Q2 2021 SLM Corp Earnings Call
Thank you first finding buy in of all times at up to 3000 of 'twenty, 1 Q2, Sallie Mae earnings call. At this time all participants are in a listen only mode. After the speaker presentation there'll be a question answer session.
The question during the session you will need your breasts are 1 of the telephone keypad anti readout of your question first yes.
And you're quite that conduct reported anytime grasp of our Yale.
I would now like to hand, the conference over here during the day, Brian Cronin Vice President of Investor Relations. Please go ahead.
Thank you Joanne.
And welcome the Sallie Mae's second quarter of 2021 earnings call. It's 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 before we begin keep in mind, our discussions will contain predictions expectations and forward looking statements ex.
Results in the future may be materially different than those of us.
Got it here, it's gonna be due to a variety of factors listeners should refer to the discussion of those factors on the company's form 10-Q, and other filings with the FTC.
For Sallie Mae. These factors include among others the potential impact of the COVID-19 pandemic all of our business results of operations financial condition or cash flow.
During this conference call, we will refer to non-GAAP measures, we call our core earnings the description of our core earnings a full reconciliation of GAAP measures and our GAAP results can be found in the form 10-Q for the quarter ended June 30th 2021. This is posted along with the earnings press release on the investors page of Sallie Mae.
Carl Thank you I'll now turn the call over to John.
And Julian Thank you and good morning, everybody. Thank you for joining us today for a discussion of Sallie Mae's second quarter 'twenty 'twenty 1 results.
Our second quarter results are a welcome continuation of the sex of the.
The success, we had in Q1 and I think they reflect a continuing of return to normalcy.
We are executing our strategy and delivering strong results as the world around US continues to reopen are encouraged by the implications for universities and for students as they fits directly returned to campus in the fall.
I Hope you walk away today with 3 key messages first we delivered strong results in the second quarter.
Second we're executing our 2020, 1 capital return program as expected and third we're well positioned to continue our performance trends this year by executing against our core strategic imperatives.
GAAP EPS in the second quarter was 44 cents compared to a loss of 20 to research and the year ago quarter.
Our results were driven by a combination of strong business performance.
And continued improvement in the economic outlook let.
Let me start with the discussion of our business performance.
Private education loan originations for the second quarter were $533 million, which as of 36 million or 7% over <unk> 2020.
Our originations are right on forecast through the second quarter.
Our market share in the first quarter of 2021 which reflects the most recent data available was 56%, which was 8% higher compared to Q1 of 2020.
Originations quality was consistent with past years.
Our cosigner rate was 76 per cent compared to 74 per cent and Q2 of 2020 and our average FICO score was 750%.
747 in Q2 of 'twenty 'twenty.
It's important to know kind of seasonally the second quarter has the lower co signer rates due to a higher mix of non traditional students and we fully expect our costar in the range of finished the year at historical levels.
Our credit continues to be of highlight as we emerge from the pandemic private education loans annualized net charge offs from the second quarter were 1.16 per cent compared to 1.29% in the first quarter of 'twenty 'twenty 1.
Charge offs are especially important in the second quarter of the year as they reflect the performance of the recent graduate vintage that entered P&I in the fourth quarter of the previous year.
This cohort is performing well and in line with past cohorts.
Our continued outperformance on the credit side as of resulted in improved charge off expectations that we will discuss shortly.
The quarter was relatively quiet from a seasonal perspective.
An improving economic outlook modestly, but positively impacted our seasonal loss estimates net of reserves.
We also saw an increase in reserves because of new originations.
Cecil reserves generally trend higher in quarters, 2 and 3 reflecting the commitments made during peak season.
This quarter was no exception, where we began to book very early commitments to the fall semester, which caused us to build reserves for these new loans stay.
Steve will discuss the specifics of the quarterly change in more detail.
In the second quarter, we continued our progress against our capital return strategy.
23 million shares were repurchased in the quarter under a <unk> 5.1 plan at an average price of $19 and twenty-seventh assets.
We have reduced the shares outstanding since January 1 of 2020, 1 by 19% at an average price of $16.87 and we reduced the shares outstanding by 28% since January 1 of 2020 at an average price of $13 and 99.
Yes.
As of June 30, 2020, 1 we have $295 million remaining from the original 1.25 billion share repurchase authority granted.
We expect to continue to make significant progress against the remaining authority throughout the second half of the year.
We remain committed to our strategy of selling loans and using the proceeds to repurchase stock. While we believe the price is undervalued and while we are phasing in the regulatory capital of facts of seasonal.
The next 1 billion dollar loans sale is still scheduled for the fourth quarter of this year.
Steve will now take you through financial highlights of the quarter, Steve. Thank you John Good morning, everyone.
This is the straightforward quarter I'll keep my comments relatively brief and to the point.
Let's start with the discussion of our loan loss allowance and provision the.
The private education loan reserve was $1.2 billion were 5% of our total student loan exposure, which under Cecil includes not only be on balance sheet portfolio, but also of the accrued interest receivable of $1.3 billion.
Unfunded loan commitments of another $1.2 billion.
Our reserve of 5.4% per barrel of portfolio is unchanged from 5.4% in the prior quarter, but down significantly from 7.5% in the year ago quarter.
Let's now look at the major contributors used to calculate out of 6 of the reserve, which we've highlighted each quarter. Since we implemented first the economic forecasts and weightings in both the first and second quarter of 2021, we use Moody's base S..1 and the S..3 weighted 40%.
30%, 30%, respectively. There was modest improvement in the forecast between Q1, and Q2, resulting in a slight improvement in reserving needs.
However, the needless to say there was sharp improvement year over year, as we were using base and S..4 weighted 50% each in the prior year and of course, the economic outlook was much tier just a year ago. So this resulted in significant improvement year over year.
Turning to prepay speeds they were slightly slower in Q2 thirds of Q1, resulting in an immaterial of increase in our reserving needs from the prior quarter.
However, the prepay speeds were significantly higher than a year ago also contributing to the sharp improvement that we've seen.
Turning to new commitments, we are now in the early days of our peak lending season, and unfunded commitments increased $700 billion from the prior quarter.
And are relatively unchanged from the year ago quarter the.
The increase in commitments the accounted for the vast majority of our loan loss provision in the second quarter compared to the first quarter vine.
Finally loans sales are obviously very body of activity here and the impact of these loans sales was immaterial to the reserve in the second quarter of 2021 the.
The factors described here in addition to other factors, including overlays and the natural accretion of our discounted reserve resulted in the $69.7 million provision for credit losses of private student loan portfolio.
Let's now take a little bit of of a closer look to our credit metrics, which can be found on page 8 of the investor presentation.
Private education loans delinquent 30, plus days were $2.1 per cent of loans and repay flat to Q1, 2021 and down from the year ago quarter.
The private education loans in forbearance.
Came in at 3%.
<unk> from Q1's, 3.7% and a sharp improvement from 9.3% in the year ago quarter. This is as expected given the.
Economic improvement we have.
John has already talked about the positive charge offs trends, we are seeing we'd have been cautioning investors that delinquencies and charge offs are expected to deteriorate as we ended our pandemic support programs. However, based on continued strong performance, we did reduce our outlook.
As expected the fault as you saw in our guidance.
Now expect net charge offs of full year to be just under 1 of them, 5%, which implies higher charge of charge offs in the second half of the year and this represents a meaningful improvement from what we were expecting just 3 months ago.
We are of course, keeping an eye on the impact of the end of the federal student loan holiday and other federal forbearance programs on our portfolio. However, economists believe that with the savings rate in consumption at the high levels are at consumers are likely to reduce savings in consumption.
And continue to service their credit responsibilities going forward.
Finally, I will just say, we believe we are well reserved for the expected outcome on our credit performance, let's look at net interest margin, which was reported on page 6 of the Investor day.
The net interest margin on our assets was 4.7% in Q2 up from the prior quarter and the year ago quarter.
We continue the deploy excess capital through share repurchases and have managed our <unk>.
Excess deposits and liquidity balances down in addition, our deposit rates have become more in line with asset yields over the last year. Both factors contributed to our NIM increase and we continue to expect NIM for the full year of 2021 will come in at 4.
In the 3 quarter of Fendt as a result of continued NIM expansion in the second half of either that 4.3 quarters was for the full year of course.
A couple of brief comments on the second quarter operating expenses they came in at $128 million compared to 1.
126 in the prior quarter of $142 million in the year ago quarter.
Operating expenses in our core student loan business declined 8% from the year ago quarter, while loans serviced increased 3%.
Our focus on improving the efficiency of our operations is clearly paying off.
Finally, our liquidity and capital positions are strong we ended the quarter with liquidity of the 24% of total assets at the.
The end of the second quarter total risk based capital was 14% and CET, 113.7%.
Post diesel we've also been reporting GAAP equity plus low loss reserves, which came in at a very strong 15% of.
Our balance sheet remains solid in terms of liquidity capital and loan loss reserves positioning us well to continue to grow our business and return capital to shareholders back to you John Steve Banks, Let me wrap up with a brief description of the broader environment and our outlook.
As Steve mentioned, we're in the very early stages of our peak season, and while it really is too early to draw any conclusions. We are encouraged by the thoughtful reopening strategies, we hear from schools and they're aggressive they're aggressive stance on vaccination plants, while the variance will always pose a risk where confidence schools.
Continue to innovate and manage the pandemic, while and reopened largely as normal in the fall.
In fact, 85% of of our reported schools are returning to a normal residential model 14 per cent state that they expect to have a high bred residential model and only 1% ex back to being fully online.
We believe this the normalcy is exactly when students and their families are looking for and expect a strong rebound in attendance.
Unemployment, especially for those with the college education continues to trend in a positive direction. The average college graduate unemployment for the second quarter of 2021 was 3.3% compared to 3.8 per cent and the first quarter of 2021.
This remains notably lower than the current 5.9% national unemployment rate.
The federal government continues to support federal student loan borrowers with payment relief through at least September 30th of 2021.
These factors will continue to positively impact our borrower's ability to service their loans successfully.
On the political front the legislative agenda appears to be rapidly filling up for the remainder of the year and perhaps beyond.
The proposals on the table to increase Pell grants and to offer free community College appropriately assessed lower income students and families achieve the dream of higher education. It.
It is encouraging that the political process has coalesced on practical proposals that focus on helping those who need the most of the assistance we continue to see such targeting proposals as complementary to our business.
Earlier this year, we released the 14th edition of how America pays for College report, which further underscores the family's belief in the value of higher education and their eagerness to return to campus post pandemic.
And while more families report, having a plan to pay for college, we found that fewer families actually completed the fast and apply for scholarships and response, where it will be introducing a new faster tool. This summer to help families complaint the form and as little of 7 minutes.
We'll also continue to enhance our scholarship search tool, which last year helped 24000 students earn of scholarship covering $67 million in college costs.
These are a couple of the confidence inspiring tools and products that we plan to roll out for 2021, and we know these products will broaden our brand position and appeal in the marketplace.
We continue to obsess over in 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 repurchase.
Therefore, we would like to update and reaffirm our 2021 guidance.
We are raising our GAAP diluted earnings per share range to $3.15 to $3.25 from the previous range of $2.95 to $3.15.
There were 2 main components that led to this increase in our from our original range first was the result of a $35 million gain related to changes in the valuation of certain non marketable securities.
This represents approximately 8 cents of the guidance increase.
The additional approximate 4 cent increase is due to strong credit performance and our outlook for the remainder of the year.
We continue to see strong performance from our borrowers and an improved outlook on credit in the future. As a result, we expect our total loan portfolio net charge offs will be between 215 and $225 million, which is down from our previous range of 216.
$280 million.
The rest of our guidance is unchanged from last quarter, including private education loan origination growth of 6% to 7% year over year.
And non interest expense to end 'twenty, 'twenty, 1 'twenty 525 and $535 million.
In conclusion, I hope you agree that our core business continues to perform well, we're originating high quality loans and gaining market share at the same time, we're controlling our expenses without sacrificing the quality of our franchise.
Credit continues to improve along with the macroeconomic environment and finally, we continue to put our capital to work buying back stock at prices. We believe are at a discount to intrinsic value.
I am proud to reported another solid quarter of results and remain excited for our future.
With that Steve why don't we open up the call for some questions.
Yeah.
Yeah.
Ladies and gentlemen, we will now begin the question and answer session.
A reminder of you wish to ask the question. Please press star 1 of your telephone.
If you wish to cancel your question please prestige.
Well the buses just don't think of them back.
Of the Q&A of us too.
Yeah.
Yeah.
Your first question comes from the line of Mochi.
Our in book from Credit Suisse. Your line is open.
Great. Thanks.
Steve and the excellent results.
The question that I get most often from investors is you know as to how to think about obviously you have had enormous success with both the loans sales and redeploying.
Those proceeds into capital return.
Right.
As we go forward of you've gotten you've reiterated that you've got 1 billion per sale in the fourth quarter like how do we think about you know.
What would make the do more or less than those numbers in any particular period, whether its the fourth quarter or early 'twenty 2.
You know given the given where we are now of favorable goes.
The team on sales margins.
Yeah Moshe it's Jon Thanks, and appreciate your question and thanks for your time this morning.
Let me start by saying we have not offered specific guidance for 2022 on capital return, but happy to talk to you a little bit about how we how we think about it.
First of all I think it's important to note and I hope we've demonstrated this over the last 18 months, we are absolutely committed to the notion of capital allocation of capital return.
And you know that's something that are you know as long as I'm, the CEO and I think as long as Steve as CFO will be you know sort of front and center in our overall strategy and our overall approach as we've talked about before we really do think that this time period right. Now is a really operating statistic time for us to buy back share.
Because of this arbitrage that exists between loan sale of premium you know and the current prevailing stock price and so I think you know you and others should exist you should expect that for the medium term.
We will continue to have a view that you know selling loans and buying back stock aggressively is a good thing for us to do obviously, you know that has to be with the full approval of our you know our board at each step along the way I think we've talked about the fact that you know next year, we expect to sell a little.
Lots of loans than we did this year.
I would expect it to look more like 2019, where I think we sold approximately $3 billion of of loans not the $4 billion. We did this year.
And I think you should expect us to continue to be.
Very active if the situation remains as it is and using the vast majority of that to tip to buy back shares and to do so in a programmatic sort of always on approach similar to what we're doing today with our 5 of <unk> 5.1 plan.
I think the real limiter for us.
Is not our ability to sell loans you know I think we could we could certainly sell more of loans. If we wanted to and I think there's really a nice appetite as we've seen in the past.
For those assets I think the real sort of ability if the you know the the.
The execution of us putting that capital to work in buying back shares and part of being a good capital allocator is not only deciding what you want to take.
Capital away from but also being really disciplined about the price you pay and the returns you get on how you put that capital to work.
I think our approach is we don't want to artificially chase of the stock price up we don't want to be so active in the market. You know that we are sort of distorting the true underlying intrinsic value of of the company, but we absolutely want to sort of be there always on in the marketplace.
Supporting the underlying stock price and taking advantage of this arbitrage and I think you know that will take a little bit of judgment and a little bit of art in terms of.
We thank God, we've sort of reached the limit of what we can productively put to work in the marketplace.
I think the final thought I would share Moshe as you should expect over the longer term.
You know that our capital return strategy will likely evolve.
My guess is we will become slightly less focused on share repurchases as hopefully the stock price increases in this arbitrage begins to narrow my guess is during that time, we will become slightly more focused on other forms of capital return for example of dividend.
But I think you should expect regardless of the form and the exact level of capital return, it's gonna be a hallmark of what we do of going forward.
Great. Thanks.
Just to add that the.
I've gotten a lot of positive response about the financial discipline that that program does kind of.
Enhance I guess within the company just as a quick follow up you mentioned the Gaiam Moshe.
Just to interrupt you I'm, sorry, I I I totally agree I mean look lot lots of management teams talk about a focus on value creation.
I share the.
Perspective, you've got and having a strong capital return program takes a somewhat nebulous notion of shareholder value creation and makes it incredibly practical intangible in ways that I think really galvanized as the management team and we've certainly seen that here.
Yes.
Certainly agree.
With respect to the guidance increase.
A big chunk of it is that a sense of yet you've also talked about.
The the significant reduction in your expectations for the lower credit losses is is the issue the strong originations from the second half to acquire.
The reserve build the independent of those losses like how do we think about that guidance increase relative to the big change of your loss expectations.
Yeah.
Sure Moshe so so this is Steve here.
Look the book.
Preparation of a seasonal reserve has a number of moving parts. So there absolutely was a reduction in the seats the reserve related to lowering our.
Opex I'm, sorry of our charge offs guidance for the year of 2021, we removed the and 1 of the overlays that I referred to in my prepared remarks, but offsetting that as an example, and there are many many moving pieces you'd be surprised the offsetting that is we recalibrated our.
Our probability of default model, which we do once a year and those 2 pieces almost perfectly offset 1 another we do think.
Credit is going to continue to perform well based on how we're seeing an hour of <unk>.
Gross service their loans and you know we will deal with the 1 quarter of the time the rest of the 4 since then and I will remind you of that we've heard of increased our guidance from $2 from 30 says for the full year to $2 of $3 and basically 20 cents now so a big significant increase.
The remaining couple of cents of really comes from all around the company, a little bit better opex, a little bit better.
Net interest income et cetera. So we're very excited and very pleased with how the year is unfolding here of the company.
Thanks, Steve.
Thank you so much of your next question from Sanjay <unk> from <unk>. Your line is open.
Hi, This is actually Steven Kwok filling in for Sanjay Thanks for taking my questions.
The first question I have the gist of round following up on most of the question on the loan sales.
What type of yields of you kind of seeing in the in the marketplace today.
Yes, Steven Thanks, I mean, obviously, we have not been in the marketplace for our own.
Our own paper in our own deals. So you know, we're probably not the right people to comment sort of more broadly on that.
What I would say is we continue to be.
Optimistic that the market is good for loans sales obviously, the recent interest rate movements are.
Helpful. I think it's useful to note that.
They were not fully offset the offset steep keep me honest by you know of widening of credit spreads and so you know I think in general we view that pricing movement. As you know is generally positive to our plans.
We have done and I think we've disclosed that.
Some recent securitization and other similar but different set of financing transactions and I think we have found the pricing of that to be positive, but the truth of the matter is until you actually get into the market until you're dealing with the actual auction among buyers and until you actually.
See you know the resolve of I think it is hard to predict perfectly what the premiums will be on the eventual on sales.
Got it got it and then just following up around the competitive landscape and you mentioned your market share increased by 8 percentage points to 56%.
Much more room is there to increase from there if you could just talk about the landscape.
Yeah look it's a it's a great question I mean, I think the the flip the answer is there's you know another 44 percentage points of opportunity to improve there by the obviously, we're never going to be 100% market share players David.
I think at the end of the day, what we are seeing in the market places I would call sort of.
A modest.
Competitive, but generally positive competitive dynamic.
We are not seeing you know sort of people introduce massive new product features that we.
We would have to respond to that we would think are maybe not in the sort of customer of the industry's best interest.
Not yet seen pricing sort of irrational pricing decisions to any large degree everyone of course fine tunes their pricing around their credit grid and you know there was some small places where we raise our eyebrow of little bit, but I think pricing seems to be really pretty pretty rational.
Relative to underlying returns and expected returns on the assets I think we do see you know pretty strong competitive intensity in the marketing, especially direct to consumer space, but that's not unique to student lending I think in general any BDC business right now we've seen.
Frisky competition in the end of the direct to consumer space. As you know everyone is buying for the kind of growth coming out of the pandemic and I think in our business.
Sure people are also you know I've been their aspirations of little bandwidth you know the.
Bacule created by you know wells is retrenchment. So I think the general kind of competitive environment I would describe it as as competitive but.
Sort of moderately sort of competitive and much like a.
What we have what we have experienced going forward.
I think the last point that I would make on this is we care a lot about volume and market share.
Steve and I and the rest of our executive committee of the care, even more about profitability.
And about the return on on the investment that we're making in our various loans. So whether it's on the cost to acquire a side or the cost of service side and the general pricing side, we have real discipline and there are real limits about what we will do to chase market share and growth.
And I would rather have market share be slightly lower and retain the very attractive ROE is that we see on our loans that have market share be slightly greater.
So we will continue to exercise that discipline I think you know market share is a great indicator of the health of our business, but I do not focus on it as much kind of quarter to quarter. You know if I feel like we're doing the right things and showing the right investment discipline.
Got it got it thanks for taking my questions and congrats on the good quarter.
Yeah. Thank you.
Our best of Sanjay place.
Yes.
Thank you so much our next question from Terry MA from Barclays. Your line is open.
Hey, good morning, Thanks for taking my questions can you maybe just give some color on the <unk>.
The delinquency trend do you expect once the payment holidays and in September.
Sure happy to do that so I indicated that.
But the charge offs should trend higher for the rest of the quarter and by the way of the last couple of my last few predictions missed the mark on the downside. Unfortunately, but we do think that we could end the year with.
The charge offs, the sort of the just under the 2% level by the fourth quarter, and then kind of stabilize from there and then probably drift lower.
Got it that's helpful. So as you just mentioned like credit outperformed the expectations over the last couple of quarters can you maybe just talk about what drove the delta between what you were expecting and the potential sort of to continue to outperform.
So I think what really drove the delta here is.
We were too pessimistic on the health of the consumer and obviously the economy. The Super strong federal loan probe of federal support programs have been pretty enormous and consumers.
Continue to perform very very well as you know savings.
The savings rates are higher et cetera, et cetera from the consumer is very strong and continues to perform very well on their obligations and.
We are favorably.
Impressed by what we see in terms of roll rates et cetera.
Delinquency buckets, so all indications point to.
Continued better performance than what we had been expecting over the last call. It 2 quarters.
Got it okay. That's helpful. Thank you.
Thank you so much your next question from John Hecht from Jefferies. Your line is open.
Excuse me the morning, guys. Thanks for taking my questions.
Just.
Kind of just a real kind of distinct question is there was I think the judge in New York recently ruled that private student loans are allowable discharged in the bankruptcy process.
Is this consistent with what you guys had interpreted.
Earlier in the or does it change anything about how you see your provision requirements.
Yes, John.
Let me take the first stab at that and then I'll see if John wants to add any additional color. We're not troubled by that decision at all I believe that that was a direct to consumer alone I don't think of it was certified by the college and.
Way different than the typical stood the loans that we're originating in our portfolio. So it was not troubling to us and I would be remiss if I did not the point out the portfolio was basically 90% cosigned and the.
For any bankruptcy and the fruit.
The group's pizza have impact we would need to see both the borrower and the cosigner decided to declare bankruptcy.
Our typical co signer with a 7.
750, FICO score and a very well developed.
Bureau score is highly unlikely to through the John anything you'd like to Steve I think you answered. The specific question of really well I think the only general point I would add is.
And we've said this a couple of times John we are very supportive of the notion of broader of bankruptcy reform you know as part of a sort of a you know.
And education solutions package, we absolutely appreciate that there are some customers out there there are some borrowers out there by the way disproportionately on the federal program, who have really gotten in over their head and for whom bankruptcy is really the only path back to any kind of a reasonable financial.
The life I think our only view on bankruptcy is there has to be some reasonable seasoning period post graduation, you don't want to create an incentive for folks to declare bankruptcy of the day. After graduation is a way of clearing their student debt, but I think we believe there is a lot of opportunity for thoughtful banker.
RFC reform, which again, we view as being accretive to our business and I think its really all centered on and I can't reinforced us enough you know the <unk>.
Underlying strong credit performance of our customers and their success with their products.
At the end of the day you know when you look at our default rates. When you look at you know our loss rates you know the vast majority of our customers. Our highly successful we underwrite. These products, we take great care to make sure. We're right. We're issuing loans that we think customers will be able to repay we think we have very.
Strong programs to help customers be successful with us through the life of their alone.
And so again, you know of bankruptcy reform of something we keep an eye on and there are certainly versions of it that could create incentives that are I think detrimental to the industry, but Steve is exactly right and I think this side of this particular ruling was very narrow and de minimis to basically no impact on us.
Alright.
Helpful. Appreciate the context there.
Second.
The apologize for this 1 we went through seasonal adjustments right when the pandemic setting.
Steve the.
The provision for unfunded commitments this quarter is that it.
Just want to make sure is that or is that something new to change the seasonality of how you guys would provision and how we should think about modeling or is that is that something that's always been done. It's just a little bit more noticeable because you've gone through the seasonal adjustment and we've kind of started to normalize out of the pandemic.
No John you're right. It is it is news useful.
Prior to the season, we were not reserving for.
Contingent.
Liabilities, we do need to do that now and if there is a more seasonal impact and Brian did.
A great slide in 1 of our Investor package as the tries to hedge.
Help you analyst.
The CERN the seasonal pattern and then we'd be happy to send the copy of that now to the help you in your modeling efforts.
Great I'll reach out to Brian. Thank you guys very much and congrats on the headquarter.
Thanks, Jeff.
Thank you so much next question from Henry Coffey from Wedbush.
Wedbush Your line is open.
Yes, good morning, and let me add my congrats to the.
Of the discussion great quarter.
<unk>.
On the new product front.
You know you're developing the credit card.
You've got it got up kind of got a.
Tree of doing 1 thing really really well and then.
Layering on new products has been more of a challenge.
With things like scholarship search and other likely programs coming out.
Is that something you're developing internally is it of known vendor of maybe you could tell us at least give us a framework there in terms of what we should expect down the line and where is it coming from.
Yeah, Henry it's John Banks, and I think it's a really good and important strategic conversation.
Let me start by saying without hopefully any confusion, we are not I am not a fan of you know what I will call of sort of broad or indiscriminate sort of diversification for diversification sake.
The Count me as 1 who believes that.
Products are not cross sold to customers. They are cross bought customers have to have an affinity to our brand. They have to have a reason for wanting to do business with us they have to see us as a credible provider of that product and the product has to make sense to them in the context of how they've experienced sallie Mae so what we're talking.
A lot about Henry internally is this notion of what we referred to as sort of brand or customer centric diversification.
In that context, you know and I think we've talked about this generally and strategically.
We have a certain zone of certain ZIP code, where we have a lot of credibility to play with students and their families.
And that you know that range starts you know a number of years before of students starts their higher education journey in earnest before they go to college for example.
And it tends to extend the 3 or 4 years of thereafter in what we might refer to sort of internally as sort of the adult tier or the launching stage.
And what customers have said to us very clearly is a within that range within that part of their life cycle. There was a lot of needs that are not being met today by anyone.
To that Sallie Mae is highly credible our brand is highly credible in meeting those needs and 3 customers would be very interested in the products and services that we would have to offer. So what we are very much focused on is how do we smartly leveraging our <unk>.
<unk> customer base, leveraging our existing brand because that's really the reason that we have an advantage how do we start to think about building products and services in those spaces and I think certainly the so the the the scholarship finder of certainly the fast the tool are good.
Ample of needs that customers have along that lifecycle journey.
And I think we believe we can be we can be credible there.
To your specific question I think you should expect a couple of things.
Number 1 we will build those through the vast make versus buy versus license arrangement. We can.
I have no pride of authorship, our team has no pride of authorship. If we can partner on some of those tools, we absolutely well if we can build those tools better we absolutely well. The thing you should expect though is that they will all be predominantly branded Sallie Mae we are not in.
Interested in leveraging our market position to help someone else build their business, we're very much interested.
And using partnerships where appropriate to help those partners build our business so whether.
Whether we use of partner or not you should expect the look and feel in the position to the customer to be very much Sallie Mae oriented.
And I think the second thing Henry you should expect is that.
That we will get paid for that and a number of different ways of my hope and expectation is that some of these businesses grow and mature to the point where.
Where they become independent.
Independent of revenue lines for us, but the good news is if they do nothing else, but strength in our business and our brand with our core borrowers and if they do nothing else, but lower our cost of acquisition and increased loyalty.
The investment we're making in these is efficient enough and de Minimis enough that even just based on kind of core business benefits. We think these are really nice investments and in keeping with our strong commitment to capital allocation of.
So we feel good about them, but I think the answer is it will be of blend and you should expect that we will get paid in different ways.
So far it is out there now as a public company.
Based on the guidance they gave when they were you know.
Become being acquired by the spec the theyre not that worried about near term profitability.
But they did talk about maybe pushing into the student loan market.
It's.
Is that is that part of the other.
44%.
<unk>.
Alright.
Have you heard of anything.
Along the lines in terms of their plans to be more aggressive in direct student lending or.
Is it more just part of a suite of the 20 things, they're hoping to accomplish.
Yeah, Yeah, Henry I'm, probably not the best person to comment on so buys overall strategy I think what I would be willing to say in general is.
We have seen a lot of players over the years, you know talk about coming and getting into the student lending business.
I think in general there's been a lot fewer companies that have been successful in that then there have been unsuccessful. Many more have been unsuccessful in doing that.
I think you know we don't take that for granted.
As the market share leader, we are keenly aware of the fact that you know.
Any 1 times into the into this business are there going to be looking to take share from us.
That is why you know you've heard me talk for 18 months about the just maniacal focus on the performance of our core business, we don't want to get distracted at all so candidly the.
Focus on unit cost and efficiency, that's the best insurance policy, we can buy against competition. You know last time I checked if you have a better higher quality more efficient operation. It gives you a ton of optionality and flexibility to protect and build your business in ways that are really beneficial to both shareholder.
And customers by the way, it's part of why we're making investments in things like you know, our martech stack and so forth, which I know we've talked about even before I arrived at the company and by the way. It's part of why we're making investments in the kind of confidence inspiring products that I just talked about because we know if we don't fill those needs somebody.
Well and giving any 1 of the foot in the door and this business is something that we sort of hate to do so I'm not sure I can comment specifically on so far I don't think we particularly seen them in the marketplace.
Any material effect, but I think the general question is 1 of just competitive entry and our view is we're not taking anything for granted and we're going to compete hard and protect our business because quite frankly. It is you know it is the core of who we are.
Thank you and congrats on a great quarter.
Yeah. Thanks Henry.
Thank you so much of your next question from Rick Shane from JP Morgan Your line is open.
Good morning, guys, it's Melissa on for Rick today.
Quick question for you on.
Our preference is slower prepayment speeds that was in the press release can you elaborate a little bit on that what's driving that particular assumption.
Okay.
I mean, Melissa it's really model driven and the change in prepay speed was not material in any serious way of I think now that we are in the Cecil World, We're going to see you know the strip you're bouncing from.
The 10, 1 quarter to 9.1 quarter of et cetera et cetera.
Any.
No significant changes.
Through what we reported last quarter, certainly, but you know Cecil is a a model driven.
Driven number and we're going to see noise from quarter to quarter for better for worse.
Okay got it. Thank you and then the follow up question on the elevated unfunded commitments from this.
Quarter do.
Do you think that's really a function of.
Students seem eager to get back on campus that may not necessarily recur or is that something that is maybe more tied to just general student commitments earlier in the year that we might be on a more regular basis.
So look at it it's a seasonal number it happened in Q2 of of 2020 of it will happen again in Q2.2022 of the number was reasonable I think it was up something like 6%. So it's a good start to.
To the peak season, it's a very early read.
And I think John talked at length about the.
The fact as of this very early in the peak season of 12 to a slow start but the next 5 weeks are very very critical.
Yeah.
Okay. Thank you.
Yeah.
Thank you so much.
Our next question from Jordan Hymowitz from Philadelphia Your line is open.
Thanks, guys.
2 quick questions..1 is can you explain what if anything you're doing to help the international students.
Quantum leap of college I know, there's a couple of programs out there to help the inner.
National students of.
And colleges in some ways.
Yes, Jordan its John.
Obviously international students are a big part of this you can imagine our direct lending to international students raises a whole host of.
Regulatory operational and legal challenges.
So our approach as we do not try to sort of fill that need directly are we do have a relationship with of provider who specializes in making loans to those types of customers are we actively refer customers to them.
And I think it's important to note they actively refer customers to us who come in who fit within our lending framework and lending aperture.
And so you know what we're effectively trying to do is leverage our marketing and digital channels.
To grab that Castro, who that customer and get it serviced through whatever provider can do the best job of with it.
It is not a huge part of our business today I think most customers.
I understand kind of the core of our business, but we certainly see it as a modest sized the opportunity and 1 we will continue to want to try to monetize to the extent that those are those fish come into our net so to speak.
I'm familiar with the company and I think it's a tremendous opportunity for you guys and I was just wondering is that investment is something that is of passive investing and packet of investment or the way that it would go well you would parry pursue or you don't want to go into those details because it seems a very promising opportunity to dramatically.
Expand the market the new ones really thought about them very positively inclined.
Yes, Jordan I don't think it's it's a it's our place to talk about sort of investments I'm not actually even sure. We have an investment in the company that are that I was referring to but look I would you know I would encourage everyone to talk directly to the company is providing those services and come up with their own judgments on that.
Okay. My second question is your branding initiative continues to make some progress and I think it's a key D of success because in my mind, 1 of the cheapest neo banks from the country you have no branches you'd be unique brand you're very profitable can you talk a little bit of some of the branding initiatives some of them getting the the name brand out as people.
We'll come back to college this year of things like that even things like updating the website with some of them getting a college degree and certificate as opposed to a picture of Steve smiling faces something which is not unattractive, but does it maybe send the same message of some kid getting it to flow more for the first time or something.
Yes, Jordan if there is a picture of Steve smiling face on our website I'd I definitely want to hear about it because we need to get that down immediately.
Look I think I think the way that I would think about our branding initiatives is across 2 or 3 different vectors and you know this is a place where we are investing significantly.
I think number 1 we are investing in the core of our service offering.
And you know as well as I do that you know your brand is not just what your market on T V.
Now of kind of core to the experience that customers have with you and so whether that's a relaunched website, which is rolling out now whether that's enhanced digital products and properties. We are doing a lot to improve the quality and the functionality of.
Of our overall digital digital experience and that can be literally as tactical as sort of the paredo analysis of why customers are calling for how many of that as the second choice channel and how do we just go back and make sure we have the capabilities to.
To be able to satisfy those needs internally.
I'll give you sort of an example, we've launched new what we call skinny flow application processes. This year for both returning and new customers and we have dramatically improved things like time to completion and satisfaction with the skinny flows out of out of that pace. So.
So think of sort of bucket number 1 is just the core of digital and customer experience.
2 we're investing meaningfully in our Martech stack.
So really think about that as the ability to target to test and learn and to.
Digitally optimized return on digital marketing spend and a highly sort of dynamic and rapid way.
And I think in the past we've talked extensively about those investments I think we're starting to see the benefits of those investments both in terms of market share, but I also think you know we're seeing those in terms of just the overall efficiency of our acquisition dollars and our ability to go better and.
Deeper into pools of opportunity that we didn't have the ability to go into before so.
Of that and I think kind of the second piece I think the third piece I would touch on is like what are the actual message is that we are beginning to convey out there and how are we beginning to convey them and I think we've dramatically upped our creative focus.
Over the last.
Several years.
To make sure that we are talking to customers in a way that makes sense.
We are in the process right now of launching a new external tagline, which we think fits well with our mission and our overall creative process has improved and I think the fourth thing that I would say Henry is along with that I'm sorry, Jordan. We are also looking hard at the channel.
<unk> in which we are talking to customers.
So youll see a much higher sort of presence from us.
Yes on the traditional digital channels, but also on the newer and emerging digital channels. The tech talks of the world by the way Jordan. If you say, Steve on Tech talk I definitely want to know about it but.
But I you know you will start to see us have those new messages across a broader set of platforms. So I think net we do all of those things well and my hope is we start to become not the cheapest Neo bank out there, but it's still the most affordable Neo bank out there Jordan, but we certainly agree with you and the importance of.
Marketing.
And your sort of statement that were improving as high praise and I will pass it onto the team.
I mean, just the Sallie Mae jackets are a huge step up and maybe every kid who gets the long could get 1 and walk around campus with the I mean, just little things that are very high.
All of them.
Yes.
Great.
Thank you so much our next question from Michael Kaye from Wells Fargo. Your line is open.
Hi, Thanks for fitting me in I'll just ask 1 very quick question I was hoping for an update on the credit card initiative.
Doesn't seem like you're doing much with direct mail of Fannie while many credit card lenders of ramping up of Dan I'm wondering if you're if you abuse of trains don't opportunity.
Yeah, Michael I don't think our views of changed at all on the credit card opportunity at the end of the day, our aspiration has never been to compete with <unk>.
Amex or city bank, or JP, Morgan or capital lawn in the broad sort of direct to consumer unbranded sort of card space.
We've always viewed the credit card as a natural product to offer predominantly to our customers.
Taking advantage of proprietary underwriting and credit insight.
Hopefully proprietary cost to acquire through the relationship we have with those customers.
And being able to build of reward.
The platform that is tailor made to sort of new graduate students in school students.
And their connection to their student loans and so yeah, that's very much the bread and butter of what we're doing I think we talked about this fairly broadly during the pandemic. We you know I think very rightfully scaled back our card activities. The idea of offering you know sort of Oh.
<unk> to consumer credit product you know when we were heading into 1 of the most tumultuous economic periods seem to make a lot of sense.
And I think what the team is really focused on this year is perfecting and proving.
Our ability to deepen our marketable universe with our existing customers to market to them in really compelling ways and to derive a really strong credit and underwriting in the insights from the experience we have with those customers.
We are I think they are committed to the card concept back to those confidence inspiring products I talked about earlier. This is clearly part of what customers expect is that adult in process. It's hard for me to imagine that we will not want to continue to offer of credit cards to our customers. We think it makes a lot of sense.
The <unk> to our brand, but we want to make sure again in the spirit of capital allocation of capital return that we're doing that in a really thoughtful and profitable way and I think this year is effectively restarting the engine built in the pipe to our customers and really proving what's the art of the possible.
Hum.
Thank you very much.
Yeah. Thank you alright, alright.
Thank you so much and there are no further question at this time you may continue.
Great well listen of folks. Thank you everyone for your interest this morning in Sallie Mae.
Look forward to continuing the discussions throughout the quarter and again next quarter, where we look forward to continue to talk about the performance of the company and obviously if you have any questions. Please feel free to reach out to Brian. We are here to answer questions and provide whatever support we can and in closing.
Thank you for your interest in Sallie Mae, Brian I think you've got a little of paperwork here at the end.
Thank you John and thank you for your time of your questions today, a replay of this call and the presentation are available on the investors page of the only made dot com as John said it'd be of any further questions. Please contact me directly. This concludes today's call. Thank you.
That does conclude our conference for today. Thank you for participating you may all disconnect.
Okay.
Yes.
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