SLM Corporation (SLM) Q2 2021 Earnings Report, Transcript and Summary

Thank you for standing by, and welcome to the 2021 Q2 Sallie Mae’s Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Brian Cronin, Vice President of Investor Relations. Please go ahead.

Thank you, Julian. Good morning, and welcome to Sallie Mae's second quarter 2021 earnings call. It's my pleasure to be here today with Jon Witter, our CEO; and Steven 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 the discussion of those 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 the COVID-19 pandemic on our business, results of operations, financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of our core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended June 30, 2021. 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 John.

Brian, Julian, thank you, and good morning, everybody. Thank you for joining us today for a discussion of Sallie Mae's second quarter 2021 results. Our second quarter results are a welcome continuation of the success we had in Q1, and I think they reflect a continuing return to normalcy. We are executing our strategy and delivering strong results. As the world around us continues to reopen, we're encouraged by the implications for universities and for students as they physically return to campus in the fall. I hope you walk away today with three key messages. First, we've delivered strong results in the second quarter. Second, we're executing our 2021 capital return program as expected. And third, we're well positioned to continue our performance trend this year by executing against our core strategic imperatives. GAAP EPS in the second quarter was $0.44 compared to a loss of $0.23 in the year ago quarter. Our results were driven by a combination of strong business performance and continued improvements in the economic outlook. Let me start with a discussion of our business performance. Private education loan originations for the second quarter were $533 million, which is up $36 million or 7% over 2Q 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% compared to 74% in Q2 of 2020, and our average FICO score was 750 versus 747 in Q2 of 2020. It's important to note that, seasonally, the second quarter has lower cosigner rates due to a higher mix of nontraditional students, and we fully expect our cosigner rates to finish the year at historical levels. Our credit continues to be a highlight as we emerge from the pandemic. Private education loan annualized net charge-offs for the second quarter were 1.16% compared to 1.29% in the first quarter of 2021. 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 has resulted in improved charge-off expectations that we will discuss shortly. The quarter was relatively quiet from a CECL perspective and improving economic outlook modestly, but positively impacted our CECL loss estimates and reserves. We also saw an increase in reserves because of new originations. CECL reserves generally trend higher in quarters two and three, 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. 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 10b5-1 plan at an average price of $19.27. We have reduced the shares outstanding since January 1, 2021, by 19% at an average price of $16.87, and we reduced the shares outstanding by 28% since January 1, 2020, at an average price of $13.99. As of June 30, 2021, we have 295 million remaining from the original $1.25 billion share repurchase authority granted. We expect to continue to make significant progress against this 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 effects of CECL. The next $1 billion loan 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. As this is a straightforward quarter, I will keep my comments relatively brief and to the point. Let's start with a discussion of our loan loss allowance and provision. The private education loan reserve was $1.2 billion or 5% of our total student loan exposure, which, under CECL, includes not only the on-balance sheet portfolio, but also the accrued interest receivable of $1.3 billion and unfunded loan commitments of another $1.2 billion. Our reserve at 5.4% of our 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 our CECL reserve, which we've highlighted each quarter since we implemented. First, economic forecast and weightings in both the first and second quarter of 2021. We used Moody's base S1 and S3, 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, needless to say, there was sharp improvement year-over-year as we were using base and S4 weighted 50% each in the prior year. And of course, the economic outlook was much dire just a year ago so this resulted in significant improvement year-over-year. Turning to prepay speeds. They were slightly slower in Q2 compared to Q1, resulting in an immaterial increase in our reserving needs from the prior quarter. However, 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 million from the prior quarter and are relatively unchanged from the year ago quarter. The increase in commitments accounted for the vast majority of our loan loss provision in the second quarter compared to the first quarter. Finally, loan sales, obviously, very light activity here and the impact of these loan sales was immaterial to the reserve in the second quarter of 2021. The factors described here, in addition to other factors, including overlays and the natural accretion of our discounted reserve, resulted in a $69.7 million provision for credit losses in our private student loan portfolio. Let's now take a little bit 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% of loans in repay, flat to Q1 2021 and down from the year ago quarter. Private education loans in forbearance came in at 3%, an improvement 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 seen. Jon has already talked about the positive charge-off trends we are seeing. We have been cautioning investors that delinquencies and charge-offs were expected to deteriorate as we ended our pandemic support programs. However, based on continued strong performance, we did reduce our outlook for expected defaults, as you saw in our guidance. We now expect net charge-offs for the full year to be just under 1.5%, which implies higher charge-offs in the second half of the year, and this represents a meaningful improvement from what we were expecting just three 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 and consumption at the high levels they're at, consumers are likely to reduce savings and 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 deck. The net interest margin on our assets was 4.7% in Q2, up from the prior quarter and the year ago quarter. We continue to deploy excess capital through share repurchases and have managed our 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 4.75% as a result of continued NIM expansion in the second half of the year. That 4.75% is for the full year, of course. A couple of brief comments on second quarter operating expenses. They came in at $128 million compared to $126 million in the prior quarter, about $142 million in the year ago quarter. Operating expenses in our core student loan business declined 8% from the year ago quarter, while loan serviced increased 3%. Our serviced increased 3%. Our focus on improving the efficiency of our operation is clearly paying off. Finally, our liquidity and capital positions are strong. We ended the quarter with liquidity of 20.4% of total assets. And at the end of the second quarter, total risk-based capital was 14% and CET1 13.7%. Post CECL, we've also been reporting GAAP equity plus loan loss reserves, which came in at a very strong 15%. 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, thanks. 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 their aggressive stance on vaccination plans. While variants will always pose a risk, we're confident schools will continue to innovate and manage the pandemic well and reopen largely as normal in the fall. In fact, 85% of our reported schools are returning to a normal residential model, 14% state that they expect to have a hybrid residential model and only 1% expect to be fully online. We believe this normalcy is exactly what students and their families are looking for and expect a strong rebound in attendance. Unemployment, especially for those with a 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% in 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 30, 2021. These factors will continue to positively impact our borrowers' 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 propose is on the table to increase telegrams and to offer free community college appropriately assist lower-income students and families achieve the dream of higher education. It is encouraging that the political process has coalesced on practical proposals that focus on helping those who need the most assistance. We continue to see such targeted proposals as complementary to our business. Earlier this year, we released the 14th edition of How America Pays for College Report, which further underscores 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 FAFSA and applied for scholarships. In response, we'll be introducing a new faster tool this summer to help families complete the form in as little as 7 minutes, and we'll also continue to enhance our scholarship search tool, which, last year, helped 24,000 students earn a 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 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 two 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 nonmarketable securities. This represents approximately $0.08 of the guidance increase. The additional approximate $0.04 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 million and $225 million, which is down from our previous range of $260 million to $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 noninterest expense to end 2021 between $525 million 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 report 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?

[Operator Instructions] Your first question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

Excellent results. The question that I get most often from investors is how to think about it? Obviously, you've had enormous success with both the loan sales and redeploying those proceeds into capital return. But as we go forward, and you've gotten -- you reiterated that you've got $1 billion for sale in the fourth quarter, like how do we think about what would make you do more or less than those numbers in any particular period, whether it's the fourth quarter or early 2022 given where we are now and how favorable those gain on sale margins are?

Yes, Moshe, it's John. Thanks, and I appreciate your question, and thanks for your time this morning. Look, let me start by saying we've not offered specific guidance for 2022 on capital return, but happy to talk to you a little bit about 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 and capital returns. And that's something that as long as I'm CEO, and I think as long as Steve is CFO, will be 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 opportunistic time for us to buy back shares because of this arbitrage that exists between loan sale premium and the current prevailing stock price. And so I think you and others should exist -- or should expect that for the medium term, we will continue to have a view that selling loans and buying back stock aggressively is a good thing for us to do. Obviously, that has to be with the full approval of our Board at each step along the way. I think we've talked about the fact that, next year, we expect to sell a little bit less in loans than we did this year. I would expect it to look more like 2019, where, I think, we sold approximately $3 billion 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 buyback shares and to do so in a programmatic sort of always-on approach similar to what we're always-on approach similar to what we're doing today with our 5 -- our 10b5-1 plan. I think the real limiter for us is not our ability to sell loans. I think we could certainly sell more 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 is the execution of us putting that capital to work and 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. So I think our approach is, we don't want to artificially chase the stock price up. We don't want to be so active in the market that we are sort of distorting the true underlying intrinsic value 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 that will take a little bit of judgment and a little bit of art in terms of when we think 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, is you should expect over the longer term 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 and this arbitrage begins to narrow. My guess is, during that time, we'll become slightly more focused on other forms of capital return, for example, dividends. But I think you should expect, regardless of the form and the exact level of capital return, it's going to be a hallmark of what we do going forward.

Great. And I would just add that 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 guidance.

Moshe, just to interrupt you, I'm sorry, I totally agree. I mean lots of management teams talk about a focus on value creation I share the perspectives you've gotten having a strong capital return program takes a somewhat nebulous notion of shareholder value creation and makes it incredibly practical and tangible in ways that I think really galvanize as the management team, and we've certainly seen that here.

Yes. I would certainly agree. With respect to the guidance increase, a big chunk of it is that $0.08 and yet you've also talked about the significant reduction in your expectations for lower credit losses. Is the issue the strong originations in the second half require a reserve build independent of those losses? Like how do we think about that guidance increase relative to the big change in your loss expectations?

Sure, Moshe. So this is Steve here. Look, the preparation of a CECL reserve has a number of moving parts. So there absolutely was a reduction in the CECL reserve related to lowering our OpEx -- I'm sorry, our charge-off guidance for the year of 2021. We removed in one 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 offsetting that as we recalibrated our probability of default model, which we do once a year. And those two pieces almost perfectly offset one another. We do think credit is going to continue to perform well based on how we're seeing our borrowers service their loans, and we'll deal with that 1 quarter at a time. The rest of the $0.04, and I will remind you that we've already increased our guidance from $2.30 for the full year to $2 -- basically $3.20 now, so a big significant increase. The remaining couple of cents 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 at the company.

Your next question from Sanjay Sakhrani from KBW. Your line is open.

This is at Steven Kwok filling in for Sanjay. The first question I have is just a round -- following up on Moshe's question on the loan sales. What type of yields are you guys seeing in the marketplace today?

Yes, Steven, thanks. I mean, look, obviously, we have not been in the marketplace for our own paper and our own deals. So we're probably not the right people to comment sort of more broadly on that. I think what I would say is, we continue to be optimistic that the market is good for loan sales. Obviously, the recent interest rate movements are helpful. I think it's useful to note that they were not fully offset, Steve, keep me honest by a widening of credit spreads. And so I think, in general, we view that pricing movement as generally positive to our plans. We have done, and I think we've disclosed this, some recent securitization and other similar, but different sort 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 the results, I think it is hard to predict perfectly what the premiums will be on the eventual loan sales.

And then just following up around the competitive landscape, and you mentioned your market share increased by 8 percentage points to 56%. How much more room is there to increase from there? If you could just talk about the landscape?

Yes. Look, it's a great question. I mean I think the flip answer is, there's another 44 percentage points of opportunity to improve there. But obviously, we're never going to be 100% market share players, Steven. I think at the end of the day, what we are seeing in the marketplace is, I would call sort of a modest competitive, but generally positive competitive dynamic. We are not seeing sort of people introduce massive new product features that we would have to respond to, that we would think are maybe not in the sort of customer or the industry's best interest. We are not yet seeing pricing -- sort of irrational pricing decisions to any large degree. Everyone, of course, fine tunes their pricing around their credit grid and there are some small places where we raise our eyebrow a little bit, but I think pricing seems to be really pretty rational relative to underlying returns and expected returns on the assets. I think we do see 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 B2C business right now, we're seeing frisky competition in the direct-to-consumer space as everyone is buying for the kind of growth coming out of the pandemic. And I think, in our business, I'm sure people are also upping their aspirations a little bit with the vacuum created by Wells' retrenchment. So I think the general kind of competitive environment, I would describe it as competitive, but sort of moderately sort of competitive and much like 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, though, care even more about profitability and about the return on the investment that we're making in our various loans. So whether it's on the cost to acquire side or the cost to 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 ROEs that we see on our loans than have market share be slightly greater. So we'll continue to exercise that discipline. I think 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. If I feel like we're doing the right things and showing the right investment discipline.

Thank you so much. Your next question from Terry Ma from Barclays. Your line is open.

Can you maybe just give some color on the type of delinquency trend you expect once the payment holidays end in September?

Sure. Happy to do that. So I indicated that charge-offs should trend higher for the rest of the quarter. And by the way, the last couple -- my last few predictions missed the mark on the downside, fortunately. But we do think that we could end the year with charge-offs at sort of just under the 2% level by the fourth quarter and then kind of stabilize from there and then probably trip lower.

Got it. That's helpful. So as you just mentioned, like credit outperformed your 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 for it 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 is super strong. Federal loan -- federal support programs have been pretty enormous. And consumers continue to perform very, very well. As you know, savings rates are higher, et cetera, et cetera. So the consumer is very strong and continues to perform very well on their obligations, and we're favorably impressed by what we see in terms of low rates etc in our delinquency buckets, so all indication point to continue performance and what we have been expecting over the last call it two quarters.

Your next question from John Hecht from Jeffries. Your line is open.

Just kind of just a real kind of distinct question is, there was, I think, a judge in New York recently ruled that private student loans are allowable to be discharged in a bankruptcy process. I was just -- is this consistent with what you guys had interpreted earlier and does -- or does it change anything about how you see your provision requirements?

Yes, John, let me take a first stab at that, and then I'll see if John wants to add any additional color. We are not troubled by that decision at all. I believe that, that was a direct-to-consumer loan. I don't think it was certified by the college and it's way different than the typical student loans that we are originating in our portfolio, so was not troubling to us. And I would be remiss if I did not point out that our portfolio is basically 90% cosigned. And for any bankruptcy -- for bankruptcy to have impact, we would need to see both the borrower and the cosigner decide to declare bankruptcy, and our typical cosigner, with a 750 FICO score and a very well-developed credit bureau score, is highly unlikely to do that. John, anything you would like to?

Steve, I think you answered the specific question 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 bankruptcy reform as part of a -- sort of an 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 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 the day after graduation as a way of clearing their student debts. But I think we believe there is a lot of opportunity for thoughtful bankruptcy reform, which, again, we view as being accretive to our business. And I think it's really all centered on, and I can't reinforce this enough, the underlying strong credit performance of our customers and their success with their products. At the end of the day, when you look at our default rates, when you look at our loss rates, the vast majority of our customers are highly successful. We underwrite these products. We take great care to make sure 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 loan. And so again, bankruptcy reform is 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. I think this particular ruling was very narrow and deminimis to basically no impact on us.

All right. That's very helpful. I appreciate the context there. Second, I apologize for this one. I just -- we went through CECL adjustments, right? When the pandemic set in. So Steve, the provision for unfunded commitments this quarter, is that -- I just want to make sure, is that something new to change the seasonality of how you guys would provision, and how we should think about modeling? Or is that something that's always been done? It's just a little bit more noticeable because you've gone through the CECL adjustment, and we've kind of started to normalize out of the pandemic?

John, you're right. It is new to CECL. Prior to CECL, we were not reserving for contingent liabilities. We do need to do that now. And it -- there is a more seasonal impact, and Brian did a great slide in one of our investor packages that tries to help the analysts discern the seasonal pattern in that. We'd be happy to send a copy of that now to you to help you in your modeling efforts.

Next question is from Henry Coffey from Wedbush. Your line is open.

Yes. And let me add my congrats to the discussion. Great quarter. On the new product front, you're developing the credit card, you've got a got a history of doing one 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 a known vendor? 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?

Yes, Henry, it's Jon, thanks. 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 what I will call sort of broad or indiscriminate sort of diversification for diversification's sake. Count me as one 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 we're talking a lot about, Henry, internally is this notion of what we refer to as sort of brand or customer-centric diversification. In that context, and I think we've talked about this generally and strategically, we have a certain zone, a certain ZIP code where we have a lot of credibility to play with students and their families. And that range starts a number of years before a student starts their higher education journey in earnest before they go to college, for example. And it tends to extend 3 or 4 years thereafter in what we might refer to sort of internally as sort of the adulting 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's a lot of needs that are not being met today by anyone; two, that Sallie Mae is highly credible. Our brand is highly credible in meeting those needs; and three, 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 existing 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 scholarship finder, certainly the fast-tool are good examples of needs that customers have along that life cycle journey. And I think we believe we can be credible there. To your specific question, I think you should expect a couple of things. Number one, we will build those through the best 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 will. If we can build those tools better, we absolutely will. The thing you should expect, though, is that they will all be predominantly branded Sallie Mae. We are not interested in leveraging our market position to help someone else build their business. We're very much interested in using partnerships where appropriate to help those partners build our business. So whether we use a partner or not, you should expect the look and feel and the position to the customer to be very much Sallie Mae oriented. And I think the second thing, Henry, you should expect is that we will get paid for that in a number of different ways. My hope and expectation is that some of these businesses grow and mature to the point where they become independent revenue lines for us. But the good news is, if they do nothing else, but strengthen our business and our brand with our core borrowers, and if they do nothing else, but lower our cost of acquisition and increase loyalty, the investment we're making in these is efficient enough and deminimis 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. So we feel good about them, but I think the answer is it will be a blend, and you should expect that we will get paid in different ways.

SoFi is out there now as a public company. Based on the guidance they gave when they were being acquired by the SPAC, they're not that worried about near-term profitability, but they did talk about maybe pushing into the student loan market. It's -- is that part of the other 44%? Have you heard 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?

Yes. Henry, I'm probably not the best person to comment on SoFi's overall strategy. I think what I would be willing to say in general is, we have seen a lot of players over the years 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 than there have been unsuccessful, meaning more have been unsuccessful in doing that. I think though we don't take that for granted. As the market share leader, we are keenly aware of the fact that if anyone comes into this business, they're going to be looking to take share from us. And that is why you've heard me talk for 18 months about 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. 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 shareholders and customers. By the way, it's part of why we're making investments in things like 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 will. And giving anyone a foot in the door in this business is something that we sort of hate to do. So I'm not sure I can comment specifically on SoFi. I don't think we've particularly seen them in the marketplace to any material effect. But I think the general question is one 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 the core of who we are.

Your next question from Rick Shane from JPMorgan. Your line is open.

It's Melissa on for Rick today. Quick question for you on a reference to slower prepayment speeds that was in the press release. Can you elaborate a little bit on that? What's driving that particular assumption?

I mean, Melissa, it's really model-driven, and the change in prepay speed was not material in any serious way. And I think now that we are in the CECL world, we're going to see the CPR bouncing from 10 one quarter to 9 one quarter, et cetera, et cetera. We aren't seeing any significant changes similar to what we reported last quarter, certainly. But CECL is a model-driven number, and we're going to see noise from quarter-to-quarter for better or for worse.

And then a follow-up question on the elevated unfunded commitments from this quarter. Do you think that's really a function of students being 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 see on a more regular basis?

So look, it's a seasonal number. It happened in Q2 of 2020. It will happen again in Q2 of 2022. The number was reasonable. I think it was up something like 6%. So it's a good start to the peak season. It's a very early read. And I think Jon talked at length about the fact that it is very early in the peak season, it's off to a slow start, but the next 5 weeks are very, very critical.

Your next question from Jordan Hymowitz from Philadelphia. Your line is open.

Two quick questions. One is, can you explain what, if anything, you're doing to help international students qualify for college? I know there's a couple of programs out there to help international students saw 10 colleges in some ways?

Yes, Jordan, it's Jon. 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 is, we do not try to sort of fill that need directly. We do have a relationship with a provider who specializes in making loans to those types of customers. 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 what we're effectively trying to do is leverage our marketing and digital channels to grab that customer and get it serviced through whatever provider can do the best job with it. It is not a huge part of our business today. I think most customers understand kind of the core of our business. But we certainly see it as a modest-sized opportunity and one we will continue to want to try to monetize to the extent that those fish come into our net, so to speak.

I'm familiar with the company. I think it's a tremendous opportunity for you guys, and I was just wondering, is that investment something that is a passive investment or an active investment? Or do you have any way that if it would go well, you would so you don't want to go into those details because it seems a very promising opportunity to dramatically expand the market that no one's really thought about. And I'm very positively inclined.

Yes. Jordan, I don't think it's our place to talk about sort of investments. I'm not actually even sure we have an investment in the company that I was referring to. But look, I would encourage everyone to talk directly to the companies 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 to your success because, in my mind, you're one of the cheapest neo banks in the country. You have no branches, you're being unique brand, you're very profitable. Can you talk a little bit of some of the branding initiatives, some of getting the main brand out as people come back to college this year, things like that? Even things like updating the website with someone getting a college degree and certificate as opposed to a picture of Steve's smiling face or something, which is not unattractive, but does it maybe send the same message as some kid getting in diploma for the first time for something?

Yes, Jordan, if there is a picture of Steve smiling face on our website, I definitely want to hear about it because we need to get that down immediately. Look, I think the way that I would think about our branding initiatives is across 2 or 3 different vectors. And this is a place where we are investing significantly. I think, number one, we are investing in the core of our service offering. And you know as well as I do that your brand is not just what you market on TV. It's 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 our overall digital experience. And that can be literally as tactical as sort of the Pareto analysis of why customers are calling or how many of that is their second choice channel and how do we just go back and make sure we have the capabilities 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 those skinny flows out of that piece. So think of sort of bucket number one as just the core digital and customer experience. Two, we're investing meaningfully in our MarTech Stack. So really think about that as the ability to target, to test and learn end to digitally optimized return on digital marketing spend in 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 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 that's, I think, kind of the second piece. I think the third piece I would touch on is like what are the actual messages 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 channels in which we are talking to customers. And so you'll 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 TikTok of the world. By the way, Jordan, if you see Steve on TikTok, I definitely want to know about it. But you will start to see us have those new messages across a broader set of platforms. So I think if we do all of those things well, my hope is we start to become not the cheapest neo bank out there, but still the most affordable neobank out there, Jordan, but we certainly agree with you in the importance of marketing and your sort of statement that we're improving as high praise, and I will pass that on to the team.

I mean just the Sallie Mae jackets are a huge step up and maybe every kid who gets a loan could get one and walk around campus with it. I mean just little things are very helpful.

Next question from Michael Kaye from Wells Fargo. Your line is open.

I'll just ask one very quick question. I was hoping for an update on the credit card initiative. It doesn't seem like you're doing much direct mail, if any, while many credit card lenders are ramping up again. I wanted to hear if your views have changed on opportunity.

Yes, Michael, I don't think our views have changed at all on the credit card opportunity. At the end of the day, our aspiration has never been to compete with AMX or Citibank or JPMorgan or Capital One in the broad sort of direct-to-consumer unbranded sort of card space. I think we've always viewed the credit card as a natural product to offer predominantly to our customers, both taking advantage of proprietary underwriting and credit insight, a hopefully proprietary cost to acquire through the relationship we have with those customers and being able to build a reward platform that is tailor-made to sort of new graduate students, in-school students and their connection to their student loans. And so 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, I think, very rightfully scaled back our card activities. The idea of offering sort of an open-to-consumer credit product when we were heading into one of the most tumultuous economic periods didn't 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 drive really strong credit and underwriting insights from the experience we have with those customers. We are, I think, committed to the card concept back to those confidence-inspiring products I talked about earlier. This is clearly part of what customers expect as that adulting process. It's hard for me to imagine that we will not want to continue to offer credit cards to our customers. We think it makes a lot of sense in cementing to our brand, but we want to make sure, again, in the spirit of capital allocation and capital return that we're doing that in a really thoughtful and profitable way. And I think this year is effectively restarting the engine, build in the pipes to our customers and really proving what the art of the possible.

Thank you so much. There are no further questions at this time. You may continue.

Great. Well, listen, folks, thank you, everyone, for your interest this morning in Sallie Mae. We look forward to continuing these 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 paperwork here at the end.

Thank you, John, and thank you for your time and your questions today. A replay of this call and the presentation are available on the Investors page at salliemae.com. As Jon said, if you have 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.