SLM Corporation (SLM) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Sallie Mae 2020 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your presenter today, Brian Cronin, Vice President of Investor Relations. Thank you, please go ahead.

Thank you, Carla. Good morning and welcome to Sallie Mae’s first quarter 2020 earnings call. It is my pleasure to be here today with Jon Witter, 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. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to these – the discussion of these factors on the company’s Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, the potential impact of COVID-19 pandemic on our business, results of operations, financial conditions and our cash flows. During this conference call we’ll 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 the Form 10-Q for the quarter ended March 31st, 2020. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I’ll now turn the call over to Jon.

Thank you, Brian and Carla. Good morning, everyone. Thank you for joining us for our discussion of Sallie Mae’s Q1 2020 results and our outlook for the business. It’s a real honor to be hosting this call along with Steve McGarry, our CFO. Let me start by recognizing that the first three months of this year have been an extraordinary time in all of our lives, both personally and professionally. The environment has changed dramatically. Our world today involves social distancing, stock market volatility, and the tragic loss of lives due to COVID-19. We have all experienced disruption to our everyday routines and freedoms, and this has had a profound impact on how we operate and lead. I want to take this opportunity to thank all of our nurses, doctors, public servants, researchers, essential workers, and others on the front line combating this pandemic. On a separate note, let me also thank Ray Quinlan for the tremendous job he’s done leading this company over the last six years. It is a true honor to succeed such a dynamic and thoughtful leader who has made such significant contributions to Sallie Mae and the industry. Ray has been an invaluable partner to me over the last several weeks, and I look forward to working with him in his Chairman role for the next six weeks to ensure a smooth and seamless transition. Given the environment we’re in, there are literally no shortage of topics that we could discuss. My hope though is that after today’s call you will have internalized four key messages. The first is that Sallie Mae is operationally and financially well positioned to weather the challenges of COVID-19. Second, underlying the impacts of the unexpected increase in credit reserves, the first quarter results were strong and the core business continues to perform well. Third, we are comfortable on our relative outlook for the rest of the year, recognizing it will be primarily driven by the interplay of a variety of factors, including the depth of the recession, school operations, and competitor access to funding. And fourth, as the new CEO, I’m committed to a few key principles centered on creating tangible value for customers and investors. I will discuss each of these topics, and then Steve will go into deeper detail on results and trends. While this is my first official week on the job, it’s clear that Sallie Mae and this incredible team are well positioned to overcome this pandemic. Of course, no planning is ever perfect, but we had strong liquidity, capital, and disaster recovery plans in place. The unique nature of this pandemic caused us to update some of these plans, and the team just flat-out delivered. Our first priority was ensuring the welfare and safety of our people. Working closely with regulators, we implemented technical and process changes that allowed us to move nearly 100% of our workforce out of our corporate locations and transition to a work-from-home setup. This allowed us to continue to care for customers with minimum service disruption, while ensuring the well-being of our team members. Equal to caring for our team members was caring for our customers, and I am exceptionally proud of the actions we have taken to support customers during these uncertain times. We recognize the real toll that the pandemic is taking on some because of job loss, wage reductions, or increased personnel expenses. For those customers who are experiencing financial hardship as a result of the pandemic, we are providing what we believe to be industry-leading disaster forbearance with no impact to credit standing. Of course, this practice is in accordance with the regulatory guidelines that our prudential regulators encourage for the entire banking industry when working with impacted borrowers. We will continue this practice as necessary through these extraordinary times. In addition, we implemented a series of new self service capabilities, including the ability to request forbearance completely online, which has allowed us to process the increase in customer requests within an acceptable service standard. I know these actions are making a real difference. I have been regularly reviewing customer feedback through surveys and social media, and we are seeing positive feedback on both the ease and the quality of our customer service. Now turning to loan loss provision. As you know, we have spent considerable amount of time working our CECL loss models over the last 2 years. The model expectations do indicate that losses will be higher this year, but will likely not exceed the 2.7% loss rate we saw in the peak of the 2008 financial crisis. There is always uncertainty in these forecasts and the great recession taught me to never say never, but we have a better performing portfolio than we did in 2008, driven by our conservative underwriting practices. Additionally, the response from the state and federal governments has been swift and meaningful and should help the economy. Our Q1 results were largely in line with expectations with the obvious exception being the growth in provision. Our strong results can be attributed to the swift implementation of our response plans to the pandemic, the strength of our franchise, and the momentum that we created in 2019. We saw origination growth of 8%, expense growth of 5%, and net interest margin of 5.08%. And before the pandemic-related loan loss build, EPS was tracking at or better than plan. Importantly, we have a strong financial position with ample capital and liquidity. We ended the first quarter with a solid balance sheet of 13.7% total risk-based capital and 23% liquidity as a percent of total assets. As an insured depository institution, we have a robust liquidity and capital plan and do not anticipate any funding constraints. It’s also worth noting that timing was on our side in the first quarter. We completed a $636 million ABS transaction, upsized our secured funding facility to $2 billion, sold $3 billion of Private Education Loans for a premium of $239 million, kicked off a $525 million Accelerated Share Repurchase Program, and originated $2.3 billion in Private Education Loans, all of which occurred before COVID-19 really began to disrupt the markets. Now, let’s discuss our outlook and guidance. A lot has changed since the company announced its guidance for the year in January. Given the current uncertainty in today’s operating environment, we have determined that it is appropriate to withdraw our full year 2020 guidance. While we won’t be providing specific numbers, I would like to take a few minutes to review the current trends we are seeing. As I mentioned earlier, future performance will be primarily driven by three factors in the near-term. The first is the nature of the recession, impact on personal [ph] balance sheets and resulting delinquencies and defaults. Credit losses will be a watch item for us throughout the year. The macroeconomic environment what caused our provision and loss expectations to move around as the COVID story continues to evolve. We believe though our conservative approach to underwriting over the last 11 years will benefit us, and I believe our portfolio will continue to perform at high levels. The second factor is whether schools open as normal in the fall. We are working closely with schools as they develop their reopening plans. We are encouraged by the priority being placed on education in the President’s Opening Up America Again plan and the reality that we will likely not have a single national answer for how colleges and universities resume operations. At this time, we remain optimistic that education will broadly resume in the fall. It is important to note however, that even if many schools open normally, there is risk to our original originations view for the year. The third factor is what happens to key origination and consolidation competitors giving changing access to capital markets. Marketplace lenders and FinTechs trying to break into the student loan space should have less enthusiasm going into the new academic year, because of the lack of wholesale and secured funding in the current market. This should also create a positive for our balance sheet. We have already seen this lack of funding caused several refinance lenders to raise their prices and cut marketing. We believe our balance sheet will be relatively stable this year due to the likely drop in voluntary prepayments and refinancing activity, potentially offsetting losses and originations. While the outcome of these factors are still unknown today, I recently shared with my team something I learned during the financial crisis for driving performance. That is to focus on controlling the controllables. Our team has worked overtime to ensure we continue to service our customers without disruption, while simultaneously ensuring we deliver results. This includes rigorously managing expenses and project spend to drive earnings and preserve capital, focusing on credit performance by investing in strategies to reduce losses and looking for new ways to meet the unique origination needs and opportunities presented by the pandemic, all of which should help alleviate the impacts of COVID-19 on our business performance. There has been industry speculation about capital return, with some policymakers suggesting that bank suspend dividends and cancel share repurchases. We agree that during times like this, continued focus on our customer experience and capital preservation are imperative, but we also recognize the important role that our dividend in place for our shareholders. As such, based on current capital models and scenario planning, we plan to continue to pay our current dividend subject to Board approval. In addition, the accelerated share repurchase program continues to run its course. You will remember, we used the proceeds from the Q1 loan sale to buy back $525 million in stock. We will evaluate any additional 2020 capital distribution decisions against economic realities once the ASR is completed. It is worth noting in this depressed market, we have the potential of repurchasing up to 30% more shares than we originally thought at the beginning of the year. I do want to emphasize and Steve will discuss this further, that both the share buyback and dividend assumptions are baked into our existing capital and liquidity plans and metrics. We do not believe that these capital distribution plans will prevent us from appropriately caring for our customers or protecting our balance sheet in the quarters ahead. I will now turn the call over to Steve, for a discussion of Q1 results. Steve?

Thank you very much, Jon. And before I begin, let me welcome you to Sallie Mae.

Great to be here with you, Steve.

I look forward to working with you over the coming years to create value for our shareholders. As I discuss our financial results, I will underscore two of the themes Jon introduced. First, our solid financial position and second, the strong performance we demonstrated in the quarter prior to the pandemic. I will repeat a few of the stats Jon just reviewed, so please bear with me. So, turning to our solid financial position, at the end of the first quarter, cash and liquid securities comprised with 23% of our balance sheet. In addition, our secured financing facility was increased to $2 billion at a marginal cost increase, and then driving the liquidity build where the sale of the $3 billion of loans in the quarter and an on-balance sheet ABS execution of $636 million that provided long-term funding at very favorable costs. These activities complete the liquidity build we had been discussing for the last year and positions us very well in these uncertain and volatile times. Our funding plan has us accessing the markets in a very limited way for the balance of the year. However, I cannot emphasize enough, that as a bank, we have accessed to both the broker and retail deposit markets at this time. In fact, out of an abundance of caution, we tested the broker deposit market two weeks ago and confirmed it was opened for business and liquid. In the retail deposit market, we have been lowering our rates relative to our competitors steadily over the last four weeks and have not seen any significant runoff demonstrating the strength of that market. Our capital position is equally strong. At the end of the first quarter, total risk-based capital was 13.7% and common equity tier 1 was 12.4%. Both of these ratios are significantly in excess of regulatory well capitalized ratios. Also it is important to note, as Jon just mentioned, that the vast majority of the capital return planned for 2020 is already accounted for in the Q1 ratios I just discussed. As you know, we run capital stress tests regularly and that capital stress testing shows it would take a massive increase in CECL reserves to harm our capital position. I will provide a little more color on that when we discuss the reserve. We originated $2.3 billion of private student loans in the first quarter, an 8% increase compared to originations in last year’s Q1. Importantly, 88% of these loans were cosigned, and the average FICO score was 746. The strong origination growth and consistently high credit quality of those new loans demonstrates the strength of our business prior to the onset of the pandemic. The net interest margin on our interest earning assets was 5.08% in the quarter, compared with 5.41% in the prior quarter and 6.28% in the prior year quarter. The vast majority of the decline in NIM was driven by the liquidity build that I mentioned earlier. For the remainder of the year, we expect liquidity to remain between 16% and 20% of our balance sheet, still very strong numbers. Because of our expected balance sheet stability, we can create project with confidence, a full year NIM of 4.9%. This is down from what we expected just three months ago for full year NIM. However, the change is entirely attributed to the sharp decline in the yield of risk-free assets, such as treasuries in the current environment, and that is where we have $7 billion invested. Turning to credit performance, Private Education Loans, delinquent 30-plus days were 3.2% of loans in repayment, up from 2.8% in Q4. Half of the increase in our delinquency rate can be attributed to the first quarter loan sale, as we did not sell any loans that were greater than 3 – 30 days delinquent and this is a typical market norm. The other half of the increase in our delinquency rate can be attributed to additional loans entering repayment and seasoning of the portfolio. Private Education Loans in forbearance were 6.2% of loans in repayment and forbearance, that is up from 4.1% in Q4 and up from 3.8% in the year ago quarter. As of Tuesday’s close of business, our forbearance rate had increased to 11.8%. All of the increase from last quarter and the year ago quarter can be attributed to the use of our COVID-19 disaster forbearance. We are currently using our disaster forbearance policy, which has been used successfully in the past to help customers deal with natural disasters. We expect the growth and accounts entering forbearance to slow now, as we have been through all of our customers’ billing cycles, since the pandemic began. In fact, growth imbalances in the last week were the slowest since the pandemic began, which is a positive sign. The loans that are currently in forbearance have an average FICO score of 722, 89% of them are cosigned. And less than 2% of these loans have been greater than 90 days delinquent in the last 12 months. These statistics provide us great confidence that our customers who are currently utilizing forbearance will successfully resume their payments after the economic effects of the pandemic subside. These are responsible and reliable customers who will be willing and able to resume their payments when the economy normalizes. Net charge-offs for average loans in repayment were 1.05%, down from 1.24% in Q4 and up from 0.89% in the year ago quarter. Clearly the strong performance experienced in Q1 will be altered by the economic impact of COVID, charge-offs will increase. Running the severely adverse Moody’s economic forecasts through our loan loss model produces an annualized default rate of approximately 2.1%. This is a 40% increase from our full year 2020 expectations and we do expect that losses would be somewhat higher for 2021 as well. The current increased use of forbearance will likely shift the timing of expected losses to the third and fourth quarters. So a 40% increase in annual default is somewhat higher than what we saw in our stress testing exercises using the Fed CCAR severely adverse scenarios, but it is lower than what the highest quality private student loans experienced during the ’08, ’09 financial crisis. Losses as Jon mentioned, peaked back then at 2.7% for our low risk loans. Today’s smart options student loans are even more rigorously underwritten than the lowest risk loans of the previous era. Therefore, we expect today’s portfolio to perform better in adverse circumstances than this historical comparison. Regulators offered banks impacted by COVID-19, the option to phase in CECL regulatory capital guidelines over a five-year period as a way to provide capital relief and we have elected to adopt that option like most banks in the industry. At quarter end, our loan loss reserve totaled $1.7 billion. The private education loan reserve was $1.5 billion or 7% of our portfolio. As a reminder, we use a discounted cash flow methodology to determine our reserves. And in fact, our reserve covers life of loan defaults on our portfolio of up to 10%. I mentioned stress testing capital earlier, we believe that we could absorb an additional at least $1.2 billion in CECL reserves on our current balance sheet and remain well capitalized. A couple of words on the provision, while the provision for loan losses were $61 million under CECL, there are several things worth noting. First, under CECL, $1.9 billion of this quarter’s originations were already reserved for as loan commitments and/or not in the provision. Second, our loan sale reduced the loan loss allowance by $162 million. Third, this benefit is mostly offset by a $153 million increase in the provision to account for a significant deterioration in the economic outlook as a result of this pandemic. Fourth, the remainder of the disbursements in the quarter plus nearly $400 million of loans that have been approved, but not disbursed are also covered in the provision. Finally, again, we use a discounted cash flow methodology, and we think that that has thrown off a few of our analysts. So, as you can see, the bank has immense loss absorbing capital on the balance sheet at this point in time. As previously disclosed, and Jon discussed, we entered an accelerated share repurchase plan, with a counterparty to repurchase $525 million of shares. I would like to give a little detail on how this transaction works. But first, because the transaction happened late in the quarter, the average share count for the quarter was down only 12 million shares, and we’ll be more impactful and reduce shares lower in subsequent quarters. Now, under this accelerated share repurchase program, the repurchased price is determined by our counterparties open market purchases made to cover the shares already delivered to us. The price of which the 44.9 million shares was delivered is simply a construct to allocate a percentage of the notional purchase price to the initial placement of shares. To-date, they have purchased roughly 15 million shares at approximately $7 each. If our share price was to remain at this level, we could purchase as many as 75 million shares in total under the program. This is the one and only benefit of a lower stock price, we can and will buy back a higher percentage of the company. As Jon mentioned, we will evaluate the market conditions for additional share repurchase once the ASR is completed. But while the economy falters and may cause a deteriorating portfolio performance, we are still creating shareholder value. Our share repurchase program was funded by the gain generated from the sale of $3 billion of loans and the capital that sale released. The gain on sale reported in the income statement is after transaction costs as well as the write-down of deferred acquisition costs. We are very fortunate to have completed these sales prior to the uncertainty and volatility of COVID-19. However, we remain confident that the buyers will receive a strong return as the stress assumptions used to price the assets will be proven to be reasonable. Finally, turning to OpEx, first quarter operating expenses were $147 million compared with $142 million in the prior quarter and $140 million in the year ago quarter. Operating expenses in our core student loan business increased 10% from the year ago quarter, as average customers increased 11% and delinquent borrowers increased 6%. The increase was also driven by portfolio growth and CEO transition impacts as well as incremental costs associated with the transition to a completely remote workforce. This was a monumental undertaking that was done swiftly and without interruption to our customer service or significant compromise to our service levels or efficiencies. We will continuously review our expenses for opportunities to offset the negative impacts of the current economic environment as the year progresses. I would like to end where I started, and that is by saying our financial position is robust and the execution of our business strategy produced strong performance results prior to the effects of the pandemic. We are well positioned to weather this storm and serve the needs of current and future customers in the process. I’ll now turn it back over to Jon.

Thanks, Steve. Before we open the call for questions, I do want to spend just a few minutes sharing some beliefs and initial focus areas and priorities for Sallie Mae. Today marks my fourth official day on the job and over the next few months, I will continue to work closely with the team and the Board to refine my vision for the company’s future and hone our strategy. I look forward to talking with many of you in addition to our team members, regulators, customers and other influencers to better understand the range of perspectives on Sallie Mae in the industry. However, I can share with you some early thoughts. First, I am impressed by the strength of Sallie Mae’s core business and believe there is opportunity for us to further grow its profitability. Driving every dollar of performance from this business will always be my first priority. This will require a continued combination of top line focus and strong class discipline. Second, we have a strong customer franchise and brand position. This gives us great access to customers and data that few others possess. We will look for ways to create new sources of value for our customers and shareholders by leveraging this customer franchise. However, we will do so with discipline around the required investment and timing of expected returns. Where appropriate, we will build organically, but we will also make heavy use of partnerships and other arrangements to increase returns, speed of delivery or capital consumption. Third, we will be disciplined around capital allocation and return strategies. I am 100% in agreement with the current strategy to sell loans to generate gain on sale and free up capital to use for share repurchases. I believe that rigorous capital allocation is an important ingredient for the success of any company, but particularly one that is publicly owned. I also believe that a regular and predictable program to return capital to shareholders, drives discipline and all investment decisions. And finally, I believe we must change the public debate about private student lending. Sallie Mae provides an important product that opens the American dream through higher education to many who could not afford it. As the son of an immigrant whose success was powered by access to our higher education system, I am a beneficiary of the multi-generational impact Sallie Mae can have. We see it in the data, the vast majority, nearly 99% of our customers repay their loans successfully and use their education to build prosperous futures for themselves and their future generations. We will do more to help shape this important industry and policy discussion. During the financial crisis back in 2008, I had the opportunity to lead critical liquidity and regulatory efforts at Wachovia. There I learned firsthand the importance of leadership and strong liquidity and capital positions and that is exactly what I am focused on now, here at Sallie Mae. As the pandemic subsides, however, there is a great opportunity for Sallie Mae to continue to expand and grow. I look forward to leveraging my strategy, technology, marketing, digital and analytical experiences from both inside and outside the industry to help the company exploit these opportunities. With that said, let me open it up for Q&A.

Thank you. [Operator Instructions] Our first question is from Moshe Orenbuch of Credit Suisse. Go ahead. Your question, please.

Great, thanks. I guess the first question that I had, you know, was, Jon, welcome and wanted to kind of explore some of the comments you made at the very end. You talked about, you know, in the future kind of thinking about partnerships and other ways to kind of leverage the Sallie Mae brand and brand and capital base and maybe you could expand on that a little bit?

Sure, Moshe happy to, you know, when I think about it, these are customers who are new and young in their financial lives. In many cases, Sallie Mae is one of the first financial institutions that they will have a relationship with. And I think if done right, that allows us to build real brand affinity, it allows us to have insight into their underlying creditworthiness that few others have. And I think it gives us marketing access to those customers at a very formative stage in their lives. That candidly as I think about my past experiences in the industry, I would have coveted to have had. And so I think, you know, the challenge for us is one, how do we strengthen that brand position and that level of engagement. I think we will spend time looking and thinking about how we do that. But then I think the question is, where are all the places that that, increased credit insight, marketing access, or just engagement has the ability for us to create value for them and value for our shareholders. And obviously, we’ve done some things in that area in the past, but I think figuring out how to add that value going forward through a variety of different products and services is a nice way for us to expand and enhance the returns that we would get on our core business. So I want to be clear, our first focus will always be our core business, we will look to drive every dollar of value that we can out of that. But I do think the idea of sort of leveraging the customer franchise is a way of enhancing profitability and returns.

Great, and I guess I would just add to that, that you probably still, since you continue to service the loans that you’ve sold, you’re actually able to have that relationship with those borrowers as well.

That’s exactly –

Second question – yeah, the next question, Steve, I’m just sort of wondering if you could talk a little bit about you mentioned the idea of deposit pricing and that you feel like you’re ahead of some of the competitors, and I think that’s been one of the big issues in that with the sharp drop in rates, deposit pricing has generally at the industry level hasn’t come down as rapidly. Can you talk a little bit, particularly in light of the fact that you’ve got, you know, you’ve built a lot of liquidity, but you may or may not have a season, in a typical loan growth season, so maybe talk a little bit how you’re thinking about that? Thank you very much.

Sure, Moshe. So subsequent to the Fed rate cuts in response to COVID, obviously, Fed’s rate dropped, treasury yields dropped, and the Fed deposit rate dropped significantly. LIBOR and money market deposits lagged behind that significantly. So, as we sit here with $7 billion invested in treasuries and Federal Reserve balances, it is costing us as I mentioned in my prepared remarks. But we are doing what we can to drop that MMDA rate. I think we’ve dropped at 40 basis points in the last couple of weeks. We will lower it further and we will also lower our retail CD deposit rates. The fact of the matter is, we have a pretty good mix of long-term funding that matches our assets and we have put a sensitivity into our plan, we do expect loan originations to drop somewhat, but as a result of the long-term nature of our funding and our assets, we are pretty confident in the 4.9% NIM that I mentioned, but we are doing what we can to nibble around the edges and reduce our cost of funds and increase the yield of which we have our liquidity invested at.

And just if I could sneak it in, I mean talk – anything that you’ve seen in April in terms of reduction in consolidation activity?

So actually, there are some very positive signs there. So, in the first quarter, consolidations actually dropped compared to the fourth quarter, albeit a very de minimis 2%. However, to put that into perspective, Q4 ‘18 to Q1 ‘19, consolidations increased 20%. So, we’ve broken that trend already and we have seen through April 15, I think is the last day that I saw data that consolidations were down about 35%, and we expect them to drop a little bit more, because you know, our competitors do have a pipeline that they are creating. So we’re watching that, obviously very carefully.

Thanks so much.

Welcome.

Thank you. The next question is from Sanjay Sakhrani from KBW. Go ahead. Your question, please.

Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my question. My first question was just around the CECL provisioning methodology that you’re using with the DCF. Can you just walk us through what – are there any go-forward impacts on the P&L as a result of it because you are discounting back some of your loss assumptions. So was curious if you could walk us through some of the other P&L implications as a result of that? Thanks.

Sure, it is pretty straightforward, Steve. So we chose the discounted cash flow approach, because it has a very significant impact favorably on capital when we set up the CECL loan loss allowance. So, the fact of the matter is, we do have somewhat larger than a $700 billion discount between expected losses and the reserve, and that will accrete up over the life of the assets, and let’s call that, you know, 6-ish years. So there will be, you know, about $100 million impact per year, basically a provision accounting for the accretion of the discounted cash flow approach to the CECL reserve. We think it’s a price very much worth paying for the capital relief that we get upfront.

Got it and then just around the strategy to continue selling loans. If we were to look at today’s environment, like what types of expense would you be able to get on those assets?

So look it’s a good question. It is a very volatile market, but I will start by saying we marked our private student loan market a portfolio to market at basically one on one for our fair market value disclosure. We thought that that was a pretty reasonable price. I stay in touch with loan buyers and immediately upon the crisis hitting, there would have been a discount for the loans, have we tried to sell them in the market, not a meaningful discount. But I will point out that, at that point in time, there was absolutely no ABS market available. When the ABS market did begin to open up, spreads were like LIBOR plus 400 to 500. We now think we could issue an ABS deal at LIBOR plus 200. ABS is what drives the premium for loan sales. We think and we absolutely have no need to sell any loans at this point in time, but if we wanted to, we could probably sell a portfolio with a small premium, I’ll leave it at that.

Got it. Great, thanks for taking my questions.

Thank you. The next question is from Henry Coffee from Wedbush. Go ahead. Your question, please.

Yes. Good morning, everyone and welcome to the call, Jon.

Thank you, Henry.

A basic question. Can you go over the dynamics around student loan pricing when they come up this summer, I think that the – obviously the direct loan rate is going to be very low because of where treasuries are. How do you think that affects your own pricing opportunities?

So look, Henry we don’t think that we’re competing with the federal government for loan volume. We are basically a GAAP funding vehicle. We tell our applicants that they should look for scholarships and grants, federal money and then as a last resort, use the private sector. We don’t think we compete with PLUS loans in a major way at the graduate student space. So we are not concerned that the May 10-year treasury auction is going to have, you know, [technical difficulty] basis points or 60 basis points yield. We don’t think that will impact our originations, student loans, private student loans are priced on basically where the market for wholesale funding is, such as ABS. So our product pricing probably will not change as much as spreads have increased. Overall market rates have declined offsetting a large chunk of that. So I hope that answers your question.

So the basic pricing mechanism for you remains pretty much unchanged is really going to be your funding cost and –

I mean, I’m going to say it’s a little bit more expensive, but not in a material way that we think that we need to change our pricing at this point in time, but peak season is approaching, we will be sharpening our pencil and pricing our product very, very shortly.

And then you know, going back to the fourth quarter and also some of the remarks you made today. There’s a lot of thinking about being more engaged but at the front end of the equation in a sort of a consultative fashion and as you guys suggested today, you know, into the future life of your borrowers with new products, referrals, et cetera, can you give us some specific examples of what’s going on you know, right now on that front or what the some specific opportunities you may want to explore in the future? I know it’s a little early, Jon, but you know, you’ve been there for four days?

Yeah. Got you, Henry and think of the answer, I’ll be able to give you in 90 days. Sure, happy to and you know, I’ve obviously started to spend a little bit of time getting into each of the different businesses. But you know, it is sometimes bigger things and it is sometimes smaller things. And some of the things that I think we’re looking to do are to build brand affinity and some of them are to build engagement. So, you know, for example, we have discussions underway to see if there are tools that we should be offering to make it easier for students to complete their financial aid and loan application process even beyond Sallie Mae. So think about that as a little bit of a one-stop shop again, that won’t directly sort of drive loan volume task necessarily. But it starts to create a level of engagement, it starts to create data flows, it starts to create a sense that Sallie Mae is on my side when it comes to the kind of brand positioning, we’re looking to create. I think we’ve discussed on past earnings calls, you know, we’re looking for ways to continue to engage with customers while they are at school, because we know that many people go to college and they don’t really think about how they’re paying for it until they’re out. So I think some of the programs around tutoring assistance and the other programs that were given are all the way of keeping our name and our brand sort of front and center keeping the engagement high and, you know, sort of keeping the brand position in a place where again, consumers view that we are on their side, we are a trusted advisor, we are someone who they will want to do more business with throughout the rest of their life. So those are just you know, a couple of tangible examples we are evaluating. You know, I would guess I’ve already heard about a dozen different opportunities, I think we will evaluate many, many more. But I would come back to the basic principles, we’re really looking to do two things, build very deep brand resonance, right. We want to be a beloved brand, a trusted and beloved brand and we want to build engagement. We don’t want to be an episodic sort of category. We want customers engaging with us in a regular way, because that drives the data flow, the market inefficiencies that I talked about during my earlier question.

Thank you very much and welcome. Take care.

Yeah, thank you, Henry.

Thank you. [Operator Instructions] The next question is from Vincent Caintic of Stephens. Go ahead. Your question, please.

Hey, thanks. Good morning and welcome Jon look forward to working with you. First on the –

Thanks, Vincent.

The – great. First on the credit reserve assumptions. If you could maybe talk about maybe the macro assumptions built in and specifically on the forbearance, that seeing the forbearance having doubled already since quarter end and the reserves don’t seem that different from prior guidance in CECL. I’m wondering if we should be expecting a bump in incremental credit reserves in the second quarter or how should we think about that?

So sure, so let me say right off the bat that excluding the $160 million provision release for the loan sales, the provision did go up $226 odd million, so that is a pretty significant build. And we did build $153 million in – for COVID in the current quarter. So we use basically the Moody’s economic forecast to build our CECL reserve. We use a baseline and improve the outlook and a deteriorating outlook and we rate them appropriately. We – the Moody’s model did deteriorate somewhat in April, but the commentary that I provided on where we think losses are headed in the current quarter, I mean for the full year are based on the deteriorated Moody’s model, but in accordance with GAAP, the loan loss reserve was based upon March Moody’s model. There is an enormous amount of volatility in these models and it is the case that if the Moody’s models deteriorate, we will take an additional loan loss reserve. But I think it’s kind of interesting at the very first quarter of CECL implementation comes along with this horrible COVID pandemic that we’re going through. We have always argued that the CECL reserve significantly distorts our company’s performance and people should focus on our in-year net revenue and in-year losses for a true picture of how the company is performing. And I think that this current environment highlights 100 x the volatility that is grown upon the company as a result of the CECL model.

Steve, if I could just add maybe 10 cent. You know, I had the same question, Steve and I had a great discussion about it. It’s obviously been a question that’s been asked of some other lenders throughout the course of this earning season. And look logic would dictate. If I have more people going into forbearance, losses will be higher at some point in the future, right that makes sense. I think the thing that I would suggest, which is, you know, stepping back a little bit from Steve’s answer, which is a 100% right. You know, we have proprietary credit insight that not sort of – is only based on whether or not you are in forbearance, but the underlying characteristics of who you are when you go into forbearance. And I do think we’ve looked not just at the forbearance numbers, but we’ve looked at those underlying characteristics and we feel like we have incorporated those appropriately. And I do think we have to recognize, this is a different sort of economic and sort of policy forbearance market than any of us have seen in the past. And so we put a great degree of confidence in those underlying characteristics as being a better indicator of what that credit performance is going to be over time.

That makes sense. Could you remind us what qualifies a customer for forbearance releasing mean?

So that the forbearance policy is very lenient in accordance with regulatory guidelines anguishes. If a person indicates that they are having a COVID related issue that is affecting their ability to make a payment, we will grant them a disaster forbearance, we think it is the absolute appropriate thing to do in the environment that we are currently in.

Okay, great. Thank you. Second question, so appreciate the commentary around capital allocation and also the detail that you might be able to sell loans for a premium even in this environment. I guess thinking about the current stock price and the economics of the sale, how are you thinking about that? I know this is perhaps supposed to be a once a year thing, but any thoughts to realizing more value given maybe an arbitrage opportunity?

So look we executed the loan sale to raise capital to execute a capital return to shareholders. And that share buyback has only just begun and we will be in the market for probably the balance of the year, deploying the $525 million of capital that we’re now using to return to shareholders. And when that share buyback is complete, we will assess the market environment and decide if we should deploy the additional $75 million that we have lined up behind that. And when that is all executed, we will assess the market environment to determine whether or not it makes sense to sell additional loans as we discussed in the first – fourth quarter earnings call to continue to return capital to shareholders. We haven’t backed away from that strategy. We will assess the environment at the time that we need to. Jon, do you want to add to that or?

No, I think Steve it’s very well said. I think, you know, if we thought, Vincent we could be in the market in a bigger way today, we would be having that discussion more actively. I think we feel like we are fully subscribed, you know, with the resources that we have on hands from the loan sale. And look, Steve said, and I’ll just reiterate it. We like that strategy. You know, I am still committed to the notion of a multiyear strategy of loan sales and share repurchases, especially when we’re at the valuations that we are at right now. You know, prudence you know, dictates that I have to say that of course, when we get to that point, we’re going to evaluate it based on economic environment, regulatory guidance in the light, I can, in this environment make a commitment what’s going to happen in nine months from now, but we like that strategy. We very much stay committed to that strategy and I think we will look for every opportunity we can to put excess capital to work and return it to shareholders.

Okay, great. Thanks for the answer and stay safe.

Yeah.

Thank you. Our next question is from Rick Shane of JP Morgan. Go ahead. Your line is open.

Good morning. This is Melissa on for Rick today. Thanks for taking our questions and Jonathan, welcome.

Thank you, Melissa.

If you could – absolutely, if we could follow-up a little bit on the forbearance term, can you review the length of the forbearance that’s being granted right now and whether or not those are eligible for extensions at the end of that period?

So certainly, we are granting three months forbearances in accordance with our disaster forbearance policy, and I believe the fact of the matter is, if we are still in the throes of this pandemic, when those forbearances mature or terminate, we will assess the situation and we will grant another disaster forbearance if appropriate at that point in time, and of course, all in consultation with our regulatory friends.

Okay, understood. And then a follow-up question is about the conversations that you’re having right now with your school partners, your university partners. What are they saying about their plans for the fall from a contingency perspective that campuses are not opened and what impact they think that could have on enrollment?

Yeah, it’s a great question, Melissa. And you know, First, you know, obviously there’s thousands of schools out there, I think it’s hard to generalize what any one of them are saying. And let me also say, I think they’re dealing in their own way with the very same uncertainty that almost every business and institution is dealing with in terms of the pandemic. No one really knows exactly how things are going to materialize, how the curve is going to flatten and so forth. With that said, I think the vast majority of the schools that we are talking to, and I said this in my prepared remarks, are planning for a resumption of activities in the fall. Those, you know, I think if you look at the schools, there may be a slightly different variant of what those activities may look like. There may be in some cases, fuller or less full sort of versions of the student life experience for residential universities. But I think almost every school we talked to is planning for a resumption of operations in the fall. I will also tell you, all of them or most of them are making contingency plans. You know what happens if in fact, we are still in a different place? And I think they’re, you know, continuing to refine their distance learning capabilities, they’re continuing to refine, you know what a scaled back set of operations would look like. But I think unfortunately, it is, Melissa just too soon to know exactly what those plans or how those plans are going to materialize. And my guess is it will not be a single answer for the entire country. My guess is it will be a slightly different answer geography by geography, state by state in accordance with the conditions on the ground in that area.

So, if I could add one more thing, Melissa, I think you did ask about forbearance trends and I didn’t answer that question. I do think it’s important for listeners to understand that we have seen a significant slowing in the granting of disaster forbearance and whether you look at it on a 7-day rate of change or a daily change. It has peaked and in fact, the growth rate peaked around April 5th, which was several weeks ago and that is encouraging. And we’ll, of course will continue that post investors on trends and disaster for. But it does look like the rate of growth has declined significantly at this point in time.

That’s great. Thanks for taking our questions.

Yeah, thank you.

Thank you. Our next question is from Arren Cyganovich of Citi. Go ahead. Your line is open.

Thanks. I was wondering if you could give us an update on the credit card product. I saw that they increased you know, very, very small amounts to-date. Is that something that you’re looking to continue to kind of test over the coming timeframe or is – has this kind of changed your thoughts in terms of how you want to approach credit card?

Yeah, Arren it’s Jon. Yeah, I would sort of describe that in both the short-term and the medium-term. I think in the short-term, we are, of course doing all the things that any lender would do, especially any credit card lender would do in an economic environment like this. So we have absolutely tightened up distribution channels, we’ve absolutely, you know, sort of looked hard at different credit cells to understand, you know, do we feel equally as comfortable about those and we are making sure that the card business is hardened appropriately for the economic environment that we are in. And that’s the first order of business and we obviously have to do that to stabilize operations. You know, I think in terms of longer-term, sort of medium-term and longer-term, we are continuing to build that business. We are now I think at the point of starting to get enough experience that we can really understand sort of the shape and the contours of that business and you know, sort of where we’re having success and where there are places where the strategy might be honed and refined over time. Honestly, I’m not deep enough into it yet to have formed any real conclusions. But I will tell you if you go back to the question Moshe asked at the very beginning, you know, if you think about access to customers’ proprietary credit insight, the ability to separate fraudulent versus non-fraudulent applications, credit card is a natural product that we should be, you know, thinking about extending to our customers. And so I continue to be excited to learn more to figure out how to make that a winner for Sallie Mae.

Great, thank you. And then just lastly, the expenses were a little bit higher for the first quarter. What was – how much of that was non-recurring that you might be able to drop off sequentially?

So, actually expenses were pretty in line with our plan and the prior guidance that we’ve had, had given but it’s a very good question, Arren and there were between moving people from the office to home and we’re talking about some pretty big call centers and virtually the entire company between that and CEO transition costs, there were probably close to $10 million of what you’ll call extraordinary costs in there.

Thank you.

You’re welcome.

Thank you. The next question is from Lance Jessurun of Jefferies. Go ahead. Your question, please.

Hey guys, this is Lance Jessurun on for John Hecht. You know, as we do think about possible school closures in the fall or a new normal of more online activities, how do you – how are you guys thinking about originations you know, in those different situations?

Sure. So what we’re doing is, we are assessing daily trends in applications. And we had seen a meaningful decline with a lot of volatility surrounding it that has subsided pretty significantly. But what we have built into – I’m sorry, so what we have built into our full year plan is a decline of some $700 million in loan originations. We are in the early stages of planning for the summer session and it looks like there will be a mix of – actually I’m sorry, it looks like it will probably be completely moved online, don’t know.

Okay, thank you. And then one more. You know, you talked about the competitive environment, especially for newer FinTechs as things get a little more troubled down the line. Have you been thinking about any opportunities that might present themselves in terms of those companies having a little bit of an issue?

Yeah, Lance let me step back and give a little bit of a strategic answer. But it’s obviously a hard thing to comment on specifically. You know, I’m a big believer and what I’ve been preaching to the team, you know, is in moments like this, you go through sort of three phases. You know, the first phase is to stabilize, you know, the business has obviously absorbed a lot of blows with the pandemic and I think we hopefully outlined on the early parts of the call, all the great steps we’ve done to stabilize operations, care for team members and care for customers. You know, to me the second phase of that is, you know, how do you restore performance against your original plan? So obviously, you know, we’re not going to overcome that magnitude of loss builds and so forth that Steve has outlined, but we are deep into the process right now of thinking about, you know, across the Board, how do we get back to as close to that plan as we possibly can. We mentioned cost control, but we’re, you know, kicking off efforts right now to really look at collection strategies, we’re looking at origination strategies, all the things that would allow us to do as well as possible given the environment that is underway. That works not done yet, but as soon as it is. You know the third question that I will ask the team is, okay, you know, how do we now figure out the opportunities for us to create a very different going forward sort of position for ourselves. You know, and you could imagine all the different ways that having, you know, sort of distressed lenders, distressed markets could present opportunity for us. Candidly, we’re not yet fully there yet in our thinking. We want to make sure that we’re getting back to as much of our original plan as we possibly can, but I am confident that strategically as the dust settles, there will be opportunities for us as the market leader in the space to you know, really strengthen our position even further and I think you know, you should expect us to come back and talk about those things in the quarters ahead.

Sounds good, thank you.

Thank you. Our next question is from Michael Kaye from Wells Fargo. Go ahead. Your question, please.

Hi. Can you just talk about you know, what expense levers you have, you know, peak seasoned originations were you know, significantly curtailed maybe worse than your base case scenario. I know you rely more on sales people and you know, direct marketing mailings, you know, by some of your peers, so does that give you less flexibility?

So, Michael, there are a number of levers that we will be keeping our eyes on as the peak season approaches and we’re obviously monitoring it on an ongoing basis. We have seen a number of direct-to-consumer pay per click, banner type of players significantly dropped their spend and as you may recall, last quarter there was enormous pressure on the direct-to-consumer market. So we think that you know, we will manage our direct-to-consumer spend a lot more carefully in the peak season. But I think from a cost cutting perspective, we’re not really going to be doing anything that even remotely approaches harming our core business. We will be looking around the company for things we can do better, more efficiently to basically reduce our cost to service, cost to acquire things of that nature. So we will be looking at different ancillary investments that we were going to make in 2020 that we’re going to have effects in 2021 and beyond and assess whether or not those investments make sense in today’s environment. I don’t know if that helps you think through that, but that’s the approach that we’re going to be taking in. But there will be –

You know, that’s helpful.

There will be the opportunity for savings we believe in the D2C markets based on what we’re seeing or competitors doing at this point in time.

Okay, that’s all I got. Thank you.

You’re welcome.

Thank you, Michael.

Thank you. And we have a follow-up question from Henry Coffee of Wedbush. Your line is open.

Oh, yeah. Thank you. I was just wondering what your managed results look like, given the portfolio sale. Have you thought of, you know, even publishing numbers like that?

So, Henry, it’s kind of I don’t think it really makes sense. So it’s very complicated, because as we remove the loans from our balance sheet, there’s a big provision allowance reversal. We can provide performance on a managed basis. I mean, we track how all the loans that we’re servicing perform in terms of delinquency forbearance and you will see the loan servicing revenue increase, but not really in a material way to the company’s overall results. So I don’t think you’ll be seeing us doing anything differently than that on a go-forward basis.

No, I was just thinking, you mentioned that delinquencies went up and half the reason was because you only sell performing loans. So if we put it all back together again, we could kind of get a better read on what the underlying dynamics were.

Yeah, I mean, we do track and I don’t know if we can publish the performance of our loan buyers’ portfolio, so it does get complicated. I mean, the best thing you could do for that really is to take a look at what we published on securitized portfolios, which is a considerable amount of information. So once we sell these assets and take them off our balance sheet, there’s really no way to put together a managed view.

But Henry –

Great, thank you very much –

Question around creating a little bit of a smoother sort of portfolio or a performer view and see what we can do there, we will give that some thought internally.

Great, thank you. Take care.

Yeah.

Thank you. That ends our Q&A session. I would like to hand the conference back to Brian Cronin.

And I think Brian’s going to immediately hand it back to Jon Witter. So Carla, thank you for that. Just a couple of quick closing comments. Looking forward, I am absolutely confident that Sallie Mae and its team will continue to deliver as this pandemic unfolds, and I hope you got a sense of some of that during our answers to the Q&A. I believe we have the leading industry team with deep experience in credit policy, pricing, operations, technology, collections and recovery. We have the deepest relationships with our school partners and that should ensure continued leading market share and we have an incredibly strong track record of risk and compliance management. This is the beginning of what I am confident will be an incredible journey as we positioned Sallie Mae customers and our business for continued long-term success. While you are still getting to know me, rest assured that I am a strong believer in two-way communication. Hopefully you’ve sent some of that during the call today and that means that we’ll be sharing information with you. But I am also looking forward to seeking information from you. So whether it’s through the questions on this call or other calls like it or in smaller meetings going forward, I look forward to learning from you, engaging with you and making sure we appreciate your perspectives on the business and the industry. Before we wrap up, I do want to take a moment and recognize the continued hard work and dedication of our team members. While I haven’t gotten to know the Sallie Mae team in the traditional sense, given the work from home, nature and safety measures in place, I am really blown away by the deep bench of talent that exists throughout the organization. And I look forward to working with the entire team as we advanced the company strategy. And finally and maybe most importantly, let me reiterate how much I appreciate your interest in Sallie Mae. And on a personal note, I hope you and your families remain safe and healthy around the world. I look forward to further discussions with our shareholders and analysts over the coming weeks and months. And I thank you for your continued support and interest in Sallie Mae. I hope everyone had a great day.

Thanks, Jon. Thank you for your time and questions today, a replay of today’s call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today’s call. Thanks.