Q2 2020 SLM Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the S. LM Corporation second quarter 2020, <unk> earnings Conference call.
This time all participants are in listen only mode. After the speakers presentation. There will be question and answer session to ask a question. During the session you would need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance please press star zero.
I would now by Dan the conference over to your Speaker today, Matthijs Centura director of Investor Relations. Thank you. Please go ahead Sir.
Thank you Ashley good morning, and welcome to Sallie Maes second quarter 2020 earnings call. It is my pleasure to be here today with John Ritter, our CEO and Steve Mcgarry, our CFO. After the prepared remarks, we will open up the call for questions.
Before we begin keep in mind or discussion will contain predictions expectations and forward looking statements actual results in the future maybe materially different from those discussed here. This can be due to a variety of factors listeners should refer to the discussion of those factors on the company's form 10-Q in other filings with the FCC for Sallie Mae These.
Factors include among others the potential impact of the cobot 19 pandemic when our business results of operations financial conditions and or cash flows. During this conference call. We will refer to non-GAAP measures, we call. Our core earnings a description of core earnings a full reconciliation to GAAP measures in our GAAP results can be found in the form 10-Q for the quarter.
At June Thirtyth 2020. This is posted along with the earnings press release, only investors page had Sallie Mae dotcom. Thank you and now I'll turn the call over to John.
Actually Matt. Thank you and good morning, everyone. Thank you for joining us for a discussion of Sallie Maes second quarter results.
During the quarter, we booked a GAAP loss of 23 cents per share in a core earnings loss of 22 cents per share. This was almost entirely driven by our substantial increase in our allowance for loan losses with some impact from our liquidity portfolio.
While the economic environment continues to be challenging and is having a significant impact on our results I would like to highlight several factors that give us confidence in our business.
We are focused on controlling the factors, we can control and driving our core business. We're aggressively managing our expenses were continuing to develop in hone our loss mitigation strategies, we're reviewing our underwriting standards to determine any changes warranted by these new economic realities.
We're carrying for our teammates in this new work from home reality, while continuing to securely service our customers and of course, we're taking steps to build that allowance for loan losses.
We see some early encouraging signs are borrowers are transitioning from the forbearance granted at the beginning of the pandemic back into paying every payments are asked to our program continues to run its natural increase that course, our current stock price only increases the value of this program as we anticipate our counterparty.
Okay, well be able to buyback more of the shares outstanding with the proceeds of the Q1 loan sale.
Stephen I will now discuss each of these interim.
Let's begin with our core business.
Liberty Street, Economics, which is the research arm or the Federal Reserve Bank of New York frequently reports on the value of a college degree.
This week they put out a research piece that concludes that starting and door, finishing college in normal course during the pandemic rather than taking a gap year. For example creates a better economic outcome. This is because students have fewer good options with low wage growth and higher unemployment.
Our own how America pays for college of research confirms how resilient and Undeterred families are about continuing their education.
Furthermore, as a society, we are beginning to understand the educational and social limitations of distance learning.
As a result, there is a significant effort to open colleges and universities. This fall in some form of a residential model.
We have collected returned to campus plans for our top schools at this point, 80% of those schools have reported their fall plans.
Of those 96% of the schools have decided to either physically returned to campus or do a high bread residential model well only 4% of schools have announced a virtual only approach.
We are seeing schools change their plans as cases spread and it is possible that these numbers I will shift in the coming weeks I.
I do want to say, we applaud the innovative step schools are taking two creatively and smartly blend technology in public health practices to maximize the value of the educational experience, while protecting the safety of the on Cat campus population.
There is no doubt that some students will not enroll who otherwise would have either because of health concerns a reluctance to pay full price for a hybrid experience or for other reasons.
In addition, we know that the university's reaction to the pandemic are causing peak season to lengthen not all schools have announced plans and many if not even sent out bills for the fall semester.
We are seeing both effect in our application flows with volumes down 21.8% year over year.
How much of this is the result of the longer peak season versus a real decline in enrollment is difficult to predict at this point, but we are monitoring it closely.
While originations are expected to decline we are seeing a 5.5% increase in the average loan size we are improving.
We believe declining state subsidies combined with a reluctance or families to use their savings to pay for college and this economic environment is contributing to this increased borrowing.
Through June Thirtyth, we have originated 2.8 billion of private education loans that look very similar in credit character characteristics to pass vintages. We believe we will originate in excess of 2 billion of loans in the second half of the year, bringing full year originations to 5 billion.
In Q1, we estimated that the declining economic environment would reduce originations by 700 million to a billion and based on the factors I. Just described we believe we will be at the upper end of this range.
Not factored into these numbers is the departure or retrenchment of competitors from the business. These moves have only been recently announced and cat and competitors have not provided full information, making any prediction of impact hard to quantify.
However, given our commitment to the business and strength of balance sheet, we look forward to competing to serve the needs of their customers going forward.
Next we are seeing some positive balance sheet trends third party consolidations were 284 million. This was 181 million lower than the previous quarter and down 30 million from the year ago quarter.
Additionally, we are seeing a reduction of voluntary prepayments, but not a sharply as we would expect given the magnitude of this economic downturn.
We still expect our student loan balances to end the year largely unchanged from year end 2910.
Turning to credit.
Helping our customers navigate the pandemic remains our top priority.
In response to the pandemic in the second quarter, we issue disaster forbearance to borrowers who stated that they were impacted.
During Q2 forbearance peaked in the mid teens of loans outstanding.
I'm pleased to report that the trend of borrowers transitioning back to making scheduled payments on their loans is positive Steve will discuss this in more detail.
Allowance build in the quarter was significant we booked an additional 243 million encoded related loss reserves. We are determined to build reserves that cover all expected future defaults in our portfolio. Our loan loss reserve represents a life of loan loss of more than 11% of our portfolio.
Given the uncertainty of the environment, we overweight didn't Moody's more stress scenarios in establishing this reserve.
Given this I'm sure. Many of you are asking one of two questions either have we been overly conservative or not conservative enough.
Relative to the economic scenarios, we see today, we believe we fully provisioned for future losses.
However, we are learning that the economic impact of this pandemic is being driven by a combination of science and policy neither of which can be independently controlled.
There are a future scenarios such as a second broad economic shutdown that are outside the scope of our current modeling.
Even with this large build however, it is important to note that we still have 1.6 billion in loss absorption capacity, while remaining well capitalized Steve will provide further detail on our reserving methodology.
As promised on our first quarter earnings call in April we took a hard look at expenses to identify opportunities to enhance performance.
At this point, we have identified 18 million worth of expense savings for the rest of year.
We will begin the budgeting process for 2021 in the next few weeks with the intention of looking for further opportunities to create efficiencies.
The next topic I'd like to cover as a capital return program.
There has been a great deal of conversation around capital return given recent stress test results and directives from the fed.
We remain well capitalized with significant liquidity and reserves, we continue to pay our common and preferred dividends. Our 525 million accelerated share repurchase program is fully funded reflected in our capital ratios and remains in place.
Our counterparty continues to repurchase shares to satisfy the terms of the ANSR <unk>.
As of July 17th 40% of the 525 million has been utilized at the current stock price. It will take the remainder of 2024 hour counterparty to complete the program.
We already reduced the outstanding share count, 11%. This year, given current stock price trends and market conditions. The ANSR program will repurchase 72 million total shares or 17% of the company of 17% of the shares we had outstanding at the beginning of the year.
Let me now turn it over to Steve to go deeper into our results Steve. Thank you John Good morning, everyone. I will continue this morning's discussion with what is on everyone's mind, a deeper dive into the details of our reserve build followed by a discussion of our credit metrics on where we think they're headed I will then discuss the rest of the drivers of the income.
Statement and end up highlighting our strong capital and reserve position.
At the quarter and our loan loss reserves totaled $2 billion private education loan reserves, including a reserve for unfunded commitments was $1.85 billion were 7.7% of our total student loan on exposure, which under Cecil includes.
Not only on balance sheet portfolio loans. It also includes the accrued interest receivable of $1.4 billion, an unfunded loan commitments of $1.1 billion as discussed previously we use a discounted cash flow methodology to determine our reserve the discount.
On factors approximately 70% and that is how we got to the 11% coverage of life of loan default on the portfolio that John just mentioned.
The provision for credit losses was $352 million in the quarter. The major components of the provision for an additional $243 million for expected economic impact from from from our seasonal model and $99 million for loans originated but not yet funded.
On the balance sheet.
We took a cautious approach to our loan loss allowance in the second quarter, our Cecil implementation reserve build at the end of 29 team as well as the first quarter reserve run through our model using a moody's baseline near term improvement and recession scenario.
Weighted 40%, 30%, 30%, respectively. So this quarter given the uncertainties around the economy, we used a baseline and a more severe economic downturn forecast the news from the past each way that 50%.
The weighted average unemployment rate from these scenarios or 11.3% in Q2, 2021 and 10.6% in Q4 2021.
This is an increase of nearly 4% for future periods from what we used in the first quarter. In addition, we have added $50 million to the reserve to account for lower charge offs are expected in the quarter due to granting forbearance as a result of the pandemic.
For the next few minutes I will be discussing our credit metrics all of which can be found on page six of our investor presentation.
Hi, with education loans, and forbearance were 9.3% of loans and repayment and for this was up from Q1 and a year ago quarter all of course due to the pandemic.
While the reported numbers down significantly from its peak in the mid teens, we're still working through the backlog of borrowers exiting forbearance in April we issued disaster forbearance to a large number of borrowers who stated that there were impacted by the pandemic, which posted their April may and.
June loan payments.
Just borrowers are no longer technically and disaster forbearance and have payments scheduled this month.
As of July 15th.
49% of these borrowers resolve their forbearance status favorably, 24% of these borrowers reenrolled them for and 27% abuse borrowers are continuing to work with us and we'll either Reenrollment forbearance program make a payment or enter a delinquency status.
Keep in mind them reporting as of July 15th and many of these borrowers.
Not even reach their payments state.
We are very encouraged however by what we've seen so far from borrowers exiting forbearance and based on the performance of these four was today we expect.
35% of a total population to reenroll in excess of 50% to make a payment and low single digits to enter delinquency.
If this trend holds we would expect forbearance to dropped to 7% at the end of July and then move lower by the end of the quarter likely in the 5% to 6% range.
In the early stages. The pandemic forbearance was granted without determining if it was truly needed. This was absolutely correct approach at the time going forward to remain in the forbearance status, a borrower must demonstrate that they and the coastline are unemployed.
The current economic conditions or will be able to make a payment in the future.
Another change is we will be granting forbearance for just one month at a time going forward. This will enable us to stay in close contact and work with our borrowers during this time.
The characteristics of the loans and forbearance ER positive and the source of encouragement at the end of May be average current FICO score was 727 and less than 2% of these borrowers had been delinquent greater than 90 days in the last 12 months a large component.
The loans and forbearance recently went into repayment.
Our listeners roll familiar with how repaid waves. So just three months before the pandemic began two and a half billion dollars went into repayment for the first time and then the current quarter, an additional billion dollars when its repayment.
I called this out because it is not unusual for borrowers in early stages keep an eye to use forbearance typically 10% over cohort will.
In addition, we are working closely with a segment of borrowers that have used for Barents frequently in the past and for these individuals we are offering a 12 month interest only payment program to help them manage their payments.
Turning to credit performance private education loans delinquent 30, plus days were 2.7% of loans and repaying delinquent forbearance.
This is down from Q1 and in line with a year ago quarter.
Ordinarily delinquent loans did not receive forbearance and are therefore, not in our delinquency tables. However, as a result of the pandemic, we granted forbearance to certain delinquent customers that will return to their delinquent status when the forbearance period ends if they do not make the pain.
But.
Forbearance has clearly been happening delinquency more broadly and we expect delinquency to rise in future quarters.
Again at the Forbearance resolution trends, we just discussed hold we think 31 plus the delinquency at the end of August could increase the over 4% and basically remain between four and 5% for the rest of the year.
Net charge offs for average loans and repayment. We're just eight tenths of a percent. This was down from Q1 and also down from a year ago quarter.
Again, the use of Forbearances dampening charge offs as well as delinquencies. We now expect net charge offs for the full year 2020 to total 1.7%. This is lower than what we forecast at the end of Q1. This is simply because forbearance usage has pushed back charge offs.
Into 2021.
We expect net charge offs for the full year of 21 to totaled 2.5% based on the forecast discussed.
During this conversation this is consistent with what we saw an hour stress testing exercises using the Feds C Corps severely adverse scenarios and it's also consistent with how the highest quality private student loans performed during the Oh wait for non financial crisis back then losses.
The.
2.7% for loans similar to our smart option portfolio.
Loan origination stats on page five of the deck as you can see we originated 497 million a private student loans in the second quarter and 2.8 billion year to date.
The nations are down 7% from the second quarter compared to the year ago quarter.
74% of these loans were coupon with an average FICO score of 747. This compares to 77% and 745 in the prior year.
Seasonally Q2 has lower coastline rates due to a higher mix of non traditional students. We are already seeing an increase in FICO scores and co sauna rates in our early peak season results. This will continue and as John has already discussed we have taken.
Steps to tighten our underwriting and stress our expected returns in the current environment.
Net interest margin stats are reported on page four of the deck as you can see net interest margin on our interest earning assets came in at 4.55% down from the prior quarter and the prior year.
The decline in the quarter was principally driven by our liquidity portfolio, while cash and liquid assets declined to 6.6 billion from 7.6 billion at the end of the quarter.
Average cash and liquid assets in Q2, we're still slightly higher.
We're still slightly higher than Q1.
So in response to actions taken by the Federal reserve and the impacts of the pandemic, we saw yields on risk free assets, such as treasuries and federal reserve deposits, which is where our cash is invested decline much faster than bank deposits and LIBOR indexed I'll.
Cities during the first quarter of the month and Ms. pressured our NIM as well.
Spreads have now normalized and we do still expect our full year them to come in right around 4.9%.
Few quick words on operating expenses in the quarter that came at a 142 compared to 147 in the prior quarter and 139, a year ago quarter.
Backs in our core student loan business increased 7% from year ago quarter, while average customers increased 5.5% and delinquent borrowers declined 14.1%.
Ultimately full year operating expenses will come in around $565 million and that is just below full year 29 team Opex. Finally, let me comment on our strong capital position at the end of the second quarter total risk based capital.
It was at 13.7% and see T. One to risk weighted assets came in at 12.4%.
Both of these ratios are significantly in excess of regulatory well capitalized ratios in the post Susa World. We also look at cap equity plus loan loss reserves over risk assets and that came in at a very strong 15.7%.
In conclusion, our balance sheet remains rock solid in terms of liquidity capital and loan loss reserves I'll now turn the call back to John Thanks, Dave before we go to Q and I would like to spend just a few minutes lifting our gays and talking about a few things beyond the current.
And it's resulting impacts on performance.
First and just 103 days Americans will go to the polls to vote in the presidential and congressional elections, and as you can imagine we continue to spend significant effort understanding the potential implications of likely student lending reform proposals I'd like to touch on a few of these including free college debt forgiveness and.
Bankruptcy reform.
Let's begin with free college.
We appreciate that there is a strong public policy benefit of subsidizing college tuition for those who would otherwise not be able to attend this helps promote a quality of opportunity and economic mobility to real cornerstones of a healthy society and economy.
During the previous presidential campaign, both Senators Clinton and Sanders campaigned on this approach and it has been adopted by the Biden campaign.
Interestingly it has already been implemented in several states with New York's Excelsior program being the most prominent example, under this gold standard program, New York State residents, who earn less than $125000 receive free to wishon, if they enroll full time maintained a minimum GPS day.
And make post graduation, New York residency commitments.
It is important to point out that statewide programs already exist in 19 States and 18 additional states have programs with variations on this thing.
In the first year of the New York program, our originations in the Sunni system went down 3% and have grown every year since then.
We also recognized that borrowers sometimes get over extended and need relate to that end federal debt forgiveness in bankruptcy reforms are to either common proposals.
The cost of forgiving all federal student loans as approximately 1.5 trillion, making it hard to imagine that such a policy would have a life beyond the campaign trail.
This is especially true given other democratic priorities, such as clean energy infrastructure and health care access.
However, one might envision programs more focused on those individuals experiencing deep financial difficulty.
These targeted proposals would likely have little impact on our business as they would be directed at high risk customers, who are already struggling to make their payments and likely expected to default.
As for bankruptcy, we have long been supportive perspectively, allowing the discharges student loan debt in bankruptcy provided there is some reasonable period of post graduation payment to guard against the moral hazard of declaring bankruptcy simply to discharge student lives.
We believe Sallie Mae will continue to operate and thrive alongside programs, whether state or federal that provide much needed assistance to lower income families. As has been the case for decades. We believe it will require a combination of federal and state government programs and private offerings to meet the diverse needs.
Millions of students as such we believe we have a key role to play in higher education finance and our business will perform well regardless of the results of the election in November.
Well I have already commented on this year's MSR program I would also like to discuss capital return more brought by the recent news around stress test in the Fad have investors wondering if our future buyback plans are in jeopardy.
Looking ahead to 2021 and beyond we are committed to our hybrid model of originating loans, maintaining a core balance sheet and selling loans to free up capital to return to shareholders.
This strategy raises too obvious questions first is the whole loan sale market robust.
And to weather regulators will object to such a strategy.
The whole loan side, you can make your own determination, but we have been impressed by the resiliency of the whole loan market. Even during these most difficult economic conditions on the regulatory side, let me start by saying our interest and those of our regulators are well aligned when it comes to maintaining capital adequacy.
We believe though that there is traditionally last resistance to capital return when the proceeds come from a conscious strategy to manage the size of the balance sheet versus stretching existing capital ratios.
While we can't make a guarantee we would expect our hybrid strategy to breed viewed in this light.
Assuming market conditions are conducive in 2021, which I believe they will be we expect to continue a strong capital return strategy.
I would also like to talk briefly about our emerging areas of focus you will remember at our last call I had been on the job for four days. However at that time I suggested several priorities, including first maximizing the profitability and growth of our core business.
Second maintaining a predictable capital return program to create shareholder value three optimizing the value of our brand and are very attractive client base and for changing the narrative around private student lending to help reduce real and perceived political risk.
Now 90, plus days into the job I'm more convinced that these are the right priorities I believe if we execute against these objectives, we will increase earnings reduce risk and reduce required capital all of which are proving to have a positive impact on valuation.
We are just now building our bottom up plans in each area and I look forward to discussing our progress with you during future calls.
Finally, I want to recognize the incredibly painful but productive conversation that has come to the forefront in this country around race systemic discrimination and inclusion more broadly.
The pandemic in recent events have brought the in equities phase by the African American community and all people of color, even more starkly into focus.
Sallie Mae we have intensified our dialogue on these important topics and reiterated our zero tolerance policy for discrimination or racism of any kind.
During the quarter, we ups, we assess several options to determine the best way for us to take action in our communities that is consistent with our core mission of facilitating education.
As a result, we announced that the Sallie Mae fund, which is the charitable armor Sallie Mae will contribute 4.5 million and scholarships in grass over the next three years to increase higher education access and completion among minority students and underserved communities.
And to support educational programs that advance social justice diversity inclusion into quality.
This is a first step of many and diversity and inclusion will be an ongoing focus of ours in the months quarters in years ahead.
Thank you and with that let's open it up for questions.
Thanks, Tom If you have your question. Please press Star then apparel line and your telephone keypad.
And your first question comes from Moshe Orenbuch with credit Suisse.
Great and can you hear me okay.
We got in fine Okay, great. Thanks.
All right. So you guys gave us really.
A great overview.
Kind of what's going on with respect to.
The loans coming out of forbearance and your expectations.
Going for inferred for charge offs I guess, some first of all I just would it would assume that you know all of that is encompassed in your existing reserve.
Okay, and maybe could you just talk a little bit about what would cause your reserving to be different in other words.
Right.
Yes.
Using kind of think about and it's a little trickier now because you've also got issues of volume and balance.
Growth.
In there, but as you think about that over the balance of the year, how should we think about that.
And what should we be looking for from the standpoint, and the performance of the individual borrowers and your loan book in terms of thinking about that reserve levels differently.
[noise] sure so emotional look the but the key to our seasonal reserve and the biggest driver is really the economic forecast that we.
Use too.
I would calculate that reserve and given the uncertainties as I mentioned, we went from a baseline S. One us three type of a mix of forecast to a baseline us for and that result in some.
For the trying economic conditions. So the simple answer to your question would really be if the economy deteriorate significantly more than some of the really dire forecast that are out there and I guess one of the reasons why.
We chose to go with that mix was simply because we do have these loans coming out of forbearance difficult to do a management overlay over that if if those loans started to all the sudden perform worse than what we're seeing coming out of that could that.
But obviously result, and stepping up our reserve game as well however, based on everything that we're seeing you know that population is performing even a little bit better on what's the is they've July 22nd than they were on July 15. So we feel like we are very.
Adequately reserved at this point time.
Great. Thanks, Thanks, Steve that makes a lot of sense I guess I'd just when you think about a 1.7% charge off rate. This year in 2.5 next year I mean, those numbers are not.
I don't mean to be lifted that this but that theyre not particularly high in terms of the amount of reserves that you, Phil and presuming that most of the charge offs related to the pandemic would've been realized by the end in 2021, So I guess.
I mean, I don't know if you have kind of a reaction to that statement, but it feels like there's a lot of reserves relative to the loss content that you think is in there at least related.
Over the next quarters.
Look I would be remiss, if I didnt take an opportunity to agree with you. If we do have a very high quality of loan portfolio 2.7, certainly does not seem extreme weather in the context.
Reporting charge off some a you know 1.11 0.2 vicinity of is a pretty big increase the 2.7 is a little heightened because it will include loans that default and that should have defaulted and 2020 as well, but you know the economic for.
Cast that the reserve is built on don't show you know a sharp recovery. After 2021 unemployment rates are still pretty elevated.
And you know it it is expecting additional loss was to emerge.
Understood and maybe just a little bit of Flushing out on the competitive environment than we've seen some comments from one very large bank and when midsized bank.
Some of the private companies I think are a little less aggressive on the recycling front anything you'd call out specifically with respect to the competitive environment.
So I'll make a quick comment on on the refinements and John with who will discuss the competitive environment you know the rifai market, while the ABS market has recovered the market for the equity tranches of those deals. So in other words, the residual is still pretty if he.
Of the opinion the since the refi market is not going to snap back and I think that that is a positive sort of tailwind for us and I'll, let John talk about what we're sitting on the current environment sure at I look I I think competitively as this is a story, where we probably just don't have is.
And yet many of these announcements have literally been made in the last couple of weeks.
And I think it's probably too early to really discern what is the likely impact of that by sort of school and kind of market share type numbers.
What I will say is we are doing everything we can as I said in my prepared remarks.
To continue to serve this market. It is our core business, how we have the balance sheet to grow here and to continue to thrive we have the liquidity position.
We are being.
Very proactive with schools and reiterating our commitment to this marketplace, we are being sort of very proactive and our marketing efforts to make sure we're putting.
Our best foot forward.
All of that sort of high return loans that we think we can reasonably compete for and I think.
Given the newness of this and just the lengthening of peak season in general It will probably take a few months for us to really discern what is that true impact of some of those some of those assets and retrenchments from the market, but I think overall, we believe that that will net net and the future be a positive thing for the company.
Great. Thanks, very much yet.
Your next question comes from Sanjay Sakhrani with KBW.
Hi, does that say Steven Kwok filling in for Sanjay. Thanks for taking my questions I guess I'd just to go back to the competitive environment.
Could you just remind us of your market share that youve added that how we should think about that some of the peers that have either departed retrench and how much additional market share that's potentially up for grabs.
Yes, it's a little bit of a question of how you measure it and over what time period, but I think you can think about our market share as roughly 52%, 53% year end and year out.
Yes, if you're sort of asking specifically about the wells Fargo announcement, we don't normally sort of discuss what competitors are doing but you know there they're typically sort of a top three player in the market and they might have something like 15% market share again, recognizing those our internal estimates and different people.
Could have slightly different numbers.
Got it and then you mentioned staying the course in terms of originating in selling just wanted to get a sense of given where the stock is trading today are there opportunities for perhaps to accelerate that pace and be able to take advantage at the current environment. If you were to sell today what type of year.
Would you be able to get added and versus the payback of buying back stock. Thanks.
Yes.
Sure So Steve look.
So the market for student loans is very resilient.
Well at a premium today I'm reluctant to a cup of too much but.
You drew me in it'd be a couple of percentage points, probably below where we most recently sold we would rather not so our loans in this environment. Because we think we are getting penalized for the uncertainties of those forbearance situation, which we think will.
Resolve pretty well and I'll, let Sean comment on a share buyback opportunities sure and look as you can imagine Steve. This is a topic that Steve and I talk about a lot.
We are very pleased with the answer program as I said before it is in force in the marketplace. It's still has more than halfway to go and you know in discussions with our counterparty. We feel like we are in the market regularly sort of buying up to the reasonable limit of what we could buy up too.
Given both sort of practical and regulatory.
Guidance around around share repurchases and.
And I think as we said earlier even even.
With that active buying it's probably going to take through the ended the year for the HSR program to add so.
Could we do more.
Maybe I think our strong sort of preference at this point, yes. It to let the ANSR continue its fours and to end to sort of move on from there. Yes. It is important also I think in these times, where there is just a lot of scrutiny on capital return for banks in General you know the ANSR program is really unique in that it say preset.
Program, if we wanted to do something differently would have to go back and sort of undo that program and that's that's obviously a complicated thing to do you know and again I think that yes raises in introduces risks to the equation. So so we like the HSR program, we like how it's running we think it's active in the marketplace. We think it's doing exactly.
What we want which is buying back a lot of our shares outstanding during a time where that stock prices depressed.
And again I think our view is we want to sustain that far into the future.
In addition to let it run its course this year.
Great. Thank for taking my question.
Your next question comes from Michael Kaye with Wells Fargo.
Hi, I'm. The first question I had was I wanted to see if I could get any thoughts on how we should think directionally about the provision expense in Q3, particularly as it relates to the provisioning on new loan commitments in Q3.
Just a dip in cheaper we typically has a large percentage of your total commitments for the year.
Yeah sure my little bit hopping to comment on on.
That part of the reserve build in Q3, we're hoping that we are taking a.
Big provision for beating our of loan origination targets and you know rule of thumb is gonna be right around you know 7% of volume that we originate.
So you can you kind of expect to see a continued reserve build in Q3.
Okay.
And then add.
Fall question, just John the competitive environment.
I want to compare you to your largest cure discover it seems that Sallie mae's you know much more sells for scrip and while discover is more focused on direct to consumer marketing and I would think that the salesforce approaches a bit hindered now just given the corona virus. So I was wondering how your go to market peak seasonal strategy is changing giving the kroner power.
As perhaps you need to lean harder on direct to consumer marketing.
Yes, yes first of all I think we've always had a good blend of salesforce and direct to consumer and we've certainly talked in past quarters about sort of the enhanced capabilities and investments that we're making and the direct to consumer side of things.
With that said.
I think as I've talked to our Salesforce.
The role that financial aid offices, our plane and these decisions is as important as it has ever been.
And truthfully I think the number one question that I think our Salesforce is getting right. Now is are you still committed to this marketplace are you still open for business are you still going to be there for our students and as you can imagine we are the lifeblood for these universities in many cases and they can't do and fulfilled.
They are important mission, unless we do our job and fulfill our important mission. So I would say I think the Salesforce approach is every bit as important in my mind as it has ever been maybe more so in terms of.
Really cementing our overall commitment to the marketplace.
Course, the ways that we're going and sort of contacting and engaging with those financial aid offices is different.
I think it's following the same patterns that all of us are living in our lives everyday by just like we're figuring out ways to make it work I think our great salespeople are figuring out ways to make it work.
Great. Thank you.
Yep.
Your next question comes from Rick Shane JP Morgan.
Hey, guys good morning, and thanks for taking my questions.
Right and a follow up on on what Michael was asking.
The provision for new commitments during the quarter was on new commitments was $98 million and almost $99 million did you change your was the reserve.
The reserving policy on unfunded commitments disproportionately impacted by the economic.
Changes in your economic outlook.
So.
I guess the answer is yes, because the life of loan reserved for new loans also includes.
The impact of economic forecasts as well so yes, it would and on that front, Rick when we price our peak season originations basically we're looking for a life of loan return on equity and I bring this up because we also.
So stressed.
Our pricing model by increasing our losses by as much as 25% over the first couple of years of being and repayments. So we're actually feeling pretty good about the changes that we made to our underwriting practices and we're feeling very good about the loans that were going to originate.
Current quarter.
Okay, great. Thank you and so when we think about it.
You guys are discussing a 2 billion dollar origination target in the third quarter, you've got 1.1 billion of unfunded commitments presumably.
A big chunk of that 2 billion is going to be drawn from those unfunded commitments, which are essentially already reserved show how how do we think about the relationship CV. Your comment basically said hey, a suit to Michael's question.
Assume a 7% reserve rate.
On the $2 billion I think was the implication is there anything that we need to consider related to the rolling off of the rolling from unfunded to funded related to reserve rate.
So Rick basically what's going to happen is your point about a $1.1 billion that we've already reserved for is accurate and there will be some fallout from those loans originated but.
Particularly in the third quarter. There is a big second disbursement included in those originations. So we will be reserving for unfunded commitments again, and I want to trying to avoid giving you numbers here that you can.
In model on because quite frankly, I don't have good clear numbers provide you as we sit here right now during this conversation in terms of what the second disbursement is going to be et cetera.
Got it okay I as I understand that I appreciate it if you wouldn't hold one last question when we look at that 1.2 of unfunded commitments.
Yeah that I'm, assuming that those are.
Contracts that people enter into.
Over the summer in anticipation of drawing as they enroll.
And.
Are those loans typically drawn all in the first semester or are those loans drawn in the first and second semester and then to your prior point does it sort of get reloaded as people draw. They also get commitments for the second semester.
So there is going to be a mix, it's going to be loans for the fall semester and for the upcoming spring semester as well. So there were certain extent it is a leap for.
For the peak season, and it's also summer school loans and yes, there will be.
We.
We wish that all of our disbursements would sign up for their second disbursement as well when they apply for the fall semester, but it's a far less than 100% serialization at that point Tom.
Okay, great. Thank you for taking my answer questions I really appreciate the time.
Okay. Thank you.
And again for any questions. Please press star to that number one and our telephone keypad and your next question comes from Aaron Cigna fits with Citi.
Thanks.
Touching the the expectation that you were loan balance Intel will be kind of flat year over year on 2019, I just wanted to.
Clarify that's that's before the loan sale so.
Im pleased a decent amount of growth I think you were at around 21, five gross loans at the end of last year I'm, sorry, 23, two at the end of last year in your 21 five now.
And you're going to have slower originations, that's predominantly just from a decent slow down and in prepayments.
Yeah, we're seeing a big run off in both full consolidations and.
We are seeing a slowdown in typical curtailments and prepayments as well. So yes, we think that the balances at the end of 2020, they're going to be very close to the balances at the end of 2019.
Okay.
And.
On the forbearance side can you just talk a little bit about the.
Links that you're allowed to from a regulatory perspective to continue the Forbearances and then the other aspect of of adding the one month.
Option I guess of just continuing to do this.
Does that make it for you in the borrower to continuing to do that option.
Given that it's yeah.
Relatively quick each time.
So Aaron.
The disaster forbearance.
Basically something that has been.
I don't want to say encouraged but regulators absolutely want us to work with borrowers that are having difficulty because of the current environment.
And if you go back to a battle days of March when we introduced a disaster forbearance program. It was introduced alongside of basically the total waiving of federal loan.
Forbearance I'm, sorry, federal loan payments most of our borrowers have federal loans most of them. Just instinctively took advantage of the disaster forbearance as basically an insurance policy and then you know as as we all know the unemployment rate for car.
Roger coated individuals is a lot lower than it a lot lower than it is for non college educated individual so our client base is we believe in pretty good shape and the current economic environment and what we're seeing is people rolled back.
Back into.
Repayment.
Fairly routine ways. So our call centers are working with individuals and our collection centers or working with individuals and we absolutely have.
Bandwidth to deal with each and every customer that needs additional help rolling off of the first three month forbearance into the next one month forbearance, so operationally and from a regulatory perspective.
This program is not an issue now.
I think you might be harkening back to what we what we announced back in October where we were going to alter our forbearance plans.
That was essentially put on hold until the end of Twentytwenty.
And obviously, we will assess the economic and regulatory environment at that time, but we do fully expect.
In 2021 to Star Reintroducing, what we talked about last fall and that was the the six months of payments in between.
Periods of forbearance.
From cap at 12 months et cetera et cetera.
I've thrown a lot out there hopefully I've answered.
Your question, but please tell me if there are other questions you have on that topic.
Yeah, I guess just.
What is that what is the maximum amount of forbearance that you're willing to give right now.
Consecutively for 12 months.
It's kept basically a 12 month and we give it in a remote.
Okay. All right that's good thank you.
Your next question comes from Vincent can take with Stephens.
Hey, Thank you just two quick follow up question. So first.
On the reserve level and covering 11% lifetime loss expectations I was wondering if you could give.
Text around what did 11% would be maybe using some historical experience like how things were in 2008 or any kind of context is to be able to decide how much 11% is.
So look forward for cumulative losses.
11% on the current portfolio.
His is pretty significant because when you put it into perspective, when we originated cohort of new loans, we basically expect about a 9% default rate so right off the bat were adding more than 20% to new cohorts. However.
We've got basically.
$10 billion of loans in various stages of seasoning that have already charged off so I'll take the 2015 repay cohort as an example charge off on that cohort has already been close to 6%. So what I'm trying to say if you do the weighted average.
Expected defaults on the entire portfolio of 11% probably captures something like.
A new origination cohort expectation of I don't know, 15% and and I'm sort of.
Doing this back of envelope math as we talk here long story short is this is a very significant reserve that we have on our our books.
Okay, Thats really help yeah, that's sort of especially when you separate out the stuff that's really season versus the new originations.
Next question just on the origination guidance, so still a very good.
Each nation results with that guidance.
Just one if you could flesh out what assumptions are in there like maybe what what sort of levels of students would need to come back and also it doesn't seem like you have the competitive benefits from others exiting built into that that guidance any other metrics.
So you could get.
Yeah, I mean as as we've done our scenarios there and any as you can imagine we've looked at a number of different pieces I think the primary variable that we've looked at is actually just total experience and what is happening in the year over year flows yeah, we have than sort of looked at and stressed that.
Or changes in assume ticket prices.
Average loan size.
No I mean that some schools are going back on.
Hi, Brad model, where maybe the room and board and other commitments would not be as high but I think the primary driver is actually our year to date experience and what we're seeing in our flies.
Okay, great. Thank you very much.
And at the second part of your question I think we cited in the comments now we have not included anything at this point for competitive.
Sure.
Reactions or implications from retrenchment or people exit in the marketplace.
Great. Thank you.
Your next question comes from Henry Coffey with but Wedbush.
Good morning, everyone. This detail is extremely helpful. So thank you.
Well when we all of this reminds me of going through other cycles.
Where instead of the price of oil we're talking about Moody's as their forecast change.
A month to month, whether it gets worse or better how much impact is that going to have on future reserve requirements or have you built in.
Nicley I, maybe you don't want to call it a buffer but by going to the the worst case scenario have you have you left some room for some level of flexibility in terms of how how how responsive you have to be did that change in forecast either either good or bad either reserve build to reserve release.
Yes.
So look there was there was a governance process around the construction of the loan loss reserve. There was a loan loss allowance committee made up of individuals from around.
Credit finance enterprise risk management fits cetera, we meet we assess the facts, we assess than loans and the unknowns and we document the case that we make for using whether it's 40 30 30 or 50 50.
At some point in time, we will revert revert back to 40 30 30, because in normal times that is best practices, but basically Henry the fact of the matter is in the Cecil World. The most impactful.
In variable on a seasonal model or the economic forecasts.
We use for our predictable and supportable period, which is the next two years. So the bottom line is whether we use 40 30 30 or 50 50 of any combination of a scenario. The reserve is gonna be dictated essentially by the economic.
Comic.
Environment of course, we put a management overlays onto the reserve for things that we know and the and the model would not picked up but.
That is the state of play in the.
Current accounting environment.
And Henry as John I think the only thing I would add to what Steve said is of course the volatility in the fast moving nature of the current environment is one of the key factors that led that governance Committee that Steve you described to think differently about our way I think we were trying to be sort of.
Understanding of chest, how the world was changing and what the implications of that would likely bank.
So I think we all get it on the the forbearance issue.
Is that that expected reduction was that more of a mechanical process and that you have a pipeline of people who you know are trying to get all forbearance, but you have to.
We'll go through a process with each one of them and it's a question of picking up the phone and getting on the phone.
Yeah, it or is that.
More based on your statistical models and just just I just a second question I know you went over this around forbearance, but what what percentage of your loads and forbearance are actually paying.
So so Henry Unfortunately, there is no past experience to base. The statistical model on what we are saying is that a you know a large percentage of borrowers just you know start making payments to automatically.
Again, the forbearances over they get back into bill pay they may be a C H et cetera et cetera.
There are borrowers that coal and see what they qualify for and then there is of course of population, where we initiate the coal, but basically the the projections that I gave for the level of forbearance and the.
Resolution of forbearance is basically straight out of the trends that we are seeing to date.
And they are pretty consistent and continuing apace and you know the the borrowers in forbearance as I mentioned average FICO score of 727 less than 2% have been to have been 90, plus delinquent in the last 12 months abuse or.
Good consistent borrowers that basically make their payment, but we're confronted with.
An economic situation may have never encountered before and then there is the chunk of borrowers that are recently in repayment and again, it's not unusual for them to use forbearance and those are the borrowers that needs a little hand, holding and controlling from time to time, but we have the resources.
As we have the patience and we're working closely with one at all to get them back into the REIT status.
And Henry I can tell from your but it's it's highly dependent on the cycle dates for billing statements and payment date. So we work through these in a predictable pattern yeah, there's a time, where its natural for customers to engage with us or asked with Dan and that's why doesn't happen all at once.
You know in the mortgage business, there's a high percentage of people who were in forbearance, but still paying and you're saying that's not what you're seeing with the.
Student loan business.
No. We we did not see a high percentage of people that actually winning for continue them agreements.
Super Thank you very much you're answering my questions.
You're welcome.
Your next question comes from Lance Cesarean with Jefferies.
Good morning, guys. Thank you after taking my question.
Got two quick ones unless I have already been answered.
You know with the liability costs have they fully reset or is there still will decrease.
Lance they have pretty much fully fully resets. So when you know fed funds dropped down to 10 basis points LIBOR stayed up at 89 be for a month or so one month LIBOR, which was our biggest index is now I think 18 basis points, so pretty close to.
Were fed funds and bills and treasuries a trailing so that has normalized for most part.
We have five $6 billion of money market deposits that we have a inched down to just under 100 basis points now from think there 175 or one navy.
The start of the pandemic, so we feel like.
We are in pretty good shape from a cost of funds and then them standpoint.
Awesome, Thanks, and then.
Are there any other opportunities to optimize liquidity and captured back some of the attraction that you've seen in the NIM.
I think food the good news is the worst of the decline is over from a liquidity build but the liquidity is what it is and quite frankly, I felt pretty good waking up on March 25th them, having $7 billion on the bank.
So it takes hold on to that type of liquidity position for the foreseeable future.
Sounds good thank you.
At this time there are no further questions.
Great well first of all let me say thank you for everyone. Joining us. This morning I absolutely appreciate the interest in Sallie Mae I hope to call and the information provided was useful.
And until we talk again in the next quarter hope, everyone and their families remains sort of safe and well and with that I think I'll turn math to call back over to you sure. Thank you John Thank you for your time and questions today, a replay of this call in the presentation will be available in the investors page at Sallie Mae Dotcom. If you have any further questions feel free to contact Brian or I directly.
That concludes today's call.
That concludes today's conference. Thank you for your participation you may now disconnect.