SLM Corp Q2 FY2025 earnings call

• Delivered solid results in the second quarter and first half of the year. - Loan originations for Q2 were $686 million, with lower volume due to nontraditional school partner challenges. - Credit quality of originations remains robust with higher cosigner rate and average FICO. - Continued capital return strategy with share repurchases. - Agreed to indicative pricing on $1.8 billion private education loan sale. - Federal student loan reforms could create $4.5B-$5B in annual private education loan origination volume for Sallie Mae, with impacts building over time. - Engaged in readiness planning for federal lending changes, evaluating funding strategies including private credit partnerships.

GAAP diluted EPS in the second quarter was $0.32 per share. Loan originations for the second quarter were $686 million, roughly in line with the same period last year and slightly below expectations. Net interest income for the second quarter of 2025 was $377 million, up $5 million from the prior year quarter. The net interest margin was 5.31% for the quarter, 4 basis points ahead of the prior quarter. The provision for credit losses was $149 million in the second quarter, up from $17 million in the prior year quarter due to a prior year reserve release. Private education loans delinquent 30 days or more were 3.5% of loans in repayment, a decrease from the 3.6% at the end of the first quarter of 2025 but higher than the 3.3% at the end of the year ago quarter. Net private education loan charge-offs in the second quarter were $94 million, representing 2.36% of average loans in repayment, an increase of 17 basis points compared to the second quarter of 2024. Noninterest expenses in the second quarter were $167 million. Liquidity ratio ended the quarter at 17.8%, total risk-based capital was 12.8% and common equity Tier 1 capital was 11.5%.

• Expect year-over-year growth in private student loan portfolio. - Anticipate $4.5B-$5B incremental private education loan origination volume from federal lending reforms, with impacts building over time (2027 and beyond). - Plan to hold investor forum to highlight strategic priorities.

• Impact of federal student loan reforms on near-term originations if schools and borrowers shift to federal loans. - Macroeconomic uncertainty affecting portfolio performance. - Volatility in loan sales and funding structures.

Q: Can we talk a little bit about the loan sale -- the $1.8 billion loan sale described in the third quarter? Can you help us sort of narrow the channel markers in terms of gain on sale margin?

A: I'd say we're in line with our expectations when we set guidance for this year. I think obviously, the rates environment changed a little bit since we did the first quarter loan sale. And as a result, the pricing has adjusted modestly from what we attained earlier in the year, but we're very pleased with the execution of the transaction.

Q: The net charge-off rate for loans in repayment after trending down for 4 quarters in a row, ticked up in the second quarter on a year-over-year basis. And again, you talked a little -- you alluded to forbearance related to the wildfires, that -- I'm having a hard time sort of dimensionalizing or putting that particular cohort of borrowers and having that explain the change that we've seen in the loss rate?

A: Yes, Rick, happy to. So when there is a FEMA declared national disaster, we have a series of programs and protocols in place to provide assistance to borrowers, both reactively if borrowers call in, but also in circumstances -- certain circumstances proactively recognizing that some borrowers don't have access to communication and we would not want something like a hurricane, a wildfire, a flood to negatively impact someone's ability to maintain a lending relationship with the company. Typically, those natural disasters are smaller blips on the radar and things that you would sort of scarcely notice in the context of the timing of net charge-offs but because we offer sort of 60 to 90 days forbearance in those cases and it kind of puts customers into spaces, you can move a charge-off that would have happened into the first quarter, say, into the second quarter. And so that's sort of the mechanics of it. I think what's unique about the California wildfires is that this was the first time that such a wide area and a densely populated area was impacted. And so I think the impact was larger in this case than it would have normally been in a more typical natural disaster situation. But we can obviously track the specific customers who we gave that forbearance to. We can understand how they sort of are progressing through delinquency. We can sort of anticipate which ones likely would have charged off post facto without the forbearance, and we feel very comfortable that the slight uptick that Pete described in his comments, was it attributable to that population.

Q: It sounds like the changes to federal lending can potentially create a lot of upside for private market and in turn Sallie Mae, and it gives you a lot of optionality. If I kind of go back to the last investor forum, you guys kind of laid out a 5-year plan with high single-digit receivables growth and double-digit EPS growth. I guess with the potential upside, like can that potentially kind of change and increase the algorithm? Like how you guys thinking about that because you kind of called out the same algorithm before, but it seems like there's just a lot more upside to volume over time?

A: Yes. I think that the framework we laid out there is still relevant when evaluating this opportunity. And again, just kind of reiterating some of the points that Jon was making, we're really talking about a 2027 and beyond sort of growth opportunity profile because of the staging, but we still have the same sort of mindset around balance sheet growth. In light of this sort of step change in opportunity, we might trend towards the higher end of that sort of mid- to high single-digit growth of the balance sheet, again, reflecting constraints of capital and EPS impact of reserving in the period. The investor appetite for loan sales has continued to sort of remain strong year in and year out, and we don't see any signs of that abating, and we're also looking at other types of sort of committed funding arrangements that we might do in the private credit space that will give us another tool in the toolkit to sort of optimize for full return and ability to sort of meet as many customers and satisfy the needs of the customers as well as the schools.