We're on our second fireside chat of the day. I have Jon Witter, here from Sallie Mae. Thank you for being here, Jon.
Good.
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.
Yep, 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 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, you know, Sallie Mae is a 45-year-old company, but the current version of it is really, you know, call it 10 or 12 years old now since our spin-out 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, you know, 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. You know, 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, you know, our average loan is, you know, call it roughly $12,000, $13,000 a year. I'm sorry, $12,000- $13,000. An average customer might have one and a half or so loans with us. Typically, it takes a customer five or six years to pay back that loan. So, you know, all those, I think, indicate pretty good customer success with the product. And, you know, 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 the last several years.
Yeah, thank you for that, and it's been an eventful four and a half, coming up on five years now. I was one of the sort of COVID CEOs that started in the midst of all of that. You know, 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. You know, and so I realized pretty early on that we could not simultaneously grow the balance sheet, phase-in CECL, you know, and return capital to shareholders, and capital return is something that I believe incredibly strongly in.
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, you know, rough justice, 50% of the company over the first, call it, four 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. You know, a year ago in December, we sort of started to move into phase two 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, you know, 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.
We're incredibly sort of proud of sort of the early work and the focus on the core business, the simplification, the, you know, getting out of non-core 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 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?
Yeah, you know, 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, you know, if we were in charged for a day what would our view day, and, you know, I think for a number of years now, we've had the perspective that, you know, the federal program does, you know, too much for too many and not enough for those who really need it.
You know, and so if you unpack that a little bit, you know, the fact that you have unwritten and virtually uncapped levels of federal borrowing, you know, 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, you know, the too much for too many, I think, is pretty clear. I think likewise, you know, the not enough for those who really need it is also clear. You know, if you go back to what I said at the beginning, you know, how we talk to our customers, get all the free money you can, get all the subsidized money you can.
You know, 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, you know, 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, you know, 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.
You know, we think the current administration is very focused on sort of potentially capping and limiting, you know, sort of the, let's, you know, 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.
Could be an opportunity.
Could be an opportunity, certainly.
Yeah, yeah, okay. When 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.
Yeah, you know, 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, you know, it was basically, you know, sort of mid-single-digit origination growth, you know, sort of a, you know, slight tapering of loan sales over time, which drove, you know, sort of increasing balance sheet growth. You know, last year we grew, you know, 2%-3% on the balance sheet our first year. By the way, we sold a 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%-6% growth and sort of accelerating from there. Sort of the operating leverage story. When you put all of that together, I think the investment thesis that we're really excited about is, you know, sort of, you know, 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. 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.
You know.
That's the way it gets.
Last time I checked, that's who owns the company, and that's, you know, those folks and our customers are who we're here to serve.
Okay. Let's talk a little bit about the loan sale. I know when it was initially announced, the 10-K wasn't out, and we've disclosed a little bit about the gains. Talk a little bit about, you know, how much you moved, what the gains looked like, and your plan for the proceeds.
Yeah, $2 billion 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, you know, 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 roughly the other half, you know, and a little bit of that will be based on market dynamics. We always try to buy sort of slightly below the weighted average trading 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.
You know, 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, you know, 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?
You know, we did a fair amount of modeling back around the investor forum to kind of get that right balance. And, you know, we took into account a bunch of different factors. We, you know, 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, you know, what were the impacts on the other parts of our business. You know, 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.
You know, and when we put all of that in sort of the, you know, the Mixmaster , this idea of sort of accelerating, you know, modest but accelerating balance sheet growth came out the other side. So, you know, I think we said in the investor forum, you know, this year might look like 5%, next year might look like 6%, kind of capping 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.
Yeah, we have, you know, I think fortunately a very sort of diversified and straightforward funding strategy. You know, 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, you know, the funding strategy in the past, unless something unexpected, you know, changes in the marketplace, which, you know, obviously we don't anticipate. You know, I think we're conscious of how quickly we grow the asset side of the balance sheet, because the thing that really, I think, you know, accelerates your cost of funding is when you have to grow that funding very quickly. If you can grow that funding, you know, 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 liked the idea of moderate balance sheet growth, so not to strain, you know, 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. Seems like there's a little bit of a lag in the pricing.
Yeah, well, you know, I think there's a couple of different issues there. I think the, you know, the deposit pricing, we're not seeing anything that is out of the ordinary. I think, you know, we've got, you know, betas depending on whether you're going, you know, up or down of, you know, 75%-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, you know, 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, you know, anytime we have periods of, you know, relative stability or, you know, even modest change, but not sort of super accelerating change, you know, we tend to hold that target NIM of sort of, you know, low to mid 5%, I think is what we've said publicly and continue to believe it's sort of the right, you know, sort of the right NIM target for the business.
You got the nod.
Yeah. I've got to always check with my proofreader out here, so.
That's good. You feel like you've optimized your funding base? There's more that you need to do over time?
You know, I think we've optimized our funding base. You know, 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, you know, 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.
Sure.
Last year, there was a little bit of a, I don't want to say surprise, but I didn't think it was that bad. I thought it was more of an opportunity to buy back more stock.
Yeah.
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?
Yeah, and I think what you're referring to is actually now probably a couple years ago, although it still feels like last year to me. But look, you know, I think we're very public about the fact that, you know, 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, you know, as really sort of the primary tool of helping customers when they hit some period of financial distress.
As we looked at that, as we sort of, you know, 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. I think, you know, 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.
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. We feel like we're striking the right balance there. It did lead, you know, to a little bit of a credit hiccup. I think we've largely seen kind of the normalization of that credit over time, you know, 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, you know, every year for the last, you know, two or three years, we've, you know, on the margin, tightened our credit boxes in places to make sure that we're always sort of responsive to those performance indicators. And, you know, we are literally just at the very sort of tip, given the long sort of period that, you know, 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?
You know, 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. You know, 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, you know, 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, you know, 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, you know, 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 two, three, four 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 ones, low twos, compared to the numbers you've seen in the federal program. It's just you do a nice job, obviously.
You know, we take a lot of care in underwriting the loan. And again, I think, you know, when you have not underwritten and unlimited loans, you know, that can lead to problems. That's obviously not what we do. And I do think that the, you know, 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, you know, it makes sense when you're, you know, in college, you know, 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, you know, that just allows you to sort of fare better than if you had to carry that freight entirely on your own.
Yeah. Okay. Talk about there's been a lot of, call it, exits and entrants into your market. You guys have stayed steady. But why do people exit? Why do they enter?
Yeah, those are probably better questions for the folks who have exited. You know, 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, you know, those unique names and those specific companies. You know, 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, you know, 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, you know, both for the customer, but also for investors.
I think, you know, 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, you know, that's attractive and, you know, I'd like to be a part of that.
Yeah. And it shows in your loan sale gains as well.
Exactly right.
Yeah. Okay. Remind us of the cadence of originations that you see as a company and how you're feeling about the spring?
Yeah. So, you know, 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, you know, sort of understands the college calendar, that makes total sense. You know, people start school in the fall, people tend to think about their financial relationships with that, you know, 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 disbursement and unfunded commitments where, you know, we've committed to an academic year and we're now funding the second installment.
It can also be, you know, sort of new originations, customers realizing that they have a gap need for that spring that they need to take care of. You know, the spring tends to be a little bit smaller than the fall, just, you know, given the nature of it. But both are attractive markets. And so, you know, last year with some of the industry dynamics, we grew at roughly 10% for the year. So if you think about that versus, you know, kind of an expected annual average growth rate of mid-single digits, that was up nicely. I think, you know, this year we sort of believe we'll be in that, you know, 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, you know, the market continues to settle out post the departure of a major competitor.
Yeah, 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?
Yeah. I mean, look, we are fortunate to have, you know, largely a kind of a fixed cost business. I think depending on how you measure it, probably, you know, 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, you know, we have modest year-over-year expense growth built into our originations for this year. But I think the most important thing is, you know, we've really committed internally to getting to sort of 60-ish%, 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 minutes left if anybody has a question. This is your chance. Okay. One of the things we talked about, I guess when you arrived, was some of the misperceptions of the company.
Yeah.
I think you had about four 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?
Yeah, I think we've gone a long way to sort of addressing those perceptions. And I think, you know, when I got here, certainly there was, you know, misperceptions or perceptions about, you know, political risk. I think, you know, 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 know, you go down the line, I think we've corrected lots of those things. You know, as I look forward, it's less a misperception. But I think, you know, at the end of the day, this is a nicely sized, but as I said earlier, not massive consumer credit market. You know, it's, you know, call it $14 billion a year of originations.
You know, as a 60% or so market share player, you know, that's really surrounded by, you know, a number of sort of private non-publicly 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 a market, learn a company when I can apply that to effectively one name, and so, you know, 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, you know, gosh, it sounds sort of tailor-made for, you know, 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.
Yeah, appreciate it. Thank you for your time.
Thank you.
Yeah. Enjoyed being here, thanks.