The stock fell over 10% today to $10.34 after announcing their earnings after the close yesterday and their conference call (thanks to Seeking Alpha) this morning. Here is an abbreviated look at the issues that investors seem focused on:
- Continued declines in their private loan originations. While a seasonally slow quarter (the quarter that sets the tone for the academic year for private loans occurs this quarter ending in September), the Smart Option originations were still below company expectations with a 43% drop.
- From conference call: "We originated a disappointing $219 million in private credit loans in the quarter, compared to $387 million in the Q2 of 2009, as loan demand remains low.").
- For the last twelve months, Sallie Mae's private loan originations have dropped over 52% to $2.3 billion in private loans compared to $4.9 billion in the 2008-09 academic year period. This $2.3 billion figure was mid-point of SLA estimates in January.
- Company continues to point to external forces (from conference call): "Private loan demand continues to be impacted by increased federal loan limits, more students applying for federal loans, and students switching to lower-cost institutions."
- Company investments in marketing for private loans not paying off yet:
- From conference call: "On the DTC side and the consumer deposit side, we’ve had, we did spend a significant amount of dollars investing in that space this year. With private loan demand begin relatively low we certainly did not get the results we would have expected or would have liked to see in the direct to consumer marketing for private loans."
- I also wonder what impact the new preferred lender regulations have had since schools seem much less likely to be posting lender lists for their students.
- Company seems to loosening up credit standards somewhat as average FICO scores and cosigner rates have fallen:
- 2Q 2010 conference call: "Loans underwritten in the quarter remain of very high quality, with an average FICO score of 735, and 77% of the loans we made had a co-borrower."
- 1Q 2010 conference call: "Loans underwritten in the quarter remained at very high quality with an average FICO score of 740 in 85% of the loans made had a co-borrower.
- 4Q 2010 conference call: "The loans underwritten in the quarter had an average FICO score of 747 and 88% of loans made had a co-borrower."
- Charge-offs for private loans remain stubbornly elevated and the company raised their loan loss provision for the year by $100 million to $1.3 billion reflecting higher than expected defaults (an earlier SLA post from January indicated that this increase in provision was likely).
- Here are the loan chargeoff figures for the last six quarters, which show a decline on a year over year basis but clearly not as significant a drop as the company had forecast since they had to raise their provision:
- 1Q 2009: $297 million
- 2Q 2009: $362 million
- 3Q 2009: $443 million
- 4Q 2009: $298 million
- 1Q 2010: $284 million
- 2Q 2010: $336 million
- Company has continued the practice of granting immediate forbearance to delinquent borrowers which minimizes delinquency figures and forbearance figure
- From 2Q 2010 earnings supplement: "As of June 30, 2010, 1.5 percent of loans in current status were delinquent as of the end of the prior month, but were granted a forbearance that made them current during June 2010.
- This brings the total to almost $3.0 billion of delinquent loans that have received this benefit over the past two years
- Continued uncertainty regarding the structure of the company in a post-FFELP world:
- From 2Q 2010 conference call today: "I’ve advised shareholders that they’re likely to see some remaking or restructuring of the company in coming months, and I think I’ve said within the next year. That’s been described as a spin-off or sale...Well, we’re closing in on that. The Board and management have made very good progress in its deliberations...you will hear from us before the end of the Q3 about the directions that we’re taking."
- Company made recent announcement about moving their headquarters to Delaware.
So, in summary, investors (who hate uncertainty) are left wondering about three items: a) the prospects for the Smart Option Loan (a key to future growth and profitability of Sallie Mae), b) the stubbornly high loan default rates and the company's inability to provide accurate guidance on them and c) finally what the company's structure will be in the post-FFELP world. Stay tuned....