SLM - NASDAQ

Hello. And thank you for standing by. Welcome to Sallie Mae Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to Melissa Bronaugh. Ma’am the floor is open.

Thank you, Towanda. Good morning, and welcome to Sallie Mae's Second Quarter 2023 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 the call up 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 can 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, results of operations, financial conditions and/or cash flows as well an 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 GAAP measures and our GAAP results can be found in Form 10-Q for the quarter ended June 30, 2023. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. And now I'll turn the call over to Jon.

Thank you, Melissa and Towanda. 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 non-traditional 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 in 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 re-examined the performance of our credit standards. As is also the case every year, as consumer and market conditions changed, we found sub segments 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 Sallie 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, 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 from October 1, 2023 to September 30, 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 1, 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 at $247 and $275, 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, Jon. 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 S-1 and S-3 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 continue 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, booked 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. We continue to expect 30-plus day delinquencies to remain in the mid-3% range for the remainder of Q23. 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. Debt charge-offs, as Jon 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 Jon 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 reserve 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. As we mentioned in April, we expect our FDIC assessment fees to be higher in 2023 than in 2022. Volume increases in originations, servicing, and collections account for $4 million of the increase in OpEx over 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 1 was at 12.8%. In a ratio we like to look at post-CECL GAAP 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. Back to you, Jon.

Thanks, Steve. 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 Sallie, a top scholarship search application. Sallie [Ph] platform offers a streamlined solution to connect students with a wide variety of scholarship opportunities. Along with scholarship search, Sallie also has a scholarship administration technology, as well as Sallie Offers, which is a platform matching 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 Sallie 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 Sallie Mae, 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 Origination's growth through the first six months of the year and believe we will end the year closer to the end of the year closer to the higher end of our originations guidance or slightly better. We are affirming the 2021-23 guidance for all key metrics. With that, Steve, let's open the call up for some questions. Thank you.

Thank you. [Operator Instructions] Our first question comes from the line of Jeff Adelson with Morgan Stanley. Your line is open.

Hey, good morning. Jon 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. 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. And would you be willing to upside that one billion dollars and then just related to that how much how should we be thinking about the buyback size off the back of that sale? I feel like it gives you at least another $300 billion of capacity.

Hey, Jeff, this is Steve. I'll take the first half of that question and then I'll pass it back to Jon for the second half of the question. We have a constant dialogue with our loan buyers. As Jon mentioned in the report remarks, there is a pretty large group of buyers that are constantly interested in our loan sales. So that's not an issue. We've all sensed the last sale that 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 it's not a great deal of change. I think can be underlying more pricing in the market at this point.

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. We are always open to ideas and to opportunities to create shareholder value. What is in our plan today is 1 billion? That's what we are anticipating. But we will always look at the market conditions situation, sort of price of 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 our board of management from considering and accepting that opportunity. So we're not going to commit to anything more at this point. Again, $1 billion is what's in our plan, but it's the same thought process that we go through every quarter. And 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 1st half of the year. And there's nothing that would keep that from happening again if the right market conditions existed.

Okay, great. And just to follow up on credit, I know this quarter last quarter is supposed to be seasonally higher for you. Just wondering, is there any early reads 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 is what was a grace period. Just curious, do you have any sense of how many borrowers, maybe plans to take advantage of the 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 contextual is contextualize that versus the broader population for you?

Yes, let me maybe talk briefly about credit, and then I think Steve and I can tag came a little bit on the combination of the on-brand program and IDR. On credit, I think 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's 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-brand 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 near the bottom of that hierarchy, all other things being equal, because it's just a lot more forgiving in that regard than their credit card balances or other student lending balances or card payment or whatever else they may have. So hard to know but we still think it's quite a powerful thing in giving customers a degree of flexibility. We have studied extensively the IDR program today and 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?

Sure, happy to Jon. So look, we've taken a look at what the Department of Education has published on income-based repayment plans and you 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. And this is a 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 chain so that they're making an IDR, 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 they're income-level declines and rises gradually as they're income-level increases. So it's a really powerful program that has additional benefits such as not capping negative amortization on the loan and actually for giving the loan after a 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 that has two futures of it.

And Jeff, the other thing I would add, our intelligence tells us about 42% of federal borrowers are in the income-driven repayment program today. Our understanding is they will be automatically enrolled 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.

Great, thanks for all that color I appreciate it.

Thank you. Please stand by for our next question. Our next question is from the line of Rick Shane with JPM. Your line is open.

Hey, I didn't hear the name. Is this Rick Shane, did you call?

Yes, your line is open.

Thank you. Hey guys, thanks for taking my questions this morning. One of the things that you pointed out in the last couple of years is that on the servicing side, there are a lot of ways that you can influence outcomes. You've talked about the experience of your servicers improving collections, etcetera. 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, etcetera, and are you already starting to receive inbound calls from borrowers asking questions about how this is all going to work?

Yes, 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, and 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, we are, 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 are introducing our next wave of sort of loss mitigation program enhancements in the early fall, obviously we will continue to assess those programs, and if we see that there is an unmet need caused by the resumption of federal payments, we will be quick to respond there. So it is a pretty broad and proactive approach, but again, recognizing this is effectively a federal program issue, but we want to help our customers be as successful as they can during the transition.

Terrific. It's a really interesting answer. Thank you very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Michael Kaye with Wells Fargo. Your line is open.

Hi, good morning. 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 why not improve or at least tighten the NCO guidance? I know we have the resumptions of payments ahead, but that is not until October, so I wanted to hear your thoughts on that.

Yes. Well, Michael, look, I think at the end of the day, the biggest factor at play is just the uncertainty of the macro environment over the course of the next 6 to 12 months. We have seen an unprecedented rate of interest rate increases. That obviously has the potential of stressing variable rate borrowers. By the way, not just our variable rate borrowers, but people who have other debt denominated in a variable rate instrument. I think the unemployment situation continues to be strong today, but certainly if you look at the various economic reports, there is at least some signs of a softening or slowing of the economy. We continue to season into our credit administration changes, and while I think we have pretty robust analytics that help us understand, for example, what is pull-through versus permanent changes by segment in various credit performance, some of these patterns are relatively new to us given when those changes were made and implemented. And so I think when you put all of those things together, this is just a more uncertain economic and credit outlook than would be the case in a typical year. And so I think at the end of the day, we want to reflect that level of potential risk in our outlook, and we think we are being prudent in how we are setting guidance.

Okay. I wanted to talk a little bit about the outlook for the refi market. I know refis are very, very low right now. With the resumption of payments slated to start, I have been hearing mixed signals from some of the major refi players, some saying it is 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 will not stay that way. And then, lastly, any thoughts on a defensive product ahead of a potential uplift in refis? I know you tried one before, which was a pilot that was a failure, so I just wanted to hear your thoughts on this.

So, Michael, this is Steven, and I will start the response and then always offer Jon to add any additional color. If he thinks it is appropriate, I will 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 4%, 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 entice a federal 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 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 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 year or so. Jon, anything you'd like to add to that?

Yes, Michael, maybe I'll just take the defensive product piece of it, and I'll harken back to answers I've given again on sort of calls like this. As Steve said, we don't think the current economic and rate environment 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 as we've talked about it, the issue for us has always been in a defensive product that consolidations have been a modest but not outsized part of our business. And so, the question becomes, how do you think about proactively offering a product with lower rates to just the right customers? I think we've described that in the past of sort of cannibalization map. What is the cost of consolidation away versus what's the cost of offering a defensive product that you may be offering to more people than would otherwise consolidate. And so, it really comes down to that formula. I think in the past we have not felt like we've had predictive enough models, ample enough data to really be able to crack the code on that cannibalization map. That could certainly change in the future and a big part of what we're trying to do with our increased investment in product services and content for customers to through and immediately after their higher education journey is to understand those customers to better to have better insight into their financial situation. That might in the future, change that cannibalization map and allow us to do something. But I think at this point today, 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.

Okay, thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

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.

Sure, Steve. I think at the beginning of the year, we stated that our NIM should have a five, low five handles. And that is certainly the trajectory that we are on. We have benefited obviously from the rise of rates to a certain extent, but we're not really trying to 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. Yes, so I think we're in pretty good shape. If you look at our interest rate sensitivity disclosure in the 10-Q, you'll see that we have a very balanced position at this point in time. And our NIM 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.

Got it. And I just wanted to follow up around, like, deposit betas. Are you seeing anything there? Is it within your expectations thus far?

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.

Got it. Thanks for taking my question.

Thank you.[Operator Instructions] Our next question comes from the line of Arren Cyganovich of Citi. Your line is open.

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 just talk a little bit about the decision to sell at that level relative versus just keeping the loans on balance sheet and waiting for a better potential return.

Sure, Arren. Happy to give you a little bit further color on the loan sale premium. So we basically look at the premium in the 6.5% that Jon quoted is basically what our counterparty 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 transition -- 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 I think we had a further $3.5 million write-down on our credit card portfolio, which we finally disposed of in the quarter. So that's sort of how the math and the accounting shakes out on the premium. In terms of selling at a 6.5% premium I'd like to always remind people that we also released $137 million 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%, then 6.5%, certainly pretax 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 makes perfectly good sense in terms of the loan sales, share buyback arbitrage that we speak of frequently, and we bought shares back with the 15 handle, and we believe that is below the intrinsic value for those shares by many, many measures. So we think is a great transaction all that.

Okay. Thanks. And then on the expenses, you kind of highlighted some areas that we're pushing expenses up a little bit, and you kept the guidance still the same. I always kind of think about the third quarter as tends to be your highest expense quarter, which would sort of indicated 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?

So look, the third quarter is typically our high watermark as we spend appropriately money to direct-to-consumer marketing, Jon 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 in the fourth quarter, and we will do what is necessary to hit that OpEx guidance.

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.

Towanda 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.

Thank you for your time and questions today. A replay of this 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.