SLM Corp Q1 FY2024 Earnings Call

Welcome to the Sallie Mae First Quarter 2024 Earnings Conference Call. I would now like to turn the call over to Melissa Bronaugh, Head of Investor Relations. Please proceed.

Thank you, David. Good evening, and welcome to Sallie Mae's First Quarter 2024 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; and Pete Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind, our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here due to a variety of factors. Listeners should refer to the discussion of those factors in the company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, results of operations, financial conditions and/or cash flows, as well as any potential impacts of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations, or forward-looking statements to reflect events or circumstances that occur after today, Wednesday, April 24, 2024. Thank you. And now I'll turn the call over to Jon.

Thank you, Melissa and David. Good evening, everyone. Thank you for joining us today to discuss Sallie Mae's first quarter 2024 results. I'm pleased to report on a successful quarter and progress towards our '24 goals. I hope you'll take away three key messages today. First, we're off to a fast start in 2024. Second, we're encouraged by the trends we have seen in our credit performance. And third, we believe we have positive momentum for the rest of the year. Let's begin with the quarter's results. GAAP diluted EPS in the first quarter of '24 was $1.27 per share compared to $0.47 in the year-ago quarter. Our results for the first quarter were driven by a combination of strong business performance, improvement in credit trends, and the gain on our first loan sale of the year. Loan originations for the first quarter of '24 were $2.6 billion, which is up 6% over the first quarter of '23. We have seen our application volume grow as well, increasing 4% year-over-year. We believe that this is a solid start to 2024. Credit quality of originations was consistent with past years. Our cosigner rate for the first quarter of '24 was 91% versus 89% in the first quarter of '23. The average FICO score for the first quarter of 2024 was 748 versus 746 in the first quarter of 2023. The credit improvement that we observed in 2023 has continued through the first quarter of 2024. Net private education loan charge-offs in Q1 were $83 million, representing 2.14% of average loans in repayment. This is down 29 basis points from the fourth quarter of 2023 and better than expectations. Although we are still in the early stages of implementation, we are pleased with the medium-term performance of our loss mitigation programs and are seeing improvement in our roll to default rates, as well as positive performance trends in all stages of delinquency. As we mentioned in our year-end call, we saw a rise in delinquencies in the fourth quarter due to what we described at that point as the mechanical results of borrowers entering into new payment programs who are in their qualifying period. We have added additional disclosure around both our delinquency and forbearance metrics and are seeing the desired results. Excluding those borrowers that are in their loan modification qualifying period, delinquencies are down quarter-over-quarter from 3.1% in Q1 of 2023 to 2.7% in Q1 of 2024. Loans in disaster or hardship forbearance were 1% at the end of Q1 2024, consistent with performance in Q1 of '23. The $2.1 billion loan sale that we executed in the first quarter generated $143 million in gains. We are encouraged by the price we received, which is in line with our expectations. We still expect to sell additional loans in 2024 with market conditions dictating the timing and our balance sheet growth targets dictating the volume. The balance sheet growth expectations for the year remain at 2% to 3%. In the first quarter of 2024, we continued a capital return strategy by repurchasing 1.3 million shares at an average price of $20.32. We have reduced the shares outstanding since we began this strategy in 2020 by just over 50% and at an average price of $15.95. We expect to continue to use the gain from capital release from future loan sales to programmatically and strategically buy back stock throughout the year. Pete will now take you through some additional financial highlights of the quarter. Pete?

Thank you, Jon. Good evening, everyone. Before we discuss the main drivers of earnings for the quarter, I want to highlight a change in our guidance metrics that you may have seen in our earnings release and investor presentation. We will no longer report non-GAAP core earnings and its related metrics, as it has mirrored our GAAP earnings for the past eight quarters, including this one. Therefore, for our 2024 guidance, we will use GAAP earnings instead of non-GAAP core earnings to calculate the earnings per common share metric. However, the guidance range remains the same at $2.60 to $2.70. Now, let's talk about the key drivers of earnings. Year after year, our strong loan portfolio generated substantial net interest income. For the first quarter of 2024, we recorded $387 million in net interest income. This represents a 4% decrease from the same quarter last year and is consistent with the fourth quarter of 2023. While average yields on interest-earning assets are up by about 45 basis points compared to the year-ago quarter, average interest-earning asset balances have decreased slightly, leading to a $26 million drop in interest income from the previous year. Interest expense rose by $44 million due to borrowing rates increasing approximately 75 basis points compared to last year. The net interest margin for the first quarter was 5.5%, down from 5.7% in the same quarter last year. We believe that a long-term target for the net interest margin is in the low to mid-5% range. Our total provision for credit losses in the income statement was $12 million for the first quarter of 2024. This included an increase in provision of $145 million related to updates in volume and prepayment assumptions, countered by a release of $133 million tied to the $2.1 billion loan sale we completed during the quarter. Most of the provision increase relates to origination volume during the peak period in the first quarter each year. We also adjusted our long-term prepayment assumption, accounting for approximately 26% of the increase this quarter. While this change negatively impacts the provision, it is a positive long-term strategy as we will retain our interest-earning assets on our balance sheet for a longer duration. Net charge-offs for our private education loan portfolio in the first quarter were $83 million or 2.1%, consistent with the prior year's quarter. Our private education loan reserve at the end of the first quarter stood at $1.4 billion or 6.1% of total student loan exposure, including the on-balance sheet portfolio plus accrued interest receivable of $1.4 billion. Our reserve rate improved from 6.4% in the same quarter last year and is in line with levels at the end of 2023. Private education loans that are delinquent 30 days or more represent 3.4% of loans in repayment, down from 3.9% at the end of 2023 and consistent with 3.4% at the end of the previous year's quarter. As Jon mentioned earlier, we have improved our reporting around delinquencies and forbearance for better visibility into our credit performance. After adjusting the numbers to exclude borrowers in a three-month qualifying period related to one of our new programs, the improvement in delinquencies is notable. At the end of the first quarter, loans delinquent 30 days or more accounted for 2.7% of loans in repayment, compared to 3.2% at the end of 2023 and 3.1% in the same quarter last year. We view this as a medium-term indicator of the success of the new programs and will continue to monitor and report on performance in upcoming quarters. Operating expenses for the first quarter were $160 million, compared to $143 million in the previous quarter and $155 million in the same quarter last year, marking a 4% increase compared to the first quarter of 2023. This increase primarily relates to higher volume in the quarter compared to the prior year, with applications up by 4% and disbursements by 6%. Total noninterest expenses in the first quarter were $162 million compared to $202 million in the previous quarter and $157 million in the year-ago quarter. Lastly, our liquidity and capital positions are strong. We finished the quarter with liquidity at 19.1% of total assets. By the end of the first quarter, our total risk-based capital was 13.5% and common equity Tier 1 capital was 12.3%. Another measure, the loss absorption capacity of our balance sheet, calculated as GAAP equity plus loan loss reserves over risk-weighted assets, was a robust 16.2%. We believe we are well-positioned to continue to grow our business and return capital to shareholders moving forward. I'll now turn the call back to Jon.

Thanks, Pete. I hope you agree that we have executed well in the first quarter and that you share my belief that we have positive momentum for the full year 2024. There have been some questions about the potential implications of delays and technical issues associated with the Department of Education's launching of the new fast reforms. At this point, we do not believe that these issues will cause a material impact on volume, but may likely condense an already short peak season. Externally, we continue to partner with our schools to assist families through this process. Through the calculation tools available on our website, our scholarship search capabilities available through Scholly and other materials we provide to families. We are there to help make this peak season as frictionless as possible. Internally, we are preparing for a condensed peak with enhanced staffing, improved digital and other self-service capabilities and other actions. While early, we are also paying attention to the impact of one of our major competitors exiting the market. We believe this will afford us the opportunity to compete for new business. While too early to declare definitively, early analysis suggests a slight volume increase from borrowers that previously had a relationship with that competitor. We expect to see the first real signs of opportunity during peak season over the summer and into the fall. In addition to our originations growth in the first quarter, Pete also mentioned the continuation of slower prepayment speeds, both of which are positive for balance sheet growth and interest income as we look toward the second quarter of the year. We will continue to focus on operational execution, expense management, and NIM to drive results. Let me conclude with a discussion of the 2024 guidance. As I mentioned earlier this evening, we are encouraged by both the successful Q1 origination season, the positive trends we are seeing with credit performance, and our first loan sale execution of the year. We are also optimistic that these things will lead to a successful 2024. We believe the medium-term success of our programs will continue to normalize and we look forward to updating you on that performance progress throughout the year. At this time, we are reaffirming the 2024 guidance that we communicated on our last earnings call, all key metrics. With that, Pete, let's go ahead and open up the call for some questions.

Our first question is from Sanjay Sakhrani with KBW.

This is actually Steven Kwok in for Sanjay. I guess the first question I have is just around the quarter. Relative to your original expectations, how did the quarter come in just because we're trying to tie that back to your guidance that was maintained? Was it that the quarter was in line? Or was it better than expectations that is early in the year and thus you're maintaining your guidance?

Yes, I'd say it's largely in line with what we expected it would be. And although there are some positive trends and developments in the quarter, as Jon said, it's still early in the year. So we'll wait and see how things develop over the coming quarters, but we feel good about the start.

Got it. Regarding the credit side, it's encouraging to see positive trends in credit. As we evaluate the reserve rate, considering the improvement in your credit metrics, how should we anticipate the reserve rate changing over time?

Yes, I don't think we're ready to specify a number for the absolute reserve rate over time. However, it seems reasonable to expect that as we continue to see improvements in credit metrics like charge-offs, we will experience modest improvements in the overall level of reserves we need to hold. Additionally, the changes in underwriting that we've implemented, along with our ongoing evaluation each year, suggest that the quality of our originations is very strong. This will also be refined over time.

We'll take our next question from Terry Ma with Barclays.

So it looks like you're getting some pretty positive results from our loan modification programs. Can you maybe just talk about what more you need to see or what more has to happen before you get some more confidence in kind of updating your guidance for the year?

Yes, Terry, it's Jon. I'll respond to that. As you've pointed out, we're very pleased with the progress and results we've observed thus far. All the metrics we're analyzing at the early stages of a customer entering a loan modification or meeting are modestly exceeding our expectations. Examples of these metrics include the success rate of individuals making their qualifying payments. We're encouraged by this. We consider it as positive medium-term results. However, the real measure of success will be whether participants complete their programs and achieve strong financial outcomes afterward. I believe we'll gain more confidence in this as time goes on, with each month and quarter that passes. Given that we are still in the early stages, we feel it’s important to see a bit more development before considering any updates to our guidance.

We'll take our next question with Jeff Adelson from Morgan Stanley.

Yes, regarding the use of modifications and extended grace periods, are there any metrics you can share about the success rate? You've mentioned qualifying payments, but I'm curious about the delinquency rate, the percentage of extended grace periods, and the percentage in hardship forbearance, which have increased compared to last year. How can you assure us that these will perform as expected and benefit your credit in the future, rather than just delaying the appearance of defaults?

Yes, Jeff, look, fair question. We can certainly go away and think about is there additional disclosure that we want to make there. We have not done that today. Certainly rest assured, we look very hard at those varied metrics internally. Those are the various metrics that we then project out forward when we start to think about guidance for the year as well as the long-term normalization of guidance sort of back to the 1.9% to 2.1% range. But ultimately, the way that we're all going to get comfortable with that is to see these programs fully seasoned over the next several quarters and get back to that target delinquency rate that we think is the right delinquency and net charge-off rate for us to be shooting for. So we'll think about the question of additional disclosure. Thank you for that, but I think we feel very comfortable that what we're seeing is consistent with the guidance that we have given.

Okay. Got it. And just to circle back on the comment about your competitor exiting. You kind of alluded to a slight benefit from their existing customers showing interest. I guess, why wouldn't there be a more meaningful benefit? I mean you've got peak summer season coming with freshmen going to school. It seems like it might be more meaningful than just more of a slight benefit given their presence in the market before?

Yes, Jeff, I think the way I would explain that is you have to remember that the competitor in question did not leave the market until after they had fulfilled their commitment and sort of made the opportunity for the spring loans that they had already committed to. So I think we talk often about the fact that in our business, spring follows fall; fall doesn't follow spring, and that sort of second semester follow-on business is largely cash for that in the first quarter. So I think we've been extremely consistent in saying we expect it to be really very little impact of this strategic move by this competitor until we got to the summer peak season. I think we were pleasantly surprised at the sort of the modest improvement and additional incremental business that we saw there when we looked at customers that had existing relationships with this competitor because quite frankly, we really weren't expecting any in the spring semester. I think to your second question of why you wouldn't see more, I think it's because the peak season for kids going back to school in the fall really doesn't start until June at the earliest. It really gets going in earnest in July and August. And so I think we'll start to have early read batches to set expectations in the second quarter earnings, but I think it will still be preliminary. I think where we will really sort of fully understand the benefit and our success in competing for this new business is when we report out on peak performance, which is obviously always been a third-quarter conversation.

We will take our next question from John Hecht with Jefferies.

In terms of margin and net interest margin, it appears that direct-to-consumer deposits are stabilizing. Given the outlook for the yield curve, what should we anticipate regarding fluctuations in net interest margin, considering that approximately two-thirds of loans are fixed-rate and one-third are adjustable-rate? Could you provide some insights into the reset periods for that segment? Additionally, as we think about CD maturities and their impact on repricing, what should we expect regarding the cost of liabilities and how that will influence net interest margin in the coming quarters?

Yes. I don't necessarily want to get into all of the mechanical parts of it. But what I would say is when we originally set our guidance, we were expecting five rate cuts this year. And we also talked about, in the last call, that we're mildly asset-sensitive and then flip to being liability-sensitive over a longer period of time. And so sort of higher for longer, at least in the short term, is mildly beneficial to us because we'll earn more on the asset side over the near term as the short-term rates don't get lower this quickly. So at the margins, it's probably net positive towards NIM for the year, and maybe the NIM compression they anticipated happening doesn't happen as fast. But we'll wait and see how that develops over the course.

Okay. Can you remind me when the adjustable rate reset occurs and what it is reset based on?

So our loans are SOFR-based and largely have a sort of monthly reset. Obviously, the deposits are set in the market, but generally referencing off of Fed funds or other short-term rates, but competitively priced in terms of deposit flows. And then the ABS is also SOFR based but generally, the reset periods can be slightly longer on that.

We'll take our next question from Rick Shane with JPMorgan.

I would like to elaborate on the point Jeff made regarding how to adjust for loans and modifications. It would be beneficial if you could display the dollar amounts for loans in modification, similar to how you present the figures for loans and forbearance. I'd like to discuss the changes we've observed this quarter. Looking back at last quarter, there were approximately 70 basis points of loans in the qualifying period, which is the difference between 3.9% and 3.2%. This accounts for about $105 million in loans. What percentage of that $105 million was successful in emerging from that period and is now fully modified?

Yes, Rick, I think the way that I would think about it is a loan would only show up as being modified if they were successful at making their three qualifying payments, and then they would go into and be counted as a modified loan for the duration of whatever that particular program was. So if it was a short-term rate reduction, that would be a certain timeframe; if it were a longer-term further, that would be a different time frame. But you don't get counted in those numbers unless you've made your three qualifying payments. And if you fail to make your three qualifying payments, generally as a rule, you will be put back into the delinquency bucket at the level that you would have been given that payment history.

Got it. But here's what I'm trying to understand. So and correct me if I'm wrong, I understand that 2.7 this quarter, 3.2% last quarter. The difference between the 3.9% and the 3.2% last quarter to be people who have been off of loan modifications but have not yet met the three payment standard. So they are still showing up as delinquent, but the expectation is that if they meet that standard, they will migrate. And what I'm looking at is, in the last quarter, there were $107 million specifically or implicitly of loans that were in that test period. This quarter, sequentially, delinquencies declined $90 million. So what I'm trying to understand is of that $107 million that could have rolled through and improved your delinquencies? How much did that $107 million contribute to the $90 million improvement we saw?

Yes, I understand that question. I don't think we have provided that level of detail and disclosure.

Just to add, there's some additional sort of tabular disclosure on the dollar amounts of loans in modification in footnotes. If you look at that, that doesn't give you what you need to do the calculation you're looking for, then just reach back out to Melissa, and we can dig into it more.

I appreciate that. If I could ask one last question, when a loan is modified, how does the economics change? That likely affects the cash flows. Does it also alter the GAAP accruals from an income perspective?

Yes, the modification will depend on the type of program, whether it's rate-based or term-based, among others. Once those qualifying payments are made, they exit the delinquency category and return to the portfolio. The modified terms will then determine the accruals.

We'll take our next question from John Arfstrom with RBC Capital Markets.

You guys made a comment about slower prepayment speeds. I'm curious if that was a surprise at all for you. Anything to read into that? And do you expect that to continue?

No, each time we evaluate the process, we examine recent performance trends. Recently, we have observed an ongoing improvement in the overall lower levels of prepayment. As we considered that trend and applied it to the upcoming quarter, it led us to adjust our longer-term outlook for prepayment.

And Jon, I would like to add that there are several factors influencing prepayment. The rate environment plays a significant role in this. Given the changing rate outlook since the beginning of the year, I would not have been surprised if consolidations continued to slow. At the start of the year, we were all anticipating a different rate environment, which is also an important consideration.

Okay. Fair enough. And then just one more. Your stock has done well recently. I think you deserve it. But are we still in the green zone on the buyback? And just curious how aggressive you'd like to be on that. If you can provide us with any color on your thinking?

Yes, we evaluate that periodically. As you've likely noticed, the rate market has been quite volatile at the beginning of the year. This will be determined as we consider the timing of our next transactions. The transaction we completed in the first quarter occurred when rates were a bit more favorable than they are currently, but we anticipate that as we progress through this year, new opportunities will arise.

I think I confused the question, Pete, but I was asking on the buyback, the share repurchase program, how aggressive you guys want to be on that.

Yes. As I mentioned in the previous earnings call, we plan to be more systematic with the buyback program this year. With the completion of the first loan sale this quarter, we established a plan to repurchase shares, and we intend to be consistent in the market throughout the trading days this year rather than being sporadic.

This does conclude the Q&A portion of today's call. I would now like to turn the floor over to Mr. Jon Witter for closing remarks.

David, thank you, and thank you to everyone who joined us this evening. Again, we are excited about the first quarter performance. I think we are excited about the outlook for the year and look forward to continuing to discuss our performance with you as the quarters unfold. As always, if there are more detailed questions or things that we didn't get to, please feel free to reach out to Melissa and our team, and we will be happy to follow up over the course of the next couple of days. And until we talk to you next quarter, thank you again for your interest in Sallie Mae. Have a great evening. I'm sorry, Melissa, back to you for some closing business.

Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

Thank you. This concludes today's Sallie Mae First Quarter 2024 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.