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spk03: Hello, and thank you for standing by. Welcome to Sally Mae's second quarter 2023 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. I would now like to turn the call over to Melissa Brunard. Ma'am, the floor is open.
spk01: Thank you, Tawanda. Good morning and welcome to Sally Mae's second quarter 2023 earnings call. It is my pleasure to be here today with John Witter, our CEO, and Steve McGarry, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, and forward-looking statements. Actual results in the future may be materially different from those discussed here. 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 Sally Mae, these factors include, among others, results of operations, financial conditions, and or cash flows, as well as any potential impact of the COVID-19 pandemic on our business. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to gap measures, and our gap results can be found in the Form 10-Q for the quarter ended June 30, 2023. This is posted along with the earnings press release and on the Investors page at sallymay.com. Thank you, and now I'll turn the call over to John.
spk06: Thank you, Melissa and Tawanda. Good morning, everyone. Thank you for joining us today to discuss Sallie Mae's second quarter 2023 results. I'm pleased to report on a successful quarter and continued progress towards our 2023 goals. I hope you'll take away three key messages today. First, we delivered strong results in the second quarter and first half of the year. Second, we are well positioned to deliver solid results for the year by continuing to drive our core business and serve our customers. And third, we have a resilient business model that should drive results, even if some headwinds materialize related to the resumption of federal loan payments or other macroeconomic conditions. Let's begin with the quarter's results. GAAP diluted EPS in the second quarter of 2023 was $1.10 per share as compared to $1.29 in the year-ago quarter. In May, we closed on the sale of $2 billion in loans at a premium of approximately 6.5%. As we mentioned in April, we accelerated the sale of the second billion of loans given bank valuation levels and the potential for further market volatility. We were able to put the proceeds from this successful loan sale and the corresponding capital release to work in the second quarter, repurchasing just over 16 million shares of our common stock. We have reduced the shares outstanding since January 1st of 2023 by 7% and by 48% since January of 2020. Our assets continue to be in demand from a deep pool of well-informed loan buyers. We expect to commence our next loan sale at the beginning of September and close in the third quarter or early in the fourth quarter. depending on buyer preferences and market conditions, subject, of course, to board approval and careful consideration of capital levels in an uncertain economic environment. Private education loan originations for the second quarter of 2023 were $651 million, which is up 6% over the second quarter of 2022. Our originations for the first half of the year are slightly ahead of our forecast for 2023. We are also seeing strong underclass application growth. Through the first half of the year, our underclass application volume has increased approximately 11% as compared to the first half of 2022, driven by our investments in technology and content, as well as the successful integration of Nitro marketing strategies and techniques throughout Sallie Mae's channels. Credit quality of originations was consistent with past years. Our cosigner rate for the second quarter of 2023 was 76% versus 74% in the second quarter of 2022. Average FICO score for the second quarter of 2023 was 747 versus 746 in the second quarter of 2022. Seasonally, the second quarter has lower cosigner rates due to a higher mix of nontraditional students. We expect our cosigner rate to finish the year in line with past annual levels. Net private education loan charge-offs in Q2 were $103 million, representing 2.69% of average loans in repayment, up from 2.56% in the year-ago quarter. There is seasonality in our charge-offs, with the second quarter reflecting performance of the most recent graduation vintage, that entered repayment in the fourth quarter of the previous year. With our previously implemented credit administration practice changes, we expected that we would see an uptick in defaults in the second quarter, and we are appropriately reserved for this result. Our annualized net charge-offs as a percentage of average loans and repayment for the first half of the year is 2.41%. and remains lower than our plan for the full year of 2023. We continue to operationally and strategically focus on credit and our path back to normalcy. As is the case every year prior to peak season, we reexamine the performance of our credit standards. As is also the case every year, as consumer and market conditions changed, we found subsegments of our portfolio that were responsible for elevated levels of losses. We have refined our underwriting standards, incorporating this new insight. We are pleased that we have been able to lower risk on new originations while maintaining strong growth. In addition, we continue to develop new programs and practices to appropriately help customers who are facing financial difficulty. We expect to implement another set of program enhancements in early fall prior to the November repayment wave. Before I turn the call over to Steve for a deeper review of performance, let me address the news from Washington related to the federal lending program. President Biden signed a federal spending bill which specifies the end date for the federal student loan repayment pause. In addition, the Supreme Court struck down the administration's proposed federal loan forgiveness program. While both decisions were anticipated and not directly related to our business, One might ask the expected impacts on Sally Mae. It's important to note that our historical underwriting models assume levels of federal debt and payments consistent with the Supreme Court decision and payment resumption. Therefore, we do not believe these federal loan decisions will have a permanent long-term impact on our credit outlook. With that said, payment habits and hierarchy are important determinants of short and medium-term performance. In addition, federal loan servicers have an important role to play in ensuring a smooth transition for these federal borrowers, and they may experience operational or readiness issues. Therefore, we have tried to consider what near-term impacts the resumption of payments might have on our business. The Biden administration is heavily vested in ensuring a smooth transition for federal borrowers and is taking steps to ensure a seamless transition to repayment. They have taken two important such steps. First, the Department of Education is instituting a 12-month on-ramp program running from October 1st of 2023 to September 30th of 2024 so that financially vulnerable borrowers who miss monthly payments are not considered delinquent, reported to credit bureaus, placed in default, or referred to debt collection agencies. Additionally, the Biden administration is finalizing an enhanced income-driven repayment program that would not only increase borrower eligibility, but also lower a borrower's payments. These regulations will go into effect on July 1st of 2024. However, the department has indicated it will implement some critical benefits prior to the end of the payment pause this fall and before loan payments are due. Our understanding is that many borrowers will not have to make monthly payments under this plan. For a summary and timing of these rules, please see page six of our second quarter earnings presentation. We are taking our own steps to help customers succeed as federal payments resume. We are increasing communication with customers who have federal loans, to help them better understand what federal resources are available to them, in addition to the programs and services that we offer. We are training our staff to be more conversant on these programs to help federal borrowers who might be struggling to find available resources. We are also increasing our monitoring and customer engagement to ensure we have good early indicators of performance and identify potential issues as this information might be helpful in setting or refining our expectations or strategies. Based on all of this, we believe the resumption of payments represents a short- to medium-term watch item. At this point, however, we do not believe it represents a major risk to our credit outlook, but we will remain vigilant. We are not alone in this view. Economists at Bank of America and Moody's size the average federal loan payment respectively, and by considering a range of factors, have projected that the resumption of federal student loan payments will have a minimal impact on consumer credit overall. Steve will now take you through some additional financial highlights of the quarter. Steve? Thank you, John.
spk10: Good morning, everyone. Let's continue this morning's discussion with a detailed look at the drivers of our loan loss allowance, discussion of the key components of our income statement, and a look at our strong liquidity and capital position. The private education loan reserve, including a reserve for unfunded commitments, was $1.4 billion, or 6.2% of our total private education loan exposure, which under CECL includes the on-balance sheet portfolio, plus the accrued interest receivable of $1.3 billion, and unfunded loan commitments of another $1.6 billion. Our reserve at 6.2% of our portfolio is slightly lower than the prior quarter, which was at 6.3%. We incorporate several inputs that are subject to change from quarter to quarter when preparing our allowance for loan losses. These include CECL model inputs and overlays deemed necessary by management. Let's take a look at the major variables. Economic forecasts and weightings drive quarter-to-quarter movement in the allowance. In the current and year-ago quarters, we used Moody's base S1 and S3 forecasts, weighted 40%, 30%, and 30% respectively. We expect to use this mix going forward, except during extraordinary periods of uncertainty. Despite concerns about the health of the economy, the forecasts provided by Moody's continued to be stable. There were no changes in the model inputs, such as prepayment speeds or other important drivers. Loan sales during the second quarter did reduce the allowance by $137 million. While the second quarter is not a large disbursement quarter, we do begin to book commitments for the new academic year and reserve accordingly. Provision for new unfunded commitments totaled $58 million in the second quarter. Our total provision for loan losses based on our income statement this quarter was $18 million. Private education loans delinquent 30 plus days were 3.68% of loans in repayment, up from 3.4 in Q1, but improved from 3.75 in the year-ago quarter. continue to expect very close state delinquencies to remain in the mid 3% range for the remainder of 23. Forbearance usage was 1.2% at the end of the quarter, a decrease from 1.4% at the end of Q1, and down from 1.3% in the year-ago quarter. Net charge-offs, as John already mentioned, came in at 2.69% in the second quarter compared to 2.1% in Q1 and 2.56% in the year-ago quarter. As John also already mentioned, there is seasonality in the second quarter as new borrowers go into full principal and interest repayment. As a result of our previously implemented credit administration practice changes, we did expect and reserved for this uptick in charge-offs. It is worth mentioning again that our annualized net charge-off rate through June is 2.41% and continues to be lower than our plan for the year. NIM for the quarter came in at a strong 5.52%, up 23 basis points from the year-ago quarter. Our portfolio continues to benefit from the rising rate environment. Consistent with guidance, second quarter operating expenses were $154 million, essentially unchanged from Q1, but elevated from the $132 million in the year-ago quarter. Roughly $9 million of the increase over the year-ago period relates to higher FDIC assessment fees. And as we mentioned in April, we expect our FDIC assessment fees to be higher 23, then in 22. Volume increases in originations, servicing, and collections account for $4 million of the increase in OPEX of the year-ago quarter. The remaining $8 million increase relates to both our absorption of the effects of the current inflationary environment as well as the increasing in our staffing levels over where they were in last year's second quarter. Finally, Our liquidity and capital positions are strong. We ended the quarter with liquidity of 21.6% of total assets, higher than the year-ago liquidity ratio of 20.3%. At the end of the second quarter, total risk-based capital stood at 14.1%. Common equity tier one was at 12.8%. And a ratio we like to look at post-CECL gap equity plus loan loss reserves over risk-weighted assets was a very strong 16.4%. We are well-positioned to grow our business and return capital to shareholders going forward.
spk06: Back to you, John. Thanks, Dave. Let me wrap up with a few additional comments on our recently announced acquisition and our outlook for 2023. As announced last night, we are pleased to report we have closed on the acquisition of several key assets of SCALI, a top scholarship search application. SCALI's platform offers a streamlined solution to connect students with a wide variety of scholarship opportunities. Along with scholarship search, SCALI also has a scholarship administration technology, as well as SCALI Offers, which is a platform matching users with strategic partners helping the users earn cash back. This acquisition has many advantages. It is mission aligned, and we are excited to connect more students and families to a free one-stop shop for all things scholarships. By strengthening our content offering and digital ecosystem, the deal should pay for itself with direct benefits to our core business. Finally, the Scholarship Administration and Scholarly Offers platform provide interesting growth options for the future. In summary, we are originating high-quality loans and gaining market share at the same time. Credit performance has been as expected, and we are excited about the new programs that we are developing to help our borrowers when they need it most. Through our transactions with Nitro and now Scali, we're further advancing Sallie Mae as an education solutions company. We continue to put our capital to work buying back stock at prices we believe are at a discount to intrinsic value. The Supreme Court's decision on federal debt cancellation appears to be a wake-up call for policymakers to come together for real bipartisan reform. Momentum appears to be building as reflected by the number of new bills being introduced that advocate for many of the practical ideas we have been supporting for several years. I am proud to report another solid quarter of results and remain excited about our future. Let me conclude with a discussion of 2023 guidance. We are encouraged by the strength of Originations growth through the first six months of the year and believe we will end the year closer to the higher end of our Originations guidance or slightly better. We are affirming the 2023 guidance for all key metrics. With that, Steve, let's open the call up for some questions. Thank you.
spk03: Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
spk02: Our first question comes from the line of Jeff Adelson with Morgan Stanley.
spk03: Your line is open.
spk08: Hey, good morning. Good morning, Jeff. John, I was just hoping I could just key off the comment you made earlier on the next billion dollars of loan sales. I know you already said you're looking to kick that off in early September. Um, just curious if you had any indications of interest at this point or how things kind of stand versus the last time you went to market there. Um, and, and would you be willing to upsize that $1 billion and then just related to that, how much, how should we be thinking about the buyback size off the back of that sale? Um, I feel like it gives you at least another $300 million of capacity.
spk10: Hey, Jeff, this is Steve. I'll take the first half of that question and then I'll pass it back to John. for the second half of the question. We have a constant dialogue with our loan buyers. As John mentioned in the prepared remarks, there is a pretty large group of buyers that are constantly interested in our loan sales. So that's not an issue at all. Since the last sale, there have been some puts and some takes. Base interest rates are up a little bit. since then, but credit spreads on ABS, which is where buyers go to finance the purchases, typically have tightened. So there's not a great deal of change, I think, in the underlying pricing in the market at this point in time.
spk06: And Jeff, to your question of upsizing, I think I'll give you the same answer that I tend to give every quarter. As good allocators of capital, you know, we are always open to ideas and to opportunities to create shareholder value. What is in our plan today is 1 billion. That's, you know, that's what we are anticipating. But we will always look at the, you know, market conditions, situation, you know, sort of price of the, you know, equity, our equity that's trading at that point. And if we think that there's a good opportunity there to create shareholder value, there is nothing that prevents, you know, our border management from, you know, considering and accepting that opportunity. So we're not going to commit to anything more at this point. Again, a billion dollars is what's in our plan, but it's the same thought process that we go through every quarter. And, you know, I would argue it's what led to the acceleration of the $1 billion which we had originally had slated at the end of this year into the first half of the year. And there's nothing that would keep that from happening again if the right market conditions existed.
spk08: Okay, great. And just to follow up on credit, I know this quarter, last quarter was supposed to be seasonally higher for you. Just wondering, is there any early read so far on July, how the performance is trending there quarter to date, and maybe talk about the trajectory of losses over the rest of the year? And separately related to that, the new IDR plan, as well as the grace period, just curious, do you have any sense of how many borrowers maybe plan to take advantage of this grace period in the interim, and maybe what percentage or what size of your balance sheet these borrowers that are qualifying for the new IDR plan or just any way to kind of contextualize, contextualize that versus, you know, the broader population for you?
spk06: Yeah. Um, let me maybe talk briefly about credit. And then I think Steve and I can tag team a little bit on the combination of, uh, the on-ramp program and, and IDR, uh, on credit, you know, I think, uh, Our affirming of guidance says it all. There is nothing that we have seen up to this point that leads us to believe that there is material changes to our annual guidance. And so I think you can assume that what we're seeing in July is consistent with our expectations and what we're reserved for. So nothing new or different there. I think on the on-ramp program, I think it's really hard for us to estimate how many people will take advantage of that. I think federal borrowers are really just starting to come to grips with what their new payments are going to be, when those payments are going to be due, and the like. But I do think it probably suggests that of a customer's overall payment hierarchy across all their various obligations, the federal loan payment is probably going to be, you know, near the bottom of that hierarchy, all other things being equal, because it's just a lot more forgiving, you know, in that regard than, you know, their credit card balances or other student lending balances or car payment or whatever else they may have. So hard to know, but we still think it's quite a powerful thing in giving students customers you know a degree of flexibility we have studied extensively the IDR program today and you know we think going forward it is a rich program it is a program that is already heavily subscribed to today we think it will become more heavily subscribed to and we think the benefits both in the short term and the long term are pretty amazing for federal borrowers in terms of payment reduction. But Steve, why don't you walk through some of those details?
spk10: Sure. Happy to, John. So look, we've taken a look at what the Department of Education has published on income-based repayment plans. And you can make a couple of assumptions about, for example, how much debt a borrower has. So for example, if they have a $50,000 loan with a 6% coupon, which is pretty much right in the zip code where most federal loans have been underwritten over the last several years. That payment before income-based repayment turns out to be $555, but by the time they fully phase in the two steps on the changes that they're making in IBR, that payment would be capped for the borrower at $175 which is a substantial amount of savings. And that example is for a borrower that has an average income of $75,000, and the payment drops substantially as their income level declines and rises gradually as their income level increases. So it's a really powerful program that has additional benefits, such as not capping interest negative amortization on the loan, and actually forgiving the loan after 120 payments, depending upon the size of the loan. So it's a very, very powerful program that I think the vast majority of borrowers will take advantage of if they are informed as to the features of it.
spk06: And Jeff, the only thing I would add, our intelligence tells us about 42% of federal borrowers are in you know, the income-driven, some income-driven repayment program today, our understanding is they will be automatically enrolled, you know, in this new program. And we would expect that number to go up over time as more borrowers are eligible. And I think as the administration makes it easier and easier for people to apply.
spk08: Great. Thanks for all that, Collar. Appreciate it.
spk03: Thank you. Please stand by for our next question.
spk02: Our next question is from JPM. Your line is open.
spk05: Hey, I didn't hear the name. Is this Rick Shane, did you call?
spk03: Yes, your line is open.
spk05: All right, thank you. Hey guys, thanks for taking my question this morning. You know, one of the things that you pointed out in the last couple years is that on the servicing side, there are a lot of ways that you can influence outcomes. You've talked about this experience of your servicers improving collections, et cetera. I'm curious, as we move towards the end of forbearance, if there are things that you are doing proactively with borrowers to sort of prepare them Obviously, you have a lot of insight into borrowers' credit profiles, et cetera. And are you already starting to receive inbound calls from borrowers asking questions about how this is all going to work?
spk06: Yeah, Rick, it's a really good question, and I touched on some of this in my remarks, but let me go a little bit deeper. The caveat to all of this is obviously we're not a federal loan servicer. We're not the federal government, so we want to be very proactive and appropriate in helping our customers navigate this transition, but we also want to make sure we don't get into a position where suddenly we are advising our clients on topics that are not directly in our purview. But with that said, now that we have a date certain on repayment, implementing a whole host of programs which have been under consideration for a while. So we do know which of our customers have federal loans. We are in the early stages of executing a communication program for them, really doing our part to remind them of those obligations to help them begin to understand the resources, the federal resources that are available to them, and quite frankly, also using it as a great opportunity to remind them that if they find themselves in a difficult spot, that we have resources and the ability to help them at all and encourage early outreach, which we know is incredibly powerful in helping people navigate this period, not to get too deep into a financial problem. We are doing absolutely stepped-up monitoring of that. By the way, I would describe that as both quantitative and qualitative. So, for example, we have actually set up focus groups of federal borrowers so that we can understand from their mouths directly what's being communicated to them, what they are hearing, what they are experiencing, and sort of the challenges that they are facing. Because we know sometimes, Rick, those types of qualitative insights, in addition to the quantitative insights, have real power. And look, we will continue to look at the programs we offer And we talked about the fact that we're introducing our next wave of sort of loss mitigation program enhancements in the early fall. Obviously, we'll continue to assess those programs. And if we see that there's an unmet need caused by the resumption of federal payments, we'll be quick to respond there. So it is a pretty broad and proactive approach, but again, recognizing that this is effectively a federal program issue, but we want to help our customers be as successful as they can during the transition.
spk05: Terrific. It's a really interesting answer. Thank you very much.
spk03: Thank you.
spk02: Please stand by for our next question. Our next question comes from the line of
spk03: Michael Kay with Wells Fargo. Your line is open.
spk09: Hi, good morning. You know, it feels to me like the guidance reflects a fair amount of cautiousness. For instance, you said numerous times on the call that the year-to-date NCOs of 2.41% is lower than your full-year plan. So, you know, why not improve or at least tighten the NCO guidance? I know we've got the resumptions of payments ahead, but that's not until... So I wanted to hear your thoughts on that.
spk06: Yeah, Michael, look, I think at the end of the day, you know, the biggest factor at play is just the uncertainty of the macro environment over the course of, you know, the next 6 to 12 months. We have seen an unprecedented rate of interest rate increases you know, that obviously has the potential of stressing, you know, variable rate borrowers, by the way, not just our variable rate borrowers, but, you know, people who have other debt denominated in a variable rate instrument. You know, I think, you know, the unemployment situation continues to be strong today. But, you know, certainly if you look at the various economic reports, you know, there is, you know, at least some signs of, you know, a softening or slowing of the economy. You know, we continue to season into, you know, our credit administration changes. And while I think we have, you know, pretty robust analytics that help us understand, for example, you know, what is pull through versus sort of permanent changes by segment and various credit performance. You know, some of these patterns are relatively new to us, given, you know, when those changes were made and implemented. You know, and so I think when you put all of those things together, you know, this is just a more, you know, uncertain economic and credit outlook than would be the case in a, you know, in a typical year. And so I think, you know, at the end of the day, we want to reflect, you know, that level of potential risk in our outlook. And You know, we think we are being prudent in how we are setting guidance.
spk09: Okay. Wanted to talk a little bit about the outlook for the refi market. I know refis are very low right now. You know, with the resumption of payments slated to start, I've been hearing, you know, mixed signals from some of the major refi players. Some saying, you know, it's not going to be a big impact. Some expecting something more material. So I wanted to get your thoughts on that. I know rates are also a lot higher now, but they likely won't stay that way. And then lastly, any thoughts on a defensive product ahead of potential uplift in refis? I know you tried one before, which was a pilot that was a failure. I just want to hear your thoughts on this.
spk10: So Michael, this is Steve, and I'll start the response and then always offer John to add any additional color he thinks is appropriate. I'll echo my good friend and former colleague, Joe Fisher, who I think described on his earnings call that the consolidation slash refi business is very much an interest rate game and to undercut where the vast majority of debt that gets refied is, which is the federal loan program. You need to be able to be well under, I think, 4.5%, certainly 5% in your offerings. And today, sort of base rates in the five-year vicinity start around four. And by the time you add in credit spreads and maybe the opportunity to actually make a little bit of money on those consolidation loans, you need to be well above the level that would student loan holder to consolidate their debt. And I think the second and potentially more important factor might be the richness of the benefits that are now being offered in the federal loan programs in the form of the income-based repayment situation that we've spent a lot of time describing here. So I think, look, you're right if rates are do come down considerably in future quarters and years. The consolidation game might be fired up again, but I think borrowers are going to have to think long and hard before they give up the opportunity to take advantage of the federal loan benefits. And I think the private lending industry is not big enough of an opportunity to warrant the cost to acquire that would be necessary to target just simply our business. So we feel pretty good that the drag on our portfolio growth and, you know, the unfortunate expense of seeing our cost to acquire consolidated away. We think that we're in pretty good shape, certainly for the coming quarters and a year or so.
spk06: John, anything you'd like to add? Yeah, Michael, maybe I'll just take the defensive product piece of it, you know, and I'll harken back to, you know, answers I've given again on sort of calls like this. You know, as Steve said, we don't think the current economic and rate environment, you know, creates much of a need for that, nor do we think there's really a product that we could offer today at these rates that would be compelling. But I think even in the future, you know, as we've talked about it, The issue for us has always been in a defensive product that, you know, consolidations have been, you know, a modest but not outsized part of our business. And so, you know, the question becomes, how do you think about proactively offering a product with lower rates, you know, to just the right customers? And I think we've described that in the past as sort of cannibalization math. you know, what is the cost of consolidation away versus what's the cost of offering a defensive product that, you know, that you may be offering to more people than would otherwise consolidate. And so, you know, it really comes down to that formula. I think in the past, you know, we have not felt like we've had, you know, predictive enough models, ample enough data to really be able to crack the code on that cannibalization math that could certainly change in the future. And, you know, a big part of what we're trying to do with, you know, our increased investment in product services and content, you know, for customers to through and immediately after their higher education journey is, you know, to understand those customers to better, to have better insight into their financial situation that might in the future, you know, change that cannibalization math and allow us to do something. But I think at this point today, you know, We don't think it's economically viable. And looking in the past, we've not been able to crack that code. So it's enticing. But again, as good capital allocators, the math has to all work. And to date, we haven't been able to make that math work in a better way than what we've seen.
spk07: Okay. Thank you.
spk02: Thank you. Please stand by for our next question.
spk03: Our next question comes from the line of Sanjay Sakharani with KBW. Your line is open.
spk04: Hi, this is actually Steven Kwok filling in for Sanjay. Thanks for taking my question. I guess most of them have been asked and answered. Just wanted to follow up around the NIM. I know the NIM did come down a little bit sequentially and just wanted to see what's your outlook on the NIM for the year. Thank you.
spk10: Sure, Steve. I think at the beginning of the year, we stated that our NIM should have a five, you know, low five handles. And that is certainly the trajectory that we are on. We have benefited, obviously, from the rise in rates to a certain extent, but we're not really trying to, you know, position ourselves for increases or decreases in interest rates. And we are very happy to have a low to mid 5% handle on our net interest margin. That's the outlook for the full year. Yeah, so I think we're in pretty good shape. If you look at our interest rate sensitivity disclosure in the 10Q, you'll see that we have a very balanced position at this point in time. And our NIMS should not be changed where the rates go. up significantly or down significantly. So we feel pretty good about where we're positioned now in terms of asset liability management.
spk04: Got it. And just wanted to follow up around like deposit betas. Are you seeing anything there? Is it within your expectations thus far?
spk10: You know, so obviously we are a lot different than the regional banks. And I know in the regional banking industry, they are seeing pressure on their rates as they move into the more insured deposit sort of marketplaces that we have always participated in. Just as a reminder, at the beginning of the year, our deposits were basically 98% FDIC insured, and that is where they remain today. In terms of our beta, it has been bang on in the 0.75% vicinity throughout the entire rate cycle. So we're not seeing any additional pressure, nor are we seeing any easing up. And the market has been very favorable for us.
spk04: Got it. Thanks for taking my question. You're welcome.
spk03: Thank you. As a reminder, ladies and gentlemen, that's star 1-1 to ask the question. Please stand by for our next question. Our next question comes from the line of Aaron Signovich with Citi. Your line is open.
spk11: Thanks. I was hoping you could clarify the gain on sale. I think you said 6.5% when I was doing quick math. 6.1% was what I had. And maybe you should talk a little bit about
spk10: Decision to sell at that level relative, you know versus just keeping the loans on balance sheet and waiting for a better better potential return Sure Aaron happy to give you a little bit further color on the loan sale premium so We basically look at the premium in the six and a half percent that John quoted is basically what our counter Farnie is paid for the loans on our balance sheet. And then, as is always the case, the accountants sort of get in the way. And then when we book the gain on sale, we have to write off unamortized acquisition costs and certain other transaction costs, which lowers the premium that you see on the income statement. There was also a little bit of noise in that gain on sale line where we i think we had a further three and a half million dollar write down on our credit card portfolio which we finally disposed of uh in the quarter so so that's sort of how the the math and the accounting shakes out on the premium in terms of selling at a six and a half percent premium i like to always remind people that we also release 137 million dollars of reserve as part of that gain on sale. So the reserve is roughly 6% of the portfolio that we sold. So you can argue, and I often do, that the premium that we actually earned is closer to 12.5% than 6.5% certainly pre-tax because we free up what is basically capital that is lying fallow in our loan loss reserve for many, many years. And even excluding the 6% reserve release, we think the 6.5% makes perfectly good sense in terms of the loan sale share buyback arbitrage that we speak of frequently and we bought shares back with a 15 handle and we believe that that is below the intrinsic value for those shares by many, many measures. So we think it was a great transaction all in.
spk11: Okay, thanks. And then on the expenses, it kind of highlighted some areas that were pushing expenses up a little bit. You kept the guidance still the same. I always kind of think about the third quarter tends to be your highest expense quarter, which would sort of indicate that you might be a little bit above the high end of that. Are there particular changes that would pull that lower for the second half of the year?
spk10: So, look, the third quarter is – Typically, our high-water mark, as we spend appropriately money on direct-to-consumer marketing, John and the management team are determined to manage our expenses appropriately, and we do intend to hit our guidance. And what you'll see is typically OPEX will be higher in the third quarter and then sharply lower later. in the fourth quarter, and we will do what is necessary to hit that OPEX guidance. Thank you. Thank you. You're welcome.
spk03: Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John Witter for closing remarks.
spk06: Jawanda, thank you, and let me say thank you to everyone who joined today's call. We appreciate your interest in Sallie Mae. As is always the case, if there are questions that weren't addressed today or other follow-up items, our investor relations team is always here and at your service. And with that, I will hand the call back to Melissa for some closing business.
spk01: Thank you for your time and questions today. A replay of this call and the presentation will be available on the investors page at sallymay.com. If you have any further questions, feel free to contact me directly. This concludes today's call.
spk03: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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