Shimano Q1 2024 Earnings Call Transcript

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April 24, 2024

There are 9 speakers on the call.

Operator

Welcome to the Sallie Mae First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed in a listen only mode and the floor will be opened for your questions following the prepared remarks. I would now like to turn the call over to Melissa Brano, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, David. Good evening, and welcome to Sallie Mae's Q1 2024 earnings call. It is my pleasure to be here today with John 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.

Speaker 1

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.

Speaker 1

And now I'll turn the call over to John.

Speaker 2

Thank you, Melissa and David. Good evening, everyone. Thank you for joining us today to discuss Sallie Mae's Q4 2024 results. I'm pleased to report on a successful quarter and progress towards our 2024 goals. I hope you'll take away 3 key messages today.

Speaker 2

First, we're off to a fast start in 2024. 2nd, we're encouraged by the trends we have seen in our credit performance. And 3rd, 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 Q1 of $0.24 was $1.27 per share as compared to $0.47 in the year ago quarter.

Speaker 2

Our results for the Q1 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 Q1 of 2024 were $2,600,000,000 which is up 6% over the Q1 of 2023. 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.

Speaker 2

Our cosigner rate for the Q1 of 2024 was 91% versus 89% in the Q1 of 2023. Average FICO score for the Q1 of 2024 was 748 versus 746 in the first quarter of 2023. The credit improvement that we observed in 2023 has continued through the Q1 of 2024. Net private education loan charge offs in Q1 were $83,000,000 representing 2.1 4% of average loans and repayment. This is down 29 basis points from Q4 of 2023 and better than expectations.

Speaker 2

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 did see a rise in delinquencies in the Q4 due to what we described at that point as the mechanical results of borrowers entering into new payment programs who were 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 'twenty three.

Speaker 2

The $2,100,000,000 loan sale that we were able to execute in the Q1 generated $143,000,000 in 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 remains at 2% to 3%. In the Q1 of 2024, we continued our capital return strategy by repurchasing 1,300,000 shares at an average price of 20 point $3.2 We have reduced the shares outstanding since we began this strategy in 2020 by just over 50% at an average price of $15.95 We expect to continue to use the gain and 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.

Speaker 2

Pete?

Speaker 3

Thank you, John. Good evening, everyone. Before we jump into the key drivers of earnings for the quarter, I wanted to mention a change to our guidance metrics that you may have noticed in our earnings release and investor presentation. We have discontinued reporting non GAAP core earnings and its related metrics as it has been identical to our GAAP earnings the last 8 quarters, including this quarter. As such, for purposes of our 2024 guidance, we are now using GAAP earnings in place of non GAAP core earnings in the calculation of the earnings per common share metric.

Speaker 3

However, the guidance range is unchanged at $2.60 to 2.70 dollars Now for a discussion of key drivers of earnings. Year after year, our quality loan portfolio generates significant net interest income. For the Q1 of 2024, we earned $387,000,000 of net interest income. This is down 4% from the prior year quarter and level with the Q4 of 2023. Although average yields of interest earning assets are up about 45 basis points over the year ago quarter, average interest earning asset balances are down slightly, which resulted in a $26,000,000 decrease in interest income from the year ago period.

Speaker 3

Interest expense was $44,000,000 higher as borrowing rates increased approximately 75 basis points from the prior year. Net interest margin for the Q1 was 5 point 5% compared to 5.7% in the year ago quarter. We continue to believe over the long term that low to mid 5% is the appropriate NIM target. Our total provision for credit losses in the income statement was $12,000,000 1st quarter of 2024. This is comprised of an increase in provision of $145,000,000 related to volume and prepayment assumption updates, offset by a release of $133,000,000 associated with the $2,100,000,000 loan sale we completed during the quarter.

Speaker 3

The majority of the increase to provision is related to origination volume during the mini peak that occurs in the Q1 of each year. Additionally, we reduced our long term prepayment assumption, which accounted for approximately 26% of the increase during the quarter. Although this change in assumption has a negative impact on provision, this is a long term positive as we will continue to keep our interest earning assets on the balance sheet for a longer period of time. Net charge offs for our private education loan portfolio in the Q1 were $83,000,000 or 2.1 percent consistent with the year ago quarter. Our private education loan reserve at the end of the Q1 is $1,400,000,000 or 6.1% for the total student loan exposure, which includes the on balance sheet portfolio plus the accrued interest receivable of 1,400,000,000 dollars Our reserve rate shows improvement over the 6.4% in the prior year quarter and is consistent with levels at the end of 2023.

Speaker 3

Private education loans delinquent 30 days or more, 3.4 percent of loans repayment, a decrease from 3.9% at the end of 2023 and consistent with the 3 point 4% at the end of the year ago quarter. As John mentioned earlier, we've refined our disclosure around both delinquencies and forbearance to get more visibility into our credit performance. When adjusting the numbers that I just discussed to remove the borrowers who were

Speaker 4

were in a

Speaker 3

3 month

Speaker 5

qualifying period

Speaker 3

related to one of our new programs, the improvement in delinquencies is compelling. At the end of the Q1, loans delinquent 30 days or more becomes 2.7% loans in repayment as compared to 3.2% at the the end of 2023 and 3.1% in the year ago quarter. We believe that this is a medium term indicator of the success of the new programs and we'll continue to monitor and disclose performance in the coming quarters. 1st quarter operating expenses were 100 and $60,000,000 compared to $143,000,000 in the prior quarter and $155,000,000 in the year ago quarter. This was a 4% increase compared to the Q1 of 2023.

Speaker 3

Majority of this increase relates to increase in volume in the quarter compared to the prior year, with applications increasing 4% and disbursements increasing 6%. Total non interest expenses in the Q1 were $162,000,000 compared to $202,000,000 in the prior quarter and $157,000,000 in the year ago quarter. Finally, our liquidity and capital positions are solid. We ended the quarter with liquidity of 19.1 percent of total assets. At the end of the Q1, total risk based capital was 13.5% and common equity Tier 1 capital was 12.3%.

Speaker 3

Another measure of the loss absorption capacity of the balance sheet is GAAP equity plus loan loss reserves over risk weighted assets, which was a very strong 16.2%. We believe we're well positioned to continue to grow our business and return capital to shareholders going forward. I'll now turn the call back to John.

Speaker 2

Thanks, Pete. I hope you agree that we have executed well in the Q1 and that you share my belief that we have positive momentum for the full year 2024. There has been some question about the potential implications of delays and technical issues associated with the Department of Education's launching of the new FAFSA form. At this point, we do not believe that these issues 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 Scholarly and other materials we provide to families, we are there to help make this peak season as frictionless as possible.

Speaker 2

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 1 of our major competitors exiting the market. We believe this will afford 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.

Speaker 2

In addition to our originations growth in the Q1, Pete also mentioned the continuation of slower prepayment speeds, both of which are positives for balance sheet growth and interest income as we look toward the Q2 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 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.

Speaker 2

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 for all key metrics. With that Pete, let's go ahead and open up the call for some questions.

Operator

Our first question is coming from Sanjay Sakhrani with KBW. Please go ahead. Your line is open.

Speaker 6

Hi. This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. I guess like the first question I have is just around the quarter. Relative to your original expectations, how did the quarter come in?

Speaker 6

Just because I'm trying to tie that back to your guidance that was maintained. Was it that the quarter was in line? Or was it better than your expectations that it's early in the year and thus you're maintaining your guidance? Thanks.

Speaker 3

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

Speaker 6

Got it. And then just around the credit side, it's nice to see that the credit trends are trending positively. Just as we look at the reserve rate, as your credit metrics continue to improve, how should we think about what the reserve rate can get to over time? Thanks.

Speaker 3

Yes. I don't think that we're ready to call a number for the absolute reserve rate over time, but I think it makes sense that as we continue to see improvements in credit metrics like charge offs, etcetera, that we will continue to see modest improvements in the overall level of reserves

Speaker 7

that we're trying to put up.

Speaker 3

I think that coupled with the changes in underwriting that we've made and we continue to sort of tweak each year, the origination quality is very strong and that will itself over time as well.

Speaker 6

All right. Thanks for taking my question.

Operator

We'll take our next question from Terry Ma with Barclays. Please go ahead. Your line is open.

Speaker 6

Hey, thanks. Good afternoon. So it looks like you're getting some pretty positive results from

Speaker 3

your loan mod programs.

Speaker 6

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 guide for the year?

Speaker 2

Yes, Terry, it's John. I'll take that one. As you indicated, we are very pleased with the progress and the results that we've seen so far. All of the metrics that we can look at, at the early stages of a customer entering a loan mod are meeting or modestly exceeding our expectations. So examples of those types of metrics would be things like what is the success rate of people making their qualifying or their 3 qualifying payments.

Speaker 2

So we like all of that. And I think we sort of described it as sort of positive medium term results. Ultimately though, the real proof here is do folks graduate from their programs, do they enjoy strong financial success on the other side of those programs. And I think that's just something that we will gain more and more confidence in with each passing month and each passing quarter. But I think given it was still relatively early stages, I think we felt like we wanted to see a bit more of that seasoning before we thought about updating guidance.

Speaker 6

Great. That's helpful. Thank you.

Operator

We'll take our next question with Jeff Adelson from Morgan Stanley. Please go ahead. Your line is open.

Speaker 8

Hey, good evening, guys. Thanks for taking my questions. Yes, just along the same lines of credit, I guess, as we look at the increased use of these mods and the extended grace periods,

Speaker 1

Maybe are there any kind

Speaker 8

of metrics you can point us to in the success rates? I know you just alluded to that, how you're seeing qualifying payments, etcetera. But I guess I'm just wondering if you look at I don't know if this is the right way to look at it, but if you look at the delinquency rate, the percent in extended grace period and the percent in hardship forbearance, that number has gone up versus year ago. So how do you give us that confidence that those are going to perform as expected and help your credit even in a year from now and you're not just putting them into a bucket where the default rate isn't going to show up for now?

Speaker 2

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 very metrics internally.

Speaker 2

Those are the very same 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 season over the next several quarters and get back to that target delinquency rate that we think is the right delinquency in that charge off rate for us to be shooting for. So we'll think about the question of additional sort of 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.

Speaker 8

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 the peak summer season coming with freshmen going to school. It seems like it might be more meaningful than just more of a slight or modest benefit given their presence in the market before.

Speaker 2

Yes, Jeff. I think the way I would explain that is you have to remember that the competitor in question did not leave the mark yet until after they had fulfilled their commitments 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. That sort of 2nd semester follow on business, the die is largely cast for that in the Q1. So I think we've been extremely consistent in saying we expected there to be really very little impact of this strategic move by this competitor until we got to the summer peak season.

Speaker 2

I think we were pleasantly surprised at the sort of the modest improvement and sort of 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 till June at the earliest and really gets going in earnest in July August. And so I think we'll start to have an early read of that just 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 sort of the benefit in our success in competing for this new business is when we report out on peak performance, which has obviously always been a Q3 type of conversation.

Operator

We'll take our next question from John Hecht with Jefferies. Please go ahead. Your line is open.

Speaker 5

Afternoon. Thanks for taking my questions. Just looking at margin NIM, it looks like the direct to consumer deposits are stabilizing. I'm wondering kind of given the yield curve outlook, what we should think about the NIM kind of fluctuations as I think you have about 2 thirds fixed rate loans and 1 third adjustable rate loans. And so maybe you could kind of give us some details about kind of how the reset period looks for that group.

Speaker 5

And then thinking about kind of CD maturities and repricing of that, what we should think about kind of the cost of liabilities and how that affects NIM over the next few quarters?

Speaker 3

Yes. I don't necessarily want to get into all of the mechanical parts of it. What I would say is when we originally set our guidance, we were expecting 5 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 the 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 those short term rates don't get lower this quickly.

Speaker 3

So at the margins, it's probably net positive towards NIM for the year and maybe the NIM compression that we anticipated happening doesn't happen as fast, but we'll wait and see how that develops over the course of the year.

Speaker 5

Okay. And then remind us or remind me when the reset of the adjustable rate occurs and what it's reset off of?

Speaker 3

So our loans are SOFA based and largely sort of a 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 SOPRA based, but generally the reset periods can be slightly longer on that.

Speaker 5

Okay. That's very helpful. Thanks.

Operator

We'll take our next question from Rick Shane with JPMorgan. Please go ahead. Your line is open.

Speaker 4

Thanks everybody for taking my question this afternoon. Look, I'd like to pull a little harder on the thread that Jeff started, which is thinking about sort of or how to calibrate for loans in modification. I think it would be really helpful if you would show as you show with the dollars of loans in forbearance, the dollars of loans in mod as well. I'd like to talk a little bit about the migration we've seen this quarter. So if we go back to last quarter, implicitly there were about 70 basis points of loans that were in the qualifying period.

Speaker 4

That's the difference between the $3,900,000 and the $3,200,000 That represents, call it, dollars 105,000,000 worth of loans. What percentage of that $105,000,000 actually was successful and emerged from that period and is now fully modified?

Speaker 2

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 3 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 time frame. If it were a longer term program, that would be a different time frame. But you don't get counted in those numbers unless you've made your 3 qualifying payments.

Speaker 2

And if you fail to make your 3 qualifying payments, generally as a rule, you are put back into the delinquency bucket at the level that you would have been given that payment history. So it is a, in my mind, pretty clean task. The customers that are in here are the ones that have been successful at qualifying for those payments over the course of a quarter, 3 months. And if you don't qualify, then you move very quickly back into sort of the rest of the delinquency buckets and you continue to age and perform as you would as a result.

Speaker 4

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 offered loan modifications, but have not yet met the 3 payment standard. So they are still showing up as delinquent, but the expectation is that if they meet that standard, they will migrate.

Speaker 4

And what I'm looking at is in the last quarter, there were $107,000,000 specifically or implicitly of loans that were in that test period. This quarter sequentially delinquencies declined $90,000,000 So what I'm trying to understand is of that $107,000,000 that could have rolled through and improved your delinquencies, how much did that $107,000,000 contribute to the $90,000,000 improvement we saw?

Speaker 2

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

Speaker 6

Got it.

Speaker 4

Okay. I appreciate it.

Speaker 3

I'll just add, there's some additional sort of tabular disclosure on the dollar amounts of in modification in Footloq for. If you look at that and 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.

Speaker 4

Terrific. I appreciate that. And if I can indulge one last question. How do when a loan is modified, how do the economics change? Presumably changes the cash flows.

Speaker 4

Does it change the GAAP accruals from an income perspective?

Speaker 3

Yes, it will because the modification will depend on which of the programs, whether it's a rate based program, whether it's a Term based program. Term based program, etcetera. And then again, once those qualifying payments are made, they come out of the delinquency bucket and they go back into the book and whatever the modified terms are will drive the accruals. Perfect.

Speaker 4

Hey, I realize I had some pretty in the weeds questions. Thank you guys very much.

Operator

We'll take our next question from Jon Arfstrom with RBC Capital Markets. Please go ahead.

Speaker 7

Hey, thanks. Good afternoon.

Speaker 2

Good afternoon.

Speaker 7

You guys made a comment about slower prepayment speeds. And curious if that was a surprise at all for you, anything to read into that? And do you expect

Speaker 3

process, we look at recent performance trends and we've seen over the recent past continuing improvement in the sort of overall level of lower levels of prepayment. And as we looked at that trend and kind of rolled that forward another quarter, it caused us to make a different assumption regarding our longer term outlook for prepayment.

Speaker 2

And John, I think the thing I would add, because I think we have seen there's a number of factors that influence prepayment. Obviously, rate environment is a big part of the sort of calculus there. And so I think the changing rate outlook from the beginning of the year, if you had said to me rates behave this way or the way that they behaved, are you surprised that consolidations would have continued to slow? I would have said, no, I'm not surprised by that. I think we were all expecting at beginning of the year a different rate environment and I think that goes into the equation as well.

Speaker 7

Okay. Fair enough. And then just one more. Your stock has done well recently. I think you deserve it.

Speaker 7

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?

Speaker 3

Yes. Again, we reassess that at a point in time. And as you probably observed, the rates market has been fairly volatile to start the year. And that'll be sort of a game time call as we evaluate timing of any next transactions. But this transaction that we got done in the Q1 was at a point in time when rates were a little more favorable than maybe they are on spot.

Speaker 3

But expectation is as we move through this year that the other opportunities will present

Speaker 7

themselves. I think I confused the question, Pete, but I was asking on the buyback, the share repurchase program, how aggressive you guys Yes.

Speaker 3

So as I said in the last earnings call, we're going to be more programmatic around the buyback program this year. And so with the first loan sale that we completed in the quarter, we put a plan in place to buy back shares and we're going to be programmatic across to try and be in the market across the trading days of the year this year as opposed to any of our in periods of time.

Speaker 7

All right. Thank you very much.

Operator

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

Speaker 2

David, thank you, and thank you to everyone who joined in and joined us this evening. Again, we are excited about the Q1 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's more detailed questions or things that we didn't get to, please feel free to reach out to Melissa and our team and 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 Sally Mae.

Speaker 2

Have a great evening. And I'm sorry, I must have back to you for some closing business.

Speaker 1

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

Operator

Thank you. This concludes today's Sallie Mae First Quarter 2020 4 Earnings Conference Call and Webcast. Please disconnect your line at this time and have a wonderful evening.

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