Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- SLM Corp (SLM, Financial) reported GAAP diluted earnings of $1.11 per share for Q2 2024, slightly up from $1.10 in the same quarter last year.
- Loan originations increased by 6% year-over-year, reaching $491 million in Q2 2024.
- Credit quality of originations improved, with the cosigner rate increasing to 80% and the average FICO score rising to 752.
- The company executed a $1.6 billion loan sale, generating $112 million in gains.
- SLM Corp (SLM) continues to see positive trends in credit performance, with net private education loan charge-offs better than expected.
Negative Points
- The delay in the Department of Education's FAFSA rollout has caused uncertainty and a small decline in application volume.
- Net private education loan charge-offs were $80 million, representing 2.19% of average private education loans in repayment.
- The company expects a lower EPS in the second half of 2024 due to higher provisioning for new originations.
- Non-interest expenses increased by 2% compared to Q2 2023, reaching $159 million.
- The competitive environment remains intense, with aggressive marketing spend from competitors.
Q & A Highlights
Q: What's the outlook in terms of the FAFSA fixes and college enrollments, and how are you viewing the competitive environment at this stage?
A: Jon Witter, CEO: We are gaining more confidence in the FAFSA catch-up each day. Completion rates for high school seniors are improving, and application volumes are narrowing the gap. We expect to have a clearer picture by the end of the third quarter. Regarding the competitive environment, we compete in a nicely competitive market with strong competitors. We always see aggressive marketing, especially early in the season, but we remain disciplined in optimizing our marketing channels.
Q: Can you expand on the optimization of the loss mitigation programs and discuss the protections for investors?
A: Jon Witter, CEO: We are replacing a broad forbearance program with more segmented and targeted programs. Optimization could involve tightening eligibility criteria. We use rigorous analytical and test-and-control frameworks to measure success, looking at metrics like qualifying payments and performance after the program. The goal is to help customers regain financial footing if they have the ability and willingness to do so.
Q: Are you seeing share gains with a large competitor exiting the market, and what can you say about the gain on sale from the recent portfolio sale?
A: Jon Witter, CEO: Yes, we are seeing share gains from the competitor's exit, which is part of our expectations. We track new originations from customers with the competitor's trade line and have seen an increase. Pete Graham, CFO: The competitor had slightly better credit quality, which may have contributed to their higher gain on sale. However, the demand for our assets remains strong, with multiple bidders ready to invest.
Q: Given the success of the loss mitigation programs, do you anticipate a better steady-state charge-off rate?
A: Pete Graham, CFO: We are still targeting a long-term net charge-off rate in the high 1% to low 2% range. The updated guidance for this year touches the low end of that range, and we are encouraged by the success of the programs.
Q: Can you explain the improvement in loss mitigation efforts and how it affects delinquency rates?
A: Jon Witter, CEO: The impact of loss mitigation programs is seen in early to mid-stage delinquency buckets. The real payoff is in net charge-offs, which we aim to keep in the high 1% to low 2% range. The programs help customers at different points in their journey, ultimately reducing net charge-offs.
Q: How do you view the impact of potential interest rate cuts on deposit pricing and net interest margin?
A: Pete Graham, CFO: We are not market leaders in setting deposit rates and tend to follow the market. We expect deposit rates to move in lockstep with Fed funds rate cuts. The impact on net interest margin will depend on the overall rate environment and our mix of fixed and floating rate loans.
Q: What is the strategy for share repurchases given the high cash position and remaining authorization?
A: Pete Graham, CFO: We plan to deploy share repurchases programmatically throughout the year, funded by proceeds from completed loan sales. The authorization is for two years, and we aim to split it roughly half and half over that period.
Q: Can you provide more details on the new default rate model implemented for reserving?
A: Pete Graham, CFO: We continually improve our modeling capabilities. The new model implemented in the second quarter is an improvement over the previous one, reducing the need for overlays. The difference is not material but enhances the precision of our computations.
Q: How do you plan to optimize eligibility for loss mitigation programs, and what are the success rates of different programs?
A: Jon Witter, CEO: We aim to help customers regain financial footing if they have the ability and willingness to do so. Optimization involves tailoring programs to individual needs while balancing economic costs. Both the extended grace and modification programs have shown success, with no material difference in performance between them.
Q: How should we interpret the sequential improvement in loans in modification versus the increase in delinquency rates?
A: Pete Graham, CFO: There is some noise quarter-to-quarter in these metrics. We focus on broader trends and the success of borrowers in the programs. There is meaningful seasonality in these numbers, and we expect some new curves to emerge as we gain more experience with the programs.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
