SLM Corp Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Sallie Mae 2020 Q4 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. Please be advised that today's conference is being recorded. I would like to hand the conference over to Mr. Brian Cronin, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Angel. Good morning and welcome to Sallie Mae’s fourth quarter 2020 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind, our 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 operations, financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures, which we call core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the earnings supplement for the quarter ended December 31, 2020. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I'll now turn the call over to Jon.

Brian, Angel. Thank you. Good morning, everyone. Thank you for joining us for a discussion of Sallie Mae's fourth quarter and full year 2020 results. To say 2020 was an unprecedented year is an understatement. We were tested as individuals and as a nation, but we persevered with resilience and resolve. I want you to walk away today with three key messages. First, we delivered strong results in 2020, despite the many challenges we faced. Second, I believe we are positioned to continue that performance trend in '21 by executing the strategies we have previously discussed. Third, we will begin '21 with a significant return of capital to shareholders. This specific plan is currently being finalized. GAAP EPS in the fourth quarter was $1.13 compared to $0.32 in the year ago quarter. Our full year 2020 GAAP EPS was $2.25 compared to $1.30 in 2019. This includes the gain on sale from the January 2020 loan sale. Our results for the year and fourth quarter were driven by a combination of strong business performance, reactions to the pandemic and some timing related changes. Let me start with the discussion of our business performance. Originations ended the year at $5.3 billion. While down 5% year-over-year as a result of the pandemic, we believe this level of originations is a testament to the importance of education to our customers and the power of our franchise. Originations quality was consistent with past years. Our cosigner rates were 86% compared to 87% in 2019, and average FICO scores were 749 versus 746 in 2019. Market share through the end of September was 54%, up 0.5%, as we compete for volumes from competitors who are leaving the industry. We executed a $3 billion loan sale in the first quarter of 2020. The proceeds funded a $525 million accelerated share repurchase program. The ASR was completed this week. We were able to repurchase in total 58 million shares at an average price of $9.01. This equates to 14% of the shares outstanding at the beginning of 2020. We received 44 million of those shares in the beginning of the program, and the remaining 13.3 million shares will settle this week. In 2020, we enhanced our focus on the core business by selling our Upromise business and our personal loan portfolio. We raised $500 million in unsecured debt and used some of the proceeds to successfully retire 37% of our Series B preferred stock. Finally, we were able to reduce our planned 2020 expenses by $18 million. Additionally, we implemented a $50 million reduction to our expense base in '21 and future years as a result of the restructuring efforts we announced last quarter. During the fourth quarter, we continued to experience changing impacts on our business from the pandemic, in this case related to the economic outlook and assumed prepayment speeds in our CECL loss estimates. Based on an improving economic outlook, we changed the economic scenarios used in determining our CECL allowance calculations from the previous 50-50 Base S4 weighting back to our standard approach. In addition, we have continued to adjust our assumed prepayment rates in response to changing customer behavior. While Steve will discuss both changes in more detail, the impact of these pandemic related changes, coupled with a reserve release related to our early 2021 loan sale that I'll discuss next, reduced our provision by $316.4 million in the fourth quarter, bringing our loan loss reserve down to $1.466 billion. Finally, there were some impacts to our 2020 earnings that were strictly the result of timing. At the end of 2020, in response to strong market conditions and inbound inquiries, we decided to start our 2021 loan sale process earlier than for the 2020 loan sale. In keeping with GAAP, those loans were moved to held-for-sale in December of 2020. This change in designation mandated a release of the CECL reserves for those loans, which flowed through our income statement. Previously, we expected this reserve release to happen in Q1 2021, coinciding with the sale and the booking of the gain. This $206 million release accounted for $0.41 of EPS in 2020. Said simply, our full year core EPS would have been $1.82 excluding this reserve release. We do not expect this split year result to occur again. The financial impacts of the January 2020 loan sale were contained within one calendar year, and we expect the same to be true for the remainder of 2021 and beyond. We will more fully discuss the loan sale and capital return in a few moments. It's worth noting that despite all of the challenges and moving pieces caused by the pandemic, this $1.82 a share result is just $0.06 lower than the midpoint of our initial guidance for 2020. While loss expectations are still elevated since the start of the pandemic, we were able to partially offset these impacts through tight expense control and other actions. Steve will now take you through some specifics on 2020 and the details of these pandemic and timing impacts.

Thank you, Jon. Good morning, everyone. I will continue this morning's discussion with a detailed look at the drivers of our loan loss allowance and the rest of our financials, followed by a discussion of the capital structure changes we have made, and finally highlight our strong liquidity, capital and reserve position. The private education loan reserve, including a reserve for unfunded commitments was $1.5 billion, or 6.5% of our total student loan exposure, which under CECL includes the on balance sheet portfolio, plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of $1.7 billion. Our reserves at 6.5% of our portfolio is down significantly from 7.1% in the prior quarter. As a reminder, we use a discounted cash flow methodology to determine our reserve and that discount factor is approximately 70%. I would now like to walk you through the process of calculating our loan allowance to help you understand the current quarter. This will be a core component of our quarterly earnings discussions going forward. We incorporate several inputs that are subject to change from quarter-to-quarter. These include model inputs and any overlays deemed necessary by management. The most impactful model inputs include economic forecasts their weightings, prepayment speeds, new volume, including commitments made but not yet dispersed, and loan sales. Under CECL, the economic forecasts we use are key and will drive quarter-to-quarter movement in the allowance. As Jon already mentioned, we've changed the mix and weightings of the forecast we use in the fourth quarter. Specifically, we moved from using Moody's Base S4 forecasts weighted 50% each to a more balanced mix of Moody's Base S1 and S3 forecast, weighted 40%, 30%, 30%. As a reminder, we moved to Moody's Base and S4 in the second quarter due to the uncertain economic environment, the significant increase in forbearance usage we were seeing and uncertainty about how it would play out. This environment persisted throughout the third quarter as well. However, as the fourth quarter came to an end, the economy and the outlook continued to improve. And we were seeing steady performance in our portfolio, including recent repaid cohorts. As a result, we concluded it would be appropriate to revert to the more balanced mix described earlier. This is in fact, what we determine to be best practices in normal environments when we were preparing for CECL, and is the mix of forecasts recommended by Moody's to capture a multitude of probable economic outcomes. The change in scenarios and weightings reduced our reserve requirement by $31 million. Turning to prepay speeds, as we have discussed in past calls, this has been a watch item since the pandemic began. Our CPR forecast, as modeled, was not aligning with current observations and trends. The model was built using historical data that shows a substantial drop in prepayments during periods of economic stress, and this never materialized. In Q3, we increased it from 2% to 4%. In Q4, we increased it again to align with observations of how prepayments are trending in our portfolio. This change reduced our reserve requirement by an additional $77 million. Volume, of course, is an important driver of our allowance. While the fourth quarter is a quiet quarter for new loan originations, we did enter into new loan commitments of over $500 million, which required us to increase our reserve by $37 million. Finally, as Jon already discussed, but it's worth repeating, loan sales had a big impact on the provision moving loans to held-for-sale in December. For our early January transaction reduced the reserve by $206 million. The factors I enumerated here net to a reduction of $288 million in our reserve, and they're offset by other factors, including overlays and the natural accretion of our discounted reserve, among other things, resulting in a negative $316 million provision for credit losses. For the next few minutes, I'll go over our credit metrics which can be found on Page 9 of our presentation. For our held-for-investment portfolio, loans in forbearance were 4.3% flat to Q3 level, but slightly higher than 4.1% in the year ago quarter. This is expected given the economic impact of the pandemic. Loans delinquent 30 plus days were 2.8% of loans in repayment, down from the 3% in Q3, but unchanged from 2.8% a year ago. We now expect that 30 plus day delinquencies will rise into the high 3% in mid 2021, and then trend lower for the remainder of the year. Net charge-offs as a percentage of average loans in repayment were 1.52%, up from 1.24% in the year ago quarter. The full year of 2020 charge-offs totaled 1.17%, which is unchanged from 2019. Looking ahead, we expect that charge-offs for 2021 will increase to around 1.8% for the full year based on our current forecasts. The large wave of loans that entered P&I in Q4 is performing very well compared to prior years’ repayment cohorts, as measured by things like early roll into delinquency, and cure trends in the collection shot. I would like to point out that our delinquency and charge-off forecasts, while higher, are informed by our CECL model, and have declined steadily since the peak of the pandemic, as the outlook has improved and our inputs have changed. This, of course, is a big positive, and I should reiterate that we are very well reserved for the expected outcome in 2021 that I just described. Wrapping up conversation about credit, the strong performance of our portfolio continues to validate our underwriting, the cosigner model, and of course the value of higher education. Turning to net interest margin on Page 6 of the deck. Our NIM on interest earning assets was 4.82% in Q4, up from the prior quarter, but down from the prior years as interest rates have moved dramatically. Full year net interest margin was 4.81%. This is slightly lower than anticipated, principally due to higher cash balances, and investment securities. Looking ahead to 2021, we expect very little change and we believe that our NIM will come in right around 0.0475%. A few words on OpEx. 2020 operating expenses, excluding restructuring fees were $538 million compared to $574 million for 2019, 6% lower. The significant reduction in expenses was driven by exiting the personal loan business, scaling back on credit card investments during the pandemic, and our overall cost cutting efforts. Put it into perspective, operating expenses in our core student loan business declined 9% from the year ago quarter, while average customers increased 4%. We will continue to focus intently on generating operating efficiencies, and clearly our initiatives are already paying off. Finally, in the fourth quarter, we did several transactions that improved our capital efficiency. First, we issued $500 million in 5-year unsecured debt. A portion of the proceeds of this issue will be used for share repurchases. Secondly, we repurchased nearly 1.5 million shares of our preferred stock at $0.45 on the dollar. This transaction created equity which enables the company to repurchase common stock. Turning to liquidity and our capital positions, they are very strong. We ended the quarter with liquidity of 19.7% of total assets. At the end of the fourth quarter, total risk-based capital was 15%. Common equity to Tier 1 risk-weighted assets was at 14%, and in the post CECL world, we also look at GAAP equity plus loan loss reserves over risk-weighted assets, which came in at a very strong 16%. Our regulatory capital ratios are well in excess of well capitalized. In conclusion, our balance sheet remains rock solid in terms of liquidity, capital and loan-loss reserves, positioning us very well to grow our business and return capital to shareholders in the future. Thank you. Now, I will turn the call back to Jon.

Thanks, Steve. In addition to delivering strong 2020 results, I also believe we are well-positioned to continue that trend into 2021. Key to this belief is an expectation that we will operate in an improving external environment. On the COVID front, I'm heartened by the continued positive developments around vaccines. While the spring semester is setting up to be much like this fall with students returning to campus on a shortened hybrid schedule, we are optimistic that because of the vaccines, schools and students will be operating under more normal conditions this fall, which should have a positive impact on originations. Unemployment, especially for those with a college education, continues to trend in a positive direction. In December, this rate declined to 3.8% from 4.2% in November and remains notably lower than the 6.7% national unemployment rate. The federal government continues to support taxpayers with additional stimulus and federal student loan borrowers with payment relief now through at least September 30, 2021. These efforts should positively impact our borrowers' ability to service their loans. Finally, despite the tremendous political activity and turmoil of the last few months, our assessment of the political environment and likely policy priorities has not changed dramatically since our last call. Before I elaborate further, let me congratulate our 46th President of the United States. As the CEO of a company headquartered in Delaware, we take special pleasure in congratulating our own Joe Biden, along with Kamala Harris, who makes history on a number of critical dimensions as our Vice President. It's worth noting we believe strongly in the power of our products and services in helping customers achieve the dream of higher education. Our core product, the private student loan, is incredibly customer-friendly with features such as no application or prepayment fees, attractive pricing compared to other financing options, and a full spectrum thoughtfully underwritten approach. These factors allow our customers to be successful with our product, as evidenced by our low default and charge-off rates. In addition to our core lending product, we also offer a variety of other products, services and programs to help our customers plan for and navigate the challenges of attending college. These include tools to help customers find scholarships, complete their financial aid applications more easily, plan for the transition to college, complete their degrees and get launched on strong footing. I am proud to announce that in keeping with this focus, this week we officially launched a new scholarship program with the Thurgood Marshall College Fund to meet the needs of minority students and those from marginalized communities. Our Bridging the Dream scholarship program will provide $1 million a year over the next 3 years to help students not only access, but importantly complete college. With all of this said, we recognize that not all student lending products and programs can claim the same positive results. We also recognize that loans are not the right financing option for all, especially for those with less access to financial resources. As such, we continue to support thoughtful policy changes to increase access and affordability of higher education while controlling the inflation of costs. This is key to affording the dream of higher education to all who can benefit from it, which we know is a key ingredient in promoting economic mobility and social justice. In this context, we look forward to working with the Biden administration and our continued efforts to increase access, affordability and college completion for all Americans. I have received several questions about the future direction of the CFPB and potential impacts to our business from a change in our regulatory environment. As I said earlier, we are committed to running a customer-centric business, and we treat that as our North Star or our mission. Doing right by our customers for us is not dependent on any particular regulatory focus. We enjoy a productive relationship with the CFPB and expect to do so going forward. While one cannot predict future regulatory priorities, we are confident in our customer focus, practices, operations and products and look forward to working with the CFPB to strengthen our business and better serve students, their families and our communities. As we move into 2021, we believe focusing on four key strategic imperatives in this improving environment positions us for continued success. We will obsess over the performance of the core business and believe we have opportunities to enhance top and bottom line performance, which will be further strengthened through share repurchases. In that context our guidance for '21 is the following. GAAP diluted earnings per share of between $2.20 and $2.40; private education loan origination growth of 6% to 7% year-over-year; and consistent with our outlook for the spring and fall semesters, we expect loan originations to be down in the first half of the year and up sharply during the fall semester. We expect noninterest expense to end 2021 between $525 million and $535 million. As Steve said earlier, this reflects our continued focus on efficiency and operating leverage. And we expect our total loan portfolio net charge-offs will be between $260 million and $280 million. Let me conclude with a discussion of one of our four strategic imperatives, which is capital allocation and return. Before going into details about our 2021 capital plans, let me step back and provide a bit of context. Core to our investment thesis and strategy are three main beliefs. First, we can attractively grow earnings beyond 2021 because of market growth and dynamics and a focus on operating leverage. Second, especially post-CECL implementation, we can deliver attractive organic payout ratios to investors while funding balance sheet growth because of the high ROEs of our loans. And third, as proven risk managers, we can deliver more predictable cash flows. In this context, one might ask why we are selling these attractive loans? The simple answer is that as a committed capital allocator, we believe there is a real dislocation between whole loan pricing and our current stock price. This dislocation creates an arbitrage opportunity to sell loans and aggressively return capital to shareholders. As long as this arbitrage exists, our plan is to continue to operate in a hybrid originating sell model, and to aggressively allocate and return capital. While we will likely reduce our focus on loan sales as organic capital generation increases, and this is when CECL is more fully implemented, we will likely always engage in some loan sales to demonstrate external value and maintain a ready funding source. Regardless, we will remain a committed champion of the principles of capital allocation and return. Enabling this multiyear capital return strategy, our Board has approved a $1.25 billion share buyback authorization, which expires in January of 2023. In keeping with our past practices, we would expect to fully utilize this authorization well before its expiration. As I mentioned earlier, the finance team was busy in the final days of 2020 working with potential investors on our next loan sale, which was completed in early January. We held an auction for a representative sample of $3 billion worth of loans from our portfolio, and we received bids from eight different bidders, all with full tranche orders for the loans. In the end, we were able to achieve low double-digit premiums on these loans, which is a validation of the quality of our portfolio and the strength of the current loan sale market. The gain on sale for these loans will be recorded in the first quarter of 2021. We felt it was critical to sell loans early in the year to capitalize on the robust loan sale market. And our plan is to sell an additional $1 billion of loans later in this year. We expect this will result in a relatively flat to slightly down balance sheet year-over-year with some uncertainty given the wider-than-normal variation in peak season outlook caused by the pandemic. We are finalizing our capital return strategy for the year. This will include the return of a significant amount of capital made available by the recent loan sale, debt offering organically generated capital and from other sources. We expect to announce the details of our capital return strategy in the very near future. With that, Angel, let's open up the call for questions. Thank you.

Thanks. Good morning, and good results. I guess, I wanted to break apart the 220 to 240 outlook and you mentioned Jon that the double-digit gain on sale. But maybe we could just talk about those pieces, the gain on sale, the capital return assumption and any reserve releases expected inside the numbers?

Certainly, Sanjay. The 230 midpoint is based on solid assumptions. We have a NIM of 0.0475% included. The gain on the first $3 billion sale is in the low double digits, and we received a strong premium on that. We are also anticipating another sale later in the year of an additional $1 billion at what we expect will be a very attractive premium. We don’t want to reveal too many specifics about the pricing to support our partner while they work on selling the loans they purchased. It was a great transaction, and we look forward to collaborating again in the future. There will be a significant amount of share repurchase included in the $2.30 midpoint. While we haven’t announced the form and timing of the share repurchase yet, Jon has provided commentary to help you estimate when and how large it will be; further details will be coming soon. Lastly, I want to clarify that there will not be another reserve release in late 2021 linked to an additional sale. The number is straightforward. The CECL assumptions related to the provision are based on the CPR increase in the 40-30-30 Base S1, S3 that we shared. Overall, it’s a clean number for 2021. If you exclude the gain from 2020 and consider it in 2021, we expect to see substantial EPS growth. As Jon mentioned in his prepared remarks, if we continue with this hybrid originate and sell strategy, we will achieve earnings growth in 2022 and beyond. However, we would prefer not to start providing guidance for the next calendar year just yet. I hope this clarifies things for you, Sanjay, and I'm here to answer any additional modeling questions you may have.

Thank you. Thanks, Steve. So I guess I completely agree with the comments that at these gain on sale levels, it seems like the ARB makes sense. Is there any appetite to do even more than the $1 billion later this year, and given the gains are so high, the gain on sale rates are so high?

Look, we'll assess market conditions as they develop. We think that the strategy for 2021 that we've laid out here is a pretty good one. We like these loans and want to hold as many on our balance sheet as possible. We're not concerned that the loan sale premium market is going to be volatile and softer in '22 than it is in '21. A lot of positive things have happened over the last 6 years, as we've been an independent bank and originator of smart option loans. I think investors are more comfortable with the credit embedded in these assets as they've ever been and the discounts that they put on that assumption and the loan sale purchase formula has improved greatly. Prepayment speeds are pretty consistent and the biggest ingredient right here now is the low-interest rate environment. And we don't see that changing dramatically over the course of '21 and into '22. So long story short, I think we will leave all options on the table. But we think we're going to stick with the current plan as we've outlined it here this morning.

Yes. And Sanjay, if I could add to what Steve said, and I agree with him. Look, this is clearly a balancing act and a matter of both analysis, but also a little bit of judgment and intuition. We love the quality of our loans. We think they're great loans. By the way, clearly, investors do as well with the kinds of premiums that we've been talking about. But if you think about it from our perspective, they provide very profitable, very high return and very stable cash flows for the business. We love holding those loans on our balance sheet. That's a great business for us. But we also recognize the incredible importance of returning capital to shareholders always, but especially in the form of share buybacks during these types of dislocations. There are upper limits on how much capital you can return at any one given point in time. So I think we are really trying to strike the balance and do it in a very thoughtful way of being extremely aggressive towards our commitments around strong capital allocation and return. I hope we started to prove that last year. I suspect we will continue to earn that reputation this year. But we also back to sort of the strategic description, we also like the ability, especially post-CECL of growing our balance sheet and organically generating capital and we think that's an important part of our long-term valuation thesis. So we will endeavor to get that balance right. I'm sure on any given point in time, there will be some disagreement about whether we could do more or do less. But I can assure you there is no conversation inside the company that gets more discussion with me, Steve and our Board, than getting the right balance of capital retention versus capital return.

Hi. Good morning. I wanted to see if I could get further thoughts on the improved 2021 net charge-off guidance. Is it just really a delay of the timing of losses into 2022? Or is there real incremental improvement here? And how much the federal payment holiday is really helping, and is that just delaying the losses in the portfolio?

Sure, Michael. So look the last forecast is very much an output of our loan loss reserve, CECL credit model. So one of the reasons why you've seen it come down dramatically over the course of the last few quarters is because the outlook has improved and we changed our inputs. While anecdotally, we absolutely agree with you that the federal payment holiday is supporting our customers and absolutely helping overall cash flows and performance in our portfolio. At this early stage, we cannot really triangulate it and tell you how much of a factor that is and what it may or may not offset. But the bottom line is, we are seeing very positive performance in our portfolio across the board. And absolutely the federal stimulus programs and the monetary policies being employed by the government are helping, but I think it really is at the end of the day, a testimony to the value of college education that we've talked about consistently over the years.

Okay. That's great. Second question, I see that refis are lower now on a year-over-year basis. But it seems like Sallie Mae has never really come up with a real solution to the issue after the failed attempt at a defensive product. So, refi risk is something you're going to just have to live with? Or are you going to try to come up with a viable defensive product option? And I was wondering if you had any comments on SoFi going public via SPAC. Do you think that makes a more dangerous refi competitor?

Yes, Michael, it's Jon. Let me take those in reverse order. I don't think it's our place to comment on SoFi's plan. They’re a great and able competitor, and we love competing against them, but we'll let them answer their own questions. I think on the question of refi, look, this really comes down in my mind to what I have always referred to as cannibalization math. And at the end of the day, if we could perfectly predict who was likely to refi, we would be extremely aggressive at coming in and effectively cannibalizing our own book before others could do it. I think at this point, we have not found a way that from an economic and return perspective, makes that refi, that cannibalization math work for us. So said simply, we would have to offer sort of new products and new services to too many customers who likely would have stayed with us anyway. And so, from an economic perspective and a return on capital perspective, it's not the right choice for us today. But it is obviously a driver of our business. It is obviously something we are focused on. We will continue to look very, very hard at sort of where are the options for us to improve the retention of our customers and our book, wherever we can find the opportunities through marketing and analytics to jump in and to do that better, of course, we will do that. But we have not yet found the economic model year there that we think is right. I will say - and you didn't ask this, Michael, but I'll just put a little plug in, in addition to refi, we are generally very interested in assuring that our customers get off on strong financial footing. So more than refi, the real question is, do we help customers borrow a responsible amount of money? Do we give them the tools to understand how to repay their debts quickly and efficiently? Do we help them get to the point where their student loans are not an impediment to their living the kind of life they want to live? And so I think, in addition to refi products, we will be very, very focused on that. And at the end of the day, I think if our customers are extremely successful with their loans, the likelihood that they would seek to refi for many of them is going to be lower anyway. So we'll take a couple of different pronged approach on this. But at the end of the day, the specific refi question really comes down to the math and the ability to do that in an efficient and economically value creating way.

Thank you. How much would the tension between selling and retaining loans need to collapse before you shift back towards retaining more of your originations? If you could either frame that in terms of like, how much loan sales would have to go down? Or how much your stock price would need to go up?

We view our stock price similarly to how everyone else does, understanding the factors that contribute to its price-to-earnings ratio. Considering our cost of capital and growth rates, we believe a conservative PE should be in the mid to high double digits. We don't think that's unrealistic, and we believe our stock price should be significantly higher. We consider the ARB viable with premiums as low as 6%, 7%, or 8%. Additionally, if we were to pay a 10 multiple for the stock, it would still represent a reasonable arbitrage.

Okay, that's really helpful. Thanks, Steve. And then, next question, can you just remind us what your economic capital requirements are? And just talk about how you balance the buyback with your capital requirements and the CECL phase-in over the next few years?

Sure. So we at the end of the year held 15% total risk-based capital. We think that the appropriate capital to hold against these assets is somewhere around 11.5% based on the inherent credit business, et cetera risks that we hold, that we have in these assets. So we have a substantial amount of excess capital on the balance sheet today. And as we go through 2021, we will continue to have a substantial amount of excess capital. That being said, we think that the $1.25 billion share repurchase authority, that Board just granted us is perfectly adequate for 2021 as we get started here.

Hi, everyone. I appreciate your assistance with my questions. Steve, while you were addressing the previous question, I imagined you at the table holding up ten fingers and searching for the answer. As we consider the loan sales this quarter and another $1 billion later this year, I'm interested in the mix of in-school versus in-repayment loans. Additionally, you mentioned that you don't anticipate a reserve release related to the second sale this year. Is that because those loans will already be classified as held-for-sale? Or does it relate to a net situation throughout the year where, for instance, the CECL reserve accumulates but is then released? Overall, it seems it might not have a net impact, but I'd like to understand how we should view this in relation to the quarter's trends.

Let me clarify to avoid any confusion. In our guidance, we expect the loan sale to occur within this calendar year. Therefore, any necessary reserves for the year are already accounted for in our provision as outlined in our guidance. It is important to note that in our 2021 guidance, we do not anticipate a reserve release for loans that will be sold in 2022. I want to make sure that is clear before I discuss the details of the loan sale.

Absolutely. Yes, that totally makes sense.

Okay. Yes, okay. So when we sell loans, we sell a representative sample of the loans that are on our balance sheet. So whatever you see in the portfolio today, the loans 50%, and principal and interest for repayment, whatever the mix of loans is on our balance sheet is the mix of loans that we sold to our counterparty. And while I have the microphone, we could have sold additional loans in the first quarter. The demand is absolutely there, but we chose not to.

Great, thanks. Most of my questions have actually been asked and answered, but maybe, clearly you just finished last year's program and this year's program even before the second loan sale is likely to be larger in dollars and even larger as a percentage of the company. So, maybe could you just talk a little bit about what lessons you learned about paid on clearly, maybe in the better to be lucky than smart category that slowing those purchases got you a 20% lower price than where the price was when you announced it, but as you think about it now, like, I know that you haven't made a decision yet, but just talk about the parameters that you're thinking about as to how to deploy that capital efficiently in 2021?

Sure, Moshe, it's Jon. I'm happy to discuss this, and I'll include Steve in the conversation. First of all, it's important to note that when we consider capital return and our strategy involving the sale of producing assets to reinvest that capital, time is of the essence. We want to minimize holding cash that could be earning favorable returns through loans on our balance sheet. Therefore, our goal is to deploy capital as quickly as possible. This is part of why we appreciated the ASR program last year, as it provided an effective way to quickly reinvest a significant portion of that capital. To summarize, speed is our top priority. Secondly, we pay close attention to market conditions; understanding the market's depth, nature, and levels is crucial for us. Lastly, we continuously evaluate our capital needs, uses, and sources throughout the year to ensure we maintain proper timing and capital levels, not just at year-end but continuously throughout the year. Ultimately, we prefer speedy execution, consider market conditions, and analyze cash flows over time to inform our decisions. However, there are only a limited number of options available for deploying the capital we're discussing, and you can expect that our course of action will fall within that small set of possibilities.

Got it. Thanks. Regarding the core business trend, the yield on the portfolio has been quite stable, deposit costs are decreasing, and your expenses have been better than we anticipated, possibly in line with your expectations as well. Could you elaborate on the core profitability of the company as we move through 2021?

Certainly, Moshe. Let me break that down into market dynamics and long-term fundamentals. We will always be influenced by environmental factors. For instance, a major recession due to a pandemic or other forces that drives interest rates down will impact our business. While the Current Expected Credit Loss (CECL) model provides visibility and has its benefits, it can also introduce more volatility, particularly during significant economic changes like what we’ve seen recently. These unpredictable factors will affect our financial results. However, setting those aside for a moment, I believe the core of our business remains very strong. We outlined this in our long-term investment thesis. We are experiencing solid growth in our industry. While it may not match tech-level growth rates, we find the growth rates for private student loans to be attractive, particularly because of our efficient, scale-driven operating model. This means we can take this growth and translate it into substantial operating leverage. Steve and our executive team are focused on improving our unit costs annually, as this is vital for driving the overall earnings growth of the company. Another notable aspect of our business that may not be fully appreciated is our attractive return on equity (ROE) on loans. These loans are profitable yet customer-friendly, as we underwrite them carefully and manage losses well. Our efficient funding and operations further enable us to generate organic earnings. While current stock price fluctuations and the implementation of CECL might obscure this, I believe that in the long run, these loans will support our balance sheet growth and generate significant organic capital. We want everyone to understand our current loan sales within the context of our future, which suggests a healthy earnings growth outlook supported by solid ROE from our loans. We have demonstrated our ability to manage the associated risks effectively over the past year. Overall, our investment thesis reflects the confidence that both Steve and the management team, including our Board, have in the business's quality. As I approach my one-year mark here, I am increasingly excited about the fundamental potential of this business over time.

Thanks, guys. I was wondering if we could spend a minute on the competition in the business. I mean, we all know it's a 20% ROE, we all know the dynamics are favorable. But can you help me understand like, you have the largest market share. Your competitors other than Discover seem to be wilting on the vine, in an environment with less and less competition, what type of growth, what type of pricing? And is there anybody else looking to get into it? Because it seems like the moat around your space keeps getting wider and wider, and arguably that should argue for higher returns on a higher multiple?

Jordan, I think it's a great question. And I think sort of strategic context, strategic environment, is again a question we think long and hard about. Let me offer a couple perspectives. But I think all of these will be sort of affirming of your general direction. Number one, in my career in banking, what I think you normally see during times like this is people see high ROE, reasonably growth businesses, and they come running in. And I think what has been interesting is, there doesn't seem to be more competition coming in, in fact, you could argue that there is a little bit less. Now, I think there are some real structural barriers to doing this business well. It is a vastly different product from an underwriting perspective. It is a vastly different product from a customer experience and management perspective. Think about sort of the process of taking someone who's 18 years old with no education and managing them and servicing them all the way through, they have a career and they are now repaying. And so, it is a hard business. It's not like going from one installment loan business into another installment loan business. The fundamentals really are very, very different. So, in our outlook, we compete and we plan, like, we're going to have really, really tough competition. And by the way, we do have some really tough competition, and some of the players that you talked about, we feel, give us a great run for our money in the marketplace and we're happy to compete against them every single day. But we plan like we're going to have people coming in, that's why we're so focused on efficiency, that's why we're so focused on the performance of our core business. Candidly, our hope would be to maintain our high market share and maintain our ROEs. And if the competitive dynamics are such that we can enhance those, that's great. But we don't plan that this is going to be less competitive. We plan that it's going to be more and we look to quite frankly just deliver better value to our customers and kind of keep on top of our game.

I would add one thing.

Okay. Please, Steve.

I think you've covered it perfectly, but while we are very focused on operating efficiency, we are not complacent and still defending and looking to grow our market share. And what I would like to point out is that we continue to invest in our all-important brand and we continue to invest in things like digital marketing and want to make sure that we are best-in-class and on the top of the industry.

Yes, good morning. I feel a bit underwhelmed not because I plan to ask foolish questions. Regarding the provision expense for 2021, there has been a lot of discussion about this topic. What are the main factors involved? I understand that we are considering reserves for new loans to be around 8% to 10%, along with a discount factor estimated at $30 million to $40 million annually. As we compile our provision estimate for 2021, what are the fundamental components, and have they changed in light of your revised economic outlook?

Great question, Henry. Our current reserve is about 6.5% of our portfolio. We do have additional reserves above the normal run rate. To put that in perspective, pre-pandemic, the reserve was approximately 5.8%. As things normalize towards the end of the year, we expect the reserve to decrease when we look ahead to 2022. We've seen enough volatility at this point. It’s important to follow Moody's economic forecasts, as they are a crucial factor in determining our CECL reserve. We look at a two-year supportable outlook, reserving for the next two years based on the model, after which we revert to mean default. It’s challenging to provide a precise formula, but if you consider 6% to 6.5% of the portfolio, you won't be far off.

Yes, Henry, it's Jon. There has been extensive discussion in the media about the K-shaped recovery and the varying effects of college versus non-college education. I recently saw some graphs in a journal highlighting this. We definitely notice the impact of these trends in the macroeconomic data we analyze. Steve has pointed out that this is reflected in our loss provisions. It's clear that during this economic downturn, there's been a significant disparity between those who have completed college and those who have not. The specific industries affected play a role here; for instance, many individuals without college degrees work in hospitality, bars, restaurants, and construction, which have been hit harder. This is not just sector-specific; it also relates to having the skills needed to compete for jobs in a rapidly changing economy. We see these patterns in our data, which explain the fluctuations in provision we've experienced this year. Earlier this year, we lacked clear visibility on unemployment trends, which is a big reason we've returned to our base model as those trends have become clearer. We certainly observe this divergence, and personally, I believe it will continue to be a reality moving forward. This underscores the importance of our mission and the focus we need to adopt. Higher education will become increasingly vital for social justice, economic mobility, and creating opportunities for disadvantaged communities, and we are eager to contribute to that broader social role. We're proud to be part of such a crucial segment of the economy. Thank you for your question.

Great. Thank you for your time and your questions today. Replay of this call and the presentation is 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. Thank you.

Thank you for your participation in today's Sallie Mae 2020 Q4 earnings call. This concludes today's conference call. You may now disconnect.