SLM Corporation (SLM) CEO Jon Witter on Q2 2022 Results - Earnings Call Transcript

Jul. 28, 2022 10:25 AM ETSLM Corporation (SLM), SLMBP
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SLM Corporation (NASDAQ:SLM) Q2 2022 Earnings Conference Call July 28, 2022 8:00 AM ET

Company Participants

Brian Cronin - VP, IR

Jon Witter - CEO

Steve McGarry - EVP & CFO

Conference Call Participants

Moshe Orenbuch - Credit Suisse

Mark DeVries - Barclays

Sanjay Sakhrani - KBW

Melissa Wedel - JPMorgan

Operator

Good day, and thank you for standing by. Welcome to the Second Quarter Sallie Mae Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Brian Cronin, Vice President of Investor Relations. Please go ahead.

Brian Cronin

Thank you, Carmen, and good morning, and welcome to Sallie Mae’s second quarter 2022 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our 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 Sallie Mae, these factors include, among others, the potential impact of the COVID-19 pandemic on our business, results of operation, 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 core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter that ended June 30, 2022. This is posted along with the earnings press release on the Investors page at salliemae.com.

Thank you. I’ll now turn the call over to Jon.

Jon Witter

Thank you, Carmen and Brian. Good morning, everyone, and thank you for joining us to discuss Sallie Mae's second quarter results. I hope you'll take away three key messages today. First, we delivered strong results for the second quarter and first half of the year. This includes the continued successful execution of our loan sale and share buyback program.

Second, we are seeing some real positives throughout our business with regard to college enrollment, originations, consolidations and expenses. Third, despite these positives, we are not immune to this challenging and volatile environment. The decline in the EPS guidance announced in our press release is driven by an expectation of lower loan sale premiums due to higher rates and wider spreads and separately the impact of certain credit pressures that we believe will be largely isolated to 2022.

Let's begin with the quarter’s results. GAAP diluted EPS in the second quarter of 2022 was $1.29 compared to $0.44 in the year ago quarter. In April, we sold $2 billion in loans at a premium of approximately 11.5%. You will remember that we accelerated the sale of the second billion of loans as a risk mitigant, given early signs of market volatility. In the second quarter, the company repurchased 20 million shares. We have reduced the shares outstanding since January 1, 2022 by 11% and by 42% since January of 2020 at an average price of $15.41.

Private education loan originations for the second quarter of 2022 were $616 million, which is up 16% over the second quarter of 2021. This is a strong start to our 2022 peak season and is tracking better than our initial guidance for the year. Following two years of declining FAFSA completion numbers, the high school class of 2022 has returned to near pre-pandemic levels with 52.1% of the senior class completing the application. We are seeing strong underclass and application growth. Through the first half of the year, our underclass application volume was up 16.6% over the first half of 2021. These growth trends are continuing as peak season ramps up in July.

Freshman and sophomores are more valuable in terms of lifetime value and serialization potential because they are at the beginning of their education journey. Credit quality of originations was consistent with past years. Our cosigner rate for Q2 of 2022 was 74%, down slightly from 76% in the second quarter of 2021. Average FICO score for Q2 of 2022 was 746 versus 750 in Q2 of 2021.

Seasonally, the second quarter has our lower cosigner rate due to a higher mix of non-traditional students and we expect our cosigner rates to finish in line with past annual levels. Consolidation shows signs of slowing. In June of 2022 versus June of 2021, we saw refi volume drop from our two largest refi competitors by 60% and 37%, respectively. Monthly consolidation volume June of ’22 over June of ’21 was down 21%.

Steve will now take you through some additional financial highlights of the quarter. Steve?

Steve McGarry

Thank you, Jon. Good morning, everybody. We'll start where we usually do with a discussion of the components of our loan loss allowance and provision. The private education loan reserve was at $1.19 billion, or 5.4% of our total student loan exposure, which we call under CECL includes the on balance sheet portfolio, plus the accrued interest receivable of $1.2 billion and unfunded loan commitments of $1.4 billion. Our reserve rate is up slightly from 5.3% in both the prior and year ago quarter.

Take a look at the major variables used to calculate our allowance for credit losses. We continue to use Moody's Base, S1 and S3 forecasts, weighted 40%, 30% and 30% respectively. We expect to use this mix going forward except for extraordinary periods of uncertainty. There were no changes in model inputs such as prepayment fees or other important drivers.

Loan sales in the quarter reduced the allowance by $116 million. While the second quarter is not a large disbursement quarter, we do begin to book commitments for the new academic year, I mentioned the $1.4 billion in commitments and we reserved accordingly. The provision for new unfunded commitments totaled $120 million in the second quarter. All-in, we booked a provision for credit losses of $31 million on our income statement in the quarter.

Our reserve and our outlook covers all the topics we will discuss this morning. Private education loans delinquent 30-plus days came in at 3.7% of loans in repayment, up from 3.5% in Q1 '22 and 2.1% in the year ago quarter. We expect 30-plus day delinquencies to drop in Q3 and end this full year near 3%. Private education loans and forbearance were 1.3% at the end of the quarter, down from 1.4% at the end of Q1 2022 and 3% at the end of the year ago quarter, which you may recall we had not yet implemented our forbearance policy changes.

In the quarter, net charge-offs from private education loans were $95.5 million, resulting in an annualized charge-off rate of 2.56%, which exceeded the forecast of 2.25% we provided in April. Based on our current performance of our portfolio, we now expect charge-offs for private education loans will remain steady at this higher level in Q3 and decline in Q4. Jon is going to provide a deep dive on current charge-offs as well as our outlook in just a few minutes.

NIM for the quarter came in at a strong 5.29%, up significantly from 4.7% in the year ago quarter. Our portfolio benefited from a rising rate environment and in addition, the drag on our NIM from our liquidity portfolio declined meaningfully as we invested our cash and medium-term treasuries as interest rates have risen over the last several quarters. We do expect our NIM will remain in the low 5% vicinity for the full year of 2022.

Second quarter operating expenses were $132 million, unchanged from the prior quarter and $128 million in the year ago quarter. OpEx in our core business increased just 5%, while we experienced 16% increase in disbursements and a 19% increase in applications being processed. These are key drivers of expense, and highlight the fact that we continue to focus on driving servicing and acquisition costs lower on a unit basis.

Finally, our liquidity and capital positions are very strong. We ended the quarter with liquidity of 20.3% of total assets and at the end of the second quarter, total risk-based capital was at 15.6% and common equity Tier 1 came in at 14.3%. We believe we continue to be well positioned to grow our business and return capital to shareholders going forward.

Back to you, Jon.

Jon Witter

Thanks, Steve. As I mentioned earlier, we see many positives in our business. After several years of unusual trends caused by the pandemic, it appears that the college marketplace is finding its new normal. However, the issue likely most on your mind is our changing guidance and whether it reflects on the long-term prospects of the company.

Let me start that conversation with some initial perspectives, but we want to make sure we get to all of your questions, so I'll be as brief as possible. We have increased our full year net charge-off guidance to $325 million to $345 million from the previous range of $270 million to $290 million. This brings our expected charge-off rate for the full year to 2.3% compared to our prior expectation of 1.75% for the full year.

There are three principal factors that have influenced our estimates of future charge-offs. The first impact is a change in the expected performance of our GAAP year population. While we have talked about this during past calls and disclosures, let me provide some brief context. Every year, we have a portion of students who withdraw from school without graduating. I'll call these the annual withdrawal population.

Typically, the annual withdrawal population enters their P&I phase after 180 of grace. They are unfortunately historically among our worst performing cohorts of borrowers. In some respects, 2022 is no different in this regard. We have a group of withdrawn students who did not return to school last year entered P&I last November and are beginning their journey through repayment and in certain cases delinquency.

What is different this year is that we effectively have what you could think of as a second annual withdrawal population that entered P&I at about the same time. This group that we have referred to on our previous calls and in our disclosures as our gap year population, withdrew from school during the pandemic, specifically from August to December of 2020, and did not return by the fall of 2021.

Under normal conditions, this group would have entered P&I in early 2021. However, during the pandemic, we were concerns that students might temporarily withdraw from school for longer than normal given all of the disruption and uncertainty on campus. If this happened, and they entered P&I, they would have lost many of their student and transition benefits. To avoid that outcome, we created a temporary program to protect customers' student benefits that effectively extended the grace period for customers.

As such, this gap year group did not enter repayment until Q4 of 2021 or slightly later. While the 2021 charge-off performance was not burdened by an annual withdrawal population. 2022 is effectively being burdened by kids. There are several important facts to note about this population. First, it is a finite population. This program is over and will not be repeated. Second, all of these customers are now in P&I. Third, as I have mentioned before, this gap year group has approximately doubled the effective size of the group of withdrawn students who recently entered P&I.

Now that a critical mass of these students are well entered their P&I journey, we can assess actual payment behavior and journey to charge-off. Based on the data from the last few months, we understand that this gap year cohort is performing meaningfully worse than a typical withdrawn student population. As an example, the gap year student who entered P&I earlier are demonstrating an average 30 day plus delinquency rate that is 173% higher than that of non-gap year borrowers who withdrew from school in 2021.

This gap year population represents 50 million of our expected net charge-offs this year. This is over and above the charge-offs we expect from this year's typical annual withdrawal population. It is worth noting that this year's annual withdrawal population, that typical population is demonstrating performance in line with past vintages and expectations. Given these unique circumstances and this finite population, we do not believe that this gap year effect will repeat itself in 2023 and beyond.

The second factor impacting the portfolio this year are the significant changes we made to our credit administration collection practices over course of 2021. Again, as discussed on numerous calls and detailed in our disclosures, the changes significantly reduce the amount of forbearance borrowers can utilize. As you can see, 1.3% of our loans used forbearance in the second quarter compared to 3% in the year ago quarter. You will also remember that as we implement these changes, we built an incremental reserve and anticipation of higher expected lifetime losses.

What has changed this quarter, however, is that we see what we believe is an increase in the number of customers who have exhausted their forbearance benefit and other options and are moving to charge-off faster than expected. At this time, this appears to be more of a phase and effect than something that would meaningfully increase our expected lifetime loss calculations for this program. To support this, when we look at resolution rate trends, payment trends and the use of other programs, it appears that most borrowers are finding other paths to success even with a curtailed forbearance program.

Finally, at the end of 2021, a combination of attrition and slower than normal hiring challenged us to fully staff our collection shop to plan. We then encountered the higher than expected volume, especially entering our early stage collection buckets resulting from the gap year and forbearance factors I just described. We believe we are well on our way to correcting the situation.

We have hired meaningful numbers of collectors during Q1 and Q2 and those individuals have been deployed. We have an additional wave of collectors starting training who will be deployed in late summer and early fall. We have already gain marked improvement in key operational data such as abandon rates and expect full normalization of best load performance over the next several months.

However, having now seen several months of flow rate trends, we are projecting higher charge-offs through the remainder of the year. While I'm sure we will learn from this experience, industry wide hiring and attrition trends coupled with an unexpected volume surge or major contributing factors. It's fair for you to ask whether environmental or portfolio wide factor has impacted our changing guidance. While it's difficult to make longer term credit predictions in an uncertain economic environment, we do actively monitor our portfolio to look for signs of current or impending stress that our borrowers may be facing.

At this time, we are happy to report that our borrowers refresh FICO scores remain strong. We have not observed any changes in this environment that differ from those that we experience in normal economic times. We’ve also closely review payments and performance of our variable rate loans to ensure that they are not degrading in this rising rate environment. Again, we are happy to report that these loans continue to perform in line with the fixed rate loans in our portfolio.

Shifting gears from charge-offs, let me spend a minute discussing the outlook for our remaining $1 billion loan sale for the year. While markets remain volatile, interest rates are off their highs and transactions in the secured finance market continue to get done, albeit at slightly wider spreads. We remain in close contact with the market and recognize that premiums have declined subsequent to our last sale. Our revised guidance reflects this.

However, despite lower premiums, our share price is lower as well. Based on the framework we utilize, we believe selling loans at a lower premium creates value by repurchasing shares at a similarly lower multiple. We expect to execute a loan sale in the third quarter and continue our buyback of shares, but could conceivably slip to Q4 if we see another round of really major market disruptions. All of that is of course subject to board approval and careful consideration of capital levels in an uncertain economic environment.

Let me translate all of this into an outlook discussion for an update of our 2022 guidance. First, we are reaffirming our guidance on full year expenses of $555 million to $565 million. Despite pressures from inflation and increased staffing in collections and servicing, we continue to find ways to leverage our fixed expense base and efficiently bring in new to firm customers at lower marketing expense.

With a strong start to the year and peak season performance to-date, we are increasing our full year origination growth expectations to 9% to 11%. Based on the previous credit discussion, we are also raising our charge-off guidance for the year to between $325 million and $345 million. This new guidance reflects all of the factors that I've reviewed. And finally, we are lowering our diluted non-GAAP or EPS guidance for the year to 250 to 270. This reflects a variety of factors, but most notably, changes in loan sale premium and in year charge-off expectations.

With that, Steve, let's go ahead and open up the call for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch

Great. Thanks. Jon and Steve, thanks for that really detailed discussion on the credit side. And I guess, the interesting thing about this is that it wasn't something that sprang up quickly, it's something that you kind of knew about in and got somewhat worse, I guess, or at least the bulk of it. Is there a way to kind of just give us some additional comfort that isn't going to reappear somewhere else? I guess, obviously assuming a relatively stable economic environment, not talking about kind of significant economic deterioration, but I guess the fact that it kind of developed in stages like that. Is there any way to kind of give us a little extra comfort?

Jon Witter

Yeah, Moshe. Thanks for the question. I think it's an important one and I appreciate you are putting on the table early. And obviously, this is one that, Steve and I and the team here have spent a lot of time talking about. I think the historical perspective I would give you is, is you're exactly right. We've note about both of these factors, the gap year population and the changes to credit administration practices for a while. But I think what one needs to appreciate is that they are both effectively sort of new and distinct things. I think what we've seen on the gap year population is that, that population has really performed materially worse than a standard withdrawal population.

I think when we saw that early on, it would have been natural to assume, it would have performed a lot like a standard withdrawal population. Clearly, that has not been the case. I think that suggests highly that the decision to drop out of school during the pandemic, I think we will look back on and understand what's a meaningful risk splitter that quite frankly we just didn't have any experience before with because there hadn't been a pandemic before. But I think we certainly now understand that.

On that one, I think what gives us confidence, Moshe is for those customers that entered repayment earlier in that gap year population. We have now seen their performance trends effectively normalize to what we would see from a typical gap year population. So we've sort of seen them work through whatever we think was extraordinary in their performance and they've kind of rejoined the sort of expected performance trend if you want to think about it that way. And I think that gives us confidence as we think about modeling out the rest of that gap year and how it flows through -- that gap year population and how it flows through over the course of the remainder of the year.

Likewise, I think on the credit administration changes, it's a little bit of the same story. This is a new program. I think we knew that there were going to be both sort of longer term and shorter term impacts there. I think the longer term impacts we've cared for as I said in my talking points through the reserve that we've taken. But we also knew that there was going to be sort of a shakeout effect that I think we are seeing that play out. Again, we can see the changing curves and data. So we know that how sort of the proportion of customers who exhibit each of these behaviors that I referenced earlier are changing.

And again, I think that gives us confidence that we've got now with real experience a better take on sort of the way things are going to play out versus the assumption based approach in models that we put out when we launched the program. So when I put both of those things together, I think the core or common element is we now just have real practical experience over the course now of a growing number of months with each of those populations and that gives us a lot more confidence in our ability to model some things that were quite frankly new to our system.

Moshe Orenbuch

Got it. Thank you. And just as a follow-up, obviously, you've mentioned many times before that the premium on the loan sale is only one portion of the capital generated from the loan sale process. But if we are in a period of kind of higher rates and therefore lower premium, how does that influence kind of your thinking over the intermediate term in terms of how much is the right amount of loans to sell?

Jon Witter

Yeah, Moshe. Let me answer the broad strategic piece and I'll ask if Steve wants to jump in with anymore sort of technical pieces. I think as we've described before, we have developed what I think you can simply think about as a grid, it's slightly more complicated than that, but effectively a decision matrix. And we are looking at not just the premium, but what we are really looking at is sort of the premium. And yes, you're exactly right as a result total amount of freed capital from a loan sale versus the multiple of the stock and really trying to figure out what is driving or what drive real value creation, considering things like the NPV of those loans, accretion, dilution over periods of time, et cetera.

We still think as we've said before, we're well within the green zone of that. And by the way, understand the green zone gets easier to achieve when the multiple is lower, that's just the math of the whole thing. I think we've also said Moshe, just to remind everyone, we view the share buyback program an arbitrage program really as an opportunistic medium term strategy. We strongly suspect that we will continue with going forward, but I think we've always said it was something that we really wanted to press on when we saw that we were well within that green zone.

So I think as long as we continue to live in that green zone, I think we will be very, very interested in continuing that program. I think if we start to move outside of that, we would think it differently. Again, we don't think we're close to that point today. Even with the kind of lower loan sale premiums we put into our guidance and really do believe that over the course of the last couple of years, our share buyback program has been a significant creator of shareholder wealth and we are excited to continue with going forward.

I think we've had over the last couple of months the added complexity of not just rising rates, but broader volatility and a risk off orientation in the market. And I'm sure that has factored some of the intelligence that we've gotten around likely market premiums. I think our arithmetic says that if you are just dealing with the higher rate environment, there's probably a greater premium than what we have modeled in. But again, I think we'll continue to take that based on market intelligence as we go forward. Steve, what would you add to that?

Steve McGarry

I think you covered a pretty thorough Jon.

Moshe Orenbuch

Thank you.

Operator

Thank you. One moment for our next question please. Next question is from Mark DeVries with Barclays. Please go ahead.

Mark DeVries

Yeah. Thanks. First, just wanted to clarify some of the comments around the impact of the credit administration policy changes. Are you saying you think that's -- it's more of a 2022 impact mainly because of the impact of earnings is now kind of factored in to your CECL reserve or do you actually think it has a more temporary impact on charge-offs?

Jon Witter

Yeah. I think what I was saying, Mark, is based on what we're seeing today, we think that is more of a ‘22 temporary impact. So let me dive a little bit deeper into that. I think our view is there's sort of two ways that the changes to credit administration practices may impact sort of charge-offs and credit metrics over time. There's clearly going to be some longer term change to the program. That's why we've taken the CECL reserve that's why we've done the things that we've done. And by the way, I don't think we've seen yet anything that indicates that those estimates were wrong or needing of updating.

But I think what we also knew when we implemented this is that there would be sort of a phase in effect. So if you think about it, anytime you curtail or restrict a loss mitigation program, there is a group on the margin borrowers, people who may have been able to make payments a little while longer, may have been able to sort of keep their head above water a little while longer. And now without access to that program, and being out of other options, if they move faster through to delinquency.

And I think what we believe we are seeing this year is those on the margin customers moving faster through to delinquency versus the expectations that we initially had. And so we do think that this is an implementation effect based on what we've seen so far. Well, of course, continue to monitor carefully and report out on the results as appropriate. But I think we believe that the charge-off effect is really much more of that temporary phase in or transitional impact?

Steve McGarry

Yeah, Mark.. Just for perfect clarity, we do have a sizable reserve for expected increases of life of loan losses due to forbearance changes, which we haven't touched and is still out there. And we also have additional reserves as we originate loans for this impact and what Jon is describing is a little bit of an acceleration, which is also what he served for. So we are very -- the CECL reserve is 100% accounting for the impacts of everything that we're discussing here.

Jon Witter

Okay. Great. Appreciate all the commentary.

Operator

Thank you. One moment for our next question please. Our next question is from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani

Thanks. Good morning. Let me dig in a little bit more to Jon your commentary on the green zone. I know in past calls, you've discussed sort of 8% gain on sale being sort of a mark or tipping point for you guys to decide to sell or not. I think the new assumption is lower than that. And I know Jon you mentioned you can probably get higher in the current environment. But I'm just curious, can we just get a sense as to what we should expect based on the gain on sale and when you'd sell versus not?

Steve McGarry

I mean, Sanjay, since you're quoting my past comments, which I think you may have misinterpreted. Basically, what we do is, we triangulate between our estimated equity cost of capital. We calculate the net present value of the portfolio based on equity costs and funding costs and we compare that -- and then we use that equity cost of capital to estimate basically what our price earnings multiple should be on a conservative basis. And we compare the two and that creates the green zone that Jon is describing. And in extreme cases where the stock price could be extremely undervalued based on basic finance I call it, 201 as opposed to 101, the premium that we could sell at and make the arbitrage work to be significantly lower than the 8% that you referenced. And hopefully that clarifies that a little bit.

Sanjay Sakhrani

I mean is there a way to get that number now, like, maybe using that calculation, what that rate is now?

Jon Witter

Yeah, Sanjay. I'm sure you can appreciate, we sell loans at a competitive auction. Part of what we try to take great care of is to build demand and interest and a little bit of sort of uncertainty in our market clearing price. I don't think we really want to be putting out to the market sort of our decision framework for how we think about the exact price at which we would or would not sell loans. I'm sure you can appreciate that.

I think it is fair to say we have a very robust methodology and if we sell loans at a lower premium, rest assured, it's because we think we can deploy the capital at an even more aggressive level and create value for our shareholders. And look, we understand that that may have a slight impact on in year EPS through the gain number. But at the end of the day, while we take in year EPS guidance really, really seriously, what we're much more focused in on is the multi-year value creation that that arbitrage creates.

Steve McGarry

And one other points to recall to mention, Moshe, pointed out that the premium we receive is really not just the gain on sale premium. When we sell these loans, we also released the 5.4% CECL reserve that I mentioned earlier. And we do consider that to be part of the gain because it's essentially capital that's stranded for the life of these loans, plus the 13% capital that we really see.

Sanjay Sakhrani

Got it. Just one final question. I appreciate all the commentary on those specific cohorts that had the gap year. So as we think about the impacts this year, I think you guys are pretty clear that it's specific to this year. So as we move into next year, does that all else equal from a macro standpoint bring down the provision run rate adjusted for those one time impact?

Steve McGarry

Yes, it absolutely would Sanjay.

Sanjay Sakhrani

Okay. So it would be roughly that $50 million plus some of the servicing gaps?

Steve McGarry

Yes, there is a considerable amount of reserve in the number this year for these transitory effects that we're seeing. I mean basically an accept charge-offs with the CECL methodology as you estimate what you need for the portfolio and then you look at charge-offs and that lowers the reserve and you're essentially topping up the reserve for charge-offs that you're experiencing over and above the forecast rate.

Jon Witter

And Sanjay, not to snatch complexity from the jaws of simplicity on this one, but that is a four subject to all of the factors that would normally go into our provision calculation. So growth, mix, economic outlook, et cetera. Those are also other variables. But what Steve said is exactly right with regard to this year's temporary effects.

Sanjay Sakhrani

Okay. Great. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from Melissa Wedel with JPMorgan. Please proceed.

Melissa Wedel

Good morning. Melissa on for Rick today. Wanted to follow on the topic that we've been talking about here on reserves and credit quality. I'm just trying to reconcile, we've seen the allowance ratio as a percent of any loans and repayments sort of settling declining on sort of a quarter-over-quarter basis but also on a year-over0year basis and yet we passed some charge-off guidance going up. So I was hoping you could either rephrase or kind of elaborate on how you're thinking about the allowance ratio in particular and how you would expect that to trend given your credit expectations throughout the rest of the year? Thank you.

Steve McGarry

Sure. So here's the process and the numbers that I typically quote in my prepared remarks are the more accurate reserve level because the reserve level does conclude the accrued interest receivable and the commitments. And we were at 5.4% versus 5.3% so up by [indiscernible]. But I guess your question is fair since charge-offs are going up, a little bit more than that, but you member it is a life of loan loss reserve. But I think what you need to think about is, when we provide guidance basically what we're doing for the reserve and the provision is, we calculate a year-end CECL loan loss allowance requirement.

And then we build upon that by adding unexpected charge-offs, which requires additional provisioning, which basically accounts for the expected charge-offs between quarter end and the end of the year. If that makes sense, it's a little complex, but that's expected charge-offs between quarter end and the end of the year, if that makes sense. It's a little complex, but that is the process that we use to build guidance. So the guidance includes additional provisioning that will take place by the end of the year.

Melissa Wedel

Okay. Thank you for that.

Steve McGarry

You’re welcome.

Operator

Thank you. And I will now turn the conference back to management for final remarks.

Jon Witter

Carmen, thank you. And appreciate everyone's time and interest this morning. Hopefully, we were able to answer questions and provide information on the business in general, but also specifically on the changes in guidance. Please know that the management team and IR teams Steve, Brian and I are here and happy to answer additional questions as you complete your analysis and reviews. I really do appreciate everyone's time and interest in Sally Mae. Have a great rest of your summer. Look forward to talking again in the fall, if not before. Thanks.

Steve McGarry

Thanks, Jon.

Brian Cronin

Thanks for your time and your questions today. A replay of this call and the presentation or questions, feel free to reach out to me at salliemae.com. Again, if you have further questions, feel free to reach out to me directly. This concludes today's call. Thank you.

Operator

And thank you for participating and you may now disconnect.

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