? Are you seeing some easing in pricing? And I know it's been a little bit of a debate on your calls. It seems like there's a little bit of a lag in pricing.

Yes. Well, I think there's a couple of different issues there. I think the deposit pricing, we're not seeing anything that is out of the ordinary. I think we've got betas depending on whether you're going up or down of 75% to 80% kind of in that range. I don't think there's anything that we see that's particularly sort of different there. I think what's notable about the company is just how balanced we are from an asset liability perspective. So we have periods where if we see very rapid changes in rates over very short periods of time, we can see some short-term mismatches between how quickly our assets and liabilities reprice. And I think we've talked about that on some of the calls. But by and large, we have a really pretty nicely matched book. And so any time we have periods of relative stability or even modest change but not sort of super accelerating change, we tend to hold that target NIM of sort of low to mid-5%, I think, is what we've said publicly and continue to believe it's sort of the right NIM target for the business.

You got the nod.

I've got to always check with my proofreader out here. Is that...

That's good. Do you feel like you've optimized your funding base? Or is there more that you need to do over time?

I think we've optimized our funding base. I would never say never. And there's certainly always -- whether you're talking about on balance sheet or off balance sheet, there's always new innovations. There's always new conventions. We're active market participants, and we'll continue to look for opportunities there. But I don't think there's anything on the on-balance sheet funding side that we're looking at right now as a material change.

Okay. Let's talk a little bit about credit. Last year, there was a little bit of a -- I don't want to say surprise, but I don't think it was that bad. I think it was more of an opportunity to buy back more stock. Talk a little bit about last year, some of the actions that you've taken on credit and how you're feeling about credit today.

Yes. And I think what you're referring to is actually now probably a couple of years ago, although it still feels like last year to me. But look, we -- I think we're very public about the fact that we wanted to get ahead of changing how we thought about loss mitigation programs for our customers. And we used to have a very flexible program heavily using forbearance, which is pretty common in the student lending space as really sort of the primary tool of helping customers when they hit some period of financial distress. And as we looked at that, as we sort of looked at the regulations, looked at the business practices, it just made sense to us to migrate to more of a tailored approach, where rather than having one general program, we would have a series of more tailored programs, each really linked to the particular sort of need or source of distress that a customer might be facing at that moment. And I think over the medium term, that transition has gone really well. We like the programs we've put in place. We probably have a few more to go and do. We have a little bit of optimization of the eligibility of those programs that we're still working through. But we really like the progress and the performance that we're seeing there. And we think we're striking the right balance between helping people who really need it, most of whom will be successful, a few of whom won't, and not giving it out to folks who don't really need it, understanding that, that may not be in their best interest or in our shareholders' best interest. So we feel like we're striking the right balance there. It did lead to a little bit of a credit hiccup. I think we've largely seen kind of the normalization of that credit over time through the optimization of the programs that I just described. The other thing that we also did during that time, which really hasn't even started to have a material impact yet is we've continued to sort of refine and enhance our credit box. And we learned that there were some people who probably could have been successful under the old loss mitigation approach who maybe can't be quite as successful under the new loss mitigation approach. And so every year for the last 2 or 3 years, we've, on the margin, tightened our credit boxes in places to make sure that we're always sort of responsive to those performance indicators. And we are literally just at the very sort of tip given the long sort of period that students spend in school. We're really at the very tip of seeing those underwriting changes begin to come out and enter P&I. And so we think that gives us even a little bit of tailwind going forward.

Okay. This kind of gets at reserve levels, but also just your view on the economy. How are you feeling about the economy, the jobs market for students?

I think right now, we feel good about kind of where the economy is today. I think certainly, this is a period of lots of change, lots of turmoil, lots of new policies being put out there. I guess there's tariffs that have probably been implemented this morning. We, like everyone else, are looking and paying attention to how those things will impact through and sort of trickle through the broader economy. I think to date, we have not seen anything that gets in the way of sort of the guidance and the normalization of credit that we talked about on the last earnings call. I know that there were a series of articles written recently on student lenders, federal student lenders and some of them seeing lower credit scores as their delinquencies are now starting to be reported to the bureaus. We, every month go back and sort of look and stress and strain our portfolio. We looked at sort of FICO migrations. We've not seen sort of material evidence of that strain to date. But obviously, we'll stay vigilant and continue to look for that. And as I said before, I think the loss mitigation programs and the underwriting changes we've put in place over the last 2, 3, 4 years, I think, will serve us whenever we hit our next downdraft. And whether it's now or at some point in the future, every credit business will eventually hit a downdraft, and we feel like we're pretty well prepared for that.

It's pretty stunning when you think about your losses kind of high 1s, low 2s compared to the numbers you see in the federal program. It's just -- you do a nice job, obviously.

We take a lot of care in underwriting the loan. And again, I think when you have not underwritten and unlimited loans, that can lead to problems. That's obviously not what we do. And I do think that the very cooperative relationship that we encourage between our student borrowers and their parents through the sort of the co-signing process is really helpful as well. And it makes sense. When you're in college, if you can get a better deal by having your parent co-sign the loan, as you're coming out and your income is a little bit lower, if you can get a little bit of support, should you be fortunate enough to have it, that just allows you to sort of fare better than if you had to carry that freight entirely on your own.

Good, okay. Talk about -- there's been a lot of, call it, exits and entrants into your market. You guys have stayed steady. Why do people exit? Why do they enter?

Yes, those are probably better questions for the folks who have exited. My sense is every exit story is an idiosyncratic story. I think really less about the particular market and underlying product, which is a really attractive one. And I think it's more about kind of what's going on at those unique names and those specific companies. I think the entrants, I think, probably see what I hope a lot of the folks in this room and on this webcast see, which is, while this is not the largest consumer credit market out there by any means, it's nicely sized, it's growing, it has attractive features and characteristics, it serves an important social function, and it's a really good loan, both for the customer but also for investors. And I think whether it's private companies, private credit or public companies, I think the folks who have come in see just the really strong intrinsics of the underlying market and say, that's attractive, and I'd like to be a part of that.

Yes. Great. And it shows in your loan sale gains as well.

Exactly right.

Yes. Okay. Remind us of the cadence of originations that you see as a company and how you're feeling about the spring.

Yes. So as I always say, in our business, spring follows fall, fall doesn't follow spring. So fall is really our peak season. And for anyone who's -- sort of understands the college calendar, that makes total sense. People start school in the fall. People tend to think about their financial relationships with that sort of annual academic calendar. So fall really does tend to be our peak season. We tend to have what we refer to as a mini peak season in the spring, and that can be either in the form of sort of serialization and unfunded commitments where we've committed to an academic year, and we're now funding the second installment. They can also be sort of new originations, customers realizing that they have a gap need for that spring that they need to take care of. The spring tends to be a little bit smaller than the fall, just given the nature of it, but both are attractive markets. And so last year, with some of the industry dynamics, we grew at roughly 10% for the year. So if you think about that versus kind of an expected annual -- average annual growth rate of mid-single digits, that was up nicely. I think this year, we sort of believe we'll be in that 7%, 8% growth range. So a little bit lower than last year, but still really nice and attractive growth versus the long-term average as the market continues to settle out post the departure of a major competitor.

Yes. So nothing unusual in the mini peak.

Nothing unusual there in the mini peak at all.

Okay. Remind us of your expense guidance and anything you want to flag or talk about in terms of the cadence of expenses.

Yes. I mean, look, we are fortunate to have largely a kind of a fixed cost business. I think depending on how you measure it, probably 60% or so of our costs are fixed cost business or fixed costs, and that's both on the servicing side, but also carrying through to the marketing and cost of acquisition side. So growth is a really kind of attractive thing for us. So we have modest year-over-year expense growth built into our originations for this year. But I think the most important thing is we've really committed internally to getting to sort of 60-ish percent, maybe slightly better operating leverage in the out years and feel like we've got great line of sight to doing that.

Okay. Got a couple of minutes left. If anybody has a question, this is your chance. Okay. One of the things we talked about when -- I guess, when you arrived was some of the misperceptions of the company. I think you had about 4 key misperceptions that you wanted to correct. Do you feel like you've done enough there? And what are the current things that maybe frustrate you that people don't fully understand about Sallie Mae?

Yes. I think we've gone a long way to sort of addressing those perceptions. And I think when I got here, certainly, there was misperceptions or perceptions about political risk. I think that's changed pretty dramatically. I think there were questions about the potential sort of growth in the core business. I think that has changed sort of pretty dramatically. You go down the line, I think we've corrected lots of those things. As I look forward, it's less a misperception. But I think at the end of the day, this is a nicely sized, but as I said earlier, not massive consumer credit market. It's, call it, $14 billion a year of originations. As a 60%-or-so market share player, that's really surrounded by a number of sort of private, nonpublicly traded companies. We're kind of a universe of one in a nice size but not massive market. And so I think the thing that I hear most from investors who don't know us is just it's a lot of time and effort to learn a business, learn the market, learn the company when I can apply that to effectively one name. And so a lot of what we've been doing has been trying to sort of address that. So why did we spend as much time a year ago in December talking about the investor forum? Because we wanted to make it drop-dead simple as to what we were going to do. Why do I obsess so much about the ROEs on our loans and double-digit EPS growth and operating leverage and the other things that were sort of inherent in that strategy that we presented? Because I know that those things are really important to our investors. You teased me earlier about, gosh, it sounds sort of tailor-made for sort of a financial buyer. Well, yes, that's not by accident. We think this is a great company. We think the loans that we provide are both a really important social thing, but a very powerful economic product as well. We're excited that there seems to be more and more investors who are taking the time to really know our story, and we hope even more do going forward.

Okay. I think we'll leave it there, but nice job, Jon.

Yes. Appreciate it. Thank you for your time.

Thank you.

Yes. Enjoyed being here. Thanks.