SLM Corporation ($SLM)

Well, thank you, everybody, for being here. I want to thank Jon for being here selling me the last slot of the 30th RBC conference. .

Encore slot.

Yes. This is the encore slot. But I want to say, save the best for last, but I think it's a dramatically undervalued company, and we're going to try to get through some of the big objections that people have. But it's -- I think it's probably best. I think there's a lot of generalist interest and I know there is from the sign-up sheet. So give us a 30,000-foot view of what is Sallie Mae, and then we'll get to some of the other strategic objectives of the company from here. .

Yes, Jon, thank you, and thank you for the chance to be here. I know this is a huge event for you, and it's great and we have wonderful meetings today and appreciate all the support. For those of you who don't know Sallie, we are technically a 50-plus year old company but the real sort of current version of the company is about 12 or 15 years old now. And we are predominantly or exclusively a private student lender. And so to put that in context, our sort of position with customers is that they should find all the free money that they can to attend college that could be family support, that could be scholarships, that could be grants, they should then get all the subsidized money that they can. And then if there is a gap left at the end, those last dollars to make access to or completion of their higher education journey reality, they should come to see us. So the way that, that plays out, practically, we will lend about $12,000 or $13,000 per loan. An average customer will have about 1.5 loans with us. It will take them about 7 years to repay their loans. So this is very different from what you might hear about with some of the federal programs that are out there. In terms of student success, we know the vast majority of our customers are quite successful with the loan and with the product. We have about a 2% annual net charge-off rate, so comparatively low. When we also do our surveying of customers, we will hear a lot about sort of the last gap financing dollars really being that sort of final thing that put them over the edge in terms of being able to attend the college that they wanted to attend or earn the degree that they wanted to earn. So overall, a business that we're all really excited and passionate about. Almost every member of the management team has their own version of a story of how access to an education played a really pivotal and important role in their life. And we're really thrilled with the ability to pay that forward with our customers. .

Good. Yes, we just talked about that with -- mic's off. There's a lot to talk about going forward. But just what are some of the things that you're the most proud of that you've accomplished over the last few years. .

I've been CEO for 6 years and had the chance to work with a great group of team members and Board colleagues. And I think there's 3 or 4 things that we're really proud of. First, we have built what I think is just an absolutely fabulous customer acquisition machine. We now form a client-initiated relationship with about 4 million customers a year. That's roughly 2/3 of all the high school seniors and families who will matriculate the next year to college. And we help the vast majority of them with things that don't involve lending at all. And that could be accessed to scholarships, that could be access to other collateral information to help them navigate this journey to through or after school. It could be helped with their federal loans and applications. And we do that really because at the end of the day, we sort of stake our north star on this notion of student success. And so being that education solutions company, the one-stop shop for their needs is really important to us. Secondly, Jon, we've had a lot of fun really working on innovating and improving our core business. And whether that's at the top end of the marketing funnel all the way through to how we work with borrowers who are in financial distress we've been able to, I think, find really nice improvements to every aspect of the business. And that's driven down key metrics for us like cost to acquire. It's driven up our NIM over time. It's driven down our loss rates. So we're proud of that innovation in the core business. I think third, we've become a very trusted name in the broader policy with circles around all things higher education. And 2025 was clearly a year with lots of changes in the federal program. We like to think that we were a real voice of moderation and reason in those dialogues. We think we were credible with both sides of the aisle and really making sure that we have responsible borrowing, full access to and completion of higher education is something that our views were sought out on. And then maybe last, but certainly not least, we have been, I believe, real innovators in the area of capital allocation and capital returns, and that through a variety of different strategies the number I'm most proud of is in the last 5.5 years, we've bought back roughly 55% of the shares outstanding of the company. That's generated, we think, really nice total shareholder returns over that period of time and look to continue to be active in that space going forward.

Okay. Great. And also, if anyone has questions at all during the session, just put your hand up and we'll get them answered. There's obviously a lot of ground to cover. So this -- there's a lot to talk about on Grad PLUS, and we'll get to that. But maybe touch on the 8-K that you filed after the close, and I don't want to say that's a legacy business in any kind of way, but talk about that just for a second.

We've been active and maybe I'll zoom out a little bit and put it into the broader context. We've been very active over the last 2 or 3 weeks in the capital markets. Things that were important to our business, but we also think that there are things that during this time of market disruption really show the underlying value of the products that we provide. So we announced last week that we had completed our first on-book securitization of the year. We did that at pricing that was superior to inside pricing of our last deal. We were very proud of that. We thought that was during a tumultuous market, a real indicator of source of strength in our underlying assets. . On Monday of this week, we announced a $200 million accelerated share repurchase arrangement, that in addition to share repurchase activity that we had already undertaken brought us up to about $300 million of delivered capital against repurchasing stock at what we think are very attractive valuations. And then in that press release, sort of hinted at the fact that there was more work to be done. And I would sort of think about that plan is really sort of the recalibration of the capital return we had planned already for this year. But again, we thought and we knew we could do more. And so our great team, our capital markets team went out into the market. We executed a loan sale process. And I'm happy to report that as of about midday today, had reached indicative terms on a $2 billion loan sale that will be closed if all goes according to plan in the first quarter here of this year and included in our first quarter earnings results. I think the more important thing for this conversation, given this is really late breaking news is, we had gotten board approval this first quarter for a $500 million share repurchase authorization split over 2 years, and that's not uncommon. That's what we've done historically. We now believe that with this loan sale agreement in place, our expectation is that we will exhaust most, if not all, of that $500 million authority in calendar year 2026. And so again, that gives us more tools to respond to this period of market dislocation that we're living in.

Okay. A market kid in a candy shop. I mean, that's incredible. .

You can take the big soccer behind the counter. Go for it.

I haven't seen the 8-K, I've been up here for 2.5 hours.

You're not hanging on every word we're putting out .

Well -- can you talk about the gains? Or what was the demand like?

Yes. No, we're not going to talk about the gains ahead of time. We never do that before the deal has closed. And before we announce earnings. Suffice it to say, it is well in line with our expectations. We think it is sort of attractive economics in the grand scheme of sort of what we were planning for, and we're pleased with the outcome and more to come on that. .

And how about the securitization? How did that go, generally?

Yes. securitization, I think, went great. This was during some of the very most sort of intense periods of market dislocation, and we ended up inside of our previous pricing and are thrilled with the execution on that several times oversubscribed, and so I think it really just couldn't have gone any better.

Okay. Okay. So it's interesting because we're still pushing off Grad PLUS but you just executed a loan sale. You just talked about a securitization being nice and tidy, clean and tidy. But at the same time, people are concerned about AI wiping up the prospects of new college graduates and maybe even if you take it to the further extreme, the co-signers. What's your answer to the threat of AI with the recent college grad job market and white collar jobs in general?

Yes, Jon, great question. And first of all, I would be remiss if I didn't say this is not the first time we have seen dislocations between the equity markets and the loan sale markets and fixed income markets as it relates to our name. So it doesn't happen all the time, but we've seen this movie before. On the AI front, to me, it's sort of a story in 4 parts. And number one, while I'm not a futurist, we've obviously looked long and hard at the AI threat. And I guess our emerging internal view is AI is a powerful technology. It's clearly going to reshape big parts of how the industry -- all industries work. It will clearly have an impact over time on how work gets done. But I think it is our view that it like many other technology innovations that have come before it, its evolution is going to be more complex and more nuanced than maybe some of the sort of simple resorts that are out there. And I think if you look over time, there are always cases where innovation takes long in some places, less long than others. There's always places where it causes disruption. At the very same time, it's causing advancements and opportunities in other places. And so I think this notion of it's going to be nuanced, but I think our belief is, in aggregate, it's going to be a procyclical pro business, pro economic set of innovations is really our kind of our working hypothesis. And at the end of the day, you can't make huge sectors of the economy more productive and not have the benefits of that productivity go someplace. And I think that's one of the key messages that's been sort of lost in some of the positions that's been put out there. Yes. Secondly, I think what we're already seeing though is schools, colleges, universities are responding. And they are, I think, understanding that their students are going to need a different set of skills and a different set of capabilities going forward. And they are innovating with new programs, they're innovating with new support services around sort of employment. They're really, I think, looking long and hard at the affordability question within their university in ways that I've never seen before. So this spirit of school innovation, I think, is really taking root and will be very positive for our business, but more importantly, for students who are going to and completing their degrees. Third, I think we really underestimate the resilience of college grads and in particular, new college grads. And you think about this group, they're trained, they're technologically savvy. They're hungry. They're scrappy. And they are looking to go out there and to get started. And I don't think you have to take my word for it. I think if you look at recent college grad unemployment rates, they really tell the story. So if you rewind the tape to last spring, we had Independence Day. We had a lot of talk from companies about the early impacts of AI, a lot of talks about sort of cutting employment and hiring on campuses. And we saw that in the early grad unemployment rates. They always spike over the summer as people graduate and then come down over time. And at the height, unemployment, college grad unemployment, recent college grad unemployment was sort of 1.3, 1.4 percentage points higher at the peak last summer than the year before, so '25 versus '24 as of data that came out today, that gap has closed to 0.1%. And so to put that into real terms, it's taking students this year about a month or maybe 2 longer to find a job than it did at the same time the year before. And so that's a level of resiliency that I'm not sure sort of the pundits get right when they talk about the big AI story. And I think sort of the final part I would put out there, Jon, is we are, as a company, built to be successful in this model and continue to invest in that. So that's things like a 93% cosigner rate on our borrowers, that gives a tremendous amount of support to those students, and it gives us a tremendous amount of confidence in those loans. It's things like a 20%, 25% ROE on our loans which if we do hit an air pocket and have some higher credit exposure, unlike some other products, there's a lot of profitability there to absorb those losses while still being very high return and very attractive. And I think most importantly, over the last, call it, 4 years, we've taken really hard action that I'm not sure has always been fully appreciated to continue to really refine our underwriting approach. So to put numbers on it, depending on how you count it, we have reduced our annual origination somewhere between 10% and 15%, all with a focus on getting a greater resilience in credit performance within our book. And so when I kind of take all of that together, I think the AI changes are likely to be more pro-economic sort of more sort of spread out over time. I think schools are doing a great job responding. I think students are super resilient and scrappy and ready to get after it. And I think we've put ourselves in a really good position to be able to be successful no matter which version of that AI narrative actually evolves. So for all those reasons, I'm excited about what's ahead for us.

Okay. Good. So secondary markets are efficient. You did about $7.4 billion in originations. Things are going well. You're buying back a lot of stock and then the market opens way up with the reform that's come out of Washington. So talk a little bit about what's ahead for you? What's attractive about it and just generally size and frame the Grad PLUS opportunity? .

So for those of you who don't know, we put out some materials in our last earnings report. It gives a bit more of a detailed description of the exact reforms. Jon, for the sake of time, I won't go through all of those. But suffice it to say, it has effectively sort of capped and limited the federal government's involvement at both the sort of undergrad and grad level through the Parent PLUS and the Grad PLUS program. As we have put that through what I think is a very deep and detailed credit sort of analysis and underwriting analysis. We think that is -- you said $4.5 billion, $5 billion a year of annual originations, assuming our current credit box and obviously, if we did something different, there a chance to expand that opportunity. I think I would be remiss if I didn't say that I think the reform is important, first and foremost because it makes the system healthier and better. There's a lot of evidence out there that the uncapped and unlimited federal lending was leading to higher levels of indebtedness that was probably healthy for these students and families and also very directly contributing to the rate of higher education inflation that I think has been haunting the sector probably for the last 30 years, but certainly for the last sort of 5 to 10 years. And so I think it's a positive step forward in terms of reforms, probably more to be done there, but a positive first step forward. I think it means for us, we have the opportunity now to help support and serve a lot more customers. And some of that business is very familiar to us and really very directly related to the particularly undergrad business we have always done. Some of that business very much rides the same sort of chassis and rails, but will take some degree of incremental investment. But again, we think over the next 3 to 4 years, which is how long it will take for the reforms to fully mature and season in, it will be a really nice increase to our annual originations, a really nice increase to our business as a whole and represent the same commitment to high-quality, high-performing assets that we've always had.

Okay. And then to build out your infrastructure to take on some of this new volume required a step function in investment maybe. I don't know if that's too strong in the term. Where are you in the process? What you think people maybe got wrong or misunderstood about what you had to do to take on another $5 billion -- potentially $5 billion in originations?

Yes. There's a little bit, which I think is investment in sort of ongoing sort of resources and capabilities and that's part of it. There's clearly some new products. There's clearly some new capabilities that we will need to have. I think the thing that's most understood though -- most misunderstood is a lot of the increase in spending in my mind is really the result of the market sort of seasoning effect and growth effect as we phase in the reform. So what do I mean by that? Under the reforms, you are only sort of capped in your access to federal programs, if you start school later than this summer. So everyone who comes before that is still under the old program. What that means is this year, we'll have 1/4 of all college students under the new program. And next year, we'll have 2/4 or half and then 3/4 and then all. Same thing for the different graduate school programs. If you think about the effect of that ramp though, it impacts revenue in a couple of ways. One, this year, we'll only have 1 semester of originations, not 2 under the new program. That's the difference between the academic year and the calendar year. So that's pretty understandable. Two, we know in our business, what we call serialization is a big deal. So the most expensive thing that we do, for example, is to acquire that new customer the first time. Having them take their second disbursement from us, having them come back to us their second year or their third year is much more efficient from a marketing perspective. Well, if you think about it in the first year, none of that serialization happens. So there's a whole host, maybe a dozen of these types of sort of forces at work that just caused the first couple of years to not be as efficient as it will be when fully implemented. We've tried to address that by being pretty declarative about where we see our efficiency ratio walk going. So today, we have an efficiency ratio in the mid-30s, which I would argue is pretty darn good. I think in the worst of sort of this ramp up, it will go to the high 30s, which I think there's probably a bunch of my CEO banking colleagues out there who would take that in a heartbeat. But I think we believe that after we get through the ramp period, we will end up in the low 30s around efficiency ratio. So net-net, a little bit of a price to pay for a couple of years, but we think all in service of an improved level of operating leverage and efficiency going forward. .

Okay. Good. And you feel like $5 billion is the number, that's the opportunity set that you have?

We will always aspire to more. We will always aspire to serve more customers. We will always aspire to sort of challenge the contours of our credit box. And I think we will learn a lot, Jon, in the first year, which will really start this summer about where there is opportunity to sort of do more or different. But honestly, a 70% increase in originations is pretty darn impressive in my book. And if it ends up being 75% or 80% so much the better. But I think we're focused on making sure it's at least the 70%.

Are you hearing anything on competitors? The competitor reaction to this opportunity.

It is important to say, first of all, it's a new market for everybody, right? This is a function of the federal government stepping out and creating new space for private enterprise to come in. We have certainly heard anecdotally through CEO comments and other interviews of folks intend to play here. We can see a little bit on the edges of what we suspect are various marketing tests and other programs that are starting to pick up in the marketplace. And we are going into this with a full expectation that this will be a full-blown heavyweight competitive title fight. And I think a big part of why we want to make sure we invest appropriately is we don't want to show up unprepared and out of shape for that title fight. So I'm sure it will be a competitive market. We really like our advantages. We like the proprietary data and insight that we have around our underwriting models, we like the relationships that we have with schools out there and sort of the access that we have to the financial aid offices. We think that gives us a real advantage. We think we have some really deep proprietary marketing channels and insights that will serve us well, and the list goes on. So we like our odds, but I'm sure it will be a competitive title.

Any nuances in terms of how you acquire the volume?

There are certainly nuances around how we acquire the volume. And I think like many products today, this is a sort of a multi-touch acquisition strategy for all of our customers. We've talked about it before. I think we are really proud, and I mentioned at the beginning of that 4 million customer acquisition engine that we've built, we've built that in a really efficient way. with a very low CTA on that. And that allows us to really start a dialogue with customers that we think will play out either on their undergraduate journey or eventually even on their graduate journey if they don't need us on the underground side.

Okay. Good. Touch briefly on the distribution model or how you handle all of these volumes for the benefit of people that may not understand it in terms of the partnership agreements?

Yes. So historically, there have been 2 ways that we have funded the growth in our business. We are a regulated bank. So we have a deposit franchise and sort of an attractive banking option there. And at the other end of the spectrum, we have engaged over the last 5-plus years in a pretty active loan sale process. . Each of those programs has advantages and disadvantages as most things in life. The bank funding provides very stable, consistent, predictable, high-quality earnings over time. but you maintain full risk ownership and in our asset class, the loan loss reserves, the CECL costs and the capital costs are high. So there's a give and get. The loan sales side has historically been great, full transference of risk, nice premiums on the assets that allows us to deploy capital. And as I said earlier, buyback over half the company. The downside there is the earnings, the premium, I think, have been viewed as more volatile over time and perhaps sort of a lower cost of earnings -- it is lower quality of earnings. And so we've kept an eye on this for a few years, but this fall, we announced a strategic partnership with KKR. We love that partnership. We think it's a model for others that may evolve over time. But we really liked it, Jon, because it was a bit of a hybrid between the two. It was all of the -- or much of the capital return and premium options of -- and risk transfer options of the loan sale, but it also provided sort of opportunity for there to be ongoing economics in the loans over time. And so we really like that. And that was important before Plus reform, it became even more important after Plus reform. Because when you start to think about the ability to fund not $7 billion of originations or $7.5 billion, but $12 billion, $13 billion of originations several years out, having multiple different sources there of sort of funding and business arrangements just gives us a lot of options to optimize the mix. .

Okay. Good. I do have a couple more questions, but does anybody have any? Okay. Good. Credit is a topic. You guys have a pretty tight band for credit expectations for the upcoming year. How are you feeling about credit in general? It's obviously on investors' minds. How do you feel about the trends? .

Yes. We put out or put up credit performance in 2025 that was in the sort of the mid-section of our guidance range and kind of within the range of what we think is sort of the right long-term sort of credit expectations for the business. This year, our guidance was very much focused on sort of a stable credit outlook. That's how we described it. And I think if you look at our guidance, it very much fits into that. . I think for us, the big question has been, for those who know us, we started a number of years ago, a very different program around loan modifications and sort of how we treat and work with customers who are experiencing some degree of financial distress, and really, January was the first time we started to see what would happen when those customers rolled out of their loan modification programs. And sort of began to enter back into sort of a normal relationship with the company. And I want to stress a 1.5 months worth of data is really not enough to draw any pattern. And I'm loath even to say it. But based on what we've seen today, we believe those are in line with actually slightly better than our expectations of how those customers would perform. So it's here in early March, it's way too early to declare success, but we like our position coming into the year and the signs that we've seen so far seem to support that contention. .

Okay. This is great. Anything we missed? Anything else you want to touch on? .

I think you hit all the really big ones, and I see we have 30 seconds -- 7 seconds left. So... .

You have a train to catch, I'm ready to shut this down. .

And the bar is about to open.

30th Annual conference. I want to thank you very much for being here at the very end with us. A lot of good stuff happening within the company. Thank you very much, Jon. .

Well, thank you. You've been a great host.