Welcome to the Sallie Mae session. My name is Nate Richam. I help cover consumer finance here at Bank of America, and I'm pleased to be joined by Pete Graham, CFO of Sallie Mae. I'll be asking some questions for the first 30 or so minutes, and I'll open up to the audience during the last 10. So firstly, Pete, thank you for joining us.
Yeah, thanks for having me.
So I think many of you know, many of you are familiar with Sallie Mae, the largest private originator of student loans in the U.S. with about a 6% market share. So I'm not going to dive too deep into that, but I wanted to start more high level before diving into deep specifics. Pete, you joined the company about a year and a half ago. What has surprised you most about Sallie Mae and the broader industry?
Yeah, I think it's been really energizing to be part of such a mission-focused company and one that really provides a significant value to our customers. If you think about college funding, we're really enabling these students to attain higher education. And then that's kind of a ticket to a much better earnings profile and potential over their lives and very impactful to them. I think at the same time, it's a really solid business model, and we've demonstrated the return profile and the fact that the way that we're running the business, we can drive significant value for shareholders. So it's kind of, in my mind, a very unique combination of those two things in consumer finance.
Awesome. So you had earnings just a few weeks ago where you set out some solid guidance with you're going to return to a more moderate balance sheet growth. So we can start with the drivers of the guide. Can you talk a little bit about the dynamics between origination growth with the 60%-80% range you have right now and how that might shape out between the mini peak you're currently seeing and the peak season we'll see in the fall?
Yeah, so I'll kind of make some references back to the investor framework that we rolled out in December of 2023. And I will caveat that heavily that that was an analytical framework and not intended to be multi-year guidance. That framework, the assumption that we had was over the long term, we'd kind of have a mid-single digit originations growth. And that's supported over a long period of time by kind of our experience, the overall relative rate of inflation and the cost of higher education. When we completed that investor forum, Discover exiting the student loan market space was just a rumor. It wasn't known at that point. And by the time we gave guidance for 2024, it was kind of more of a known thing. And we incorporated that into our guidance for 2024.
And what we've consistently said all along is that opportunity around a major competitor exit is going to manifest itself for us over two calendar years because of the cycle that our business follows, which is tied to the academic calendar. Spring follows fall, not the other way around. And so we had our first opportunity at that volume opportunity in the peak origination in the fall, which surpassed our expectations. We ended up having 10% year-over-year originations growth, so above even our revised estimates for growth last year. That will naturally carry forward into what we refer to as mini peak, which is that sort of second funding in a normal academic calendar year. And then when we get into peak in the fall, we think we'll be back in more of a normalized 5% kind of level.
So the combination of a heavy mini peak, normalized regular peak is kind of baked into our guidance for originations for the year.
That's very helpful. And then on the origination range, I guess what gets you to the high versus the low end? Is it more so the execution on your side, maybe in the back half of this year and how the market shape or the market size shapes out? Or is it more so the flow through of loans into this peak or mini peak season we have right now?
Yeah, it's hard to be more precise than the ranges. I mean, I think there's a reason that we give a range on these things. I don't think that there's any one thing that I would point to to say it's going to be in the high or the lower end of that range, but more we feel comfortable committing to that, and we feel good about our competitive position. We feel like we took our fair share and then some of volume in this past peak season, and we'll look to continue to build on that as we go into this year.
Keeping on share and for this current season, the season later on this year, how would you describe the competitive intensity currently and your ability to maintain this pretty robust 6% market share you currently have given current dynamics?
Yeah, what we've seen is as major bank competitors have exited our space, so Wells exited a couple of years ago, and then most recently Discover. We've seen we have an ability to take some market share, but then there's plenty of smaller, mostly private equity-backed competitors that are eager to grow their books as well, so we've got a nicely competitive marketplace. We feel great about our position in that market. We've got a brand that's synonymous with private student lending. We've got a very seasoned relationship management team that's got decades of interacting with financial aid offices at over 2,000 institutions across the country, and we've also built through our acquisition of Nitro College a couple of years ago our own internal sort of digital aggregation capabilities, so we feel good about our ability in any environment to maintain our share.
Awesome. And then on the dynamic of the competitive intensity, and like you mentioned earlier in this conversation, Discover left the market about a year ago. How has that exit played out to your expectations? Have you, I don't know, I think you said you took more than your fair share, but how has it played out, I guess, with other competitors in the space too, just as well as you?
Yeah, I think, again, it's been a robust competitive market, but well-balanced in that people weren't doing crazy things for volume. I think at the margins, we have an advantage because we have more than just digital pay-per-click sort of placement to get deal flow and so I think that's one of the things that benefited us as we look to take advantage of the marketplace opportunity this year.
Got it. And then we've seen some, I guess, call it fintechs and some newer entrants in the in-school product recently. Is that something you see as a material threat to your market share? And how do you see those shaping out in the next few years?
Yeah, again, I think those newer competitors are largely going to be limited by how much money they're going to spend on marketing and attracting new customers. And as I said before, we feel really good about the balance of our origination capability with in-person, in-school relationships that have been built up over years, as well as our own organic capabilities to generate digital engagement.
Got it. So now the CECL transition's behind us. You guys are now targeting balance sheet growth of about 5% for 2025. And on the earnings call, you've noted that you could modestly exceed that. Can you discuss a bit why 5% is the right level and how much higher could growth be in this year over 5% without putting too much pressure on funding?
Yeah, so again, I'll point back to the investor forum because that was really a good framework for how we're thinking about stepping back into growth of the balance sheet. So that called for us to grow kind of 2% in the final year of the CECL transition, which was 2024, and then step into growth measurably each year, so 5%, 6%, 7%. Obviously, we're not tied to some linear sort of step each year. But on balance, maybe I'd point you to what we actually did in 2024 as a guide as to how much that could move. We grew our overall balance sheet 3% in the year, but that was also inclusive of us exiting a lower-yielding FFELP portfolio. If you look at it just on a core loan growth, we grew our loan book 5.7%.
So again, at the margins, we could grow a little bit more, but we're mindful of both the capital required, the drag that we face on earnings from the CECL provisioning upfront on originations growth. And we feel like the framework we've laid out of using loan sales to moderate the rate of growth as creating a good balance framework for both stepping into that, managing our earnings commitments, and giving us levers for returning capital to shareholders.
Got it. Very helpful. On the funding side, is there a ratio you try to seek between deposit funding versus using ABS? And how do you think about deposit pricing going into 2025?
So over a long period, we've really had kind of an 80/20 kind of mix of deposits and ABS. Within the deposits, we're trying to roughly balance our use of brokered and retail gathered deposits. The brokered deposits give us capability of getting term into that deposit mix, which is helpful from an ALM perspective. And also the ABS gives us an ability to bring some term into that mix to balance out the duration mismatch between the loans and deposit funding. So we like that mix. We've employed that consistently over a long period of time, and we feel like that's kind of like the right level for us to operate at.
That makes sense. Is there anything you can tell us about trends quarter to date or about halfway through the quarter? Not sure if you can say anything else you can give us there.
I mean, we just released earnings and gave guidance for the year. We feel comfortable in the guidance, so we'll leave it at that. Other than the subsequent events that'll be in our 10-K around completing our first $2 billion loan sale in the quarter. And we also successfully refinanced the unsecured notes that matured in the fourth quarter of this year at really good pricing. We were happy with the execution on that.
Awesome. And then on the loan sale comment you just made, I know you can't talk about execution of the sale entirely, but can you talk a bit about the demand you're seeing in the market for your loans and the pricing you're receiving on the transactions, just broadly speaking?
Yeah, I think the large portfolio sales that happened both when Wells exited and also more recently as Discover exited really attracted a lot of attention from private credit, and people did a lot of work to get up to speed on the asset class and were involved in those bidding processes, and I think on balance, that's created a lot more demand for the asset class. People are sort of up to speed on the business model. They like the combination of yield and return and low loss profile and duration that fits well into the investment profile that they're trying to put to work, so that's been very supportive, and I think we'll continue to be supportive of our strategy of using loan sales to moderate the rate of growth of the balance sheet.
Got it. Previously, I think still currently, your level of loan sales did contribute to the level of buybacks you would put back through the business. Can you just delve a little bit into your capital return strategy now that you're planning for a faster balance sheet growth? I know it might imply some lower loan sales, but is there anything that might also change these factors going forward?
Yeah, I think if you look at, again, back to the investor framework, we tried to create the sort of framework of how we think about capital allocation. So as we start to grow the balance sheet, that will create, let's just call it, high single-digit rate of growth in organic top line NIM. And we're focused on driving expense operating leverage as we move through time and start to grow the balance sheet. So let's say that single-digit top line growth with operating leverage, we feel like we can support double-digit organic earnings per share growth as we begin to grow the balance sheet. That will feed into a growing dividend over time. We're continuing to use the loan sales to moderate that rate of growth of the balance sheet, and that's creating a pool of capital that we can use to continue our share buyback programs.
In order of operation, as we think about growing the balance sheet, obviously, we've got to have capital to grow. That's part of the reason why the share buybacks this year was a little less than half of our allocation because we grew at 5.7% instead of 3%. After funding that growth, we have two pockets of potential capital return to shareholders through the dividend and through share buyback.
Got it. I want to touch on both the capital point and the dividend point. I think also too, part of your litmus there is the share price appreciation you've had in the last year and how that kind of goes back to buybacks. At this higher stock price or lower loan sales, can you speak a little bit to how you might approach dividend raises or special dividends to return capital to shareholders?
Yeah, so our primary framework would say that as we grow organic earnings from growing the balance sheet, that will provide a pool of capital that we can use to grow our dividend. And I think it's early stages of that. We're only in sort of year two of our five-year framework, but you can expect us to be thoughtful about as we grow that pool of organic earnings, we'll start to think about payout ratios and the like to sort of pace the growth of our dividend as supported by that growth in earnings. And similarly, we've said that as we complete the loan sales and we know the amount of capital that's been released by that, we'll then be programmatic about buying back shares.
And so, as we complete the first loan sale in the first quarter of this year, we'll put a program in place that aims similar to what we did last year, to be in the market every day and to try and buy more shares when the price is trending below average and less shares when the price is trending above average.
That's very helpful. And then how much do you factor in your CET1 ratio into this equation? And I guess what target level would you want to be at or remain above?
Yeah, I mean, all of this longer-range planning that we're doing has a capital and liquidity component to that. We each year go through a stress testing process at the bank, and the results of that stress test then inform our discussions with the risk committee of the board as they're setting desired buffers to regulatory minimums. And we kind of go through that every year and make adjustments as appropriate. And then those overall target levels become part of the sort of framework as we're planning the future in terms of ability to pay dividends to the parent for normal dividends or for the share buybacks.
Great. Switching to credit, guidance was very encouraging with net charge-offs improving on a year-over-year basis for 2025. That'd be the third straight year of improvement for credit, where this is an environment where a lot of consumer debt is seeing a lot of credit rising across credit cards or personal loans or whatever. Can you give some color about the underwriting changes SLM has made and I guess how loan modifications have driven strength in your credit over the last couple of years?
Yeah, I think there's an important distinction to make between our credit profile and recent sort of experience versus broader consumer credit. I think some of the weakness in broader consumer credit is because of underwriting decisions that were made in 2021 as they were trying to rebuild balances post-stimulus. Our credit performance recently has been more changes made in our internal credit and collection practices. So we made changes in 2021 to cease the use of sort of judgmental forbearance in helping manage stress in the portfolio. And that caused us in 2022 to have a spike in charge-offs. We've since designed and put in place the various programs that we've talked about, the short-term program focused on extended grace for new grads, and then the loan modification programs that we also rolled out in the fourth quarter of 2023.
Those programs are having the intended effect and is what gives us confidence in giving guidance on continued improvement in net charge-offs as well as our guidance towards a longer-term high 1%, low 2% net charge-off rate, so it's different in that our migration and journey towards normalcy is really driven by normalization of our internal programs as opposed to underlying credit dynamics in the original underwriting, and what you'll see if you look in our investor presentations, we give kind of an origination cohort statistics, and you'll see that through those time periods, our credit metrics as measured by key things like combined FICO score or cosigner rates was pretty stable through those time periods when other parts of consumer credit were stretching to get volume.
We've continued to sort of chip away at higher loss cohorts in the corners of our underwriting box, and we've continued to improve the credit quality of our originations each year.
Got it. And then these loan mods, are they used by a specific type of borrower? Is it a recent grad who may have not gotten a job yet even after their grace period, or is it more attributable to individual circumstance and one-time items?
Yeah, so what we see in our portfolios, the highest period of stress is that, call it, 24 months after separation from college, which is typically graduation. And they're sort of starting on their adult journey, getting first career job, getting established and learning how to balance their budget, making the payments that they're required to make. And so our programs are really targeted at having a tool to help them manage that stress. That said, once you get past that kind of first 24-month period, then our portfolio is more like any other consumer credit portfolio where stress on a particular individual borrower is going to be driven by things like job loss, medical issue, divorce.
In those cases, the same sort of modification programs can be tools to help get through a temporary situation, but the design of them is really focused on that initial period of stress that we see in our portfolio.
Got it. And then I was just curious if SLM does any preemptive actions. We've seen from other credit providers in the event of disasters like the hurricanes we saw in the fall and the winter or the fires we see in California. Do you guys do anything like that too on a preventive basis?
Yeah, certainly. We're monitoring events like that and look to create opportunity for providing relief proactively to consumers. It takes different forms for different types of events, but we always look to provide assistance where appropriate.
Got it. And then are there any learnings you think are most notable or any areas you think these loan mods can be enhanced even further?
I'm sorry, say that again.
Are there any learnings you think are most notable or any ways these loan modifications can be enhanced any further?
Oh, I think we've continued to sort of monitor and tweak at the edges as we rolled out the programs, observed performance in the programs, and the like. We've made some adjustments each quarter as we move through 2024. We're now a year into the programs. We believe the statistics around success rates are really good. So at the three-month mark, over 80% of the people in those programs are being successful in making the payments. At six months, that's over 70%. So again, a good indicator of an appropriately sized and dimensioned loss mitigation program. We'll continue to evaluate changes. One of the things we're observing is we're kind of barbelled. We have a really short-term focus with the extended grace, and then we've got kind of a standard two-year offering.
There's a potential that there might be something in the middle there that would make sense, but we'll continue to observe and test and learn our way into any changes that we might make in the future.
Got it. And then on this credit conversation we're having currently, are there any macro impacts you're looking for that might affect this business? I imagine unemployment might be one of them, but is cumulative inflation something you've also thought about for these consumers as well?
Yeah, I think the one thing I would say about our credit profile versus the broader consumer finances is because we are essentially enabling higher education and either undergrad or grad degrees, the earnings potential and the earnings profile of our borrowers is significantly different than broader consumer finance, so we tend to look at college grad unemployment as an indicator as opposed to overall unemployment. If you look at the trends in that, there's been some pressure there, but it's not as marked as it is in the overall broader unemployment rate, and our borrowers tend to be more resilient in any kind of an economic downturn than the broader economy, so again, I think like any other CFO, I'm watching what's happening in Washington and watching for unintended consequences of some of the changes that are being made.
But I think that's sort of the thing that would keep me up at night is sort of the uncertainty around the broader economy.
Got it. Turning to NIM really quickly, you've spoken to this low- to mid-5% range as the right level for the portfolio over the medium to long term. NIM in the fourth quarter was 4.9%. Can you just walk through the moving pieces about how we get back to this level, both on the yield side and the funding side?
Yeah, I think in general, we're pretty fairly balanced. We have a slight asset sensitivity in terms of rate moves because of the liquidity portfolio that we carry. If you strip the liquidity portfolio away and you look at loan repricing versus liability repricing, the liabilities will reprice faster than the loan book. But the level of the liquidity portfolio does create a drag on NIM. I think as we look at the totality of this year, it's our expectation that we'll aspire to be within that long-term guidance, so low- to mid-5% NIM over the course of the full year, but we'll probably have some pressure earlier in the year and not be at that level yet.
Got it. Very helpful. Obviously, there's a lot of focus on the last earnings call, but the potential for new business arising from the PLUS loan opportunity is pretty large interest for a lot of investors. I know you probably can't speak to the specific numbers, but can you give some background about what the opportunity is and how you're preparing for it?
Yeah, sure. So again, kind of reiterating that without a specific proposal, it's hard to size the potential opportunity. But in broad terms, the PLUS programs are about $25 billion of originations per year. Grad PLUS is about $14 billion of that $25 billion, and Parent PLUS is the remainder. I think the Grad PLUS, a vast majority of that loan product, if moved into the private space, would be underwritable in a responsible way and would be a good volume opportunity in our market. The Grad PLUS or sorry, the Parent PLUS lending is less certain. It's our view that that program, which is largely uncapped, there's no real underwriting that happens in that. We believe that's a source of a lot of the overborrowing and stress on the consumer that's created in the federal programs.
So our view is there's not a whole lot of that roughly $11 billion of volume that would survive in a properly underwritten public lending market space.
Got it. And then on that point, of that $14 billion, obviously, all of it won't be directly to the private market probably, but would there be anything you need to do on an operational standpoint to, I guess, take in that much more capacity if you took your fair share?
Yeah, I mean, we've got existing grad product offerings, although not a huge part of what we originate currently. So it's not like we need to design necessarily something new. We've got a product. We've got an underwriting matrix that we've already been using. At the margins, we might need a little extra staffing around the origination peak. I think probably the thing that we would need to size and work on, put it in a pretty focused way, is how we would fund that. I don't think that we would change our view on rate of growth of the balance sheet and would probably look to build more of kind of an originate-to-sell kind of model around that volume if it comes to pass.
Got it. Staying on the regulatory topic, Sallie Mae and the broader industry saw some noise last year from the FAFSA issues, and recently, there was some confusion from the federal government on the whole funding freeze and whether or not there will be federal student loans or programs and all of that, and while that's been rescinded, and that's more of a messaging issue versus a structural issue we saw before with FAFSA, do you expect any similar impacts to the business just from the recent news and confusion that arose from it?
Yeah, I think it's creating a lot of uncertainty and stress in what is already a stressful period for students and their families. So it's unfortunate. It's really hard to say without seeing specific proposals as to what's going to change. At the margins, it could drive schools to steer more into the private markets and stay away from steering their students into the federal programs. But I think until the framework is a little more known, it's hard to judge how impactful that would be.
Got it. And then are there any other potential regulatory changes you're keeping an eye out for, whether it be any CFPB stuff or something else?
No, again, the main thing really is reforming the federal programs. Even before the election, for a number of years, we've been advocating for responsible reform to the programs because it's our view that the federal programs try and do too much for too many and don't really truly help the ones who actually need it the most. And we were hopeful on bipartisan reform before the election. I think it doesn't seem like bipartisanship is really in fashion on the Hill right now. So I think likely whatever gets done will be part of a reconciliation process, and therefore, we'll need to be pretty narrowly focused on things that impact budgetary concerns.
Got it. We're coming up on time here, so I just want to make sure if anybody has any questions in the audience, we are able to accommodate for that. There's one over here. Oh, sorry, can you wait for the microphone? Thank you.
We were chatting about the NIM, and I'm just wondering the pressure.
Sure, on the first. And the pressure on the NIM that'll then get to 4.5%, does the MOD program have anything to do with that? Because we noticed on your securitizations that there's been a massive increase in those 24-month MODs.
Yeah.
The coupons have come down decently where you're charging borrowers.
Yeah, obviously, the MOD programs do have a depressive effect on NIM. But again, if designed properly, it's a trade-off of a little lower NIM and not having the loans charge off completely. And so again, based on the statistics I talked about in terms of success rates, etc., we feel like it's sized appropriately for the need that's there in the portfolio. I think the other dynamic that's going on in regards to NIM is sort of the tail end of repricing in our deposit liabilities of some longer-term money that we took in a very different interest rate environment that will sort of kind of finally roll out in the first part of this year. And so again, on balance, we feel like we're going to attain our longer-term target for the full year, but we'll probably have some pressure early in the year.
Please quantify around what percentage of your origination will eventually go through this 24-period MOD? How would you think that?
What portion of our origination?
If you're doing the originations for in-school, and then they get out, and all these people have these problems for the first 24 months of balancing their budget and maturing, what % of the borrowers will go through that of any vintage? How do you think about that?
It's hard to say on a vintage basis. I think, again, the maximum stress that we have in our portfolio is when the payment vintage starts. I get that you referenced some of the securitization trust data. That's neither origination vintage nor payment vintage. That's the cut that was created for that pool, and so not really indicative of broader trends in the portfolio necessarily.
And any comment on the CFPB, because they've driven a lot of student lenders a little crazy, and now with the shutdown, is there regulatory cost savings that you may have? It wasn't on the table.
We feel like our program, our process, and how we interact with borrowers is a very fair and balanced interaction. As with any financial company, we have interactions with CFPB as well as our primary safety and soundness regulators. We've always strived to be proactive around understanding what their hot buttons are and reacting to those. So we did not have any particular outsized issues with any of the interactions with that regulator.
Any other questions? Okay. I have a few more. You've made some acquisitions in the last couple of years between Nitro and Scholly. Can you detail a bit about what those additions did for the business and how they could probably grow from here?
Sure. So since Jon took over as CEO in 2020, he's been very focused on creating a very mission-focused company. And our mission is really powering confidence in students and their families to, through, and immediately beyond college. As a result of that sort of mission focus, he has rebalanced our product offering. We exited credit card and personal lending businesses that we had that really weren't mission-aligned, didn't have a tie-in with that core customer and core mission for the company. We've acquired these two companies within a framework of must be mission-focused and meet some need within that customer lifecycle that I articulated. They need to be small in size. They need to pay for themselves in terms of impact to the core business.
And they need to have some interesting optionality that we can use to either broaden our product offering with that core customer set or deepen our connectivity and relationship with that core customer set. So the Nitro acquisition, again, was at the time they were one of the larger aggregators, digital aggregators in our space. We acquired them. They've now become the organic aggregator for our business. So feel that that acquisition has paid for itself through benefits to reduction in our cost-to-acquire customers. Similarly, Scholly was a leading scholarship site, predominantly focused on helping students find scholarships. And we felt like that filled a customer need for our students. We advocate for our students to get as much free money as they can before they look to borrow from us.
And so that had a benefit in terms of that customer relationship, but it also creates some interesting optionality for us to create a B2B play with scholarship providers to host those scholarships on our site and feed applicants into the scholarships. So those are kind of two examples of products that we've built in that space. Another one that we've sort of launched in prototype at the end of the year on our redesigned website is kind of a college page and partnering a tool that's helping students with selecting, deciding what major, and then giving them options for colleges that offer those majors. And so again, it creates more touchpoints with those consumers and builds a stickier relationship over time.
Awesome. We're coming up on time. Just to wrap up, what do you think investors are missing about the Sallie Mae story?
If they're listening to these things, I think they're getting all the points. I think we've talked about all the things that we've been having questions and sessions in our one-on-ones with folks over the course of the day. I think we've touched on all the key external factors that we're concerned about that we're watching. And so I think we've covered all the bases here.
All right. Awesome. Thank you for joining me. I appreciate it.
Yeah. Thanks for hosting. Thanks, everybody, for taking the time to come hear about the company. Appreciate it.