Sallie Mae executives say they've overhauled their credit quality analyses after the private student lender charged off more loans last year than previously expected.
As more of the company's student loan borrowers struggled to make their payments, net charge-offs for all of 2022 jumped to $386 million. Net charge-offs comprised 2.55% of all Sallie Mae loans in repayment status, above the company's prior guidance of 2.3%.
The rising charge-offs appeared to be a major factor in the 16% drop in the company's stock price on Thursday.
"I appreciate and understand the frustration you feel in the charge-off performance we showed last year," CEO Jonathan Witter said during the company's fourth-quarter earnings call. He added that he and Chief Financial Officer Steven McGarry are disappointed in the fact that the company's forecasting did not capture the extent of the losses.
Sallie Mae has "ripped apart and reconstructed our analytics around loss forecasting," Witter said, by building new models that "look for and track" unique patterns within its borrowers.
One apparent pattern is that borrowers in their first year of repayment — borrowers who are often recent college graduates — are having a harder time paying their loans than similar cohorts from past years did.
Borrowers who are "brand new out of college" have less income and fewer savings available to absorb the blow from decades-high inflation and a sharp increase in interest rates on their credit cards, Witter noted.
"You can all of a sudden see very clearly why that small subsegment of customers might be very different than someone who has the exact same payment, but three years later in their postgraduate journey," Witter said.
Sallie Mae does not see "evidence of broad stress" across its loan portfolio, and credit issues are limited to some categories of borrowers, Witter said.
He said that while staffing issues previously hampered Sallie Mae's ability to collect delinquent payments, the company is now "fully staffed" after ramping up its hiring in the second half of last year. Sallie Mae is also working on improving its training programs after its new hires underperformed in collecting borrower payments, Witter said.
"We are not seeing our new collectors, despite a really high-quality set of classes we brought in, reach proficiency and effectiveness in all the areas as quickly as we would have expected," he said.
Michael Kaye, an analyst at Wells Fargo Securities, seemed unconvinced that Sallie Mae has the issue fully under control.
"We believe the persistent credit issues have damaged management's credibility," Kaye wrote in a note to clients. "We do not see visible catalysts to move the shares higher, and we think it will take time to regain investor confidence."
Though Kaye downgraded his rating of Sallie Mae to "equal weight," he also wrote that the company "still retains several attractive favorable elements," including a dominant position in the private student loan market and an aggressive share buyback strategy.
Sallie Mae reported a $77 million loss for the fourth quarter, down from a $306 million gain a year earlier. The drop in net income was partly a result of rising provisions for credit losses.
