Great. Thanks, everyone for joining us. We're very pleased to have with us Sallie Mae and Pete Graham, CFO. Sallie is the dominant private student lender, and has been a disciplined originator, and has been a seller of loans, which is something, a strategy that has generated significant capital to both build the capital base and significant capital return to investors. So, Pete, welcome. Thanks for joining us.
Hey, good morning. Yeah, good to be with you.
Thanks. So maybe kind of pulling up, you know, this, undergraduate enrollment has actually started to increase, for the first time really since COVID, yet there also were delays in the FAFSA. You know, how do you think about the current peak season?
Yeah, so, applications, enrollments were up in the fall of last year. Indications are that that trend is continuing into, you know, into this year. So that overall backdrop is positive in terms of sort of return to growth. And then, you know, inflation and cost of education has always run significantly higher than overall, you know, broader economy inflation. So I think that that's all supportive in terms of the backdrop for the need for our product, if you will, in the funding school. You know, the FAFSA issues that you know, we started the year with, I think have subsided somewhat.
So that if you look at the data around, you know, 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, you know, two, three months ago. We've been anticipating that and preparing for kind of a compression of the peak origination season this year. And you know, we're ready to deal with that, you know, as we start to move into peak season then. But we feel like it was more just a delay to getting started, as opposed to anything that's going to impact the overall volume for this year.
Right. And you've talked a little bit publicly about, you know, about your, your thoughts about, the second-largest competitor leaving. Kind of just give us your, your current thinking as to how that will impact, you know, your, your peak season.
Yeah, again, we included anticipated volume growth from that exit into our guidance for the year. And we anticipate that that will be an above sort of trend line originations profile for this year and next, just given the you know the way that our business follows the academic calendar as opposed to a regular calendar. You know, we'll see the impact of that in our originations during peak this year, and then we'll get another bump you know next year as the second funding on those commitments gets made. You know, nothing really new to report in terms of what we anticipate happening in the market.
We believe that, you know, it's going to be a competitive environment, but I think a disciplined competition as we go into peak this year.
Gotcha.
But 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, you know, last October, you know, federal 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, you know, comparable to before the pandemic. Not quite, but pretty close. When you look at this, you know, how has it impacted your borrowers? Anything that you've seen from a, from a credit performance? You know, those, you know, presumably many of your borrowers do have a federal loan.
Yeah, the majority of, of our borrowers do have federal loans as well. We see that, you know, in the underwriting at the origination of the loans. So over time, you know, we don't get any additional information about whether they're in any kind of, you know, income-driven repayment plan or the like in the federal space, but we do know, you know, which borrowers have federal loans and which don't, and we monitor performance, you know, of those cohorts against each other. We have not seen any indications of a difference in sort of credit performance between those with and without federal loans. So I, I think it's all baked into performance to date, and I think it's all baked into the guidance that we've given around credit.
Gotcha. And before we get into kind of, you know, Sallie Mae-specific questions, maybe one other kind of general topic, and that is, you know, kind of regulatory, various regulatory issues. You know, I think on the one hand, you've certainly got, you know, the concept, the ongoing concept of federal loan forgiveness and the SAVE program. Can you talk a little bit about you know, about how you see that impacting Sallie Mae, you know, if at all on the demand side, and certainly on the credit side as well?
Yeah, 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, you know, policy proposals around that. I think there are some common elements there that I think are things that are gonna get support around really directing the aid to those who need it most, and think about that in the context of expansion, perhaps of Pell Grant programs, additional support for, Historically Black Colleges and Universities-
Right
... and an overall focus on limiting overborrowing in the federal space. I think those are all things that we would support and we think are complementary to, you know, to our business, and I think are good practice. And I think, you know, nothing is likely to happen in an election year, but I think there's good bipartisan support for some of these ideas to maybe get reform going post the election, regardless of who wins.
Got it. You know, 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 two years of free college for anyone earning up to $90,000, so a little higher than the typical income levels. You know, any thoughts about that Colorado program, whether it's something that could, you know, apply in more states? And, you know, if so, you know, how you think about that impacting Sallie Mae's business.
Yeah, again, I think broadly, these programs are gonna be targeting the most needy folks, and that isn't necessarily-
Yeah
... you know, the cohort of folks that become our customers.
Right.
I think in general, to the extent whether it's federal or state programs are focused on, you know, enabling those that have the most need to go to college, you know, that's complementary with our view of responsible, you know, funding in the student loan marketplace.
Yeah. I mean, when we saw it, I you know, sort of had come to the conclusion that, so 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 when you think about, you know, you've done—you did a securitization relatively recently, and obviously you're, you know, selling loans, you know, likely twice a year. Can you talk a little bit about what the investor appetite's been, and how that kind of, you know, kind of influences your thoughts, you know, as we go forward into, you know, the second half and you know, likely another loan sale?
Yeah. You know, 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, you know, was three times oversubscribed, and we ended up upsizing the transaction and tightening pricing in the course of getting that funding done, which is, you know, indicative of strong investor demand. I'm happy to be able to share that right before the Memorial Day weekend, we closed this $1.5 billion second loan sale for the year. Can't comment on pricing really, 'cause the secondary sort of securitization take out of that is-
Right
... is gonna be in the market here in the next week or so, but we'll have more to share in the second quarter.
Got it. So that would make it a second quarter event then?
Correct.
Yeah.
Correct. Yeah.
Okay. Good to know.
Right.
Thank you for that.
That's breaking news, shared here with-
There you go. That's right. All right, so, you know, one of the things that's been very, you know, kind of interesting about Sallie Mae is, you know, the performance of borrowers through the pandemic, the performance of the company from a credit standpoint through the pandemic. And, you know, 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, you know, they're moving sideways, we hope with a slight down trajectory. One of the things that, you know, that you've done recently is started in very late 2023 and continuing now is various forbearance and modification programs.
And can you kind of give, everyone, you know, a little bit of a backdrop on those efforts, you know, what you're trying to accomplish, and where they stand, and how they're likely to affect, you know, Sallie Mae over the course of the next, you know, several quarters?
Sure. Happy to do that. I think it's important to maybe rewind the tape a little bit to that 2022 timeframe... there were a number of factors that drove that, you know, sort of increased credit losses in that time frame. But the primary reason was our change in practice to cease using broad forbearance in sort of managing 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, you know, 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.
You know, we now have, you know, the first cohort of folks that, you know, enrolled in those programs, have completed their three, you know, payments and have re-aged into performing status. Feel good about the, you know, sort of success rate that we're seeing there. Although it's not 100%, it's still a, a pretty, pretty strong success rate, indicative of a well-designed program. We wanna continue to monitor that and see, you know, continued performance of people that have enrolled and see those trends continue. We wanna look for, the folks that have completed those program payments and been, you know, sort of re-aged into performing status. Do they continue to perform under the modified terms of their agreements?
Those are things that, you know, we wanna have more than three to four months of performance to really declare victory. But early indications are that those programs are performing as intended and helping, you know, the borrowers that need to be helped. 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, you know, 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, you know, financial journey, you know, post-college.
And so that's why our programs have a six-month grace period built into the, you know, into the loans before repayment's required to start. And we have an expanded, an additional six months that, you know, folks can tap into, if they need that for, you know, delays in job starts and the like. And so we've had an increased usage of that, you know, starting in the fourth quarter of last year and through into this year. But again, we feel like that's 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, you know, help us get to the overall position on net charge-off that we've signaled we're on a journey to get back to, which is kind of that high 1s-low 2% annualized net charge-off rate. We're, you know, we're feeling good about the guidance we gave for this year. That was a step, you know, in that direction. 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 release earnings.
Right, and certainly it's in contrast to many other consumer lenders who are seeing their credit loss numbers increase. You know, 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, you know, in this extended grace program, I think you said that it's primarily, you know, new borrowers. Are there any other types of borrowers that-
No, it-
There is-
It's only targeted and available to those that are, you know, new in repayment.
Gotcha.
So it's just a tack on to the six months that's built into the program already.
Gotcha. Okay. All right. So I guess when you put all of that together, you know, as we get into the second half, we should start to see, you know, increased exits from the program, kind of offsetting some of the inflows of new borrowers taking advantage?
Yeah, I think we anticipate we'll start to see a normalized level of, you know, of that, as we move into the latter part of this year.
Yeah. So we talked about this, you know, the exit of the second-largest player, Discover, a little bit. Maybe just, you know, kind of flesh out the competitive environment. You know, it's the second time in four years that the number two player has actually left the industry. When you get past number three, you know, you don't see too many significant players. I would say there's, you know, a couple of players that have kind of half-raised their hand about getting into the market. Yeah, just talk a little bit about the competitive dynamic as you're into the peak season this year.
Yeah, I think broadly, what we're seeing in the student loan space, you know, we've seen in other pockets of banking, where, when the traditional banks exit, your private equity-backed entities, you know, sort of step into that, step into that space. You know, we saw that with the Wells exit that enabled, you know, really the, you know, the ramp up of College Ave, who we view now as, you know, one of our main competitors, along with Citizens. So I think those will be the competitors that are our primary competitors, but there's probably some smaller players that will, you know, look to take market share as well. We think it's gonna be a, you know, a very balanced but competitive market as we go into and through peak this year.
Gotcha. Gotcha, gotcha. Okay. Maybe as we kind of talk about, you, you did sort of already preview this by saying you're, you're, you know, confident, maybe increasingly so, about your, your 2024 guidance, given some of the positive things that have gone on. Maybe we could talk about some of those. I mean, we, you know, we, we are in a period where I guess if we had gone back six months or, you know, four, five months when you gave the guidance, expected interest rates to be declining, they're not. Talk a little bit about what your borrowers are doing, and what you're doing, in response to that.
Yeah. So the last two 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, you know, fixed rate, over the potential for, 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, you know, 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, five or six rate cuts this year.
Obviously, now we're looking at, you know, far fewer and 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'll have a positive impact in terms of cost of funding. At some point, you know, could spur an increase in, you know, consolidation related, you know, early repayment. But I think, you know, there's been some comments by folks in that space that it would need to be, you know, 100 basis points or more of rate decrease from here 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'll be some time before that becomes a reality.
Yeah, I mean, I think that, you know, that's been one of the areas of improvement in the, you know, 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 you know 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, you know, safety valves, if things go wrong for borrowers through the programs that-
Right
... you know, the administration has rolled out, that could bring a different calculus in. So it's not just a rate-based, you know, focus on whether to consolidate or not. You know, time will tell whether that changes behavior or not.
Right. I should have mentioned that if there are questions from the audience, you can either... I think there's a link that you can click to have them sent directly to me, or you can email them to me at moshe.orenbuch@tdsecurities.com. 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 know, you've had a small decline in your savings account pricing. I would say, you know, anything that you would tell us, you know, to be aware of in terms of deposit pricing? I mean, as you said, you know, fewer rate cuts this year. Kind of anything, you know, anything we should be, you know, aware of?
No, I think it's just, you know, it, it will be reactive to the overall, you know, movement in Fed funds rate. You know, we are among a group of, you know, interest rate-based deposit gatherers.
Yeah.
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, you know, that we're putting out there. Sometimes we're on the first page of offerings, if it's a specific tenor that we need to gather deposits in. But, you know, largely we're kind of middle of the pack. We're never the highest.
Yeah. So, what I'd like to kind of talk about with our remaining time is kind of capital and, you know, here, you know, you basically... you know, repurchased half the company since this current round of the strategy of sale of loans and stock buyback. Obviously, that also kind of coincided, you know, with the, you know, the CECL deferral, and that's almost done now. You know, you've got one more installment left at the beginning of 2025, but essentially, essentially done. You know, the company you know have spoken about this at length really since the very 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.
Yeah, sure. So, we laid out that five-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 January of next year, and then we'll begin to grow modestly after that. So, in order with the originations, you know, sort of machine that we have, we need to maintain a pretty significant level of loan sales in order to keep that rate of balance sheet growth in single digits. So, you know, the guidance we, you know, sort of laid out there or the framework we laid out there was kind of 6%, 5%-6%, you know, 7% kind of growth over a multi-year period, with loan sales sort of being the tool to balance that out.
This year we've given guidance around 2%-3%, you know, rate of balance sheet growth. You know, we've now completed loan sales with an anticipation of what we think is gonna happen in peak. If we get through peak and, you know, originate more than what we anticipated, then, you know, we could have a decision to either carry a little bit higher rate of growth of the balance sheet this year, or do another loan sale later in the year. It just gives us a flexible framework to just, 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, you know, double-digit rates of growth of the balance sheet.
I think we'll use the, you know, 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 change in valuation multiple as we start to demonstrate, you know, solid, you know, growth of the balance sheet as well, so.
Right. I, you know, I've always thought that the existence of loan sales also puts a little extra discipline from both an underwriting standpoint to pricing, you know, standpoint on the company. So would just, you know, lob out there that the view that having some of it is probably, is probably good all the time. Well you, you know, you, 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 you know, the, the buyback now that you, you know, you, you know, the stock price is somewhat higher? I mean, you'd obviously like the valuation to be better, but, you know, the stock price is higher.
You know, how do you think about the mix of that capital return between dividends and buyback as we go forward?
Yeah, the framework, we laid out, which is, you know, what we intend to follow as we move forward in time here is, you know, that growth of the balance sheet will, you know, fund a growing dividend, you know, in accordance with that over time, and the share repurchase will largely be confined to capital generated through the loan sale process. Now, there's a theoretical argument that at some point we get to diminishing returns in terms of share buyback and the outstanding float of the stock, et cetera. If and when we feel like that becomes an issue, we can revert to special dividends or the like, you know, to deal with that sort of pressure on outstanding float stock, but I don't... You know, like, it hasn't been an issue so far.
It'll be a happy circumstance if it's something we have.
I certainly don't disagree. And I think it is a, you know, it is a, you know, a testament, I think, to the strength of that strategy. And, you know, and, and to be perfectly honest, you know, the fact that the first loan sale was able to, you know, use that, deploy that capital into a, you know, a, a temporarily, significantly depressed stock price. So it certainly had even better, you know, even better, results. We are pretty much out of time and have not, and 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, that they just announced, and, thank him for his participation.
Thank you so much, Pete.
Yeah, great to, great to be here with you, and look forward to seeing you again soon.
Thank you. Take care.