Q1 2021 SLM Corp Earnings Call
Good day, and thank you for standing by welcome to the Sallie Mae first quarter 'twenty 'twenty One earnings conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.
Today's conference is being recorded I would now like to hand, the conference over to Brian Cronin Vice President of Investor Relations. Please go ahead.
Thank you Regina good morning, and welcome to Sallie Mae's first quarter 2021 earnings call. It is my pleasure to be here today with John Winter, our CEO and Steve Mcgarry our CFO.
After the prepared remarks, we will open up the call for questions.
We begin keep in mind, our discussion will contain predictions expectations and forward looking statements actual results in the future may be materially different from those discussed here.
It could be due to a variety of factors listeners should refer to the discussion of those factors on the Companys form Thank you and other filings with the SEC.
For Sallie Mae. These factors include among others the potential impact of the COVID-19 pandemic on our business.
On the operations financial condition 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 and our GAAP results can be found in our form 10-Q for the quarter ended March 31, 2021. This is posted on a long.
With the earnings press release on the investors page at <unk> Dot Com. Thank you I'll now turn the call over to John.
Brian Regina. Thank you good morning, everybody. Thank you for joining us today for a discussion of Sallie Mae's first quarter results.
It has been one year. This week since I joined the company and I am incredibly proud of the hard work on the Sallie Mae team and what we've accomplished during what can only be described as difficult times.
We're off to a fast start in 2021 executing our strategy and delivering strong results. We are encouraged by the trends towards normal fee driven by vaccine distribution and we're particularly encouraged by what this implies for colleges and universities on the ball.
I Hope you walk away today with three key messages first we delivered strong results in the quarter.
Second we are executing our 2021 capital return per Gram as expected and third I believe we are well positioned to continue our performance trend this year by executing against our core strategies.
GAAP EPS in the first quarter was $1 75, compared to 87 cents in the year ago quarter.
Our results for the first quarter were driven by a combination of strong business performance.
For admits in the economic outlook and gains from the sale of laughs.
Let me start with a discussion of our business performance.
Private education loan originations for the first quarter were $2 1 billion.
While down 10% year every year as a result of the pandemic impact on the overall market. We believe this is a strong start to the year and positions us well to achieve on our full year goals.
Remember the first quarter of 2020 originations were not meaningfully impacted by the pandemic.
Our market share results for the first quarter will be available on the next few weeks. However, we are coming off a very strong 61% market share in the fourth quarter of 2020.
Originations quality was consistent with past years.
Our cosigner rate was 89% compared to 88% in the Q1 2020 Corp.
Average FICO scores were 751 versus 746 in the year ago quarter.
We executed a 3.16 billion dollar loan sale on the first quarter of 2021 and recorded a gain on sale of $399 million.
This is just under a 13 per se gain on sale for these loans, which represents a new high watermark for our loan sale program.
Our credit continues to be a highlight as we emerge from the pandemic.
Education loan annualized net charge offs for the first quarter were 1.29% compared to 1.52% on the fourth quarter of 2020.
Delinquencies are especially important in the first quarter every year.
That number reflects the initial performance of the new graduate vintage of loans that entered P&I in the fourth quarter of the previous year.
I'm happy to report this performance is in line with past cohorts. Despite all the challenges of the last year on the economy as a whole.
During the first quarter, the economic outlook and assumed prepayment speeds in our seasonal loss estimates impacted our reserves.
As we have discussed on past calls these aspects of Cecil are difficult to forecast because of the changing assumptions around macroeconomic environment.
While Steve will discuss both changes in more detail the impact of these forecasts related charges was a negative provision of $226 million in the first quarter, bringing our loan loss reserve down to 1.1 93 billion, which includes the reserve for unfunded commitments.
In the first quarter, we made tremendous progress against our capital return strategy some of which we have discussed during our January earnings call.
On January 28, we completed the $525 million accelerated share repurchase program and received 13 million additional shares of common stock over what had been returned in 2020.
This was an extremely successful program, where the company repurchased 58 million shares of common stock in total on an average price per share of $9.01.
On February 2nd the company announced the commencement of a modified Dutch auction tender offer to purchase up to $1 billion of the company's common stock.
On March 16th the company purchased $28 5 million shares of its common stock on a per.
Purchase price of $16 50 per share for a total purchase price of approximately $472 million on.
Although not fully subscribed we were pleased with the outcome of the tender offer for two reasons for.
We were able to repurchase a significant number of shares in a short period of time and at an attractive price second we believe the subsequent share price movement and the <unk> 47 per site.
Per cent participation rate demonstrate that investors believe in the fundamental value of the franchise.
Soon after the tender closed we began aggressively buying shares using a <unk> one program.
Through April 20th we spent 370 million to buy back 20 million shares at an average price of $18.51 through this program.
I think it's important to keep our regular and persistent capital return program in perspective.
In 2020, one we have repurchased $16 five per cent of the shares outstanding at the beginning of the year.
Since January 1st of 2020, we have repurchased 26% of the shares outstanding at that time.
Set again and a little over a year, we have repurchased a little bit over a quarter of the shares outstanding since we began our strategic capital return program.
As of April 20th 2021, we have $485 million and authority left under the original 1.25 billion authority granted under our 2021.
Share repurchase program.
Although we have made considerable progress in our stock price.
We remain committed to our strategy of selling loans and using the proceeds to repurchase stock while the price is undervalued and we are phasing in seasonal.
Before I turn the call over to Steve to discuss the quarter's financial results in more detail I'd like to take just a moment to reflect on the progress we have made over the last year on.
On a Q1 to Q1 year over year basis, we have increased GAAP net income by 77% reduced our operating expense by 15%.
Reduced our common shares outstanding 26% and that's again since the beginning of 2020 and increased our GAAP EPS by 101 per cent.
Although the macroeconomic environment has added volatility to the results over this last year I Hope you agree we are making progress against our strategic imperatives.
We will now take you through the financial highlights on the quarter Steve. Thank.
Thank you John Good morning, everyone. I will continue this morning's discussion with a detailed look at the drivers of our loan loss allowance for discussion on key components of our income statement and finally, our strong liquidity and capital position.
Education loan reserve, including reserve unfunded commitments was as Jon mentioned $1 $2 billion or five 4% of our total student loan exposure on.
<unk> sold this includes beyond balance sheet portfolio, plus the accrued interest receivable and unfunded loan commitments of $457 million.
Our reserve at five four percentage on the portfolio is down significantly from six 5% in the prior quarter.
As you know we incorporate several inputs are subject to change from quarter to quarter, we're preparing our allowance for loan losses.
Clued, Susu model inputs and overlays deemed necessary by management.
Most impactful seasonal model inputs include economic forecasts for forecast weightings prepayment speeds.
New volume and of course loan sales I will now walk you through each of these impacts on.
<unk> economic forecasts, we use draw on quarter over quarter movement in the allowance.
As discussed before we use Moody's base S. One and S three forecast weighted 40%, 30% and 30% respectively.
The forecast used in their ratings were unchanged from the prior quarter.
The economy on the outlook continued to improve as you're all aware the forecast for unemployment for college graduates declined on average 1% on near 25% reduction in projected unemployment. This contributed to the decline in our reserve.
Turning to prepay speeds and we have discussed in past calls this has been a watch items since the pandemic began.
Our CPO or forecast as modeled who's not on lining current observations and trends as a result, we implemented for new CPR model in the quarter, the new model and the improved economy resulted in a considerable increase in prepay speeds.
Faster prepay speeds, we used to model cash flows this quarter.
Also of course.
We reduced our reserve means we do think we are in pretty good shape regarding our probability of default and cash flow model and don't think they will contribute any additional volatility over the course of the year.
Moving to volume volume is an important driver of our allowance of course, while the first quarter is a large disbursement corridor for the spring semester recall that many of these loans were reserved for at the time of commitment in the fall of 2020.
New loan commitments this quarter were $843 million, which required us to increase our reserve requirement by $40 million.
The reserve for the vast majority of the loans. We sold this quarter was released in the prior quarter.
Recall, therefore loan sales had no meaningful impact on the reserve this quarter.
For factors described here in addition to other factors, including overlays and the natural accretion of our discounted reserve.
But on a $222 million provision for credit losses in our private student loan portfolio.
For the next few minutes I'll be discussing our credit metrics, which can be found on page eight for.
Our investor presentation.
For our held for investment portfolio, which this quarter is the entire portfolio private education loans and forbearance were.
3.7%. This is down from four three in Q4 of 2020 and six 2% in the year ago quarter.
As we would expect given the economic improvement, we have seen and expect to continue.
Looking at delinquencies private education loans 30, plus days delinquent were two 1%, which was down from two 8% in Q4 and three 2% in the year ago quarter.
While these results were very positive we do still expect a 30 plus day delinquencies will rise into the 3% in mid 2021, and then trend lower for the remainder of the year.
Turning to charge offs charge offs as a percentage of average loans and repay 1.29%.
Up from 105 in the year ago quarter, but down from the one five to John quoted in the prior quarter.
Again, we do still expect net charge offs for 2021 will increase to around one 8% for the for.
Full year 2021 based on our current forecast but of course, we are very well reserved for these expected outcomes.
Let's talk now about net interest margin, which you can find on page six of the debt.
NIM on our interest earning assets was four 4% in Q1.
And this was down from the prior quarter and the year ago quarter.
The NIM is slightly lower in the quarter due to our high cash balances, which were driven by the stickiness of deposits in this current environment and the proceeds from the January loan sale remaining on our books, a little bit slower than anticipated.
However, we are quickly deploying those cash and capital and expect NIM for the full year of 2021 to still come in at the fourth quarter per sensor area that we discussed in January.
Let's talk about operating expenses Opex was 125 in the quarter compared to $122 million.
Prior quarter, but $147 million in the year ago quarter.
Operating expenses and our cash.
Core student loan business day.
Creased, 15% from the year ago quarter. Despite the fact that loans serviced increased 3%.
This is obviously driven by the sharp cost reductions generated by our Q3 2020 restructuring.
While we were on the topic of operating expenses, we have talked about providing some unit cost information.
On that front, our target cost to service alone for the full year 2021. It was roughly $5 75, a month on average, but breaking those down into its components. It costs us roughly for the quarter to service a current zone.
But $27 50 to serve us a delinquent loan.
These numbers will obviously have some seasonality. These numbers also have our planned efficiencies embedded in them.
Goal is to leverage our cost structure and technology to drive our unit costs down.
<unk> sacrificing either customer experience our recovery efforts for our well managed servicing practices through the volatility from quarter to quarter to quarter. We expect that we will report out on our success on this front.
Finally, our liquidity and capital positions are very strong.
We ended the quarter with liquidity of 25% total assets at.
At the end of the first quarter total risk based capital stood at 13, 8%.
Common equity tier one to risk weighted assets was 13, 5% very strong ratios well above.
Well capitalized.
Finally, the posts useful world. We also looked at Capex plus loan loss reserves as a measure of our capitalization and that was a very strong 15% at the end of the quarter.
Our balance sheet remains solid in terms of liquidity capital and loan loss reserves, which positions us very well to grow our business and return capital to shareholders. Thank you back to you John.
Thanks, Steve I Hope you all agree that we executed well on the first quarter and that you share my belief that we are well positioned to continue that trend throughout 2021.
This belief is an expectation that we will operate in an improving external environment on.
On the Covid front I'm heartened by the continued positive development around vaccines, it's really hard to believe that students will be wrapping up the spring semester over the first few over the next few weeks and quickly making plans for the fall.
Our original guidance for originations in 2021 was built on the assumption that the first part of the year would be much like the fall of 2020 and the second half of the year would benefit from schools operating and more normal conditions early indications from schools regarding their fall of 2021 plan.
<unk> indicate just that by and large most schools are indicating that they will be operating in a completely on campus experience. We believe this normalcy is exactly what students and their families are looking for and expect a strong rebound in attendance.
Unemployment, especially for them is with a college education continues to trend in a positive direction. The average college graduate unemployment for the first quarter of 2021 was three 8% compared to four 1% in the fourth quarter of 2020.
This remains notably lower than the current six point O percent national unemployment rate.
The federal government continues to support taxpayers with additional stimulus and federal student loan borrowers, but payment relief through at least September 30 of 2021.
These efforts should positively impact our borrower's ability to service their lives.
Finally on the political front, we are beginning to see higher education priorities from the New administration being discussed we believe that any proposals that focus on assisting lower income students and families achieve the dream of higher education for targeted datasets and proposals are important and complement our.
Well, we continue to look for ways to educate and aid lawmakers to help create good policies that will improve outcomes for students and families.
I'd be remiss if I also didn't mention our corporate social responsibility report, which was released earlier this month.
One lesson, we can take away from the last year is the very real importance of owning responsibility responsibility to each other our communities and to our planet.
This is true of individuals' of governments and it is certainly true of the companies that have the privilege to operate and serve customers and our communities.
This is a responsibility we take very seriously here at Sallie Mae This year's corporate social responsibility report reflects the strides we have made to achieve our mission to power confidence as students begin their unique journeys and digital ever a healthier more inclusive just and equitable world.
Im encouraged by the progress we continue to make and I'm excited about the work that lies ahead.
Let me conclude with a brief discussion of our 2020 one guidance.
We continue to obsess over the performance of the core business and believe we have opportunities to enhance top and bottom line performance, which will be further strengthened through share repurchases.
Therefore, we'd like to update and reaffirm our 2021 guidance.
We are raising our GAAP diluted earnings per share range to $2 95 to $3.15 from the previously announced $2 20 to $2 40.
There are two main components that lead to this increase and our original range first was the result of the changes in our seasonal reserve, which should be viewed as non recurring in the future.
This represents approximately 55 of the guidance increase the.
The additional approximately 20 <unk> increase is due to the strong execution in our core business drivers and outlook for our loan sale program.
As a reminder, this guidance includes an additional $1 billion of loan sales in Q4 of 2021 that we had disclosed on the last earnings call.
We are reaffirming the rest of our previously announced guidance, specifically private education loan origination growth of 6% to 7% year over year and consistent with our outlook for the spring and fall semesters, we expect loan originations to be down in the first half of the year and up sharply during the fall semester.
We expect our non interest expense to end 2021 between 525 and $535 million and this reflects our continued focus on efficiency and operating leverage and we expect our total loan portfolio net charge offs will be between 260 and $280 million.
With that Brian lets open up the call for questions. Thank you.
And as a reminder, if you wish to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Michael Kaye with Wells Fargo.
Hi, Good morning, I wanted to talk a little bit of balance that NCO guidance, which was unchanged. It seems to me like the trends are a little bit better Corp.
Me, if I'm wrong, but I recall last quarter, you were thinking delinquencies would rise to the high 30 percents by mid 2021, but now I thought on Steve.
As Steve said to about 3%. So can you just explain that.
Yes, so no Michael our guidance on delinquencies and charge offs are basically unchanged I did say in the fourth quarter on I think I refused today that we should delinquencies should rise above 3% potentially into the mid threes and then crest lower from there than we did.
With our charge off guidance of the two succeeded to AAV. The fact of the matter is.
Defaults were much lower in 'twenty on the first quarter of 'twenty, one that we would have.
Expected, we do have a backlog of defaults that we reserved for and you know it is a fact that as we move through 2020, one we will use.
Significantly less COVID-19 type of forbearance, what we call disaster forbearance in the past we have continued to use that although on a much.
Right to cure defaults and delinquency buckets, we will be dialing that back significantly over the coming months and quarters and look we do think that it is prudent.
To remain reserved for potential default.
Backlog of.
Hum.
Loans.
Pipeline.
Okay. Thank you.
Could you talk a little bit about any changes in how youre approaching income market for the 2021 peak season with one of the larger players in our sector, having exited I was just wondering if perhaps could you spend more on marketing our hiring more salespeople has more market share stands up for grabs for now.
Yeah, Michael It's John I'll take that one.
Look we've talked about this on the last couple of calls and obviously theres been a lot of changes in the competitive intensity in the market not the least of which is the departure of a major and quality competitor.
I want to start with a very clear statement, though which is we really obsess over and care deeply about the profitability of our loans. The <unk> of our loans and I think the most important thing is that we've maintained very strong discipline around as Steve mentioned earlier, our cost to service, but also our cost to acquire those are pretty big drive.
<unk> of the lifetime return on equity return on investment return on equity on those loans. So there are limits to how far and how much we will spend to chase volume and we really do try to be extremely disciplined around that.
With that said, we believe that this is a great opportunity for us to continue to show and demonstrate our commitment to the marketplace.
So you know in conjunction with our marketing and sales teams. We've looked hard not just at our level of sales force resources, but the way that we are deploying against opportunities in schools.
Really applying what I would describe as.
Tried and true and tested Salesforce management practices as we've talked about on a number of calls before we continue to invest we think very effectively in our direct to consumer marketing efforts.
And we continue to also invest in our other programs like our partnership channels, which are a meaningful source of origination high quality origination for us.
So we are we think I do on the right things to drive that growth, but I think as we've also talked about on previous quarter as we know that the pandemic impacted enrollment we now it didn't impact enrollment evenly across all origination channels.
We know that not every student not every family will rejoin the sort of journey to their higher education aspirations at exactly the same time and in exactly the same way. So I think we think it will take a.
Probably a peak season or two for things to really normalize again, but we're encouraged by the fourth quarter results that we talked about before and will continue to focus on this as a real opportunity for us in the future.
Okay. Thank you very much.
Your next.
Question comes from the line of Moshe Orenbuch with credit Suisse.
Great. Thanks.
Sure.
Steve I think when when when you talked about or actually the question really is for both John and Steve.
When Steve talked about where he thought.
Stock what would have been fairly valued back when you talked about this year's plan you talked about a number in the Twenty's and.
Thankfully the stock is approaching there could you talk just about how you think about the trade off still between.
The ability to I mean, clearly youre going to complete this program, but how do you think about that trade off now between the loan sale and stock buyback.
Moshe it's John.
Thanks for that question as you can imagine it's one that we talk about.
Really extensively internally.
Let me, let me break my answer into a couple of pieces.
Number one for folks who.
Maybe haven't listened to past calls we are rock solid committed to the notion of strong capital allocation and capital return. It is one of our key strategic pillars and the idea of being a great capital Allocator and capital return or is something that is not a.
On a fly by night notion for us, it's going to be as long as I'm CEO and enduring part of what we do going forward.
With that said overtime you know.
Sort of how we generate excess capital and how we deploy excess capital will undoubtedly change.
And I think as we've talked about on previous calls we fully expect that through Cecil implementation. We will move from a model that is somewhat more reliant on loan sales to a model that is somewhat more reliant on organic capital generation, we will in all likelihood continue to.
Sell some amount of loans to improve the value of the asset and to keep the channel open, but I think that mix will likely share.
I think the way we deploy the capital will also likely share from something that is far more I'll focus today on share buybacks are something that is more balance between the various ways of us deploying and returning capital.
The real question is when do we start to make that pivot and I think obviously the Cecil implementation is going to happen on a known time frame and a known pattern I think.
Pivot from share buybacks to a broader strategy is something where we will really look at sort of multiples and valuation I'd say, Steve and I talk regularly about where we are from a multiple perspective on where we should be we think in that discussion a lot about the factors that go into any good multiple analysis whatsapp.
Our implied cost of capital on our assumed growth rates, what capital return profitability all the things a good sophisticated financial analyst would sort of bring into it.
Yeah.
I think we have obviously views that may change over time.
About where that multiple is well.
We're probably not going to sort of stake ourselves out to a specific multiple where the strategy will shift because we could obviously change, but I think it's fair to say that we feel like we're still probably at least.
Several turns of the valuation multiple away from where we feel like we should be and so I think the assumption should be that our current strategy will largely persist for some period of time.
But folks should expect again that capital allocation on capital return My hope is that we're talking about that in an evolutionary way every quarter from here on out.
Great. Thanks, and I think your commitment to that capital allocation is pretty clear.
A quick follow up.
John You mentioned that 20 cents of that guidance increase was not related to the change in Cecil unrelated to better operating trends without asking for specific guidance for years past 2021, but is it reasonable to assume that debt that those amounts should you know kind of persist.
Yes sure look.
Moshe we are one of the things that I think investors Miss when they look at us on the long run.
We are going to continue to grow our earnings steadily over the coming years.
There might be some so we'll originate will sell for billions of loans. This year that might decline for $3 billion on loans next year, but the trajectory for our earnings is decidedly.
Sloping upward and look we have only really just begun to pull the levers.
Inside the company, which is to continue to focus on.
The efficiencies that we know that we can continue to generate and to continue the KN <unk>.
While our share of the market that we play in so our outlook is very very positive for our earnings power on them.
Great. Thanks, Steven Chang.
Your next question will come from the line of Sanjay Zaccone with K B W.
Hi, This is actually Steven Kwok filling in for Sanjay. Thanks for taking my question.
The first one just around the $1 billion up on loan sales expected in the fourth quarter within the guidance.
Gain on sale is being filmed there and is there the potential to if the environment remains.
Strong to do with more than $1 billion.
So Stephen what we have embedded in our guidance is a premium that is slightly lower than what we just reported but not significantly so regarding selling additional loans at this point in time, we think that that's pretty much on.
Off the table.
Despite where premiums may or may not end up I mean, we have.
We've generated a significant amount of capital that we still haven't even deployed yet this year. So we wanted to.
Keep things on a somewhat steady pace as we move forward.
I wouldn't expect.
You shouldn't expect us to change for loan sales in 2021, yes.
Yes, David It's John I think the only thing I would add to what Steve said and it's a little bit of a broader answer it but I think it's important to say it.
We really as we've talked about on a number of calls here.
Believe that loan sales are a great way of taking care or taking advantage of this arbitrage that exists today between the whole loan market and the current value of our equity in the market.
So that's obviously why we're being so aggressive there and as Steve said the cap on that is really how effectively we think we can deploy that capital I do want to remind everyone that our real goal and I think we are starting to talk about this in past calls.
Is to have and to generate very sort of stable predictable high quality high profit and growing earnings streams. So we like these loans tremendous he's a really attractive loans, we want to keep as many of these loans on our balance sheet for their full life as we.
We possibly can we think that will drive that persistent consistent predictable earnings flow going forward and if we can marry that with the kind of focus on topline growth and market share that Steve just talked about.
And really effectively manage risk along the way we think that is a winning combination. So recognize every day, we're sort of striking this balance of wanting our cake and eating it too we want to take advantage of this incredible arbitrage, but we really like these loans as well and think they will drive a very attractive valuation for us.
For the future. So the reason we're not just looking at loan premium as we are interested in.
Earnings and growth today, but we are also very very interested in creating a long runway of predictable on attractive earnings growth in the future and that is effectively sort of the balancing act, Steve and I and our board will continue to make.
Got it.
Very helpful. And then just a follow up question around the political front is there anything that youre seeing that there is monitoring from the new administration.
Yeah look I think on the political front.
We are encouraged by the sort of the thoughtfulness of the debate and the discussion and we are encouraged by the types of proposals that we are seeing being floated not just now by the by the administration, but I think by leadership within Bolthouse.
As of Congress.
We've talked on a number of occasions on this call about things like free community College, and free sort of state University Public University education for families below particular income levels I think that the popular number today is about $125000 a year.
These are proposals that continue to get I think a lot of attention and a lot of traction and by the way we very much support we think they drive access to education, which again as we've talked about on past calls is a key determinant to economic mobility, social justice and really achieving the American dream. That's so much a part of.
Of our society.
We are really encouraged by what we think is very thoughtful discussion going on right now around debt forgiveness, I'm, sorry round out loan forgiveness.
And I think what has really come to the surface is just how regressive and expensive large scale loan forgiveness is.
And you know if I have to read the tea leaves I think what that's leading us to is probably if there are no debt or loan forgiveness type proposals them being far more targeted on people, who really have a demonstrated need versus something that is broad and across the board.
You throw in that some of the other proposals like expansion to Pell grants and so for it.
These are all things that we think serve an incredibly important social benefit, but I think they also have the added benefit of being highly complementary to our business model as we've disclosed in the past. So I will sort of never assumed that the current political environment is the ever forever political environment things.
Can certainly change.
But I think we are optimistic and supportive of the discussions that have been ongoing.
Got it thanks for taking my question.
Got it.
As a reminder to ask a question simply press Star One. Our next question will come from the line of Rick Shane with J P. Morgan.
Good morning, guys, it's Melissa on for Rick today.
Okay.
Understand your thinking around the reserve rate on low currently.
Currently it is great for.
For quarter.
We've seen that move around a little debt.
Talk about how you think about asking your framework.
For play between the reserve rate level.
On when you do on the map.
Right.
Sure. So look unfortunately with sue so we are holding to the models and the economic forecast but.
That drives the life of loan seasonal reserve.
Seasonal was introduced that the absolute worst time, and we've seen an hour.
Our reserve go from 6% at the <unk>.
Starting point to as high as eight 5% and now it's dropped back down to five 4%, we think given the current ingredients that.
That reserve is probably appropriate as a life of loan loss reserve as you probably know from following US we originate loans with an expected.
Life of loan loss.
Right around about 9.5%.
Obviously, we have many cohorts that are out there that have already experienced a significant amount of their default, but when you take that into consideration on the fact that we used to use a discounted cash flow model to calculate now receives the reserve.
Five 4% feels probably like it's about right although look.
For college unemployment rate, which is the biggest ingredients for the most important explanatory variable in our model I think pre pandemic coasted around.
Low to mid twos.
And we still very much of.
Hi, three and for handles and a reasonable and supportable period.
So the reserve could very well come down as the move to.
Normalcy continues hopefully that captures the spirit of your question, but that is how.
You know, we think about the Skus for reserve.
Yeah, that's incredibly helpful. Thank you.
As a follow up question I'm, just curious what Youre hearing from your University partners in terms of debt.
Public application.
This year coming out of Covid with the expectation of being on campus next year.
Im curious what youre hearing from them with anything around how this compares to pre COVID-19.
Thank you.
Yes, Melissa thank you.
I think at this point most of what we're hearing from universities falls more into the sort of anecdotal space than it does into the specific data space that would take everything that I'm about to say in that context, but I think what we are absolutely hearing from the vast majority of our.
College partners.
Is that they expect the fall to be if not a full return to sort of normal say largely a return to normalcy.
I am sure that there will be exceptions to that.
But I think that is their expectation coming in I think the only color I would add on top of that is.
You really have to imagine the pandemic through the lens of an individual student or an individual family.
And there are a group of students and families who have just powered through their education and have said, hey look regardless of the hybrid model and the economic uncertainty, we're going to keep moving forward and by the way I think that speaks to the resilience we have seen in our originations.
Last season and this season.
I think there is a second group of people who said.
Gosh, maybe I will take a year off even though my my other opportunities arent as rich.
Arent as arent as arent as attractive because I just don't believe in the hybrid model and I really want to sort of wait till things returned to normal on and we expect many of those people to come right back into the system next year and these are all the people who are taking GAAP years, I think is sort of day, most sort of classic.
Label of that but I also think it's really important to recognize that there are certainly students and families out there who have delayed college because of their very real economic damage that has been done by this pandemic and resulting recession.
And as I point out you know whenever I get the chance. My guess is some of those students will come flooding back end right away. Some of those students will come back in over the course of the next semester or two or three and my guess is some of those students will not ever come back on Unfortunately, you know they will have.
Missed the window for them to get to their higher education, and we will be sort of permanently part of.
Many lost generation of folks, who otherwise probably would have gone to college I think the problem is we've never gone through anything like this before so it's really hard for us to quantify what that looks like and what those numbers are as.
As we said, we're very I think yes.
It's supportive of the guidance, we've given around originations.
For the remainder of this year.
But a little bit like when I referred to earlier I think it's going to take a year or two to really see all the trends normalize into understand how those different cohorts of students sort of come back into the system and sort of where and how they engage in the higher education marketplace.
Our next question will come from the line of Erin <unk> with Citi. Please go ahead.
Thanks.
Maybe you could just talk a little bit about the consolidations to third parties, they came down a little bit.
Quarter over quarter year over year.
With the.
Look there.
Expectations.
Yes, sure and so you know look consolidations as part of being in the business. We watch the trends, obviously very very closely.
Since our portfolio has started to age call that in 2019.
2019, we haven't seen any real discernible increase in the trend of loans being consolidated consolidated away as a percentage of our portfolio, we watch where consolidations.
Come from what cohorts for the increasing decreasing and what we see as a steady state loans go into Grace.
And to consolidate pretty quickly and then the pace.
Slows down on those who are looking at chart.
A couple of days ago and that trend continues so this quarters.
Consolidations, where pretty much composed of the last to repay cohorts on the contribution from the prior cohorts is down significantly if that trend was the change we would.
Become very concerned it has not.
We continue to look for ways to.
Stem the flow of loans for kept consolidated away from the balance sheet as John mentioned earlier, we really really like these high quality loans they generate.
Very high Roe.
On the matter is the consolidation business.
Very very low ROA business and not something we think is appropriate for us to participate and at this time and something that I've said I think very often in the past is for loans that consolidated away or you know held by.
Very high income very high credit quality individuals, they're going to consolidate away anyway, and maybe weighted average wise for those loans are fairly short. So look bottom line is we continue to monitor the trends and <unk>.
Look for the silver bullet, we havent found that just yet, but we think.
As those functions very well and we can generate for.
Very strong returns and earnings growth.
While the consolidation activity continues.
Thanks, and maybe we could just touch a little bit on the on the net interest margin you mentioned it.
It dipped a little bit on the first quarter I believe there is typically some seasonality with your cash balance is easily how much was that in and the other was.
On the broker deposits.
Really come down much from a rate perspective quarter over quarter.
Look.
On on that decline there.
So look.
We were very very cash rich this quarter.
We have more liquidity than we would have liked to for deposit market is extremely STREAMWAY sticky I think we're probably not the only bank.
That is saying.
Deposit stay on the balance sheet.
We're price to a lower balance.
I'm speaking specifically about.
Our retail slash Internet deposit base, but we did also expect to spend $1 billion sooner than we did with the tender offer which unfortunately was only participate.
47% that impacted the NIM as well, but look at the end of the day I think the important thing is that the liquidity will run off we will spend the capital and for the full year, we will hit.
Our NIM of four and three quarters, and I think that that's going to be a sustainable level, which is pretty attractive on the banking industry for the medium term as well.
And just on the broker deposits do you expect that rate to continue to decline.
So our broker deposit we typically take longer term brokered deposits and we have not been very active in the marketplace. What we do is we we swap them to fund our variable rate portfolio. We've had some runoff in broker deposits we.
Don't expect.
On to refill that bucket of funding until later in the year when we.
When we.
Make our peak season disbursements, so, yes that could decline a little bit before it before it increases.
Thank you.
Your next question will come from the line of Vincent <unk> with Stephens.
Hey, Thanks. Good morning, just have a couple of quick questions. So for.
First on capital return so you've indicated you have corn at $85 million.
Perfect.
And of course, you have the upcoming sales and just sort of wondering in your CET ratio is also pretty good at 35 per cent just wondering when youre thinking about whats the right level of your CET one ratio is.
How fast do you think he might get there.
So we tend to focus on our total risk based capital ratio, which we need to maintain.
Margin above the well capitalized level most of our.
Capital is C T one anyway.
So.
For the target for total risk based capital is less.
Let's call it 12%.
We ended the quarter with 13 eight preferred on.
On our current trajectory of capital return that ratio should decline a little bit, but if we stick with our current capital return strategy, we will actually end the year.
Higher as opposed to lower than where we ended the current quarter.
Okay got you. So it's sort of yes. So look what we really wanted to do is there's been an incredible volatility in our seasonal reserve.
Clearly that impacts our capital accounts significantly so we will stay on our current course of capital return until we see.
And see some stability in our excuse for reserve.
Okay got it that's helpful.
On the NIM. So I appreciate the color about the <unk>.
Excess liquidity you had I guess, if you could help us maybe understand if you didn't have that excess liquidity would you be at that.
For seven 5% now and is that something where now that you used on liquidity in the second quarter. We should just expect that to quickly ramp up and so for the full year you're at for three quarters.
That is a very good question.
Yes, we should we should glide back up towards that 475% area.
Yes.
Okay.
This last one for me so I know the Cecil.
<unk> was impacted by prepayment speeds that we looked at.
You've done your different model on non prepayment speeds I'm wondering how much of that so the prepayments were affected by the <unk>.
Customers, having really strong cash positions it seems like stimulus or things like that have resulted in la.
Loan balance that's being paid off across the consumer lending industry. So sort of wondering if that's a big driver of prepayment speeds.
So when you set your pre payment speeds is that something you expect to last for a while or.
Once consumer cash balances come down maybe the prepayments that you start to extend weekend. Thank you.
So that's a very good question.
A very accurate observation for the fact of the matter is that our prepay model basically looks at 10 years of data.
And the last couple of quarters of prepay speeds may very well led.
All agree that they are absolutely elevated by stimulus checks for federal student loan holiday et cetera, all of the things that have been going on on the economy.
Supported whether or not so.
To put a finer point on it though.
Payments will continue probably up through September 30 of this for federal student loan holiday is going to continue so I think it would take.
Robley several quarters of sharp declines in prepayment speeds for.
Into impact.
The seasonal reserve in any meaningful way.
That makes sense I mean these models are are trained.
On longer term data and it takes.
A reasonable period of time for just a couple of quarterly observations to skew it and what we're really looking at.
As the last.
For 10 year average prepay speeds.
On our portfolio is somewhere around 9% on that sort of at the root of our current model.
Long long winded rambling answer, but I think it would take significant decline on current prepay speeds to offset our outlook.
Great that's very helpful. Thanks much.
Our final question will come from the line of Jordan Hymowitz with Philadelphia financial.
Thanks for taking my questions guys.
When I look at your company I mean, you have no branches.
And you're basically on all digital so to speak on person why.
Are you guys at Neo bank, so to speak and if you thought about comparing yourselves motor Neo bank, especially one that actually makes money with a very high return on assets or said a different way of putting quote Neo bank.
Might be interested in merging with you for the assets that you have.
Hey, Jordan, it's it's John Thanks, Thanks for your question on La.
Look I'd say.
It's hard and I am probably not the right person to opine on the current valuation of Neo banks.
I think what we are really focused on is delivering on our core investment thesis, which we think is really really attractive and quite frankly, I would put a pound for pound against anybody.
And I would.
Boil that down into three pieces number one we think we provide a very attractive earnings growth.
Think about the natural rate of growth in the private student lending market do you think about the 60% fixed cost base that we have.
Think about the ability to turn that into even more attractive earnings growth for operating leverage and all of the ingredients that go into that a real brand rail customer connection real relationships with schools, we very much like our earnings growth trajectory as we've talked about we very much like our cash.
<unk> return trajectory, both pre and post Cecil.
And we're not at the phase of our development of having to absorb all of this capital to grow I think we've been very thoughtful about how we make sure we share.
The benefits of these incredibly profitable loans with our investors so that they get paid every day every quarter.
Look I think we are more and more demonstrating the incredible risk management power of this franchise, both credit risk and political risk.
Certainly the great recession, and the pandemic I think has demonstrated the incredible resiliency of these loans the power of the college education. The power of the Cosigner model and look I think the discussions we've had and how we're seeing the political discourse unfold.
<unk> that private student lending continues to be regarded as an incredibly positive and important part of the overall higher education toolkit.
Make college affordable and accessible so so we love that investment threshold or I'm, sorry that net investment thesis, we think it compares well to anybody's investment thesis.
We're not stock analysts, it's not our job to go in and say, who is better or worse valued and whereas the upside on the downside quite frankly, that's for you all to decide but I think we would put ourselves up against anyone in that regard.
Obviously don't comment on.
Plans for acquisitions mergers or what if scenarios, but I think hopefully our board has demonstrated across the board.
That we are laser focused on creating shareholder value not on an abstract way, but in a very tangible way and thats something that we will always take extremely seriously.
Okay, and if I could just follow up on that when you're talking about profitability.
Youre really guide, but if you take out the gains on sale you know your returns on equity around 30% on a core basis, I mean, it's dramatically more profitable than almost any other financial institution and growing much faster I mean, I just think that's part of the story is well known as it should be.
Jordan Bryan Krug into right now is sweating bullets that we're going to get rid of him and hire you as our head of Investor Relations.
But look I mean, we very much like the profitability of our loans and you heard me say it earlier, when we were talking about marketing and growth.
We'd rather be incredibly profitable and.
Only modestly growing then rapidly growing and non profitable I mean, it is one of the superpowers of this business is too.
Have incredibly high ROE loans by the way that is what in a post Cecil World allows us to organically generate capital. While we are growing our balance sheet riding on and when you really understand that and you model. It out it is a very very very powerful thing. So thank you for the plant, yes, we agree.
And as long as I'm here, we will do everything in our power to safeguard the profitability and the <unk> of our loans, we think they are incredibly attractive.
Okay.
Long time ago, and we all have a little more here J P. Morgan and JC flowers. Almost bought you guys had 20 times earnings with more regulatory clarity on where scarcity value maybe someone else will see that opportunity again.
We will.
Yeah.
Yes.
Again, we don't comment on any of those types of discussions Jordan, but where.
We are committed to shareholder value return.
Thank you.
Yes.
With that I will turn the conference back over to management for any closing remarks.
Thank you everybody listen we know, it's a busy morning, and Theres a lot going on and we know that your time is valuable, especially during these key earnings <unk> appreciate your interest in Sallie Mae.
And really up please let us know if there's any additional thoughts or perspective that we can provide to clarify the information so with that Brian I think I'm handing the call back over to you. Thanks, John and thank you for your time on your questions. Today, a replay of this call and the presentation are available on the investors page at selling made dot com if you have any.
Further questions.
Free to contact me directly this concludes today's call.
Yeah.
Thank you all for joining you may now disconnect.
Okay.
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