Q3 2020 SLM Corp Earnings Call
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I'd now like to hand, the conference over to your Speaker Mr., Matthew Centura Director of Investor Relations. Please go ahead Sir.
Thank you Angel good morning, and welcome to Sallie Maes third quarter 2020 earnings call. It is my pleasure to be here today with John what are our CEO and Steve Mcgarry, our CFO after.
After the prepared remarks, we will open up the call for questions we'd be.
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 Companys form 10-Q, and other filings with the FCC for Sallie Mae These back.
These include among others the potential impact of the COVID-19 pandemic on our business results of operations financial conditions and or cash flows. During this conference call. We will refer to non-GAAP measures, we call. Our core earnings a description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the form 10-Q for the <unk>.
Quarter ended September Thirtyth 2020. This is posted along with the earnings press release on the investors page at Sallie Mae Dotcom. Thank you and now I will turn the call over to John.
Matthew Angel. Thank you <unk>. Good morning, everyone. Thank you for joining us for a discussion of Sallie Maes third quarter 2020 result.
Let me start by saying that I hope everyone listening today has remained healthy and well as we continue to navigate these challenging times.
Today, I'd like you to take away three messages.
First while the pandemic continues to have a dramatic impact on the economy Sallie Mae continues to operate well relative to these expectations and we are cautiously optimistic about the trends we are seeing.
Second as I conclude my transition to Sallie Mae we are shifting from developing the key strategic imperatives discussed on our last call to delivering results. We look forward to sharing some of our early progress with you today.
Lastly, our financial outlook is stabilizing which gives us confidence to begin to give insight on how 2020 will and and share some thoughts on 2021.
Let's begin with the current environment there.
The Wall Street Journal and other media outlets recently described in emerging view for the shape of a likely recovery Acacia shaped recovery on the upper arm of that K are largely college educated individuals or business is tied to the digital economy, we're supplying domestic necessities most.
Most of these individuals can work remotely from home and have maintained their incomes and lifestyles during the pandemic.
On the lower arm of the K are that many people with lower levels of skills and education, largely on the service and tourism industries as well as those in lower wage service professions. These.
These individuals cannot work from home and many of their industries have been disproportionately impacted by the pandemic.
As a result unemployment for this group is materially higher with a greater negative impact on earnings and spending.
Well, we would never make light of the impact on this lower aren't group our customers generally skewed to the upper arm of this cake or by the nature of our business. Our customers are college educated with higher incomes a group that is faring relatively better at this point and the recession.
Well, we generally feel good about our customers and their employment prospects. We are carefully monitoring two situations differ.
The first is the transition into full piano I satisfy our most recent college graduates anecdote.
Anecdotally, we hear that companies are looking to limit hiring and stayed lean to help offset lost revenues due to the pandemic.
At this point. However, we are seeing early signs of strength from new graduates use.
You said you have non disaster forbearance graduated repayment programs and other assistance programs for New College grads are very similar to the vintages from past years how.
However, our experience suggests that the first year or two after graduation can be a difficult time for some customers as they get settled into their careers and adult lives.
We have long observed that customers are most likely to experience financial distress. During this early transition period.
As such we will continue to watch this group closely we will.
We will learn much more about this trend between November and April as the most recent graduation come aboard enters repayment.
The second situation. We are monitoring is the status of the state federal student loan payment holiday as you know most of our borrowers all sort of hold federal loans, while their average monthly payment to Sallie Mae has about $277 their payment on their federal loans is modeled based on our internal models to.
Would be approximately $400 without an extension of this program. These federal borrowers will be forced back into repayment around the end of the year.
This added payment burden may drive some level of increased financial distress.
Last quarter, we recognized and anticipated these elevated risks and reserved accordingly.
We continue to feel confident that the level of reserves is appropriate for the risk from these factors. The next two quarters will be important as better or worse than expected trends represent an opportunity for risk respectively.
On campus schools continue to make progress.
As we wrap up our peak origination season, which has proven to be elongated due to the impacts of the pandemic on students and schools. We have learned a few things students want to be on campus schools want students to be on campus and parents want their children to continue their journey toward adulthood.
Preferably living on their round we are.
We have been impressed with how our nation is colleges and universities continue to innovate creating solutions to ensure a safe environment for students and faculty returning to campuses.
Despite headlines our own read the cage, only 15% of our colleges and universities are completely online.
The remaining 85% are on campus in one form or another.
This demonstrates the incredible dedication of colleges and universities to fulfill their educational mission.
We are also beginning to hear encouraging news from colleges and universities about their plans for the spring.
One of our largest schools in terms of loan originations recently announced its students will continue its condensed highbred schedule in the spring.
This is a good sign schools are working to find ways to continue operations on campus, while managing the spread of COVID-19 at the same time.
We are optimistic that the trend toward on campus learning will continue.
Shifting to results I'm pleased to report a solid quarter during the quarter, we booked strong GAAP earnings of 45 cents per share and core earnings of 47 cents per share. Notable in these results was the provision line, indicating a 3.6 million provision release.
This release was driven by a combination of factors some more and some less predictable on the more predictable side, we built provision for our largest quarter for new commitments entered during the quarter. In addition, we released some provision given modest improvements in economic forecast since the last quarter.
However, the biggest drivers came from two less predictable factors. The first was Moody's changing its methodology for calculating.
Calculating college unemployment, which is a major input into our models as a result.
As a result of this calibration the college unemployment rate forecast was revised lower which reduced our expected life of loan losses.
The second factor relates to our estimates of loan prepayments speeds, we have seen higher prepayment rates on our loans than our loss models would have predicted in a declining economy as such we increased our estimated prepayment speeds, which has contributed to a lower estimate life of loan allowance.
Steve will discuss these changes in detail.
Earlier I mentioned the positive trends, we are seeing on campus as a result, our peak season originations came in on the higher end of the range. We discussed on our last earnings call third quarter originations were 1.9 billion. We are pleased with our peak season performance and believe we are on track to.
[music] originate 5.3 billion of loans for the full year 2020.
Which is approximately 6% lower than 2019.
Turning to credit we like other student lenders and consumer credit companies liberally granted forbearance to customers at the outset of the pandemic because we recognize the incredible shock to the economy. The pandemic was having and we had a strong desire to care for our customers many of whom were going through periods of trucks.
And his financial stress.
During that initial period, our forbearance rates were in the mid teens as a percentage of loans in repayment and forbearance disaster forbearance was an effective tool to help our customers through the early months of the pandemic and I am pleased with how we have continued to assess assist our customers. Since then our.
Our forbearance rate is down to 4.3% at the end of the third quarter of 2020 compared to 9.3% at the end of the second quarter 2020, Steve will give you a breakdown of how customers who received disaster forbearance forbearance benefits have managed their loans since our last call.
Over the last six months, you've heard me talk about our strategic imperatives, and our commitment to shareholder value.
Well remember that our number one imperative is to maximize the profitability growth of the core business.
I firmly believe if we focus on topline growth and relentlessly controlling expenses and unit costs. The company will continue to have an attractive earnings growth profile that will serve our shareholders well in the future.
We recently announced a new organizational structure intended to help the company achieve its new vision.
This structure will create better alignment and accountability for performance and it will also generate efficiencies.
In addition, we continue to pursue non people related sources of efficiency across our business. This effort resulted in a onetime restructuring charge of 24 million that we booked in the third quarter of 2020.
But we expect it will lead to a 50 million dollar reduction in our annual ongoing expenses beginning in 2021.
It's important to know that this is not a one in done exercise going forward, we will aggressively manage the growth in our expenses.
Currently 60% of our expenses are fixed costs. If we can leverage these fixed costs control the growth of variable costs and achieve our fair share of industry growth. We are confident we can generate meaningful and sustainable earnings growth through operating leverage now and in the future.
In 2019, our operating expenses were 574 million. This year, we expect our expenses, excluding restructuring costs will be between 540, and 545 million or an improvement of roughly $30 million year over year. It is important to note that this deal.
Decrease was caused by some permanent changes that will persist while others were driven by temporary belt tightening given the pandemic driven by their recent efficiency efforts described earlier, we expect next year's operating expenses to be between 525 and 535.
Million this.
This is inclusive of the cost of expected growth in loans serviced because.
Because of growth and some natural inflationary pressures going forward. We do expect total operating expenses will grow year over year to create real transparency around efficiency. We will therefore judge our performance on unit cost trends, which adjusts for growth beginning next quarter, we will begin provide.
Adding data on our unit cost to service and my expectation is that we will consistently reduce unit costs by a minimum of mid single digits for the foreseeable future given our focus on operating leverage and cost management.
We have made additional progress toward our imperative of better allocating capital during the quarter as well you will remember we announced our exit from the personal loan business several quarters ago in the quarter. We identified it identified buyers of our originated and purchased a personal loan portfolios, we took the opportunity.
To sell these loans to reduce the risk on the balance sheet and focus our capital and management attention on the core student loan business.
This resulted in a $43 million reduction to our provision for credit losses.
In addition to this balance sheet change our MSR program continues to run its natural end preset course, our current stock price only increases the value of this program as we anticipate our counterparty, we'll be able to buy back more of the shares outstanding with the proceeds of our first quarter 2020 loan sale. Therefore crew.
Adding more long term value for shareholders.
This point the HSR program is 52% complete and on schedule to wrap up in the first quarter of 2021 as well.
As we look to next year the loan sale market continues to recover from the pause caused by the pandemic.
Although we have not tested this market directly recent trends in the secondary loan market and the ABS markets suggest that market conditions should support our plans to sell loans and buy back additional stock.
Before we move on from the core business I'd like to turn the call over to Steve for a more detailed review of the results this quarter did.
Thank you John Good morning, everyone. I'll continue this morning's discussion with a detailed look at the drivers of our loan loss allowance followed by a discussion of our credit metrics and where we think there are headed.
I will then discuss our NIM and finally highlight our strong liquidity capital and reserve position.
The private education loan reserve, including a reserve for unfunded commitments was 1.8 billion were 7.1% of our total student loan exposure, which Underseas Cecil includes the on balance sheet portfolio plus.
Plus the accrued interest receivable of $1.5 billion and unfunded loan commitments of $1.8 billion.
As discussed previously we use a discounted cash flow methodology to determine our reserve discount factor is approximately 70%.
This means our reserve is expected to cover life of loan defaults on our portfolio of 10.2%.
The provision for new commitments outstanding private student loans was $47.6 million in the quarter.
I would like to walk you through the process of calculating our loan loss allowance.
Only to help you understand the current quarter, but also to provide you with a framework for forecasting the allowance in your models.
When calculating our allowance we incorporate several inputs that are subject to change from quarter to quarter. These include Cecil model inputs.
Any overlays deemed necessary by management.
The most impactful Cecil models model inputs include economic forecasts.
The weighting of these economic forecasts.
Payment speeds.
New volume and this includes commitments made but not yet dispersed and also loan sales.
I will now walk you through each of these impacts.
Under Cecil the economic forecasts, we use will drive quarter to quarter movement in the allowance as Joe.
As John already mentioned Moody's redefine their model for forecasting college graduate unemployment, which lowered expected future unemployment rates. In addition, their overall forecast for unemployment came down.
The projections can be seen on page nine of the earnings deck.
The change in future expected college graduates unemployment reduced our loan loss allowance by $89 million.
Turning to forecast weightings, there remain unchanged from Q2 and had no impact on the allowance we continue to use Moody's base and S. Four and a score forecast each weighted 50%.
To give you some context the S. Four is a severely adverse forecasts we.
We believe using utilizing these forecasts in the third quarter is appropriate when taking into consideration the uncertainties in the economic environment.
Such as the timing of another stimulus package. The fact that there continue to be virus flare ups around the country, which generate concerns about additional lockdowns.
And finally, a maybe more importantly, we do have $2.4 billion of loans entering full PNR into this uncertain environment in November and December.
Let's now talk about prepayments speeds, we've increased our CPR forecast in the third quarter, resulting in an additional decrease in our allowance of six feet of $68 million.
Higher CPR as we to lower balances, which translate to lower life of loan losses.
Our CPR forecast was not aligning with current observations and trends, which led us to increase it.
Our CPR model was built using historical data that shows a substantial drop in prepayments during periods of economic stress.
However, the extraordinary response by the federal government, including the suspension of federal loan payments and the injection of massive amounts of liquidity into the system have caused prepayments to remain elevated compared to historical experience.
Volume of course is an important driver of our allowance for third quarter is our peak season.
Weve dispersed $1.9 billion of new student loans this quarter, but recall that a significant portion of this quarter's originations were reserved for through the provision for contingent liabilities and the provision for them is unnecessary this quarter.
However, we did make additional commitments to originate $1.7 billion in future quarters.
This resulted in an increase to our allowance of $129 million.
The factors described pier, which led to a reduction of $28 million in our reserves are offset by other factors, including overlays and the natural accretion of our discounted reserve among other things, resulting in a 47.6 million.
Our provision for student loan credit credit losses.
As John mentioned, we sold our purchased inorganic personal loan portfolios in the quarter.
The portfolios were sold at a discount to par, but considerably higher than where we held them on our books and whether the loan loss reserve on.
Unwinding the reserve for personal loans resulted in a reduction of our loan loss allowance of one of $51.7 million.
After accounting for small provisions for a FFELP and credit card portfolios.
Our provision represented a $3.6 million release to our total allowance.
For the next few minutes I will be discussing our credit metrics all of which can be found on page eight of our investor presentation.
As John already mentioned private education loans in forbearance were 4.3%.
Sharp improvement from Q twos level of 9.3%.
But higher than the year ago quarter, as we would expect given the economic impact of the pandemic.
The use of disaster forbearance has declined precipitously and was under $100 million at quarter end.
Our customers have transitioned very well from de Fourb back to servicing their loans.
Nearly 75% of the borrowers who use the disaster forbearance program, our current and in repayment.
This is a significant improvement over what we were saying just 90 days ago. When we were reporting Q2 results.
As a result, forbearance has improved to just over 4% compared to the 5% to 6% we had projected in July.
Private education loans delinquent 30, plus days were 3%.
Up from Q2, and the year ago quarter.
As also should be expected.
We now expect the 30 plus day delinquency will rise into the mid 3% levels in Q4 and reach 4% in mid 2021.
Net charge offs for average loans and repayment were 1.3%. This is up from Q2 in the year ago quarter draw.
Charge offs are beginning to tick up as the use of disaster for has declined dramatically.
We now expect net charge offs for the full year of 2020 to total 1.24%.
And to totaled 2.3% for the full year of 2021 based on the trends we are now seeing.
I can't stress enough the.
Forbearance delinquency and charge offs are all performing way better than we expected 90 days ago.
The strong portfolio performance is a validation of our underwriting practices the coasts on or model, we use and also the value of a higher edgy.
Education.
Let's talk a little bit about NIM, the net interest margin on our interest earning assets was 4.79% in Q in Q3.
This is up from the prior quarter, but down from the prior year.
The increase in the quarter was driven by the sharp decline in our cost of funds, which brought it back in line with the yield on our investment portfolio, which was producing the prior drug that.
The big decline from a year ago is of course, a result of our liquidity build which is by and large now complete.
We expect full year NIM still to be right around 4.9%.
Operating expenses in our core student loan business increased 6.3% from the year ago quarter.
This is due to average customers, increasing 7.9%, but delinquent borrowers decreasing 5.2%.
When we report fourth quarter results as John mentioned, we will begin to provide investors with information on our unit servicing costs, which will enable you to track our progress against our efficiency goals.
Brief word about second quarter operating expenses, which excluding restructuring charges were $127 million. This compares with $142 million in the prior quarter and $154 million in the year ago quarter well ops.
While operating expenses are definitely trending lower in this particular quarter. They did benefit from several items totaling approximately $15 million.
These include lower sales and marketing expenses as well as collection expenses.
Due to the pandemic, a temporary benefit to our FDIC premium premiums and several other items.
We think the true run rate for the quarter. It was closer to 140 than 127.
Ultimately as John mentioned full year operating expenses will be around that $563 million to $565 million range, which includes restructuring costs.
Finally, our lives.
Our liquidity and capital positions remain strong we end.
We ended the quarter with liquidity of nearly 20% of total assets.
At the end of the third quarter total risk based capital was 13.9% and C. E T. One to risk weighted assets was 12.7.
Both of these ratios are significantly in excess of regulatory well capitalized ratios.
Impose Susa World. We also look at GAAP equity plus loan loss reserves over risk weighted assets, which was a very strong 15.7%.
In conclusion, our balance sheet remains rock solid in terms of liquidity capital and loan loss reserves I will now turn the call back to John.
Thanks, Dave before we turn the call over for questions I'd be remiss, if I didn't have recognized that we were less than two weeks away from a presidential election, we.
We continue to monitor discussions regarding student loans and remain engaged with policymakers as they develop proposals to make the higher education system work, even harder for our country. We are.
We are keenly focused on providing insights and information that is helpful to our investors as they better assess the opportunities and risks involved with these proposals.
It's important to start any discussion of the political landscape with perhaps a statement of the obvious we run a very important and customer centric business today at nearly 2000 schools are full credit spectrum GAAP lending literally.
Literally provides the last dollars necessary to make access to higher education, a reality for the students and families who turned to us for financing.
Our underwriting is disciplined and focused on responsible borrowing this is evidenced through our low annualized default rate approximately 1% to 1.5% through the cycle and the fact that 90% of our borrowers payback our loans in 10 years or less while.
While we recognize the human impact of any default. We believe these rates compare extremely well against competition and other lending programs at the state or federal level are.
Our pricing is fair and better than many alternatives approximately half to a third the cost of credit card debt as just one point of comparison.
And our products contain many best in class customer features no prepayment penalties and no application or origination fees as examples.
While we are proud of the access and opportunities our products create for students and their families. We also know that as a whole. The current system for education finance is not working well for every American for many lower income Americans access to loans is not enough they need more direct financial assistance and grants.
Some have taken on too much debt in the past and have little hope of repayment and are struggling under its weight as a nation, we need to fix these issues knowing that access to higher education is a key ingredient in creating financial opportunity economic mobility and social Justice Excel.
Excessive student loan debt, especially among minority families can often crowd out other investments such as the purchase of a home that can help create real family wealth and lasting financial stability.
We recognize that as a private student lender operating with our investors not public capital we cannot solve every part of this problem alone.
As a result, we're encouraged to see proposals like free College gained momentum in states like New York, and others, where income based free tuition plans already exist Sallie Mae continues to play an important role in helping students finance their education by complementing. These programs for example in the year after.
For New York's program was implemented Sallie mae's originations into the SUNY system fell by only 3% and have grown since then.
While the government is instrumental in creating access for lower income families to achieve the dream of higher education, we look forward to continuing to support middle and higher income families close the gap between other savings financial aid other loans and the cost of tuition.
As has been the case for decades, a combination of federal and state programs and private offerings will be required to help families pay for higher education.
We also support proposals for bankruptcy reform provided of course, they establish appropriate safeguards to keep the system from being abused.
Simple seasoning or age limits on loans that can be discharged in bankruptcy, maybe all that is necessary to safeguard the integrity of the private lending system, while allowing those in real financial distress to responsibly responsibly in fairly discharge their deaths.
In closing, we believe the higher education financing system needs to continue to evolve to meet the needs of all Americans. While we are proud of the role we play and the success of our customers. One risk. We face is that policies enacted to fix an issue elsewhere have an unintended impact on Sally Matt.
I am however, gratified that as we continue to engage with policymakers. It has become clear to us many legislators on both sides of the aisle I understand and appreciate the unique value that Sallie Mae and private student loans provide to students and families.
We look forward to working productively with any administration and Congress on these timely public policy questions to improve and enhance this important part of the economy Bank.
Thank you and with that Angel, let's open up the call for questions.
Thank you, Sir and ladies and gentlemen at this time, if you would like to ask an audio question. Please press star one on your telephone keypad.
And our first question comes from the line of Michael Kay with Wells Fargo. Please go ahead.
Hi, good morning, based on that direct marketing mailing David that I track. It appears that discover melt seven times the volume of selling made for this peak season. This is even more than the typical four to five times over the last couple of peak seasons, I know you've been harder on your sales force been mailings, but I was wondering if you perhaps.
Leaving some market share on the table by not marketing as aggressively at your largest competitor.
Yes, Michael its John Thanks. Thanks for your question, obviously, its hard for us to comment on why discover or any other competitor is making the choices that they are making.
I think we have incredible confidence in the analytics and models and return discipline that we put on our various marketing programs. We believe that we are sort of pushing right up to the edge of value creation of those marketing programs. We also feel like we have a very robust test.
And learn capability to even in some cases it in a responsible way sort of push beyond those thresholds to see if there's new programs or tactics that we can develop or understand.
So thats I think a long winded way of saying, we feel great about our level of marketing spend and by the way when we put that together with an incredibly strong salesforce. We think that is really what drives asset of our market share and some of the returns that you see in our performance.
Okay. Thank you for that so.
Just wanted to talk a little bit more about bankruptcy performed MACOM can you just provide your perspective on what you think the likelihood that we actually see bankruptcy reform for student loans I'm interested in some of the financial impact of Sallie Mae if something like that were implemented, particularly on a retrospective basis and what this caused.
Industry to increase pricing on our loans to consumers.
So Michael.
Using history as our guideline bankruptcy reform proposals and legislation has been around.
Literally for as long as the private student loan has existed and I guess and maybe an important.
Point to look at was back I think when Congress was controlled by the Democratic Party and they passed reconciliation to and the FFELP loan program. There was an effort to also pass bankruptcy reform from that.
Sure and Bill in that reconciliation bill and they could not gone or enough support to included in the bill So theres not a tremendous amount of support.
Appealing this bankruptcy legislation.
So.
Now I don't know how to handicap it going forward, but I think the past is pretty good prologue.
Regarding the need to reprice, our loans, we don't think that would be necessary. If this legislation passed because when you look at our program, it's literally 90% co signed and it would require not only the borrower but.
The coasts liner declare bankruptcy the have the loan discharge and you know our co signers of basically responsible middle income to affluent individuals with high five.
FICO scores in pristine credit scores and unlikely to see.
Two risks of that to this charge a student loan so when we've looked at it in the past the impact on our portfolio would be very very small.
Thank you so my hope that it will fluctuate.
Thank you.
And your next question comes from the line of Moshi or much with credit Suisse. Please go ahead.
Great. Thanks very much.
Good morning.
Thanks for all the info is.
So it's really helpful. I think maybe we just drill down a little bit more on the competitive environment you talked about in your slides about a competitor kind of leaving the market.
But could you also address the consolidation.
The consolidation loan environment, and what you're seeing there I mean, we saw some pull back in the second quarter, a little bit of a recurrence in the third quarter and maybe just talk about that from a from a competitive standpoint. Thank you.
Sure motion of the consolidation trends are.
They didnt disappear completely but they are far below what we were expecting to see prior to the pandemic.
And you know this is the third quarters when volume starts to to pick up again as borrowers graduate and go into repayment. So.
So.
Pretty comfortable that we're not going to see a resurgence and the continuation of the trend that we were seeing and dynamic.
And.
You know look we continue to look for ways to to protect our our portfolio and quite frankly at current rates with if there wasn't the risk of cannibalization, we would be able to earn a reasonable return on consolidation loans given that.
4.5% to 5% yield so it's something that we continue to look at.
But.
Though.
Points in time, its three part of part of the industry landscape and we haven't found.
The elixir that crude.
We've also consolidated from from our portfolio.
And John if I comment briefly on new origination obviously this year is a noisy.
Hi, you have people announcing competitors announcing changes and their commitment to the marketplace, but by the way some of them are continuing for this year. Some of them are continuing for their current customers for this year and of course, the overlay on top of all of that is.
Really dynamic school environment, just given the realities of kind of it.
So I think our view is its hard at this point you get a really accurate read of what is the sort of through opportunity. If some of those competitor moves on new originations I think that will become easier to really assess over the coming.
Sort of the coming 12 months, but what I can tell you is we are looking at those as real opportunities for us and we're engaged through.
Through our school channel to make sure that Ed.
People change not just their commitment to the market, but underwriting and.
Sort of other credit spectrum choices that we are there and really understanding those changes and competing aggressively for <unk>.
Any good business that has lapped by that vacuum.
We are engaging very directly in the partner channels trying to understand if any of these players had valuable partner relationships that may now be in need of filling and were actively doing that now.
Most of the bank competitors in question here warrant big players in the direct to consumer piece, but.
The question that I think Michael asked earlier, we'll obviously continue to look at our direct to consumer marketing returns and if those change as a result of sort of competitive dynamics, obviously, we'll update our assumptions there.
I think it's hard to imagine while it's difficult to predict the exact impact it's hard to imagine that the current competitive situation would not benefit us.
In the medium to longer term.
Great. Thanks, very much John and maybe just following up on that exact point can be particularly given that wells was marketing as direct to the consumer is you could be and that at some point in the not too distant future they won't be doing that they won't be doing that at all.
I mean, it really does seem like it opens up.
Kind of like something write down your alley.
One of the things you talked about when you. When you first joined Sallie Mae was some of the opportunities to kind of broaden that consumer relationship.
Any further thoughts there now we are kind of three months later, maybe further thoughts on those opportunities for the company over the next several years.
Yes.
Honestly, we are in the very early stages of setting that up and that's a unit that we put more emphasis on given the organizational changes that we just announced and truthfully. We felt like it was important to get the right team and the right organization in place before pushing that too much further and.
Candidly, we also put a premium on making sure that our efficiency line and our cost line was trending in the right way. So that has been more of the focus over the course of the last three months.
We're obviously very good.
Very committed at this point to continue to build our credit card business. We are looking for ways of making that even more profitable going forward and I think you should expect that we'll look for more ideas over the course of the fourth quarter and into 2021.
Thanks, so much.
And your next question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.
Hi, This is Steven Kwok filling in for Sanjay. Thanks for taking my questions just the first.
The first question I had was around the NIM and specifically on the liability side. So that has been coming down nicely. I was just wondering if you could provide a little bit more color around how much tailwind.
On the liability side and how we should think about the NIM as we progressed through next year.
Steve I think that the NIM has reached sort of a baseline point.
The the big headwind over the last year has been the fact that we've built sub 7 billion dollar liquidity portfolio, which is basically invested in federal reserve deposits two year treasuries and agency debentures, we think Weve reached.
No.
So we built that liquidity portfolio now we don't think that that will continue to be a drag on our NIM, but quite frankly, we have reasonably long term funding in our portfolio between longer term deposits and ABS. So I don't anticipate.
Paid any additional.
Upside in the NIM from here.
Got it and then just sort of round the c. So given all that numerous moving parts in this quarter as we look out to the fourth quarter would would it really be just function, assuming the macro environment stays the same and all the outlook would it.
Would it be just a function of the unfunded commitment piece and then also the Cecil catch up.
Around the.
The MTV.
The portfolio are those the two factors that we should think about or anything else.
Steve I think you are on the right track there. So the fourth quarter is obviously going to be a very loan origination quarter and we have already reserved for $1.7 billion of second disbursements for the first quarter. So the Cecil reserve.
If to your point economic forecasts are stable and we don't make any further adjustments in our CPR. The view the seasonal reserve should be a function of what additional volume looks like and yes, because we do have basically a discounted loan loss.
These are basically we have $900 million of discounted loan loss reserve, which will creep up over time and you can think about it in the following framework.
Average life of loan of six years was really a $150 million of accretion on an annual basis. So we do have that headwind for the future reserve, but yes, I think you're thinking about it appropriately.
Great. Thanks for taking my questions.
You're welcome.
And your next question comes from the line of Vincent can take with Stephens. Please go ahead.
Hey, Thanks, Good morning, and thank you for taking my questions first I actually wanted to dig into the experience you had.
With New York since the both candidates the presidential candidates seem to.
Seems to be supporting some sort of education or at least so just kind of want to take the learnings from the New York experience onto Mike what might happen with the National program. If you could dig into that I mean, it seems with New York that even I think they were calling for 9000.
Students to be eligible there only 30000 that actually enrolled and just under even thinking about rolling that back. So just sort of wondering if there's any incremental color you might have.
Did you get more people signing up.
Even though the signed up for the scholarship program and then everything else you might add thank you.
Yes, Vincent it's John let me start, but recognizing that New York rolled out before I joined I'll also ask Steve to jump in here liberally with any additional historical perspective.
First I think it's just important to start with a recognition that there are many sub markets within the market for higher education lending and I think when you look at the free College proposal and by the way I think when you look at many of the proposals that are coming out of the more liberal end of this fact.
From what they are really all about is making sure that there is financial access and not a sort of paralyzing level of debt on the other side for at risk and disadvantaged and lower income individuals and that.
And that's that's really understandable if a college education is the key to higher income and all the good things. We've talked about you want to make sure that the price tag does not help or does not hurt.
And candidly that.
That's not our core customer do we lend to some of those customers of course were full spectrum credit provider, but you know that is not our that is not the core of our business and so we view as I said in my talking points something like the free College program as being very complementary to the programs that we.
We offer it and so I can't speak as well to the enrollment programs originally in New York, but I think Thats why you see the relatively modest decline in originations in the SUNY system that 3% number that we talked about before.
Going forward I think it's even harder to project, what something like a a biden free for free College program could look like are we obviously don't know what the exact nature of the federal contribution would be that we don't know exactly what the state requirements would be.
And truthfully all of that is done with the overlay of a co that situation, where United States are going to have less not more financial resources on average to contribute to discretionary programs.
So while we really applaud the program because we do think it is going after a core group of customers, who are needy, who are deserving and who would not have access otherwise we re.
We really continue to believe that the impact on our business will be to minimis.
And even if there is some impact we would view that as being quite frankly, a net net positive to getting to an overall system that works better for all for all students in all families. Steve would you add anything to that yes.
Yes, the only thing that I would add and I am a proud graduate of Stony Brook University are part of the SUNY system. The the program is means tested so it's only available to families with an income of below $125000. It also only provides free tuition not.
Room and board and then there are many many other.
Strings attached to it G.P.A. requirements and a big one is you have to pledge to stay in New York State for five years, otherwise it becomes an interest free loan so you're right Vincent the the take up rate or the amount of people that qualified for it was way lower than anticipated and then the.
Final thing that I will point out is that in the very early days.
Of the program the main flagship universities, Stony Brook thing Im Tim Buffalo in Albany increased their tuition costs. So.
Significantly relative to other public colleges.
In order to defray the costs and those that could afford to pay for college contributed to.
Free College for the Excelsior program. So at the end of the day, we did see an initial dip and then.
Originations have been growing slowly.
In that system since they implement the program.
Okay, Great Thats very helpful detail. Thanks, very much for that just another quick follow up so nice to see the personal loan sale.
How much capital is freed up from that sale and just curious if maybe that capital can be deployed towards share buybacks or what you're thinking about that create up capital. Thank you.
Sure the freed up capital was around you know $70 million and then we did release a big chunk of the loan loss allowance look when we look at capital available for share repurchases, we basically have a three year outlook.
And that portfolio is essentially going to run off over the next two years. So it wasn't really going to be a constraint on our share repurchase goals, but I do think that it very much reflects our strong focus on the core business going forward and the.
Fact that we are going to allocate capital, where we can get the appropriate returns.
Okay, great. Thanks very much.
And your next question comes from the line of Henry Coffey with Wedbush. Please go ahead.
Good morning, everyone and thank you for all the helpful comments around the quarter its was a lot to work through.
Two questions.
One is it and this kind of goes back to one of the earlier questions is it fair to assume that if in.
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2021, your numbers come out exactly as you indicated.
But the reserve would just be.
The origination commitment and then the present valuing of of of the needed accretion.
And is there any way you can sort of buffer yourself from these we'll call them the Moody's swings.
I mean, it is tight it is almost like a commodity input and that you have no control over what they say.
But its a dominant part of your forecast.
So Henry Yes, I think again like like Stephen you are on the right track all things being equal contributor to the C.. So reserve will be due loans to spur some commitments as well as the accretion of the discounted reserve factor.
Your second question is a very good one is there anything that we can do to insulate ourselves from movement in the Cecil Reserve. There are two things that we can do and one of them. We have already started to do and that is sell loans and ticket.
Vantage or the fact that there is a bit of an arbitrage and these loans might be better off in the hands of people that aren't constrained by Cecil capital and reserves and the other thing that we can do is take advantage of sort of a developing market for credit risk transfer.
For trades. These trades are common in other asset classes. They haven't been developed in the student loan market, yet well actually I think citizens to a variation on a credit risk transfer trades. So there are some derivative approaches that we can and probably will.
We'll utilize in the future. However, doing those transactions I think is going to be more difficult to move but kind of size that we have in mind for our future loan sale programs. So I think that will be one of the most impactful things would be we'll do going forward.
To limit the impact of seasonal on the company and our capital generation.
With CRT.
Okay, sorry go on.
The only thing I would add I think Steve said, it really well I mean look less let's take a step back I think there's there's sort of three things going on there is there is the implementation of Cecil today, and I think all of us getting comfortable with.
Sort of the rules of thumb to how to approximate that and I think Steve has done a great job in his talking points and in the investor presentation of laying out a framework of the driver is kind of that usual in typical sort of seasonal reserve write it Canadians and funded the loan sales changing economic environment and so forth.
So to me that that's a part of it secondly, let's recognize we happen to be implementing this during one of the most you know sort of.
Unusual economic periods in history, where you have incredible economic damage at the very same time that you have massive fed liquidity.
And and not just monetary and fiscal policy action taken.
To help mitigate the impacts and so things like the prepayments speeds.
I would hope 99 years out of 100, we're not having those discussions again, because we're not in another pandemic type type of situation. Although I will let met these hundred year flood it seemed to be happening with a bit more frequency and look I think the sort of third aspect of gas is we are learning and I think people.
Like Moody's our learning.
Sort of what is working well and not working well as a part of the implementation. So that change you know as I said in my talking points that change to college unemployment rate that was something that I think bay OSAT. They learn they understood as they recognize that that probably had not been getting the attention historically it deserved and I don't think we expect that.
That could change again so.
Why do I say all of that I think everything Steve said is right.
But I think my very strong hope and we're going to continue to try to provide you guys real clarity on mass my real hope is that the growing pains of CCEP implementation get in the rearview mirror pretty quickly because we've kind of gone through this a couple of times and there is not any more things like the movies. My hope is that we're not in another plant.
Mix situation that causes really uncertain and unpredictable dislocations and what we really get back to Steve's kind of core framework, which I think if you look at it actually sort of minus the other mitigating factors really does a pretty good job of estimating what the seasonal impacts are going to be so long winded.
You are saying you know, we're working and we're going to do our best to give you guys. The information you need but we also need to recognize a little bit of this is just the growing pains and the current economic situation. We're in.
Great second question unrelated.
It is it is it heresy for me to suggest that maybe the link between.
The student loan borrower and and other possible products is not that strong or maybe it requires a massive amount of.
Banking infrastructure and a full product suite to get there but.
It it seems like an idea that makes a lot of sense, but we just haven't seen seeing seeing seeing much happen on that front.
Yes, Henry let me, let me take that one and obviously this is sort of deep strategic question. So I'm going to have to give you kind of a little bit more of a general answer on it.
Look I think we are trying to look sort of more deeply at what opportunities make sense for us and.
And if I had a dollar for every bank going back 25 years or more who had gotten the bright idea to cross sell I would.
I would have a fair number of dollars at this point right that that's a very obvious and clear strategic option.
But to your point I think what you have to figure out is why would a customer want to cross buy from US why why would in fact, we be able to provide them with a better product and more relevant offer something that makes getting that next product from us a better deal benefit.
Got it from one of our competitors in any of these categories and you know as we've done the work Henry we sort of feel like there's two or three areas, where we have some real advantage.
We have deep credit you know and sort of under writing insight into these customers and by the way with a little bit of work, we could probably even have better insight and these are young relatively new credit customers and that kind of insight is really really valuable.
Two in a world where the average consumer by some estimates gets exposed to three to 5000 marketing impressions a day, we do have a relationship with these customers they are paying attention to us, especially at key points in their life and.
And our ability to cut through that marketing quieter and make sort of relevant offers at the right time.
It's something that we believe is an advantage.
And I think that's sort of the third thing is we have incredible context on these customers. We know when they are graduating we probably know where they're moving to we probably have a pretty good sense of if they're changing jobs, we can probably learn even more about them over time. So so part of why we're not rushing to announce a bunch of new products.
In services and we're trying to be really really thoughtful about where is there truly a compelling advantage we have and.
Then you know how do we not just decide to go build it but how do we make the right in the rational choice do we don't get do we partner deal. We affiliate do we engage in a marketing relationship there is bunch in different ways that we can get after it. So it is complicated I don't think to your original question I don't think its heresy to.
Ask that question and again I think as investors you all should expect us to ask that question. They have really good answers for why we would choose to engage and to offer a new product to our customers.
Great. Thank you.
Yes.
Thank you and your next question comes from the line of Arren Cyganovich with Citi. Please go ahead.
Thanks.
Were passed an hour so I'll be quick the.
The expense guidance.
Yeah, obviously very positive 525 to 535 for next year down from 545, 45 is that 50 million reduction I guess.
I guess just reflective of part of that is already in in for part of 2020, because we've already made this reduction is it that's why it's not quite yet.
Yes.
I would I would sort of say theres, a couple of components to it.
But again, we've already realized this year part of it is offsetting and I said this in my talking points sort of temporary belt tightening that we know won't be able to be long term sustainable and we don't want you all counting on earnings and expense benefits from asset. We don't feel are the results of real structural change and part of it is.
Offsetting growth right, we know that our servicing portfolio is likely to be bigger this year than it is or next year than it is this year and there is some variable cost associated with that so when you put all that together I think that is roughly speaking the main drivers of the change as Steve did I Miss anything on that.
No I think you covered it pretty thoroughly but I think the biggest impacts will be in 2021. So so the restructuring charge that we just announced.
Reflected some some some head.
Head count reductions and that is yet to impact the company's opex in a major way. So all told we took out about $40 million in run rate salary and benefit expenses and another $10 million in softer expenses travel and and things like that but.
But as John mentioned, it's it's not one and done we are going to continue to focus on every day.
Line item on our operating expenses budget and make sure that we are getting returns for the money and spending.
Okay. Thanks, and then the the loan balances.
You kind of backed away from flat because of the prepayments.
The those prepayments.
How much of the reduction is that going to be for private student loan balances by the end of the year and does that change your appetite for loan sales as we get into 2021.
No no our loan balances at the end of 2020 are going to be will be less.
Less than 5% lower than they were at the end of 2019, we also.
Earlier in the year, we were thinking that our our loan originations were going to be around $4.9 billion. We have a much better peak season than we anticipated that offset some of the run off that we're seeing and prepayments.
Great. Thank you.
I think your last question was does that change your appetite for loan sales going forward and the answer that as a result thing absolutely not.
Thanks.
And our final question comes from the line of Rick Shane with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning, and I apologize if some of this has been covered.
But Steve you mentioned some ongoing.
Some ongoing loan sales and I'm just curious given.
Both the supply demand.
Characteristics and the market, presumably less production out there.
Tighter underwriting but more.
More uncertainty about risk how do you think thats impacting pricing as you move into the fourth quarter and more importantly, as you head into 21.
Sure. Good question, we have an ongoing dialogue with investors in whole loans and securitized loan sales. So we know all the players and we continue to speak with them I think there is very high demand for our product and.
Student loans in General fact of the matter is investors really prefer Sallie Mae student loans over I think other brand names because we have a very long track record in both credit and we have an excellent and reliable servicing flat.
Form so so I think when the calendar turns into the new year, we're going to see you know substantial demand for our product at a premium similar to what we have seen in the past, but all things being equal.
Got it and thank you as always for us it really embracing trying to answer the question. It's a it's helpful. So thank you guys.
Thanks, Rob.
And now I would like to turn the call back over to our speakers for any closing remarks.
Before I turn it over to Matthew to take care of a couple of quick bookkeeping items. Once again. Thank you everyone for taking a little bit over an hour. This morning. We appreciate your interest and Sallie Mae and look forward to continuing the dialogues with you as we move forward in the quarters to come Matthew.
Thank you for your time and questions today, a replay of this call and the presentation will be available on the investors page at Sallie Mae Dotcom. If you have any further questions feel free to contact Brian or I directly this concludes todays call.
Ladies and gentlemen, thank you for your participation. This concludes today's conference call you may now disconnect.
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