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    SLM Corp (SLM)

    Q2 2024 Earnings Summary

    Reported on Apr 1, 2025 (After Market Close)
    Pre-Earnings Price$23.64Last close (Jul 24, 2024)
    Post-Earnings Price$23.22Open (Jul 25, 2024)
    Price Change
    $-0.42(-1.78%)

    What went well

    • SLM is gaining market share due to a large competitor exiting the market, leading to increased new-to-firm originations and potential growth in loan originations. They have observed a nice increase in new-to-firm originations coming from customers with trade lines of the competitor, and expect this trend to accelerate during peak season.
    • Successful loss mitigation programs are improving credit performance, resulting in lower net charge-offs and better-than-expected credit performance. The company has updated their outlook on total loan portfolio net charge-offs, and these programs are helping borrowers manage through adversity.
    • Strong execution of loan sales at favorable prices, with recent loan sales achieving slightly better gross premiums compared to a large competitor's sale, indicating robust demand for their assets and strengthening their capital position. This also enhances their ability to return capital to shareholders.

    What went wrong

    • SLM's earnings per share (EPS) are expected to be significantly lower in the second half of 2024 due to increased provisioning for new loan originations during peak season, implying potential pressure on profitability. Michael Kaye notes that the new EPS guidance at the midpoint is $2.75, and if he backs out the $2.39 in the first half, that implies about $0.36 EPS for the second half, which is much lower than estimates.
    • Delays in FAFSA reforms have caused uncertainty and a decline in application volumes, potentially impacting SLM's loan originations. FAFSA completion rates for high school seniors are down approximately 11% year-over-year, which may affect SLM's ability to achieve higher-end origination growth.
    • Increases in delinquency rates excluding modifications and uncertainties related to new loss mitigation programs may result in higher credit risk. The delinquency rate excluding loan modifications increased 10 basis points sequentially, raising concerns about future credit performance.

    Q&A Summary

    1. EPS Guidance and Second Half Outlook
      Q: Why does implied second half EPS seem so low?
      A: The lower EPS in the second half is due to higher provisioning for new originations expected towards the higher end of our guidance. Most originations occur during peak season, requiring upfront CECL provisioning, which reduces earnings. Historically, earnings are lower in the second half than in the first.

    2. Share Repurchase Commitment and Timing
      Q: Are you still committed to share repurchases this year?
      A: Yes, we remain committed to our share repurchase program. We plan to be programmatic, staging repurchases with proceeds from completed loan sales. You'll see a continued uptick as we move through the year. The authorization is a $650 million two-year program, deploying roughly half each year.

    3. Loss Mitigation Programs and Charge-Offs
      Q: Can charge-off rates improve further due to successful mitigation programs?
      A: We're encouraged by the success of our loss mitigation programs and aim for net charge-off rates in the high 1% to low 2% range. While we're currently at the low end of our guidance, our long-term goals remain unchanged.

    4. Market Share Gains from Competitor Exit
      Q: Are you expecting share gains after a competitor's exit?
      A: Yes, we've incorporated expected share gains into our originations plan due to a large competitor leaving the market. We've observed increased originations from customers with that competitor's trade line and expect this trend to accelerate during peak season.

    5. Cadence of Loan Sales
      Q: Why did you do two loan sales in the first half?
      A: We took advantage of favorable market conditions to execute the second loan sale in Q2. While timing is market-driven and hard to model, we're pleased to have largely completed loan sales for the year, anticipating potential volatility ahead.

    6. FAFSA Delays and Origination Volumes
      Q: When will you know the impact of FAFSA delays on originations?
      A: We're gaining confidence as FAFSA completion rates catch up. We expect clearer insights by the end of Q3. Early signs are positive, and despite a potentially elongated peak season, we're well-positioned to meet our origination goals.

    7. Net Interest Margin and Deposit Pricing
      Q: How will deposit pricing trends affect net interest margin?
      A: We typically follow market rates for deposits. As the Fed lowers rates, demand deposit rates will decrease accordingly. Term deposit pricing may lag modestly, with fluctuations based on funding needs. This will influence net interest margin trends.

    8. Loan Yield Trends and Fixed vs. Floating Rates
      Q: Why did loan yields decrease, and what's the outlook?
      A: Recent peak seasons favored more fixed-rate originations, skewing the portfolio toward fixed rates and lowering yields. We expect the mix to return to historical levels of 60-40 or 50-50 fixed versus variable, stabilizing yields over time.

    9. Credit Metrics and Seasonality
      Q: How should we interpret changes in delinquencies and modifications?
      A: There's inherent quarter-to-quarter variability and seasonality in credit metrics due to repayment cycles and loss mitigation programs. While new programs may alter delinquency trends, it's too early to provide precise guidance on emerging patterns.

    10. Cosigner Rates Dip in Q2
      Q: Why do cosigner rates dip in the second quarter?
      A: The second quarter, being off the traditional enrollment cycle, is our smallest and involves nontraditional disbursements. This affects cosigner rates, causing them to dip during this period.

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