Get started. So, good morning, everybody, and welcome. Thank you for joining us. My name is Terry Ma. I'm the new consumer finance analyst at Barclays. I'm very pleased to have the CEO of Sallie Mae with us, Jonathan Witter. So welcome.
Thanks, Terry. Great to be here.
Yeah, great to have you. So let's just get right, right into it. Can we maybe start with an update on how originations are shaping up for peak season? It's notable that you're, you have to call out.
Yeah, Terry, I'm proud to be able to report today that I think we are on track to deliver probably the best originations year that we have had since the split of the company 10 years ago. So I think on our last earnings call, we had indicated that we thought we would be, you know, at the upper end of our range or slightly better. And I think barring something really unexpected happening, I think we would expect to be at this point probably slightly over the upper end of our range. What I think is interesting, I'm obviously proud and the team is proud of the amount of originations. That's great. We're also really pleased with the quality of the originations.
I think if you look at, you know, sort of the underlying, sort of risk cohorts that we've originated. If you look at things like the FICO Score, the cosigner rate, I think all of those things bode really, really well for these being strong-performing loans going forward. I'm also really proud of how we've originated that growth. Over the last couple of years, we've made some key investments. We've made investments in marketing technology that, quite frankly, allowed us to sort of catch up to where lots of good marketers were already playing. We've also done what we think are a couple of really important, small but important acquisitions, which have put us in a very different place with regard to customer interaction and first-party data.
And I think we've created something in terms of a marketing engine and an origination engine, which is, really distinctive, really hard to replicate, and I think will bode quite well for the future. And when you look at that, you know, in a market that is sort of growing nicely, and quite frankly, at a time where, you know, I think the competitive intensity is quite manageable for us. We think this year's originations are positive, but also bode quite well for the future.
Great. Great. So turning to credit, the net charge-off rate was 2.69% in the second quarter. It was seasonally higher, but an average about 2.4% for the first half, and still better than your full-year expectations. So how's credit trending in the third quarter, and what's the outlook for the remainder of the year?
Yeah, in August, we put up credit numbers that were slightly better than our expectations for the month, and so I think the general trend of stabilized credit and slightly better than expectations holds. You know, this is an environment where I think any good manager of credit is gonna be a little bit nervous, certainly with the uncertainty around the, you know, the broader macroeconomic conditions. But we feel really good about the steps that we've taken to stabilize credit this year. And, you know, we've made important changes to our collections programs. We've made important changes to our collections operations. We've made important underwriting changes, and I think sort of legal changes around sort of how we collect delinquent and past due accounts.
When you put all of that together, you know, we think that bodes well. Our target is still very much for, you know, net charge-offs to be in sort of the high 1% or a low 2% range. So we have a little bit of work to do to get back to that level, but we're optimistic about the steps we've taken and, you know, feel good about the trajectory that we're on.
Got it. So you just touched on this. I think the high ones, the low twos, is what you would call normalized.
Yep.
Maybe can you just dig in and talk a little bit more about the drivers that get you there and how long it may take?
Yeah, I think we, in the last quarter earnings call, set out that, you know, we thought it was probably a, you know, kind of a couple, two to three-year path. We're reserved appropriately for that. If you go back and you look at our 10-K from 2022, I think we lay out pretty clearly the reserve methodology along the lines, and I think that sort of defines kind of how quickly we get there. You know, clearly the credit administration changes we made last year, and I think just the broader macroeconomic conditions that we were dealing with were meaningful. I don't think there's gonna be the one silver bullet, but, you know, as I said before, we've made, added what we think are new, powerful payment programs to help customers be more successful who are facing financial difficulty.
We, as we do every year, have implemented sort of on-the-margin underwriting tightening. We go through a process where we look at past performance and make decisions about where we may want to do slightly, slightly less. I think we made some important underwriting in the last year. Those will, of course, take a little bit longer to play out. We've really rethought the operations of our collection shop from, you know, the leader of that area all the way down, touching almost every part of, of that part of our business. You know, systems, processes, incentive alike. We're also thinking a lot about how we do post charge-off recovery, which doesn't have a gross impact, but it has a net impact.
And implementing different strategies around how we decide which loans to retain, how we work those loans, you know, sort of how we make use of the different legal remedies that we have to work those loans. So all of those things, I think, go into sort of the mix. No one of those is gonna be the answer, but I think in totality, those things together will give us, hopefully pretty strong-
... couple of years ahead. Okay, so helpful color. So forbearance on federal loans-
Yeah.
-is set to expire soon. It's a topic you've addressed in the past, but maybe for investors that aren't quite as familiar, can you maybe just talk about the implications for Sallie Mae, and give some color on how you're thinking about the impact of the 12-month on-ramp and the new IDR plans?
Yeah, happy to. And, you know, for those who don't follow us as closely, you know, Sallie Mae is not involved in the federal loan program. But a large percentage, you know, well into the 80s of our customers who have our private student loans, also hold federal loans. So, you know, things that happen in the federal loan program are obviously of interest to us, and we tend to study them pretty closely and want to work effectively with our borrowers. You know, I think our position to date is, you know, while this is an item we're watching and paying attention to, it is not one that, at this point, we believe is or presents a material risk to credit performance.
And in fact, maybe over the medium and long term, provide some real tailwinds and benefits to us going forward. So let me unpack that a little. As you mentioned, there's sort of two important things that I think really will help federal loan program borrowers successfully reenter payment. You know, one is this 12-month on-ramp program. So effectively, for the first 12 months, if as a federal borrower, you miss a payment or elect not to make a payment, as we understand it, you're not gonna age, you're not gonna incur penalties. You will incur interest, but there's an awful lot of flexibility built into that. I think that's important for a couple of reasons. Operationally, that helps federal servicers get their feet back underneath them.
But I also think for customers who maybe are experiencing a little bit of adjustment in getting back in the habit of making payments, it just gives them a bit more time. I think far more importantly is the new income-based or income-driven repayment options. And, you know, this is a program that I think is really substantially underappreciated in terms of the size, generosity, scope, and potential impact of the business. You know, there's a great fact sheet on the White House website. It's the IDR fact sheet. You can Google it and look it up. It gives some great statistics in there about just the level of generosity of the program.
But for example, you know, if you subscribe to their analysis, you know, the new program will yield about a 40% reduction in all sort of payments per dollar of loans outstanding across the board. And if you are in the sort of lower expected lifetime earnings group, that could be as much as 87%. You know, if you're a new school teacher with a four-year degree, and you can also take advantage of some of the service-based features of the program, you know, your annual payments might drop by as much as two-thirds. So these are really generous benefits. That has a huge impact in the short term with payments starting again. It has a bigger impact, though, on the broader creditworthiness of these customers.
Remember, we underwrite our loans assuming a level of federal indebtedness that's similar to what we see on the books today. So things that have this big an impact on federal borrowers' ability to repay those obligations likely have a positive effect on their creditworthiness with us over time. So we're excited about that. I think the other thing that is worth noting is all of this discussion, I think, has completely changed the political narrative and the perceived sense of political risk in this business. And, you know, when I joined the company half years ago, you know, all people wanted to talk about in the political space is, you know, was the government gonna forgive private loans? Was the government gonna make all college free?
I think where you see the political debate moving to today is a pretty bipartisan view that the federal system is in need of real and practical reform. And I think a lot of the ideas that are being discussed are not, only not risks to Sallie Mae or the double negative, but I think actually are potential real benefits in increasing the size of our potential customer.
Got it. That's helpful. Maybe you address some of this. Are there any other longer-term implications for higher education from these plans? Like, whether it's, you know, just overall demand for loans or, you know, how people think about education?
Yeah, I mean, listen, I think the biggest thing that is of worry in the federal program today, you know, as it relates to these programs, is just the very clear effect that the federal program has on inflation rates within higher education overall. And so when you look at the political discussion, you know, there's a lot of concern about, you know, out there about overextended borrowers. There's also, I think, a lot of concern about just the rate of tuition increase. And I think there's, you know, a number of interesting, one by the New York Fed a number of years ago, that really do connect the, sort of, you know, the generosity of the federal programs with the rate of inflation going on in the market.
My guess is, you know, that will be one of the key drivers of thoughtful reform, should it happen.
Got it. Okay, so maybe switching gears a little bit. What, what's your outlook for refi activity on your portfolio? There's at least one refi lender that expects a major pickup.
Yeah
... in refi volumes after forbearance ends.
Yeah, and let me be clear that, you know, we're not in the refi business, but we pay attention to it because, you know, most people make the decision to refi their loan based on their federal exposure, and then they, you know, tend to refi their private student loans at the same time as, you know, sort of a package of activity. So it's something that we care a lot about. I think the headline is we have continued to see real material year-over-year reductions in the level of refi activity in our portfolio. So, you know, refi activity year to date compared to last year is down, you know, some 58%-60%. So really material reduction.
I think it's our view, but I want to caveat this by saying, again, this is not my business, and I'm not an expert on it, so perhaps I'm missing something here. But I think it's our view that we don't see that picking up, you know, sort of immediately. We don't see it picking up overnight. You know, I think as we look at the world, there's, you know, in our view, two kinds of borrowers who want to refinance their loan. There's a borrower out there that has the financial means, and they're looking to refinance their loan to drive down their interest rate, to really pay back their loans and move kind of to the next phase of their financial life as quickly as possible.
In this rate environment, and when you look at where federal loans and private loans have been booked for the last decade, there is no opportunity for, I would guess, any borrower, or certainly the majority of borrowers, to meaningfully reduce their interest rate. So that group of borrowers, you know, we don't see being major players in the refi space. Likewise, if you are a borrower who's looking to refi to lower payment, and maybe you're willing to accept a higher rate and extend term, that's great. But as we just talked about, you know, with the new income-driven repayment options, the very best way you're gonna reduce rate as a federal borrower is by qualifying for one of those, our IDR programs.
Not only does it reduce your payment, but the other part of IDR is your total lifetime payments are capped at, you know, some number of months, as low as about 10 years. It goes up a little bit from there. So if you're looking for payment relief, there's also a good bet that refi is not your best option. So I am sure refi will have a day, and again, this is not my core business, and I have a lot of respect for, you know, our refi competitors in the marketplace, and they may know something that I don't know. But I think as we look at it, we think refi activity is down and likely to stay muted at least on a period of time.
Got it. Okay. Helpful. Switching gears into loans here.
Yeah.
Indicated another $1 billion planned later this year. Is that still on track?
Yep. In the second quarter, we talked about our timing for that, and I think what we said at that point was that we were going to go to market, you know, just after the Labor Day weekend, the world opened back up again. That is, in fact, still very much our plan. The machine that are in the early stages now of getting that, you know, that process going. I think our early kind of feedback from the markets is, you know, there have been some positives, there have been some negatives versus kind of our expectations over the summer. Clearly, rates have been volatile, and are slightly elevated from where they've been.
But what we've also seen is credit spreads tightening and what seems like a pickup in demand, you know, for these kinds of transactions in general. So, you know, just as a case in point, we did a securitization transaction back in August. We saw spreads tighten versus where we had seen them historically, and we saw demand multiple of what we wanted to do in that transaction, and we thought all of that bodes very well for, you know, for our expectations. So, we think we're on track. We think we will be able to execute that transaction. We believe we'll be able to execute that transaction at pricing that is consistent with our current EPS guidance.
But as I say, every time I get this question on loan sales, of course, that's the result of an auction, and, you know, we'll only know those things for certain once we get to the auction, which we expect to happen toward the end of the month here.
Got it. So I guess when you put all of that together, any color you can give on directionally where gain on sale margins should be for that sale relative to last sale?
Yeah, you know, we don't talk about gain on sale margins in public forums because, you know, it is a competitive process, and I think the last thing that we would want to do is something that, you know, kind of tips our hand toward what we're hearing from various bidders and what we may or may not be willing to accept. So, you know, as a matter of practice, we just don't talk premiums. But look, I think at the end of the day, you know, the inputs to the equation are pretty straightforward. You know, it's rates, it's spreads, it's overall market sort of demand, you know, not just for Sallie Mae, but more broadly in the fixed income space.
I think if you track those things over time, you can get a pretty good sense of, you know, has the environment improved or deteriorated, and to what degree since the last sale? So anyone who wants to think about it and model it, I would encourage them to sort of think about it in those, in these various spaces.
That's helpful. So Sallie's been selling about $3 billion of loans-
Yeah.
- annually and keeping the portfolio flattish during the CSO phase-in. Can you maybe just talk through what Sallie Mae looks like post the phase-in?
Yeah, happy to. And, you know, maybe let me start by rewinding the tape a little bit, because I know not everyone follows us as closely, and maybe not everyone has followed us over the last three years. We put in place the, the loan sale share buyback program about 3.5 years ago, right at the time that I joined the company. And there were two real reasons why we thought that was a winning strategy at the time.... You know, number 1, we saw just a massive disconnect between the premiums that we could get from selling loans in the open market and their implied premium, as evidenced through sort of our equity valuation. You know, that, that gap was just really, really wide, and we thought that was a wonderful thing to try to take advantage of.
The second thing, quite frankly, was also one of sort of capital management and capital discipline. During that very same period of time, we were implementing our CECL phase-in. As a student lender, you know, CECL is a relatively, sort of big lift for us. And what we knew pretty early on was, you know, the ability for us to grow the balance sheet, make our CECL contributions, and return significant shareholder significant capital to shareholder. You just couldn't do all three of those things. And so, the program was really put in place to manage, you know, that need and to take advantage of that opportunity. And I think we believe, you know, internally, and I think I hear it from many of our investors, that that program has been wildly successful.
We have bought back, over the last 3.5 years, approximately half the company. We have generated three-year, you know, absolute and relative TSRs that we think are off the charts. And even if you look at, you know, the most recent year, which I think has been challenging for us and for many, our relative TSR performance versus key indices and competitors is also quite positive during that period of time. So, so we love that strategy. But as your question would suggest, we always knew there would- where that strategy would need to evolve and pivot. And, and that time seemed like a long time ago, 3.5 years ago. It's a lot closer today.
And what's, I think, really exciting about this business, and, you know, I think the headline I would give you is: we believe the best EPS and the best capital generation times are ahead of us, not behind us. Because what's really exciting about this business is when you start to model out, and I've said this on the last couple of earnings calls, and encouraged investors and analysts to do this. But when you really start to model out what happens to EPS growth and what happens to organic capital generation, as you start to, you know, sort of wind down or taper down loan sales and begin to let the balance sheet grow again, it is a really, a really exciting story.
What you see is, you know, a relatively short dip on both EPS and capital available for shareholders, as you would expect. You're taking away a source of earnings and capital release by beginning to taper loan sales. But then what you see after that is really exciting EPS, organic EPS growth, and really exciting capital return capability and potential for the company. And the hero of that story is really the profitability of the underlying loans. When you have assets that are, you know, 20%-25% ROE loans, you get a fairly quick snapback during that pivot time. And so what, you know, what we've talked about and what we've, you know, sort of encouraged folks to do, is to really begin to model that and understand that. You can model that, assuming the pivot happens a little sooner.
You can model that, assuming the pivot happens a little later. By the way, back to, you know, some of your earlier questions, you can model that, assuming, you know, credit costs stay roughly where they are today or improvement in a reversion to credit. Like, it almost doesn't matter. The EPS and the organic capital generation capability of the business really shines through. So we have not made a decision as a company as to exactly when we will execute that pivot. I suspect that that is a, you know, a decision that we will make in the near future. But, you know, for something that's a long ways away, 3.5 years ago, we think it's a lot closer today.
And we think it provides us really, you know, a wonderful opportunity to drive organic EPS growth, drive organic capital generation, and do it in a way that hopefully commands a higher multiple, because it's perceived being lower risk than the, you know, than the focus we've put on gain on sale during that period of time.
Got it. That's, that's helpful. Maybe talk a little bit more about, I guess, how hard the pivot will be. Will it be just retaining the full $3 billion? Like, how do you think about how much you will sell or not sell?
Yeah, you know, look, a little bit of this is art and reading the market conditions. A little bit of this is science. You know, the science part is easier to get your head around. You know, the thing we will continue to have to manage through January of 2025, where we make our last CECL contribution, you know, is what is the sort of quarterly. And we even pay into sort of the monthly capital levels, given just the seasonality of our business. There's seasonality around when we make the CECL contributions. They're all January of the last one will be January of 2025. And for folks who are good students of our business, capital consumption in our business is not uniform throughout the year. We have peak seasons.
We have to fund for originations and disbursements, but we also have to fund for unfunded commitments as well under CECL. So all of that gets worked into, and my guess is, you know, we will look at a combination of, you know, sort of expected premiums and market conditions, and we will look at capital consumption of the business, especially in light of the consolidation and origination. Very positive consolidation and origination trends that we talked about before. And I think that will both determine when we start and how quickly we take down the level of loan sales. And look, it's a pretty easy math. The more you start to take down loan sales and the sooner, the quicker you get the rebound.
The more you delay that, the more the rebound is, you know, sort of put off for another day. So those are the things that we'll continue to pay attention to. And again, we've made no decision on that. But 2.5 years ago, this was barely worth mentioning because 2025, January of 2025 was such a long time away. January of 2025 is a lot closer, and, you know, sort of the constraints that CECL puts on the business are a lot less today than they were, again, when I came through the doors for the first time.
Helpful color. So switching gears. You've made some small-scale acquisitions over the past few years-
Yeah.
- with Nitro College and Scholly. Can you maybe just talk about, Sallie Mae as a education solutions provider?
Yeah. So, you know, I am, in my heart of hearts, a real kind of guardian of the capital of the company. I hope if we've earned a reputation for anything, it's, you know, we really, we value capital. We try to allocate it very, very closely. And I'm not a big fan in sort of large speculative, acquisitions, you know, as a way of, of driving most corporate strategies. I'm sure there's an exception out there. What we really like about these strategies is they are surefooted for us, and surefooted has a very specific meaning. Number one, they are highly accretive to our core business. So you know, what Nitro gave us literally overnight was access to, you know, over 50% of all students and families who are interested in pursuing, higher education, right?
That was a massive change from a marketing and branding and origination perspective. So these are businesses that are highly, highly, highly accretive to the core business. And in fact, you know, we make all of our decisions on premium ability to pay, you know, IRR of the deals, not on, you know, speculative views of what the businesses could be, and I'll talk about that in a second, but really on the very tangible benefits that they're going to convey to the core business. And I will tell you, I think a big part of the origination success that, you know, I talked about earlier is because of the first-party data and the capabilities that came to us with Nitro, and we expect that to continue. So, you know, element number one of surefooted is businesses to the core.
You know, number two is they have to be relatively small in price. And, you know, at the end of the day, that's just a risk element, you know? So if it's, you know, accretive to the core and not that expensive, you know, that's a pretty easy thing to get our head around. But I think third, and really related to your question around an education services company, they also all have some pretty interesting growth options embedded in them. You know, so for example, within Scholly, they have a great little advertising business. They have a great little business hosting scholarships.
You know, there's a whole host of other little growth options embedded in these businesses, which we can invest in, and again, a way that's highly accretive to the core business, but, but also opens up some opportunities down the road. And so for us, you know, the vision of becoming an education services company is, you know, we want to stay true to our knitting. We want to be really disciplined around capital, but we really want to be there as students go on their journey to immediately after college. We want to understand our ability to have a deeper engagement with them during that time.
Again, that helps with originations, it helps with securitization, it helps with collections and credit performance in the immediately after higher education space, and it provides us some interesting places to dip our toe in a low-cost, low-risk way and hopefully find some additional opportunities for us to, you know, to drive growth, you know, in again, a way that I believe is pretty smart.
Got it. Okay, helpful. I'm going to pause right here and just cue the one audience response question that I have. So operators, can you put that up? And the question is: over the next year, would you expect your position in Sallie Mae to, 1, increase, 2, decrease, or stay the same? All right, so 58% increase, 42% stay the same.
I just want to get these results from my board. They'll be so happy.
Okay. So, I'll open it up to Q&A right now from the audience. Any questions? No? All right, just one up here.
Thanks. Just, I know we've talked about credit quality sort of stabilizing or coming better, and I know there's a lot of initiatives, you know, that you're doing. But, what are you following that might make the credit actually worse?
... You know, is there anything in particular that you are worried about?
Yeah, I mean, look, I think at this point, you know, we had our material changes to our strategy and operations hit us over the last couple of years, so I think it's well documented. We made a number of changes for a variety of reasons to our credit administration practices. You know, I think we saw some unique characteristics of our customers as they emerged from COVID, which I think have, you know, really led to, you know, then some of the operational challenges that we faced last year. We don't anticipate making, you know, broad credit administration changes. You know, certainly not to that magnitude. I'm sure we'll always them a little bit going forward.
And I really hope we're never confronted with at least not in a working lifetime, you know, the kind of post-pandemic, you know, sort of stress that we have seen. So I think the sort of unique things that really drove our credit performance last year, you know, we don't see as likely to, you know, to reoccur. You know, I think as someone who's been in the consumer and consumer credit and banking space for a long time, I think the obvious answer is just, you know, broadly, what's going on from a macroeconomic perspective. And, you know, where do we expect to be? And is it a hard landing? Is it a no? Is it something, you know, much worse?
You know, at the end of the day, we've got a lot of protections built into, you know, our business. The cosigner model is a real protection built into our business. The idea that has to be certified against full cost of attendance is a real protection to, our business. You know, the fact that we're, you know, predominantly lending to college graduates, we do have a dropout. You know, most of these folks are going to enjoy higher earnings, is a real protection in our business. And by the way, the high ROEs of the loans is a real protection of our business. While we don't want the ROEs to erode, there is, you know, more loss absorption capability there, you know, should the bottom really fall out of the economy in an unexpected way.
So I think we have a ton of protections built into our business. And, you know, so we feel pretty good about our outlook. But, yeah, I think to answer your question, you know, the thing that I would be worried about is something that feels more macroeconomic and, broad, as opposed to something at this point that is, you know, Sallie-specific, at least as far as we can see.
Great. Any other questions? One back there.
Just a question on the loan sales that are happening this month.
Yeah.
Would you be open to selling more than $1 billion? And without tipping your... You know, showing your cards on pricing, around how much does every $1 billion of sales free up in terms of capital and ability to buy that stuff?
Yeah, so, I've gotten this question a number of times before. I'll give hopefully the same answer. We are always open to exploring the edges of transaction volume and appetite. So I think it's safe to say every auction we've done, at least nearly every auction, I think it's every auction, you know, we have solicited bids for our target amount and for greater amounts. And so we do that as a matter of course, and we will always consider doing more. By the way, don't forget, you know, at the beginning of this year, we actually talked about $3 billion of loan sales, but the volume's being flipped, with $1 billion earlier in the year and $2 billion later in the year. We liked the pricing we saw at the beginning of the year.
We looked at the macroeconomic conditions. We thought there was a wonderful opportunity to de-risk, you know, sort of performance. I'm glad in hindsight we did, and that was because we, you know, we looked at it. We asked for, you know, bids of greater amounts. A great bid came in for the $2 billion and we took it. So that was, you know, that was super. So yes, we will always do that. And I think our management team and our board are always open to, you know, sort of going off script if we think that sales share buyback arbitrage exists, and if we can make good use of it.
So again, I can't, you know, I can't, sort of predict what we will do in this case, and I can't predict where the bids are, but that's a natural part of what we do in every cycle, and this time would be no different. The math on the proceeds is really pretty simple. You know, we release capital, so you can go and look at our, you know, sort of, you know, held capital positions that would get released. We release the loan loss reserve. So you can go and look at that. You know, that will be in, you know, what, the mid-60s or something like that. Tax adjust or tax affect that because that cuts back through in that regard. And we then take the premium, and that's tax adjusted too.
If you add those three together, that gives you what effectively is the new capital, you know, that would be made available through the loan sale.
Okay. Any more questions? I think we'll wrap up with that.
Well, yeah. Listen, Terry, appreciate the time. Great to be here, and thanks for everyone's interest. I would just say if we didn't get to your question or you didn't want to ask it, we've got a great staff, and we'd love to get your question and be helpful any way we can. Thank you all for your interest. Thank you.