Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sallie Mae 2021st quarter Earnings Conference call. At this time, all participants are when they listen only mode. I started speakers presentation, there will be a question and answer session.
The question during the session. They will need to press star one in your telephone keypad you're required to for assistance. Please press Star Zero I would now like to have the conference over a chair for center today, Brian Cronin Vice President of Investor Relations. Thank you. Please go ahead.
Thank you Karla good morning, and welcome to Sallie Mae's first quarter 2020 earnings call. It's my pleasure to be here today, what John where our CEO and Steve Mcgarry our CFO.
After the prepared remarks, we will open up the call for questions.
Before we began keep in mind or discussions will contain predictions expectations and forward looking statements actual results in the future may be materially different than does discussed here. This could be due to a variety of factors listeners should refer to these the discussion of these factors on the company's form 10-Q, and other filings with the assay.
C.
For Sallie Mae. These factors include among others the potential impact of carbon 19 pandemic on our business results of operations financial conditions and our cash flows.
During this conference call, we refer to non-GAAP measures, we collect core earnings a description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the form 10-Q four the quarter ended March 31st 2020. This is posted along with the earnings press release on the investors page at Sallie Mae Dot com. Thank you.
Now I'll turn the call over to John.
Thank you, Brian and Karla good morning, everyone. Thank you for joining us for a discussion of Sallie Mae's Q1, 2020 results and our outlook for the business. It's a real honored to be hosting this call along with Steve Mcgarry our CFO.
Let me start by recognizing that the first three months of this year have been an extraordinary time in all of our lives both personally and professionally the environment has changed dramatically.
World today involve social distance in stock market volatility and the tragic loss of lives due to cope with 19.
We have all experienced disruption to our everyday routines and freedoms and that's just had a profound impact on how we operate on lead.
I want to take this opportunity to thank all of our nurses doctors.
Public servants, researchers essential workers and others on the frontline combating this pandemic.
On a separate now let me also thank ray Quinlan for the tremendous job he's done leading this company over the last six years.
It is a true honored to succeed such a dynamic and thoughtful leader who has made such significant contributions to Sallie Mae and the industry.
Right has been an invaluable partner to me over the last several weeks and I look forward to working with him and his chairman role for the next six weeks to ensure a smooth and seamless transition.
Given the environment, we're in there aren't literally no shortage of topics that we could discuss.
I hope that was that after today's call you will have internal watch for key messages.
The first is that Sallie mae's operationally and financially well positioned to weather the challenges of covering 910.
Second underlined the impacts of the unexpected increase in credit reserves. The first quarter results were strong and the core business continues to perform well.
Third we are relative we are comfortable when our relative outlook for the rest of the year recognizing it will be primarily driven by the interplay of a variety of factors, including the depth of the recession school operations and competitor access to Sunday.
And fourth as the new CEO I'm committed to a few key principles centered on creating tangible value for customers and investors.
I will discuss each of these topics and then Steve will go into deeper detail on results in France.
Well. This is my first official weak on the job, it's clear that Sallie Mae and that's incredible team are well positioned to overcome this pandemic.
Of course, no planning is ever perfect, but we had strong liquidity capital and disaster recovery plans in place.
The unique nature of this pandemic caused us to update some of these plans and the team just flat out delivered.
Our first priority was ensuring the welfare in safety of our people.
Working closely with regulators, we implemented technical and process changes that allowed us to move nearly 100% of our workforce out of our corporate locations and transition to a work from home set up.
This allowed us to continue to care for customers with minimum service disruption, while ensuring the well being of our team members.
Equal to caring for our team members was caring for our customers and I am exceptionally proud of the actions we have taken to support customers. During these uncertain times.
We recognize the real told that the pandemic is taking on some because of job loss wage reductions were increased personal expenses.
For those customers, who are experiencing financial hardship. That's a result of the pandemic. We are providing what we believed to be industry, leading disaster forbearance with no impact to credit standard.
Of course this practice is in accordance with the regulatory guidelines that are prudential regulators encourage for the entire banking industry when working with impacted borrowers.
We will continue this practice as necessary through these extraordinary times.
In addition, we implemented a series of new self service capabilities, including the ability to request for Barents completely online, which has allowed us to process the increase in customer requests within an acceptable service standard.
No. These actions are making a real difference I have been regularly reviewing customer feedback through surveys and social media and we are seeing positive feedback on both the east and the quality of our customer service.
Now turning to loan loss provision as you know we have spent considerable amount of time out working our c. So last models over the last few years.
The model expectations do you indicate that losses will be higher this year, but will likely not exceed the 2.7% loss rate. We saw in the peak of the 2008 financial crisis.
There's always uncertainty and these forecasts and the great recession taught me that you never say never.
Well, we have a better performing portfolio than we did in 2008, driven by our conservative underwriting practices. Additionally, the response from the state and federal government has been swift and meaningful and should help the economy.
Our Q1 results were largely inline with expectations with the obvious exception being the growth in provision.
Our strong results can be attributed to the Swift implementation of our response plans to the pandemic the strength of our franchise and the momentum that we created in 2019.
We saw origination growth of 8% expense growth of 5% and net interest margin of 5.8%.
And before the pandemic related loan loss build EPS was tracking at or better than planned.
Importantly, we have a strong financial position with ample capital and liquidity.
We ended the first quarter with a solid balance sheet of 13.7% total risk based capital.
And 23% liquidity as a percent of total assets.
As an insurer depository institution, we have a robust liquidity and capital plan and do not anticipate any funding constraints.
It's also worth noting that timing what's on our side in the first quarter, we completed a 636 million ABS transaction.
Upsized, our secured funding facility to 2 billion.
So 3 billion of private education loans for a premium of 239 million kicked off a 525 million accelerated share repurchase program and originated 2.3 billion and private education loans, all of which occurred before covert 19 really began to disrupt them.
Mortgage.
Now, let's discuss our outlook and guidance a lot has changed since the company announced its guidance for the year in January given the current uncertainty in today's operating environment. We have determined that it is appropriate to withdraw our full year 2020 guidance.
While we won't be providing specific numbers I would like to take a few minutes to review the current trends we are saying.
As I mentioned earlier future performance will be primarily driven by three factors in the nearer term.
The first is the nature of the recession impact on personal balance sheets, and resulting delinquencies and defaults.
Got it losses will be a watch item for us throughout the year, the macroeconomic environment will cause our provision and loss expectations to move around that's the cobot story continues to evolve.
We believe though our conservative approach to underwriting over the last 11 years will benefit us and I believe our portfolio will continue to perform at high levels.
The second factor is whether schools opened as normal in the fall.
We're working closely with schools as they develop their reopening plans. We are encouraged by the priority being placed on education and the presidents opening up America again plan and the reality that we will likely not have a single national answer for how colleges and universities resume operations.
At this time, we remain optimistic that education will broadly resuming the fall.
It is important to note however that even if many schools opened normally there is risk to our original originations view for the year.
The third factor is what happens to a key origination and consolidation competitors, giving changing access to capital markets.
Marketplace lenders and Fintechs trying to break into the student loan space should have less enthusiasm going into the new academic year because of the lack of wholesale unsecured funding in the current market.
They should also create a positive for our balance sheet. We've already seen this lack of funding cost some refinance lenders to raise their prices and cut marketing.
We believe our balance sheet will be relatively stable this year due to the likely drop in voluntary prepayments and refinancing activity potentially offsetting losses in originations.
While the out some of these factors are still unknown today I recently shared with my team something I learned during the financial crisis for driving performance that is to focus on controlling the controllables. Our team has worked overtime to ensure we continue to service our customers without disruption while simultaneously ensuring we deliver results.
This includes rigorously managing expenses and project spend to drive earnings and preserve capital focusing on credit performance by investing in strategies to reduce losses and looking for new ways to meet the unique origination needs and opportunities presented by the pandemic.
All of which should help alleviate the impact of Kogan 19 on our business performance.
There has been industry speculation about capital return with some policy makers, suggesting that bank suspend dividends and cancel share repurchases.
We agree that during times like this continued focus on our customer experience and capital preservation our imperative.
Well, we also recognize the important role that our dividend plays for our shareholders as such based on current capital models and scenario planning we plan to continue to pay our current dividend subject to board approval.
In addition, the accelerated share repurchase program continues to run its course.
You will remember we use the proceeds from the Q1 loan sale to buy back 525 million in stock.
We will evaluate any additional 2020 capital distribution decisions against economic realities. Once the ANSR is complete.
It is worth noting and this depressed market, we have the potential of repurchasing up to 30% more shares than we originally thought at the beginning of year.
I do want to emphasize and Steve will discuss this further that both the share buybacks and dividends assumptions are baked into our existing capital and liquidity plans and metrics. We do not believe that these capital distribution plans will prevent us from appropriately caring for customers more protecting our balance sheet in the quarters ahead.
I'll now turn the call over to Steve for a discussion of Q1 results. Dave. Thank you very much John and before I begin let me welcome you to Sallie Mae right to be here with these days I look forward to working with you over the coming years create value for our shareholders.
As I discuss our financial results I will underscore to the themes drawn introduce.
First our solid financial position and second the strong performance, we've demonstrated in the quarter prior to the academic.
I will repeat a few of the stats John just reviewed so please bear with me.
So turning to our solid financial position at the end of first quarter cash and liquid securities comprise 23% of our balance sheet.
In addition, our secured financing facility was increased to $2 billion at a marginal cost increase and then driving the liquidity build were the sale of the $3 billion with loans in the quarter had an on balance sheet ABS execution of $636 million that provided long term.
Term funding at very favorable cost. These activities complete the liquidity build we had been discussing for the last year and positions us very well in these uncertain and volatile times.
We're funding plan has us accessing the markets and a very limited way for the balance would be or however, I cannot emphasize enough, but as a bank we have access to both for brokered and retail deposit markets at this time.
In fact, Adam an abundance of caution we tested the broker deposit market two weeks ago and confirmed it was open for business and liquid.
And the retail deposit market, we have been lowering our rates relative to our competitors.
Finally over the last four weeks and have not seen any significant run off demonstrating the strength of that market.
Our capital position is equally strong at the end of the first quarter total risk based capital was 13.7% and common equity tier one was 12.4%.
Both of these ratios are significantly in excess of regulatory well capitalized ratios also is important to note as John just mentioned that the vast majority of the capital return plan for 2020 is already accounted for in the Q1 ratios I just discussed.
As you know we run capital stress test regularly and that capital stress testing shows it would take a massive increase in seasonal reserves to harm our capital position.
We'll provide a little more color on that when we discuss the reserve.
We originated $2.3 billion with private student loans in first quarter, and 8% increase compared to originations in last year's Q1.
Importantly, 88% abuse loans were coastline.
The average FICO score was 746.
Strong origination growth and consistently high credit quality of those new loans demonstrates the strength of our business prior to the onset of depends on.
The net interest margin on our interest, earning assets was 5.08% in the quarter compared with 5.41 in the prior quarter and 6.2 way in the prior year quarter.
The vast majority of the decline in them was driven by the liquidity build that I mentioned earlier.
For the remainder of the year, we expect liquidity to remain between 16 and 20% of our balance sheet still very strong numbers.
Because of our expected balance sheets stability, we can project with confidence a full your NIM of 4.9%.
This is down from what we expected just three months ago for full year admit however, the change is entirely attributed to the sharp decline in the yield of risk free assets such as treasuries in the current environment and that is where we have $7 billion invested.
Turning to credit performance private education loans delinquent 30, plus days were 3.2% of loans when repayment up from 2.8% in Q4.
Half of the increase in our delinquency rate can be attributed to the first quarter loan sale as we did not so any loans that were greater than 330 days delinquent and this is a typical market nor the other half of the increase in our delinquency rate can be attributed to.
Additional loans entering repayment and seasoning of the portfolio.
Private education loans, and forbearance were 6.2% of loans in repayment forbearance that is up from 4.1% in Q4 and up from 3.8% below year ago quarter.
As a tuesday's close of business, our forbearance rate has increased to 11.8%.
All of you increase from last quarter of a year ago quarter can be attributed to the use of our cobot 19 disaster forbearance.
We are currently using our disaster forbearance policy, which has used has been used successfully in the past to help customers feel with natural disasters.
We expect the growth in accounts entering forbearance slow now as we have been through all of our customers billing cycles since the the pandemic began.
In fact growth imbalances in the last week, where the slowest since the pandemic began which is a positive sign.
The loans that are currently in forbearance have an average FICO score of 722.
89% of them or co sign and less than 2% of these loans have been greater than 90 days delinquent in the last 12 months. These statistics provide us great confidence because our customers who are currently utilizing forbearance will successfully renewed.
Im their payments after the economic effects of the pandemic subside.
These are responsible unreliable customers, who will be willing and able to resume their payments when the economy normalizes.
Net charge offs for average average loans and repayment were 1.05%.
Down from 1.24%.
Q4, and up from point, a 9% in the year ago quarter clearly the strong performance experienced in Q1 will be all through by the economic impact of coded.
Charge off will increase.
Running the severely adverse Moody's economic forecasts through our loan loss model produces an annualize the full rate of approximately 2.1%.
This is a 40% increase from our full year 2020 expectations and we do expect that losses would be somewhat higher for 2021 as well.
The current increased use of forbearance will likely shift the timing of expected losses to the third and fourth quarters.
So a 40% increase and annual default is somewhat higher than what we saw an hour stress testing exercising exercises using the said C corps severely adverse scenarios, but it is lower than what the highest quality private student loans experienced during the wholly owned.
Nine financial crisis.
Losses as John mentioned peaked back then at 2.7% for our low risk loans.
Today's smart option student loans, or even more rigorously underwritten than the lowest risk loans of the previous error. Therefore, we expect today's portfolio to perform better adverse circumstances than this historical comparison.
Regulators offered thanks, [laughter] impacted by Cobot 19, the option to phase and Cecil regulatory capital guidelines over a five year period as a way to provide capital relief.
And we have elected to adopt that option like most banks in the industry.
At quarter end, our loan loss reserves totaled $1.7 billion. The private education loan loan reserve was $1.5 billion was 7% of our portfolio.
As a reminder, we use a discounted cash flow of methodology to determine our reserves and in fact, our reserve covers life of loan default on our portfolio of up to 10%.
I mentioned stress testing capital earlier, we believe the we could absorb and additional at least $1.2 billion excuse the reserves on our current balance sheet and remain well capitalized.
Couple of words on the provision.
While the provision for loan losses was $61 million under Cecil there are several things worth noting.
First undersea so $1.9 billion of this quarter's originations were already reserved for as loan commitments and or not in the provision.
Second our loan sale reduce the loan loss allowance by $162 million third this benefit was mostly offset by a 153 million dollar increase from the provision to account for a significant deterioration in the economic outlook as a result.
All of this pandemic.
For the remainder of this disbursement of the disbursements in the quarter plus nearly $400 million of loans that have been room, but not disperse. We're also covered in the provision.
Finally to again, we use or discounted cash flow met methodology, and we think that that has thrown off a few of our analysts. So as you can see the bank has immense loss absorbing capital on the balance sheet at this point in time.
As previously disclosed and John discussed we entered an accelerated share repurchase plan will the counterparty to repurchase $525 million of shares I would like to give a little detail on how this transaction works [noise].
But first because the transaction happened late in the quarter. The average share count for the quarter was down only 12 million shares and will be would be more impactful and reduced shares lower in subsequent quarters now under this accelerated share repurchase program the repurchase.
Price is determined by our account Counterparties open market purchases made to cover the shares already delivered to us.
The price of which the 44.9 million shares was deliberate simply are construct to allocate a percentage of the notional purchase price to due to the initial placement of shares to date.
Purchased roughly 15 million shares at approximately $7 each.
Our share price was to remain at this level, we can purchase as many as 75 million shares in total under the program.
This is the one and only benefit of a lower stock price, we can and will buyback a higher percentage of the company.
As John mentioned, we will evaluate the market conditions for additional share repurchase once the asrs completed, but while the economy falters and may cause deteriorating portfolio performance, we are still creating shareholder value.
Our share purchase repurchase program was funded by the gain generated from the sale of $3 billion with loans and the capital that's really.
The gain on sale reported in the income statement is after transaction costs as well as the write down of deferred acquisition costs.
We are very fortunate to have completed these sales prior to the uncertainty and volatility of Kogas 19.
However, we remain confident that the buyers will receive a strong return as the stress assumptions used pricing assets will be proven to be reasonable.
Finally, turning to Opex first quarter operating expenses were $147 million.
Compared with 142 million in the prior quarter and 140 million in a year ago quarter.
Operating expenses in our core student loan business increased 10% from year ago quarter.
Average customers increased 11% and delinquent borrowers increased 6%.
The increase was also driven by portfolio growth and CEO transition and.
As well as incremental costs associated with the transition to a completely remote workforce.
This was a monumental undertaking that we've gone swiftly and without interruption to our customer service or significant compromise to our service levels or efficiencies.
We will continuously review our expenses for opportunities to offset the negative impacts of the current economic environment as the year progress was.
I would like to Android started.
And that is by saying our financial position is robust.
Execution of our business strategy produced strong performance results prior to the effects of the pandemic.
We are well positioned to weather the storm and serves the needs of current and future customers in the process I'll now turn it back over to John.
Thanks, Dave before we open the call for questions I do want to spend just a few minutes sharing some beliefs and initial focus areas and priorities for Sally Matt.
Today marks my fourth or fifth official day on the job and over the next few months I will continue to work closely with the team and the board to provide to route we find my vision for the company's future in hone our strategy.
I look forward to talking with many of you. In addition to our team members regulators customers and other influencers to better understand the range of perspectives on Sallie Mae and industry. However, I can share with you some early thoughts.
First I am impressed by the strength of Sallie Mae's core business and believe there is opportunity for us to further grow its profitability driving every dollar performance from this business will always be my first priority. This will require a continued combination of topline focus and strong cost discipline.
Second we have a strong customer franchise and brand position. This gives us great access to customers and data. The few others possess we will look for ways to create new sources of value for our customers and shareholders by leveraging this customer franchise. However, we will do so with disciplined around the required investor.
Okay and timing of expected returns where appropriate we will build organically, but we will also make heavy use of partnerships and other arrangements to increase returns speed of delivery or capital consumption.
Third we will be disciplined around capital allocation and returned strategies.
I am 100% an agreement with the current strategy to sell loans to generate gain on sale and free up capital to use for share repurchases I believe that rigorous capital allocation as an important ingredient for the success of any company, but particularly one that is publicly and I also believe that a regular and predictable program to.
A return capital to shareholders drives discipline and all investment decisions.
And finally, I believe we must change the public debate about private student lending Sallie Mae provides an important product that opens the American dream through higher education to many who could not afford it has the son of an immigrant whose success was powered by access to our higher education system I am a benefit.
Jerry of the multi generational impact Sallie Mae can have.
We see it in the data the vast majority nearly 99% of our customers repay their loans successfully and use their education to build prosperous futures for themselves and their future generations. We will do more to help shape. This important industry and policy discussion.
During the financial crisis back in 2008, I had the opportunity to lead critical liquidity and regulatory efforts at Wachovia.
Hi, long first hand, the importance of leadership and strong liquidity and capital positions and that is exactly what I am focused on now here at Sallie Mae as the Pandemics subsides. However.
There is a great opportunity for Sallie Mae to continue to expand and grow.
I look forward to leveraging my strategy technology marketing digital and analytical experiences from both inside and outside the industry to help the company exploit these opportunities with that said, let me open it up for Q Annette.
Thank you as a reminder to ask the question you will simply need to press star one on your telephone keypad.
Again to ask your question you could seem to press star one on your telephone keypad to the draw your question it's about.
Our first question is from the shape our in Bush of Credit Suisse. Go ahead. Your question. Please.
Great. Thanks, I guess the first question that I had was at John Welcome and.
Wanted to kind of.
Explore some of the comments you made at the very end do you talked about in the future kind of thinking about partnerships and other ways to kind of leverage Sallie Mae brand and.
You know brand and capital base, and maybe you could expand on that a little bit.
Sure Moshe.
Happy to when when I think about it these are.
Customers, who are new when young and their financial lives in many cases Sallie Mae is one of the first financial institutions that they will have a relationship with and I think if downright that allows us to build real brand affinity it allows us to have insight.
Right into their underlying.
Credit worthiness that few others have and I think it gives us some marketing access to those customers at a very formative stage in their lives.
That candidly as I think about my past experiences in the industry I would have covenant to it.
And so I think the challenge for US is one how do we but how do we strengthen that brand position in that level of engagement I think we will spend time looking and thinking about how we do that but then I think the question is where all the places that bad increased credit insight marketing access or just.
Engagement has the ability for us to create value for them and value for our shareholders and obviously, we've we've done some things in that area in the past, but I think figuring out how to add that value going forward through.
Variety of different products and services is a nice way for us to expand and enhance the returns that we would get on our core business. So I want to be clear. Our first focus will always be our core business. We will look to drive every dollar value that we carried out of that but I do think the idea of sort of leveraging the customer Fran.
As a way of enhancing profitability and returns.
Great and I guess I would just add to that that you probably still.
Since you continue to service the loans that you sold your actually able to to have that relationship with those borrowers as well.
Thats exactly question Yeah, yeah.
The at the [noise].
The other the next question, Steve I'm, just sort of wondering if you could talk a little bit about you mentioned the the idea of deposit pricing and that you feel like you're ahead of some of the competitors and I think that's been one of the big issues.
You know anything that in that you know with the sharp drop in rates deposit pricing had has generally at the industry level hasn't come down as rapidly.
Can you talk a little bit, particularly in light of the fact that you've got you built a lot of liquidity, but but you may you may or may not have a season.
A typical loan growth season, so maybe talk a little bit how you're thinking about that thank you very much.
Sure Moshe so subsequent to the fed rate cuts in response to Cove it.
Obviously.
That's right drop treasury yields drop and.
The fed the positive rate drops significantly lie bore and money market deposits lagged behind that.
Significantly.
So as we sit here with $7 billion invested in treasuries and federal reserve.
Senses is costing US goes I mentioned in my prepared remarks, well, we are doing what we can through drop that.
And then V.A. rate I think we've dropped at 40 basis points in the last couple of weeks, we will lower it further.
And we will also lower our retail C. C D deposit rates. The fact of a matter is we have a pretty good mix of long term funding, but matches or assets and we.
We have put a sensitivity into our plan, we do expect loan originations to drop somewhat but as a result of long term nature of our funding in our assets. We are pretty confident in the 4.9 NIM that I mentioned, but we are doing what we can to nibble around the edges and reduce.
Our cost of funds and increase the yield which we have our liquidity invest for that.
And just if I could sneak it enemy tuck <unk> any anything that you've seen in April in terms of reduction in.
In addition activity.
So actually there are some very positive signs there so in the first quarter consolidations actually dropped compared to the fourth quarter, albeit a very.
Diminimus, 2%, however to put that into perspective Q4, 18 for Q1 19 consolidations drop consolidations increased 20%. So we've broken that trend to ready and we have seen through April 15th I think his last day that I saw data.
The consolidations were down about 35%, we expect them to drop a little bit more because you know or competitors do have a pipeline that they are feeling so we're watching that obviously very fair Kirk. Thanks, so much.
Well.
Your next question is from Sanjay Sakhrani from KBW go ahead. Your question. Please.
Hi, This is actually Steven Kwok filling in for side Jay. Thanks for taking my question on My first question was just around the Cecil provisioning mythology. Thank you using what the DCF.
Can you just walk us through what are there any gulf forward impacts on the TNL as a result that because you are just county back some of your loss assumption. So but was curious if you could walk us through some of the other PML implications as a result that thanks.
So sure it it is pretty straightforward Steve. So we chose the discounted cash flow approach because it has a very significant impact favorably on capital when we set up the Cecil loan loss allowance. So the fact as a matter is we do.
Have a somewhat larger than a 700 billion dollar discount.
Between expected losses, and the reserve and that will accrete up over the life of the assets that let's call that you know six this years, so there will be.
You know about 100 million dollar.
Impact per year.
Basically a provision accounting for the accretion of the discounted cash flow approach to the seasonal reserve.
We think it's a price.
Very much worth paying for the capital relief, we get upfront.
Got it and then just around the strategy to continue style loans, if we want to look at today's environment like what type.
Of.
Of that but would you DVD cat on those.
Assets.
So look it's a good question. It is a very volatile market, but I will start by saying, we marked our private student loan market.
Portfolio to market basically one no one for fair market value disclosure, we both if that was a pretty reasonable price I stay in touch with loan buyers and Hum immediately upon the crisis getting there would have been a discount for the loans have.
Try to sell them in the market not a meaningful discount, but I will point out that.
That point in time, there was absolutely no ABS market available when the ABS market did begin to open up spreads were like LIBOR plus four to 500, we now think we could issue.
Hey.
Yes feel at LIBOR, plus 200 bps is what drives the premium for loan sales, we think and we absolutely have no need to sell any loans at this point in time, but if we wanted to we probably so a portfolio with a small premium I'll leave it up.
Yeah.
Got it right. Thanks for taking my questions.
Thank you next question is from Henry Coffey from Wedbush Go ahead. Your question. Please.
Good morning, everyone and welcome to to the call John.
Yes.
Basic question can you go over the dynamics around student loan pricing.
When they come up the summer I mean that the obviously the direct loan rate.
It's going to be very low because of where treasuries or how do you think that affects your own pricing opportunities.
So look Henry we don't think that we're competing with the federal government for loan volume. We are basically a gap funding vehicle, we tell our applicants that they should look for scholarship scholarships and grants federal money and then as a last resort views.
The private sector, we don't think we compete with plus loans and a major way, but graduates food and space. So we're not concerned that the may 10 year Treasury auction is gonna have you know.
Few basis points for a 60 basis point of view, we don't think that will impact our originations.
Student loans private student loans are priced on basically where the market for wholesale funding is such as a B.S. So our product pricing probably will not change as much as spreads have increased overall market rates have declined.
The offsetting a large chunk of that so I hope that answers your question.
So the basic pricing mechanism for you remains pretty much unchanged is really going to be your funding cost and.
I mean, I'm going to say, it's a little bit more expensive, but not in a material way that we think that we needed to change our pricing at this point in time, but peak season to season is approaching we will be a sharpening our pencil and pricing or product very very shortly.
And then going back to the fourth quarter.
And it also some of the remarks you made today.
There's a lot of thinking about being more engaged both.
The front end of the equation in in a sort of a consultive fashion and and as you guys suggested today you know into the future life <unk> of your of your your borrowers.
With new products referrals et cetera can you give us some specific examples of what's going on right now on that front.
Or what the some specific opportunities you may want to explore and the future I know, it's a little early John but I've been there for four days.
Yeah, I Gotcha, Henry and think of the answer I'll be able to give you in 90 days.
Sure happy to and you know I've, obviously, starting to spend a little bit of time getting into each of the different businesses, but it is yes. It is sometimes a bigger things and it is sometimes smaller things and some of the things that I think we're looking to do our to build brand affinity and some of them are to build engagement. So.
For example, we have discussions underway to see if there are tools that we should be offering to make it easier for students to complete their financial aid and loan application process, even beyond Sallie Mae.
So think about that as a little bit of a one stop shop again that won't directly sort of drive loan volume types necessarily but it starts to create a level of engagement. It starts to create data flows. It starts to create a sense that Sallie Mae is on my side when it comes to the kinds of brand positioning we are looking to cry.
I think we've discussed on past, earning calls we're looking for ways to continue to engage with customers. While they are at school.
Because we know we know that many people go to college and they don't really think about how their pain forward until they're out. So I think some of the programs around tutoring assistance and the other programs that were given or all the way of keeping our name and our brand sort of front and center keeping the engagement high.
And yeah sort of keeping that that brand position in a place where again consumers view that we are on their side. We are a trusted advisor we are someone's they will want to do more business with throughout the rest of their life. So those are just a couple of tangible examples we are evaluating.
I would guess I've already heard about a dozen different opportunities I think we will evaluate many many more but I would come back to the basic principles were really looking to do two things built very deep brand resonance right, we want to be a beloved brand a trusted invalid brand and we want to build engagement.
I don't want to be an episodic sort of category, we want customers engaging with us on a regular way because that drives the data flow the marketing efficiencies that I talked about during my earlier question.
Thank you very much and welcome take your yes. Thank you Eric.
Thank you again, if he would like to ask a question you could seem to press star one your telephone keypad next question is from Vincent Caintic take Stephens go ahead. Your question. Please.
Hey, Thanks, Good morning, and welcome job of core to working with you.
First on.
Chris.
Oh, great first on the credit reserve assumptions.
You could maybe talk about maybe the macro assumptions built in and so.
Specifically on the for Barents Sea the forbearance having.
Doubled to ready since quarter end.
And the reserve still seem that different from targets and she saw.
Wondering if we should be expecting a bump in incremental credit reserves in the second quarter or how should we think about that.
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So sure. So I'll, let me say right off the bat that excluding the $160 million provision release for loan sales. The provision did go up $226 million for that as a pretty significant build and we did build $153 million in.
For coated in the current quarter.
So we use basically the movies.
Economic forecast to build our Suso reserve, we use a baseline and improved outlook deteriorating outlook and we wait them appropriately.
We the Moody's model.
Did deteriorate somewhat in April, but the commentary that I provided on where we think losses are headed in the current quarter.
And for the full year or based on the deteriorated Moody's model, but in accordance with gap. The loan loss reserve was based upon a March Moodys model. There is an enormous amount of volatility in these models and is the key.
Pace, but if the Moody's models.
Cheerier right, we will take on additional loan loss reserve, but I think it's kind of interesting that the very first quarter of Cecil implementation comes along with.
The this horrible cove it.
Pandemic that we're going through we have always argued that the seasonal reserve significantly distort our company's performance and people should focus on our in year net revenue and in your losses for true picture of how the company has performed.
Coming and I think that this current environment highlights.
100, <unk> ex the volatility, but as Brian upon the company as a result of the seasonal model.
Steve if I could just add maybe Vincent.
I had the same question Stephen I had a great discussion about it. It's obviously been a question that's been asked of.
Some other lenders throughout the course of this earnings season, and look logic would dictate if I have more people going into forbearance losses will be higher at some point in the future right that that makes sense I think the thing that I would suggest which is stepping back little bit from from Steve's answer which is 100% right.
We have proprietary credit insight that not sort of all its only based on whether or not you are in forbearance, but the underlying characteristics of who you are when you go into forbearance and I do think we've looked not just at the forbearance numbers, but we've looked at those underlying characteristics and we feel like we have incorporated those appropriately and I do think we have to recognize this.
It is a different sort of economic and sort of policy forbearance market than any of us have seen in the past and so we put a great degree of confidence in those underlying characteristics as being a better indicator of what that credit performance is going to be overtime.
Right makes sense of could you remind us what.
What qualifies for customer for forbearance really for me.
[noise] so that the forbearance policy is a very lenient in accordance with regulatory regulatory guidelines and wishes. If a person indicates that they are having a coated related issue that is affecting their ability.
To make a payment we will grab them they.
Disaster Forbearance, we think it is the absolute appropriate thing to do in the environment.
That we are currently now.
Okay, great. Thank you.
Second.
Question. So appreciate the commentary around capital allocation and also to the detailed that.
But you might be able to sell launch we're at a premium even in this environment I just thinking about the current stock price and the economics of the sale.
I guess, how are you how you're thinking about that I know this is perhaps supposed to be a once a year thing, but any thoughts to realizing more value than maybe an arbitrage opportunity.
So look out we executed the loan sale to raise capital too.
To execute a capital returned to shareholders and that share buyback has only just begun and we will be in the market for probably the balance of the year deploying the $525 million from capital that we are now using.
To return to shareholders and when that share buyback is complete we will assess the market environment and decided if we should deploy the additional $75 million that we have lined up behind that and when that is all.
Executed, we will assess the market environment to determine whether or not it makes sense to sell additional loans as we discussed in the first fourth quarter earnings call to continue to return capital to shareholders. We haven't.
Backed away from that strategy, we will assess the environment.
At the time.
We need to Sean do you want to add to that or no I think I think Steve. It's a very well said I think you know if we thought Vincent we could be in the market in a bigger way today, we would be having that discussion more active les I think we feel like we are fully subscribed.
With that with that resources that we have on hands from the loan sale.
And like Steve said, it I'll I'll, just reiterate it oh, we like that strategy I am still committed to the notion of a multiyear strategy that loan sales and share repurchases, especially when we're at the valuations that we are at right now yeah, Prudence dictates that I have to say that of course, when we get to that point, we're going to move.
While you wait it based on economic environment regulatory guidance and the like I cant in this environment make a commitment what's going to happen nine months from now.
But we like that strategy, we very much stay committed to that strategy and I think we will look for every opportunity we can deploy excess capital to work and returning to shareholders.
Okay, great. Thanks for the answer center stage.
Thank you. Our next question that's from a rich Shane of JP. Morgan go ahead. Your line is open.
Good morning. This is my selling for methanol and thanks for taking my questions John Welcome.
Okay I wanted to.
Absolutely if we could follow up little bit R&D form bear.
Can you review the length of the forbearance, that's being granted right now and whether or not those are eligible for extensions at these are not hearing.
So certainly we are granting three month forbearances in accordance with our disaster Forbearance policy and I believe the fact of a matter is if we are still in the throws of this.
And then when those forbearances mature or terminated we will assess the situation and then we will grant another disaster forbearance if appropriate at that point in time and of course all in consultation.
With our regulatory front.
Okay understood and then <unk> question is an owner station that you're having right now with here.
Well.
University partners.
What are they say about their plans for the fall contingency perspective, yes. This is not open and what impact they think it has.
Yeah, It's it's a great question Melissa and.
First you obviously, there's there's thousands of schools out there I think it's hard to generalize what any one of them are saying and let me also say I think they're dealing in their own way with the very same uncertainty that almost every business an institution is dealing with in terms of the pandemic no one really.
It is exactly how things are going to materialize have the curve is going to flatten and so forth with that said.
I think the vast majority of the schools that we are talking to and I said. This in my in my prepared remarks are planning for a resumption of activities in the fall a those I think if you look at the schools. They may be a slightly different variants of what those activities may look like there may be in some cases fuller or less.
Full sort of versions of the student life experience for residential universities, but I think almost every school. We talk to you is planning for a resumption of op of operations in the fall I will also tell you all of them or most of them are making contingency plans what happens if in fact, we are still into different place I think there continues.
And to refine their distance learning capabilities, they're continuing to refine what a scaled back set of operations would look like but I think unfortunately it is Melissa just too soon to know exactly what those plans our goal or how those plans are gonna materialize and my guess is it will not be a single answer for the entire country. My guess is it will.
Maybe a slightly different answer or geography by geography state by state in accordance with the conditions on the ground in that area.
So if I could add one more thing Melissa I think you Didnt ask about forbearance trends and I Didnt answer that question I do think it's important for listeners to understand the we have seen a significant slowing in the granting of disaster forbearance, whether you look at it on a seven day rate.
Of change for daily change. It has peaked and in fact the growth rate peaked around April 5th which was several weeks ago and that is encouraging and we'll of course will continue.
Post investors on trends and does this before but it does look like the rate of growth has declined significantly at this point in time.
Okay, great. Thanks for taking my question.
Yes. Thank you.
Thank you. The next question is from Iran. See Gonna vis cities go ahead. Your line is open.
Thanks, I was wondering if you give us an update on the credit card product I saw that they increased Gerry and very very small amounts to date.
Is that something that you're looking to continue to.
Test over over the coming a timeframe or is this kind of changed your thoughts in terms of how you want to approach credit card.
Yeah, Eric It's John Yeah, I would I wouldn't I sort of describe that and both the short term and the medium term I think in the short term. We are of course doing all the things that any lender would do especially any credit card lender would do and an economic environment like that so we have absolutely tightened up district.
In addition channels, we've absolutely yes, it looked hard at different credit cells to understand how do we feel equally as comfortable about does and we are making sure that the card business is hardened appropriately for the economic environment. That's the area.
And that's the first order business and we obviously have to do that to stabilize operations. Yeah. I think in terms of longer term sort of medium term and longer term. We are continuing to build that business. We are now I think at the point are starting to get enough experience that we can really understand sort of the shape into Khan.
Tours at that business and sort of where we're having success and where there are places where the strategy might be honed in refined over time honestly I'm not deep enough into it yet you have formed any real conclusions.
But I will tell you if you go back to the question Moshe asked at the very beginning yeah. If you think about access to customers proprietary credit inside the ability to separate fraudulent versus non fraudulent applications credit card is a natural product that we should be thinking about extending to our customers and so.
I continue to be excited to learn more in to figure out how to make that a winter first Alan.
Great. Thank you and then just lastly, the.
<unk> expenses were a little bit higher for the first quarter. What was how much of that was nonrecurring you might be able to drop off sequentially.
So actually expenses were pretty in line with our plan in the prior guidance that we've had had given by that some very good question.
And there between moving people from the office, so home and we're talking about some pretty big call centers and virtually the entire company between that and CEO transition costs, there were probably close to $10 million.
Both extraordinary costs in there.
Thank you.
You're welcome.
Thank you and next question, it's been Lancet Gestural Jefferies go ahead. Your question. Please.
Hey, guys. This is Lance just went on for John Hecht.
So as we do think about a possible school closures in the fall or a new normal of.
More online activity is how do you how are you guys thinking about originations.
You know it in a in those different situations.
Sure. So so what we're doing is we are assessing.
Daily trends and in applications, and we have seen a meaningful decline with lot of volatility surrounding it that has subsided pretty significantly, but what we have built in to.
I'm sorry, so what we have built into our full year plan is a decline of some $700 million in loan originations.
We are.
In the early stages of planning for the summer session and it looks like.
There will be a mix of actually I'm, sorry, it looks like it will probably be.
We move online.
No.
Okay. Thank you and then.
One more you know you talked about.
The competitive environment, especially for it near Fintechs.
As a as things get a little more troubled down the line have you been thinking about any opportunities that might present themselves in terms of those companies, having a little bit of issue.
Yeah, well, let me, let me step back and give a little bit of a strategic answer, but but it's obviously a hard thing to comment on specifically you know I'm I'm, a big believer and what I've been preaching to the team you know isn't in moments like this you go through sort of three phases that that the first phase is to stabilize Ah.
The businesses, obviously absorbed a lot of blows what the pandemic and I think we hopefully outlined on the early parts of the call. All the great steps, we have done to stabilize operations care for team members and care for customers.
To me the second phase of that is how do you restore performance against your original plan. So obviously, we're not going to overcome the magnitude of of lost builds and so forth. It's Steve as outlined but we are deep into the process right now is thinking about yeah across the board how do we get back.
Two as close to that plan as we possibly can Ah we mentioned cost control about we're kicking off efforts right now to really look at collection strategies. We're looking at origination strategies, all the things that would allow us to do as well as possible given the environment that is underway.
That works not done yet, but as soon as it is.
The third question that I will ask the team is okay. You know how do we now think throughout the opportunities for us to create a very different going for work sort of position for ourselves.
You could imagine all the different ways that having you know sort of distress lenders distressed markets could present opportunity for us I'm candidly, we're not yet fully there yet in our thinking out we want to make sure that we're getting back to as much of our original plan as we possibly can but I am confident that strategically as the dust settles there will be.
The opportunities for us as the market leader in this space. So you know really strengthen our position even further and I think you know you should expect us to come back and talk about those things in the quarters ahead.
Sounds good thank you.
Thank you and next question is from Michael Kaye from Wells Fargo Go ahead. Your question. Please.
I could you just talked about what expense levers you have peak season originations were you know significantly curtailed maybe.
Works getting your base case scenario I know you rely more on sales people and direct marketing mailings, you know like some of your peers. So it does that give you just less flexibility.
So.
Michael.
There are a number of levers that we will be keeping our eyes on as the peak season approaches and we're obviously monitoring it on an ongoing basis, we have seen.
A number of.
Direct to consumer pay per click banner type of players significantly dropped their spend and as you may recall last quarter. There was enormous pressure on the direct to consumer.
Market. So we think that you know we will we will manage our direct to consumer spend a lot more [noise] carefully in the peak season, but I think from a cost cutting perspective, we're not really going to be doing anything that even read.
Mostly approach was harming our core business, we will be looking around the company for things, we can do better more efficiently.
To basically reduce our cost to service costs to acquire.
Things of that nature. So we will be looking at different ancillary investments that we were going to make in 2020 that we're going to have effects in 2021, and beyond and assess whether or not those investments make sense in todays and.
Baramidze I don't know if that helps who have things through that.
The approach that we're going to be pacing.
But there will be about that's helpful. There will be opportunity for savings we believe in the G. D to C market based on what we're seeing more competitors doing at this point gone.
Okay. That's all I got thank you.
Thank you Michael.
Thank you and have a follow up question from Henry Coffey of Wedbush. Your line is open.
Oh, yeah. Thank you.
I was just wondering what your managed results look like given given the portfolio sale.
Have you thought of even publishing numbers like that.
So Henry is it.
It's.
Kinda I don't think it really makes sense what is very complicated because as we remove the loans from more balance sheet, there's a big.
Provision allowance reversal.
We can provide.
Formants on a managed basis I mean, weve track, how old loans that were servicing perform in terms of delinquency forbearance and you will see the loan servicing revenue increase.
But not really in a material way to the Companys overall results. So I don't think you'll you'll be seeing us doing doing anything differently than that on a go forward basis. No. I was just thinking you mentioned that delinquencies went up and half. The result was because you only sell performing loans. So we put it.
I'll back together again, we could kind of get a better read and what the underlying dynamics were.
Well.
Yeah, I mean, we we do track.
And I don't know if we can publish the performance of our loan buyers portfolios. So it does get complicated.
I mean, the best thing you could do for that really is to take a look at what we publish on.
Securitize portfolios, which was a considerable amount of information for once.
Once we sell these assets and take them off our balance sheet is really no way to put together they manage view.
But hadn't really thank you very very your question around creating a little bit of a smoother or sort of portfolio or pro forma view and say what we can do there we will get that's implied in turn away.
Great. Thank you take care.
Thank you that sense, Eric you in a session I would like to hand, the conference back to Brian Cronin.
And I think Brian can immediately hand, it back to John letters have Carla. Thank you for that I'm, just a couple of quick closing comments.
Looking forward I am absolutely confident that Sallie Mae and his team will continue to deliver as this pandemic unfolds and I hope you've got a sense of some of that during our answers. Thank you and AG I believe we have the leading industry team with deep experience in credit policy pricing operations technology collections and recovery.
Sorry, we have the deepest readout relationships with our school partners and that should ensure continued leading market share and we have an incredibly strong track record of risk and compliance management.
This is the beginning of what I am confident will be an incredible journey as we position Sallie Mae customers and our business for continued long term success.
While you are still getting to know me rest assured that I am a strong believer in two way communication hopefully you send some of that during the call today and that means that it will be sharing information with you, but I am also looking forward to seeking information from our so whether it's through the questions on this call or other calls like it or are in smaller.
Meetings going forward I look forward to learning from you engaging with you and making sure. We appreciate your perspectives on the business and the industry.
Before we wrap up I do want to take a moment and recognize that continued hard work and dedication of our team members, while I haven't gotten to know the Sallie Mae team and the traditional sense given the work from home nature and safety measures in place I am really blown away by the deep bench of talent that exist throughout the organization and I look forward to working.
But the entire team as we advance the company strategy and finally and maybe most importantly, let me reiterate how much I appreciate your interest in Sallie Mae and on a personal note I hope you and your family's remained safe and healthy around the world I look forward to further discussions with our shareholders and analysts over the coming weeks in may.
And I. Thank you for your continued support and interest in Sally Matt I Hope everyone has a great that.
Thanks, John Thank you for your time and questions today, a replay of todays call and the presentation will be available on the investors page as Sallie Mae Dot Com. If you have any further questions feel free to contact me directly this concludes todays call. Thanks.
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