Q4 2020 SLM Corp Earnings Call

January 28, 2021

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Sally May 'twenty 'twenty Q4 earnings call.

At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would like to hand, the conference over to Mr. Brian Cronin Vice President of Investor Relations. Please go ahead Sir.

Thank you Andrew Good morning, and welcome to Sallie Maes fourth quarter 2020 earnings call. It is my pleasure to be here today with John Winter, 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 Companys form 10-Q, and other filings with the SEC.

For Sallie Mae. These factors include among others the potential impact of 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 core earnings the description of core earnings a full reconciliation of 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 Sallie Mae Dot com.

Thank you I'll now turn the call over to John.

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 'twenty, one by executing the strategies, we have previously discussed.

Third we will begin 'twenty, one with a significant return of capital to shareholders. The specific plan is currently being finalized.

GAAP EPS in the fourth quarter was $1 13, compared to 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.

Our originations ended the year at $5 3 billion 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 origination.

Originations quality was consistent with past years, our cosigner rates were 86% compared to 87% in 2019 and average FICO scores were 749 versus $7 46 in 2019.

Market share through the end of September was 54% up 5% as we compete for volumes from competitors, who are leaving the industry.

The 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 of 58 million shares at an average price of $9 and <unk>.

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 you promise business and our personal loan portfolio.

We raised $500 million in unsecured debt and use 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 'twenty one in 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 seasonal loss estimates.

Based on an improving economic outlook, we changed the economic scenarios used in determining our seasonal allowance calculations from the previous 50 50 base S. Four waiting back to our standard approach. In addition, we have continued to adjust our assumed prepayment rates in response to change.

The customer behavior, while Steve will discuss both changes in more detail the impact of these pandemic related changes coupled with the reserve release related to our early 2021 loan sale of that I'll discuss next reduced our provision by $316 4 million in the fourth quarter, bringing our loan.

Loss reserve down to 146 6 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 sales and Keith.

With GAAP those loans were moved to held for sale in December of 2020. This change in designation mandated of release of the seasonal reserves for those loans, which flow through our income statement per.

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 41 of EPS in 2020 said simply our full year core EPS would have been of $1 82.

Excluding this reserve release.

We do not expect this split year result to reoccur.

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 despite all of the challenges in moving pieces caused by the pandemic. This dollars 82 of share result is just six 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 Steve.

Thank you John 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.

Follow by the 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 one 5 billion.

Or six 5% of our total student loan exposure, which under Cecil includes the on balance sheet portfolio, plus the accrued interest receivable of $1 4 billion.

And unfunded loan commitments of one 7 billion.

Our reserve of six 5% of our portfolio is down significantly from seven 1% in the prior quarter.

As a reminder, we use of discounted cash flow methodology to determine our reserve on 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 for the subject to change from quarter to quarter.

These include model inputs, and then the overlays deemed necessary by management.

The most impactful model inputs include economic forecasts their weightings of prepayment speeds, new volume, including commitments made but not yet dispersed and.

And loan sales.

Understood.

Under Cecil the economic forecast, we use are key and will drive quarter to quarter movement in the allowance.

As John already mentioned, we've changed the mix and weightings of the forecast we used in the models in the fourth quarter.

Pacifically, we moved from using Moody's base S four forecast weighted 50% each.

Two of more balanced mix of Moody's base S. One of three forecast.

Weighted 40%, 30%, 30%.

As a reminder, we moved to Moody's base and S. Four in the second quarter two of the uncertain economic environment. The significant increase in forbearance usage, we're seeing an uncertain 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 of the economy and the outlook continues to improve and we're seeing steady performance in our portfolio, including recent repay cohorts as the result, we concluded that it would be appropriate to revert to the more balanced mix described earlier.

This is in fact, what we've determined to be best practices in normal environments. When we were preparing for seasonal and as the mix of forecasts recommended by Moodys to capture a multitude of probable economic outcomes.

The change in scenarios and weightings reduced our reserve requirement of $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.

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 now.

Our portfolio this change reduced our reserve requirement plenty of additional $77 million.

Volume of course is an important driver of our allowance, while the fourth quarter as a quiet quarter for new loan originations.

Did enter into new loan commitments of over $500 million, which required us to increase our reserve by $37 million.

Finally, as John already discussed, but it's worth repeating loan sales had a big impact on the provision <unk>.

Moving loans to held for sale in December for our early January transaction reduced the reserve by $206 million.

The factors the numerator here net to a reduction of $288 million on our reserve and they were offset by other factors, including overlays and the natural accretion of our discounts of the reserve among other things, resulting in a negative 316 million.

Provision for credit losses.

For the next few minutes I will go over our credit metrics, which can be found on page nine of our presentation.

For our held for investment portfolio loans in forbearance were four 3% flow.

Lots of Q3, threes level, but slightly higher than $4, one in the year ago quarter.

This was expected given the economic impact of the pandemic.

Loans delinquent 30, plus days were two 8% of loans in repayment down from the 3% in Q3, but unchanged from two 8% a year ago.

We now expect the 30 plus day delinquencies will rise into the high of three percentage.

<unk>, 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 152% up from one to four in the year ago quarter.

The full year of 2020 charge offs totaled 117%, which is unchanged from 2019.

Looking ahead, we expect the charge offs for 2021 will increase to around one 8% for the full year based on our current forecast.

The large wave of loans have entered P&I in Q4 is performing very well compared to prior year's repayment cohorts as measured by things like early roll into delinquency and cure trends in the collection shop.

I would like to point out that our delinquency and charge off forecast, while higher are informed by our seasonal model and have declined steadily since the peak of the pandemic as the outlook has improved and our inputs of change this of course, the big part.

Positive and I should reiterate that we are very well reserve 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 six of the deck our NIM.

NIM on interest, earning assets was $4 eight 2% in Q4.

Up from the prior quarter, but down from the prior year as interest rates have moved dramatically full year net interest margin was 481%.

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 four and three quarters percent.

Few words on Opex 2020, operating expenses, excluding restructuring fees were $538 million.

Compared to $5 74 for 2019.

The 6% lower.

The significant reduction in expenses was driven by exiting the personal loan business scaling back on credit card of 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 on the fourth quarter, we did several transactions that improved our capital efficiency first we issued $500 million five year unsecured debt portion of the proceeds of this issue will be used for share repurchases.

Secondly, we repurchased nearly one 5 million shares of our preferred stock.

45 cents on the dollar this transaction created equity, which enables the company to repurchase common stock.

Turning to liquidity on 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 fourth quarter total risk based capital was 15%.

Common equity tier one risk weighted assets was at 14% and on the post Cecil World. We also look at GAAP equity plus loan loss reserves over risk weighted assets, which came in at a very strong 16% our regular regulatory.

Capital ratios are well in excess of well capitalized and conclusion our balance sheet.

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 ill turn the call back to John.

Thanks, Dave.

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 am heartened by the continued positive developments around vaccines, while the spring <unk>.

<unk> 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 the college education continues to trend in a positive direction in December this rate declined to three 8% from four 2% in November and remains notably lower than the six 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 of 2021.

These efforts should positively impact our borrower's ability to service their loans.

Before I elaborate further let me congratulate our 46th President of the United States as the CEO of the company headquartered in Delaware, We take special pleasure in congratulating our own Joe Brian of 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 and 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 of our prepayment fees attractive pricing compared to other GAAP financing option.

<unk> 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.

And 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 planned 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 thorough of good Marshall College fund to meet the needs of minority students and those from marginalized communities.

Our bridging the drain scholarship program will provide $1 million of year over the next three years to help students not only access, but importantly complete college.

With all of the said, we recognize that not all of 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 of.

<unk> ability 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 and promoting economic mobility and social justice.

In this context, we look forward to working with the by the administration and our continued efforts to increase the act 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 the 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 'twenty. One 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 the loan originations to be down in the first half of the year and up sharply during the fall semester.

We expect non interest expense to end 2021 between 525 and $535 million as Steve said earlier. This reflects our continued focus on efficiency and operating leverage and.

And we expect our total loan portfolio net charge offs will be between 260 and $280 million.

Let me conclude with the discussion of one of our four strategic imperatives, which is capital allocation of 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. Our three main beliefs first we can attractively grow earnings beyond 2021, because of market growth and dynamics and a focus on operating leverage.

Especially post Cecil implementation, we can deliver attractive organic payout ratio is to investors, while funding balance sheet growth because of the high ROE 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 of 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 high bred originated 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 seasonal 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 billion to $5 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 exploration.

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 sales 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.

And ladies and gentlemen, as a reminder, if you would like to ask an audio question. Please press star one.

And our first question comes from the line of Sanjay <unk> with K B W. Please go ahead.

Thanks, Good morning, and good results.

I guess I wanted to break apart the 220% of $2 40 outlook and.

I know you mentioned John that the double digit gain on sale, but maybe we could just talk about those pieces of the gain on sale. The capital return assumption on any reserve releases expected inside the numbers.

Yes.

Sure Sanjay so look.

The three.

<unk> 30 midpoint is basically derived from.

Some very supportable assumptions, we've got the four and three quarter percent NIM in there we already talked about the gain on sale for the first $3 billion being in the low double digits. We received the very strong premium on that sale, we're factoring in another sales.

Late in the year on the additional $1 billion at what we expect to be a very attractive premium.

That topic off of the past our co op.

Co party.

<unk> Party is still working on their sale of the loans that they purchase so I don't want to give too much specificity on the price to help our buddies out it was of great transaction. When we look forward to working with them again in the future. So we don't want to give too much specificity on that there is.

Obviously, a very large slug of share repurchase in the $2 30 mid.

The mid point, we have not announced the form and the timing of.

That share repurchase, but I think John has given you all of the appropriate.

Commentary for you to try and the factor in the when and how large that will be there will absolutely be more information coming very shortly and finally I will point out that there is not I saw on a couple of the notes. Some people are wondering if there was another reserve release.

Late in 2021 of associated with an additional sale. There is not the number is clean the seasonal assumptions supporting the provision of along the lines of the the.

The CPR increase from the $43 30 base as one of three that we provided so look of a very clean number four.

2021.

<unk>.

I'll take liberties and say if you move take the gain out of 'twenty and moving into 'twenty one.

We are going to generate some very substantial EPS growth and as John alluded to.

His prepared remarks if.

If we keep with this hybrid originate and sell strategy, we will generate earnings growth in 'twenty, two and beyond but of course, we don't want to start giving you guidance.

For the next calendar year, hopefully that helps on Jay, but I would be happy to answer any further modeling question on thanks.

Steve So I guess I completely agree with the comments debt at <unk>.

These.

Gain on sale levels. It seems like the Arps makes sense is there any appetite to do even more than the $1 billion. Later this year and given the gains are so high on the gain on sale rates are so high.

You know look we'll 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.

The loan sale premium market is going to be volatile and softer in 'twenty two and it is in 'twenty one a lot of positive things have happened over.

The last six years as we've been in the.

Pendant bank, an originator of smart option loans I think investors are.

More comfortable with the credit.

That is in these assets has 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 ingredients right here now.

On the low interest rate environment, and we don't see that changing dramatically over the course of 'twenty, one and into 'twenty. Two 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 of this morning.

And some day, if I could add to what Steve said and I agree with them. Okay. This is this is clearly a a.

On a balancing act.

On 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 flow through the.

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 is there are there is upper limits on how much capital you can.

Turn 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 beer.

Extremely true an extremely aggressive two of our commitments around strong capital allocation of 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 the strategic description.

We also like the ability, especially post diesel of growing our balance sheet and organically generating capital and we think thats an important part of our long term valuation basis. 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 on our Board then getting the right balance of capital retention versus capital return.

I appreciate it thank you.

Thanks Sanjay.

And our next question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.

Hi, Good morning, I wanted to see if I can get for the thoughts on the improved 2021 net charge offs guidance is this just really at the lay of the timing of losses into 2022 or is the real incremental improvement here and how much the federal payment holiday really helping and does that just delaying the losses in the portfolio.

Sure Michael So look the.

The loss forecast is very much much of an output of our loan loss reserve seasonal.

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've changed.

Our inputs.

While anecdotally, we absolutely agree with you that the federal payment holiday is supporting our customers and.

Absolutely.

<unk> overall cash flows and performance of our portfolio at this early stage, we cannot really triangulate it until the U.

How much of a factor of that is and what it may or may not offset the bottom line is we are seeing very positive performance in our portfolio.

Across the board.

Absolutely the federal stimulus programs and the monetary policy has been employed by the government are helping but I think it really is at the end of the of testimony to the.

The value of the college education.

But 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 selling day has never really come up with the real solution to the issue. After the failed attempt that a defensive product so refi risk something youre going to just have to look with our.

Or are you going to try to come up with the viable.

Hence the product option and I was wondering if you had any comments on sulphide zone.

Public via spot do you think that will make them more dangerous reflect competitor.

Yeah, Michael It's John Let me, let me take those in reverse order I don't think its our place to comment on <unk> plan, they're a great naval competitor and we love competing against them, but we'll let them answer their own questions.

I think.

On the question of refi.

This really comes down in my mind to what I've always referred to as cannibalization math.

And at the end of the day, if we could perfectly predict who was likely to refi.

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 a from an economic and a return perspective makes that that refi that cannibalization math worked 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 the.

Sort of where are the options for us to improve the retention of our customers in 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 that we think is right I will say and you do.

Didn't ask this Michael but I will just put the 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 of borrower responsible amount of money do we give them the tools to understand how to repay their debt as 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 product.

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 will 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.

The ability to do that in an efficient and economically value creating way.

Thank you very much thanks.

Thanks, Michael.

And our next question comes from the line of Mark Devries with Barclays. Please go ahead.

Thank you.

How much would the debt are between selling and retaining loans need the collapsed before you shift back towards <unk>.

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.

I mean mark.

Look we look at our stock price and I think the same way you all do and we all know what the.

Ingredients go into feeding what Pete should be and we will look when we look at our cost of capital growth rates et cetera, We think we should have a pay rate.

Being conservative in the.

Of the high double digit on mid double digits mid teens, we don't think thats out of the question.

So we think that the stock price should trade much higher than it does we think BR works.

The premiums as low as 678% and we.

We think if we were.

Looking across the table of my boss here before I say this we think that if we were paying.

10 multiple for the stock.

It would still be a reasonable arbitrage to do.

Okay, that's really helpful. Thanks, Steve.

And then the 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 on the peaceful phased 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% base.

Based on the inherent.

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.

We think that the $1 billion to $5 billion.

Share repurchase authority that the <unk>.

Board just granted us is perfectly adequate for 2021 as we get started here.

Okay got it thank you.

And our next question comes from the line of Rick Shane with JP Morgan. Please go ahead.

Hi, guys. Thanks for taking my question, Steve When you were answering that last question of kind of thinking you're sitting at the table of holding up 10 fingers and looking for the knot.

Anyway.

We think about the transaction debt.

You.

The loan sales this quarter and another $1 billion later on the year.

I'm curious what the mix is on.

In school versus in repayment.

And I'm also and you made the comment that you don't expect that there will be of reserve release associated with the second sale of this year is that because those will be loans that will already be held for sale or is it because there is a net.

Right.

On through the year. So that for example of the seasonal reserve builds but then it's released and so on a net basis. It doesn't make any difference, but we should think about that in terms of the contours of the quarter.

So let me first clarify that just so that there is absolutely no confusion. So in the guidance we have the loan sales taking place within the calendar year.

So whatever reserve whatever reserving we need to do for the year is already in the provision which was in our guidance of that makes sense.

<unk> that I was trying to clarify is in our 2021 guidance. We do not have a back end reserve release for loans that will be sold in 'twenty 'twenty, two which I think is a very important point too.

Lay out sort of does that make sense for you before I go on the mix that alone.

That totally makes sense.

Okay. So when we sell loans, we sell a representative sample of the loans that are on our balance sheet. So whatever you see on the portfolio today of the loans, 50% in.

Principal and interest full repayment.

On whatever the mix of loans 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 of the demand is absolutely there but.

We chose not to.

Got it that's great color.

So.

Perfect. Thanks, Scott.

And our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.

Great. Thanks, most of my questions have actually been asked and answered but maybe.

Clearly you just finished last year's program.

This year's program.

Even before the the.

The second loan sale is likely to be larger in dollars.

Even larger as a percentage of the company.

So maybe could you just talk a little bit about what lessons you learned about clearly maybe on the better to be lucky than smart category.

Slowing the purchase and Scott you.

20% lower price than where the price was when you announced it but as you think about it now.

I know that you haven't made the decision yet but could you just talk about the parameters that youre thinking about as to how to deploy that capital efficiency in 2021.

Sure Moshe, it's John happy to and I'll invite Steve to sort of jump in on this I mean look first of all I think it goes without saying that when you were talking about sort of capital return and the way that we are where we have sold.

Sort of producing assets.

To redeploy that capital.

There is a there is a premium on time right. We don't really want to have large amounts of.

Of that cash that previously would have been earning nice spreads in the form of loans sitting on our balance sheet. So we would like to deploy the capital as quickly as we can by the way that's part of what we liked about the ASR program last year. It gave us a good mechanism for deploying at least the lion's share of the capital very very quickly.

So number one is speed.

Number two is kind of market conditions, we always want to understand the depth of nature and sort of levels of the market and where we think we are in so we will take into account sort of.

Market conditions with an eye towards execution and third and you should assume we've already planned for this in the comments.

Look at what our kind of capital needs uses and sources are throughout the year to really make sure that we've got the timing right. Because obviously, we want to make sure that we've got the right level of capital not just at the end of the year, but kind of throughout the year. So I think it really comes down to we prefer to do it faster rather than slower we look.

A little bad at market conditions.

And we look a little bit about sort of flows over time, and we put all of that together, but at the end of the day.

Only in euro as well familiar with ace as anyone there's only a few different options for how you can deploy the level of sort of capital that we are talking about here and I think you should expect that our answer is going to be one of those very small number of options.

Got it thanks, maybe just on the cash.

Core business trend in terms of.

The yield on the portfolio has been pretty resilient.

Deposit costs are moving down your expenses have been.

The positive.

At least kind of the expectations, maybe maybe in line with your own you just talk a little bit about the.

The core the.

Core profitability of the company kind of.

As we go through 2021.

Yes.

Moshe Let me, let me sort of divide that a little bit into sort of market dynamics and what I would consider to be sort of more longer term fundamentals I think and by the way. This is going to sound a little bit like a sort of a look back on 2020.

We're always going to be a little bit subject to two environmental factors.

We have of major recession caused by a pandemic of other forces and.

Interest rates get driven down that's obviously going to have an impact on our business I think seasonal undoubtedly.

While it creates a lot of visibility and does some wonderful things that certainly does create a little more volatility, especially during times of real economic change like we've seen so theres always going to be those kinds of factors that I think hit our financial results, but if I kind of put those to the side for a minute because those.

Are things that if we could predict candidly, Steve and I would probably go into a different business than we're in today, but if we could predict those things perfectly, but when I think about the core of the business.

The core of the business is really really strong and we tried to outline this in sort of our longer term investment thesis.

We generate nice growth in our industry.

And you can come up with whatever you think is the right long term growth rate, we've got some internal views.

It may not be tack level growth rates, but I think for <unk>.

A well established part of the environment the.

The growth rates that we see for private student loans, we think are attractive and for US we think they're even more attractive because of what we shared with you all during our last call, which is we have an incredibly efficient and scale in fixed cost driven operating model. So we.

We can take what is nice growth and we can translate that into really nice growth through operating leverage and that's that's a trick in the trade thats as old as business itself, but it's one that Steve and I on the rest of our executive Committee and team are incredibly incredibly focused on price.

You should expect especially on a unit cost basis that every year, we will get better and better and better because we understand that that's part of driving what you guys should really care about which is the overall earnings growth of the company.

The second thing that really jumps out at me about the business.

I'm not sure everyone appreciates it we have very nice and attractive Roes on our loans. These are good profitable loans.

Well by the way of being very customer friendly because we underwrite them carefully and there is not huge loss content. There we fund them in an efficient way and we've got efficient operations.

And so the great thing about having those attractive ROE loans is day generate a bunch of earnings organically.

And that's a little bit masked during these times of stock price dislocation thats, a little bit masked during seasonal implementation, but I think you should expect in the long term.

These are loans that will allow us to fund the balance sheet growth and at the very same time generate meaningful amounts of organic capital.

And we sort of took the time to talk about that today, because we want folks to understand the current loan sales in the context of where we're going which is very much of this view of.

Hi, So relatively high you put your number on an earnings growth nice payout ratio is driven by sort of the return on equity of of our loans and I think we've certainly proven over the last year or so that we can manage the risk in this portfolio of well so that.

<unk> thesis I would just come back to it because that's really how.

I feel that's how Steve feels that is how our management team and board feels about the quality of the business and I've been here coming up on a year now of the deeper I get into it the more excited I am about the fundamentals of what I think this business can do over time.

Okay.

Thank you.

And our next question comes from the line of Jordan Hymowitz with Philadelphia Finance. Please go ahead.

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% of Aro E. We all know the dynamics are favorable but can.

Can you help me understand like.

You have of the largest market share of your competitors' oven discoveries seem to be well the thing 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 listen I think it's of Great question, and I think sort of.

Strategic contact strategic environment is again, a question, we think of long and hard about.

Let me, let me offer a couple of 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.

When will the 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 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.

From an underwriting perspective.

It is a vastly different product from a customer experience and management perspective think about.

Sort of the the process of taking someone who is 18 years old with no education, and managing them and servicing them all the way through they have of career and they are now re pain.

And so it is a hard business, it's not it's not like going from one installment loan business into another installment loan business the <unk>.

<unk> 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 comps competition on some of the players that you talked about we feel give us a great run for our money in the marketplace and we.

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 Candida.

Candidly, our hope would be to maintain our high market share and maintain our Roe.

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 is 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.

I think you've covered it perfectly but while we are very focused on operating efficiency we are.

We are not complacent and spilled 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 of that.

We are best in class.

On the top of the industry.

I mean last follow up just wells Fargo ahead of 20% to 25% share there out of the business. It seems like both citizens and college of America.

First flatlining. So you really only of one competitor you should be gaining share on the other thing I would throw out as maybe some of your next slide deck. If you look at the Canadian banks of the Australian banks or other pseudo oligopoly high margin businesses. They all trade at mid teens, I mean, I think you should be buying back your stock at least.

What is that level.

In that regard I mean, that's really where a company with a 20% Roe.

Close to 50% market share of that does a very favorable service to American share trade.

Jordan.

I think we have covered our very strong and healthy commitment to taking advantage of this arbitrage I think Steve did a wonderful job of answering the question earlier about.

What are the levels at which we would still consider our stock to be.

Of worthy of significant repurchases I think our internal view is is not largely dissimilar from yours, but look I think what you're hearing from me and Steve is competitive dynamics can change on a dime and the very worst thing of company can do is to say, we've got a big mode and of big position and we can take it for.

Granted we're not ever going to do that.

Okay. Thank you.

Yes. Thank you.

And our next question comes from the line of Henry Coffey with Wedbush. Please go ahead.

Yes, good morning, I feel a little deflated because of settlement is really stupid question.

And in terms of thinking about provision expense for 2021.

The spend so much noise around that items.

What are the key components what level of I know you.

Then thinking sort of somewhere.

Somewhere between eight and 10%.

Reserves for new loans, then you've got of discounting factor, which seems to be running 30 to 40 million of year. So as we put together our provision estimate for 2021.

What are those basic components.

Have they changed given your shift in economic assumptions.

Great question Henry.

Look of our current reserve is around well is six 5% of our portfolio as I described it earlier, we do have.

Excess of not excess of additional reserves above the normalized run rate put that into perspective pre pandemic. The reserve was running around five 8% if I remember correctly, so as things normalize towards the end of the year. The reserve will come down as we look out towards.

2022, but I think we've had enough volatility now and if you try and put the pieces together.

And.

<unk>.

One of the things that youre going to need to do on this is going to sound like an advertisement for Moody's services as follow their.

Economic forecast, because it's a very important input into our seasonal reserves. So we look at two year.

The supportable.

Outlook, we reserve for the next two years based on the model and then we revert to mean default. So so it's very difficult to give you.

The precise formula, but I think if you go with the six to six 5% of.

Of the portfolio you won't come up too far off.

Alright. Thank you and then and then kind of going back to some of Jordan's questions.

You have of real unique insight into how we will sort of call. It 20 to $35 of 40 year olds are performing.

Are you seeing of real cut between.

Your borrowers who have call. It the completed college the have college educations they have mobility.

Theyre not tied down to two two.

Your time kind of jobs they are professionals be it nurses teachers.

Professionals lawyers et cetera are you seeing kind of of real split and how your borrowers are performing versus how.

The other the other slice of life. The non college educated borrowers are performing because it seems we're sort of evolving into two economies here.

Yes.

Henry It's John.

Look there has been a lot written on this in the press sort of the case shaped recovery the differential impacts of.

Of college versus non College education, I think there was a journal set of graphs, maybe in the last day or two that I saw come across my desk, but I think absolutely I think everything that we see in the.

Macroeconomic and other data that we buy and consume and I think we've tried to say this very clearly I think Steve is that we see of playing out in our loss provisions. There is no doubt that in this economic downturn.

We have seen a huge disparity between those who have completed college and I think the completion is really an important part of that and folks who haven't.

And I think part of that is the nature of the industries that have been impacted.

Certainly if you look at where folks without college educations tend to work it's in hospitality its in bars and restaurants. It's in construction those are things that I think have gotten sort of more heavily hit so.

I think part of it is sector specific but I also think part of it is just having the skills to compete for jobs in what is a dramatically new economy. So.

So yes, we absolutely see those in our numbers I think they are partially why you've seen the.

So it will be up and down in provision through the course of this year and if you go back in the middle of the year. We didn't have good line of sight to how the unemployment trends would cure a big part of why we're back to our base model as we've seen them cure in the ways that we've talked about I think we covered that on our talking points, but we absolutely see that divergence.

And candidly and this is sort of my personal view. My guess is that is going to be the reality going forward, which further puts pressure on our mission.

And sort of the focus we're taking higher education is going to become even more important when it comes to.

Social justice and economic mobility, and providing opportunity for disadvantaged communities and we're excited to play that broader social role, we're happy to be of part of such an important part of the economy.

Thank you for the question.

Great. Thank you very much.

Ladies and gentlemen at this time I would like to hand, the conference back over to Mr. Steve Mcgarry for closing remarks.

Angel I think youre handing it back to John wetter, but thats okay.

Folks I'll be really brief I know we're over on time. Thank you for your continued interest and engagement with Sallie Mae and more importantly, thank you for what I know has been a really tough ride through the course of 2020, there have been a lot of moving parts in our business. There's been a lot of ups and downs I hope we've done.

Good job in communicating those to you in a way, which is as clear and transparent as it Ken day, but I also know it's taken a lot of extra time and effort from you and we really appreciate you guys getting it right. So with that Brian I think im going to turn it back to you to close great. Thank you for your time on your questions today, a replay of this call and the presentation is available on the inverse.

<unk> page at Sallie Mae Dot 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.

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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 speaker's presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

I would like to hand, the conference over to Mr. Brian Cronin Vice President of Investor Relations. Please go ahead Sir.

Thank you Andrew good morning, and welcomed the Sallie Mae of fourth quarter 2020 earnings call. It is my pleasure to be here today with John Winter, 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.

The 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 SEC.

For Sallie Mae. These factors include among others the <unk>.

Potential impact of COVID-19, pandemic on our business results of operations financial conditions and our cash flows.

During this conference call, we will refer to non-GAAP measures, we call core earnings the 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 was posted along with the earnings press release on the investors page at Sallie Mae Dot com.

Thank you I'll now turn the call over to John.

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.

To say 2020 was an unprecedented year is an understatement, we were tested as individuals and as a nation, but we persevered with the 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 'twenty, one by executing the strategies, we have previously discussed.

Third we will begin 'twenty, one with a significant return of capital to shareholders. The specific plan is currently being finalized GAAP.

GAAP EPS in the fourth quarter was $1 13, compared to 32 in the year ago quarter, our full year 2020, GAAP EPS was $2 25.

Let me start with the discussion of our business performance.

Originations quality was consistent with past years, our cosigner rates were 86% compared to 87% in 2019 and average FICO scores were 749 versus $7 46 in 2019.

Market share through the end of September was 54% up 5% as we compete for volumes from competitors, who are leaving the industry.

The 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 of 58 million shares at an average price of $9 and <unk> <unk>.

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 you promised business and our personal loan portfolio, we raised $500 million in unsecured debt and use some of the proceeds to successfully retire 37% of our series B preferred stock.

During the fourth quarter, we continued to experience changing the impacts on our business from the pandemic in this case related to the economic outlook and assumed prepayment speeds in our seasonal loss estimates.

Based on an improving economic outlook, we change the economic scenarios used in determining our seasonal allowance calculations from the previous 50 50 base S. Four waiting back to our standard approach. In addition, we have continued to adjust our assumed prepayment rates in response to change.

The customer behavior, while Steve will discuss both changes in more detail the impact of these pandemic related changes coupled with the 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 146 6 billion.

Previously we expected this reserve relates to happen in Q1, 2021, coinciding with the sale and the booking of the gain this $206 million release accounted for 41 of EPS in 2020 said simply our full year core EPS would have been of $1 82.

Excluding this reserve release.

We do not expect this split year result to reoccur the financial.

<unk> 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 despite all of the challenges in moving pieces caused by the pandemic. This dollars 82 of share result is just six cents lower than the midpoint of our initial guidance for 2020.

Thank you John 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 one 5 billion.

Or six 5% of our total student loan exposure, which under Cecil includes the on balance sheet portfolio plus the accrued interest receivable of $1 4 billion in unfunded loan commitments of one $7 billion.

Our reserve at six 5% of our portfolio is down significantly from seven 1% in the prior quarter.

As a reminder, we use of 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 for the subject to change from quarter to quarter.

These include model inputs, and then the overlays deemed necessary by management.

The most impactful model inputs include the economic forecasts their weightings of prepayment speeds, new volume, including commitments made but not yet dispersed.

And loan sales.

Understood.

Under seasonal the economic forecast, we use are key and we will drive quarter to quarter movement in the allowance.

As John already mentioned, we've changed the mix and weightings of the forecast we used in the models in the fourth quarter.

The Pacifically, we moved from using Moody's base S. Four forecast weighted 50% each to a more balanced mix of Moody's base as one of three forecast.

Weighted 40%, 30%, 30%.

As a reminder, we moved to Moody's base and S. Four in the second quarter due to the uncertain economic environment. The significant increase in forbearance usage, we're seeing an uncertain uncertainty about how it would play out this.

This environment persisted throughout the third quarter as well.

However, as the fourth quarter came to an end of the economy and the outlook continues to improve.

And we're seeing steady performance in our portfolio, including recent repay cohorts as the result, we concluded that it would be appropriate to revert to the more balanced mix described earlier.

<unk> is in fact, what we've determined to be best practices in normal environments. When we were preparing for seasonal and as the mix of forecasts recommended by Moodys to capture a multitude of probable economic outcomes.

The change in scenarios and weightings reduced our reserve requirement of $31 million.

Turning to prepay speeds as we have discussed on past calls this has been a watch item since the pandemic began.

Never materialized in Q3, we increased it from 3% to 4%.

In Q4, we increase of 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 as 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 John already discussed, but it's worth repeating loan sales had a big impact on the provision move.

Moving loans to held for sale in December for our early January transaction reduced the reserve by $206 million.

The factors enumerated here net to a reduction of $288 million on our reserve and they were offset by other factors, including overlays and the natural accretion of our discounted reserve among other things, resulting in a negative $316 million.

The provision for credit losses.

For the next few minutes I will go over our credit metrics, which can be found on page nine of our presentation.

For our held for investment portfolio loans in forbearance were four 3% flat to Q3 threes level, but slightly higher than the $4 one in the year ago quarter.

This is expected given the economic impact of the pandemic.

Loans delinquent 30, plus days were two 8% of loans in repayment down from the 3% in Q3, but unchanged from two 8% a year ago.

We now expect the 30 plus day delinquencies will rise into the high of three percentage.

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 152% up from one to four in the year ago quarter the fee.

Full year of 2020 charge offs totaled 117%, which is unchanged from 2019.

Looking ahead, we expect the charge offs for 2021 will increase to around one 8% for the full year based on our current forecasts.

The large wave of loans have entered P&I in Q4 is performing very well compared to prior year's repayment cohorts as measured by things like early roll into delinquency.

The cure trends in the collection shop.

Positive and I should reiterate that we are very well reserve 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 six of the deck.

On NIM on interest, earning assets was $4 eight 2% in Q4.

Up from the prior quarter, but down from the prior year as interest rates have moved dramatically full year net interest margin was $4 eight 1%.

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 of our NIM will come in right around four and three quarters percentage.

Few words on Opex 2020, operating expenses, excluding restructuring fees were $538 million.

Compared to $5 74 for 2019.

The 6% lower.

The significant reduction in expenses was driven by exiting the personal loan business scaling back on credit card of investments during the pandemic and our overall cost cutting efforts.

Put it into perspective operating expenses in our core student loan business the <unk>.

Climbed 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 on the fourth quarter, we did several transactions that improved our capital efficiency.

First we issued 500 million five year unsecured debt.

<unk> of the proceeds of this issue will be used for share repurchases. Secondly, we repurchased nearly one 5 million shares of our preferred stock.

The 45 cents on the dollar this transaction created equity, which enables the company to repurchase common stock.

Turning to liquidity on 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 fourth quarter total risk based capital was 15% comp.

Common equity tier one risk weighted assets was at 14% and on the post <unk> World. We also look at GAAP equity plus loan loss reserves over risk weighted assets, which came in at a very strong 16%.

Our regular regulatory capital ratios are well in excess of well capitalized and conclusion our balance sheet.

Thanks, Dave.

The federal government continues to support taxpayers with additional stimulus and federal student loan borrowers with payment relief now through at least September 30 of 2021 day.

These efforts should positively impact our borrower's ability to service their loans.

Finally, despite the tremendous political activity in 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 of.

The headquartered in Delaware, we take special pleasure in congratulating our own Joe Brian of Joe Biden, along with Kamala Harris, who makes history on a number of critical dimensions as our vice president.

<unk> and a full spectrum thoughtfully underwritten approach.

These factors allow our customers to be successful with our products as evidenced by our low default and charge off rates.

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 thorough good Marshall College fund to meet the needs of minority students and those from marginalized communities.

Our bridging the drain scholarship program will provide $1 million of year over the next three years to help students not only access, but importantly complete college.

With all of the 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 <unk>.

Portability 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 and promoting economic mobility and social justice.

In this context, we look forward to working with the by the administration and our continued efforts to integrate act to increase access affordability and college completion for all Americans.

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 'twenty. One is the following GAAP diluted earnings per share of between $2 20, and $2 40.

We expect non interest expense to end 2021 between 525 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 and $280 million.

Let me conclude with the discussion of one of our four strategic imperatives, which is capital allocation of 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. Our three main beliefs first we can attractively grow earnings beyond 2021, because of market growth and dynamics and a focus on operating leverage.

Especially post six of implementation, we can deliver attractive organic payout ratios to investors, while funding balance sheet growth because of the high ROE of our loans and third as proven risk managers, we can deliver more predictable cash flows.

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 originate and 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 <unk> is more fully implemented.

Enabling this multiyear capital return strategy. Our board has approved a $1 billion to $5 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 exploration.

<unk> bids from eight different bidders, all with full tranche orders for the loans and the.

The and 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 sales 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.

With that Angel, let's open up the call for questions. Thank you.

And ladies and gentlemen, as a reminder, if you would like to asking of audio question. Please press star one.

And our first question comes from the line of Sanjay <unk> with K B W. Please go ahead.

Thanks, Good morning, and good results.

I guess I wanted to break apart the 220% of $2 40 outlook.

Yes.

Sure Sanjay so look.

The true.

<unk> 30 midpoint is basically derived from some very supportable assumptions, we've got the four and three quarter percent NIM in there we already talked about the gain on sale for the first $3 billion being in the low double digits. We received the very strong prime.

Liam on that sale, we're factoring in another sale late in the year on an additional $1 billion at what we expect to be a very attractive premium.

Had that topic off of the past our co op.

Co party.

<unk> Party is still working on their sale of the loans that they purchased so I don't want to give too much.

The specificity on the price to help our buddies out it was of great transaction and we look forward to working with them again in the future. So we don't want to give too much specificity on that there is obviously, a very large slug of share repurchase in the $2 30.

<unk> mid point, we have not announced the form and the timing of the.

That share repurchase, but I think John has given you all of the appropriate call.

Commentary for you to try and factor in when and how large that will be there will absolutely be more information coming very shortly and finally I will point out that there is not I saw on a couple of the notes. Some people are wondering if there was another reserve release.

Late in 2021 associated with an additional sale there is not the number is clean the Cecil assumptions supporting the provision of <unk>.

Along the lines of the per.

The CPR increase in the <unk> 40, 30, 30 base as one of three that we.

We provided so look of a very key.

Clean number four.

2021.

<unk>.

I'll take the liberties and say if you move take the game out of 'twenty and moving into 'twenty one.

We are going to generate some very substantial EPS growth and as John alluded to.

His prepared remarks.

We keep with this hybrid originate and sell strategy, we will generate earnings growth in 'twenty, two and beyond but of course, we don't want to start giving you guidance.

For the next calendar year, hopefully that helps on Jay, but I would say half of the answer any further modeling question on thank you. Thanks, Steve So I guess I completely agree with the comments debt at these.

Look we will 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.

Of the.

The loan sale of premium market is going to be volatile and softer in 'twenty two and it is in 'twenty one a lot of positive things have happened over.

The last six years as we've been in the.

Appendant Bank, an originator of smart option loans I think investors are.

More comfortable with the credit.

And these assets has ever been and the discounts that they put on.

That assumption and the loan sale purchase Formula has.

Improve greatly.

Prepayment speeds are pretty consistent and the biggest ingredients right here now.

As we've outlined of here this morning.

And Sanjay if I could add to what Steve said and I agree with them.

This is clearly a.

On a balancing act.

Turn 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 <unk>.

Being extremely true an extremely aggressive two of our commitments around strong capital allocation of return.

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.

The strategic description, we also like the ability of especially post diesel of.

Growing our balance sheet and organically generating capital and we think that's an important part of our long term valuation basis. 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 on our Board, then getting the right balance of capital retention versus capital return.

I appreciate it thank you.

Thanks Sanjay.

And our next question comes from the line of Michael Kaye with Wells Fargo. Please go ahead.

Hi, Good morning, I wanted to see if I can get for the thoughts on the improved 2021 net charge offs guidance is this just really a delay of the timing of losses into 2022 or is the real incremental improvement here and how much the federal payment holiday really helping and is that just delaying the losses in the portfolio.

Sure Michael So look the.

The loss forecast is very much much of an output of our loan loss reserve seasonal credit model. So one of the reasons why you've seen it come down dramatically over the course of the last few quarters because of the outlook has improved and we've changed.

Our inputs, while anecdotally, we absolutely agree with you that the federal payment holiday.

Supporting our customers and absolutely.

Helping overall cash flows and performance on our portfolio at this early stage, we cannot really triangulate it until the U.

How much of a factor of that is and what it may or may not offset the bottom line is we are seeing very positive performance in our <unk>.

Portfolio.

Across the board and absolutely the federal stimulus programs and the.

Monetary policy is being employed by the government are helping but I think of it really is at the end of the of testimony to the.

The value of the college education.

But 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 selling day has never really come up with the real solution to the issue. After the failed attempt that a defensive product. So the refi risk something youre going to just have to look worse.

Are you going to try to come up with the viable.

Hence the product option and I was wondering if you had any comments on sulphide zone.

<unk> do you think they will make them more dangerous refi competitor.

Yes, Michael It's John Let me, let me take those in reverse order I don't think it's our place to comment on <unk> plan, they're a great naval competitor and we love competing against them, but we'll let them answer their own questions.

I think.

On the question of refi.

This really comes down in my mind to what I've always referred to as cannibalization math.

And at the end of the day, if we could perfectly predict who is likely to refi.

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 a from an economic and a return perspective makes that that refi that cannibalization math worked for us. So said simply we would have to offer.

Net 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 is not the right choice for us today.

But it is obviously a driver of our business. It is obviously something we're focused on we will continue to look very very hard at the.

Sort of where are the options for us to improve the retention of our customers in 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 here. There that we that we think is right I will say and you.

Didn't assets, Michael but up just put the 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 of the real question is do we help customers of borrower responsible amount of money do we give them the tools to understand how to repay their debt as 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 product.

The ability to do that in an efficient and economically value creating way.

Thank you very much thanks.

Thanks, Michael.

And our next question comes from the line of Mark Devries with Barclays. Please go ahead.

Thank you.

How much would the that are between selling and retaining loans need the collapsed before you shift back towards <unk>.

Retaining more of the 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.

I mean mark.

Look we look at our stock price and I think the same way you all do and we all know what the.

Ingredients go into feeding one of PD.

It should be and we will look when we look at our cost of capital growth rates et cetera, We think we should have a p/e rate.

Being conservative in the.

The high.

High double digits mid double digits mid teens, we don't think thats out of the question.

So we think that the stock price should trade much higher than it does we think BR works.

Net premiums as low as 678%.

We think if we were on.

I'm looking across the table of my boss here before I say this we think that if we were paying.

No.

10 multiple for the stock.

It would still be a reasonable arbitrage to do.

Okay, that's really helpful. Thanks, Steve.

Then the next question can you just remind us.

What's your economic capital requirements are and just talk about how you balance the buyback with your capital requirements on the suits will 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.

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 $125 billion.

The share repurchase authority that the board just granted US is perfectly adequate for 2021 as we get started here.

Okay got it thank you.

And our next question comes from the line of Rick Shane with JP Morgan. Please go ahead.

Hi, guys. Thanks.

Taking my question, Steve when you were answering that last question on kind of thinking your city at the table hold the 10 fingers and looking for the knot.

Anyway.

If we think about the transaction.

Got you.

The loan sales this quarter and another 1 billion later on the year.

I'm curious what the mix is on.

In school versus in repayment.

And I'm also you made the comment that you don't expect that there will be of reserve release associated with the second sale of this year is that because those will be loans that will already be held for sale or is the because there is a net.

Okay.

On the.

Through the year. So that for example of the seasonal reserve builds but then its release and so on a net basis. It doesn't make any difference, but we should think about that in terms of the contours of the quarter.

So let me first clarify that just sort of if theres absolutely no confusion. So in the guidance we have the loan sales taking place within the calendar year, So whatever reserve with ever reserving we need to do for the year is already in the provision which was in our guidance if that makes sense.

The point that I was trying to clarify is in our 2021 guidance. We do not have a back end reserve release for loans that will be sold in 'twenty 'twenty, two which I think is a very important point too.

Lay out sort of does that make sense of few before I go on the mix out of loans.

That totally makes sense.

Okay. So when we sell loans, we sell a representative sample of the loans that are on our balance sheet. So whatever you see on the portfolio today of the loans, 50% in <unk>.

Principal and interest full repayment.

On whatever the mix of loans on our balance sheet is the mix of loans that we sold to our counter party.

And while I have the microphone, we could have sold additional loans in the first quarter of the demand is absolutely there.

We chose not to.

Got it but thats great okay.

Perfect. Thanks, Scott.

And our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.

Great. Thanks, most of my questions have actually been asked and answered but maybe.

Clearly you just finished last year's program.

On this year's program.

Even before the.

The second loan sale is likely to be larger dollars.

Even larger as a percentage of the company.

So maybe could you just talk a little bit about what lessons you learned about clearly maybe in the bad it would be lucky than smart category.

Slowing the purchase and Scott you.

20% lower price than where the price was when you announced it but as you think about it now.

I know that you haven't made a decision yet but could you just talk about the parameters that youre thinking about as to how to deploy that capital efficiency in 2021.

Sort of producing assets.

To redeploy that capital.

There is a there is a premium on time right. We don't really want to have large amounts of.

So number one is speed.

Number two is kind of market conditions, we always wanted to understand the depth of nature and sort of levels of the market and where we think we are in so we will take into account sort of.

Market conditions with an eye towards execution.

And third and you should assume we've already planned for this in the comments, we look at what our kind of capital needs uses and sources are of throughout the year to really make sure that we've got the timing right. Because obviously, we want to make sure that we've got the right level of capital not just at the end of the year, but kind of throughout the year. So.

It really comes down to we prefer to do it faster rather than slower.

We look a little bit at market conditions.

And we look a little bit about sort of flows over time, and we put all of that together, but at the end of the day. There is only in euro as well familiar with anyone there's only a few different options for how you can deploy the level of sort of capital that we're talking about here and I think you should expect that.

Our answer is going to be one of those very small number of options.

Got it maybe just on the cash.

Core business trend in terms of.

The yield on the portfolio has been pretty resilient.

Deposit costs are moving down your expenses have been.

The positive.

At least kind of expectations may be it may be in line with your own you just talk a little bit about the.

On the core the.

Core profitability of the company kind of.

As we go through 2021.

Yes.

We're always going to be a little bit subject to two environmental factors.

We have of major recession caused by a pandemic of other forces and.

Interest rates get driven down that's obviously going to have an impact on our business I think seasonal undoubtedly.

Are things that if we could predict candidly, Steve and I would probably go into a different business than we're in today.

If we could predict those things perfectly, but when I think about the core of the business.

The core of the business is really really strong and we tried to outline this in sort of our longer term investment thesis.

We generate nice growth in our industry.

And you can come up with whatever you think is the right long term growth rate, we've got some internal views.

It may not be tack level growth rates, but I think for a well established part of the environment the growth rates that we see for private student loans, we think are attractive.

For us, we think they're even more attractive because of what we shared with you all during our last call, which is we have an incredibly efficient and scale and fixed cost driven operating model. So we can take what is nice growth and we can translate that into.

Really nice growth through operating leverage and that's that's a trick in the trade thats as old as business itself, but it's one that Steve and I on the rest of our executive Committee and team are incredibly incredibly focused on but I think you should expect especially on a unit cost basis that every year.

We will get better and better and better because we understand that that's part of driving what you guys should really care about which is the overall earnings growth of the company.

I think the second thing that really jumps out at me about the business and I'm not sure everyone appreciates. It we have very nice and attractive Roes on our loans. These are good profitable loans.

Well by the way being very customer friendly because we underwrite them carefully and there is not huge loss content there we fund them.

Patient way and we've got efficient operations and so the great thing about having those attractive ROE loans is day generate a bunch of earnings organically.

And that's a little bit masked during these times of stock price dislocation thats, a little bit masked during seasonal implementation, but I think you should expect in the long term.

These are loans that will allow us to fund balance sheet growth and at the very same time generate meaningful amounts of organic capital.

And we sort of took the time to talk about that today, because we want folks to understand the current loan sales in the context of where we're going which is very much this view of.

Hi, Ren.

Relatively high you put your number on an earnings growth nice payout ratio is driven by sort of of the return on equity of of our loans and I think we've certainly proven over the last year or so that we can manage the risk in this portfolio of well so that investment thesis I would just.

Come back to it because that's really how.

I feel that's how Steve feels that's how our management team and board feels about the quality of the business.

And I've been here coming up on a year now of the deeper I get into it the more excited I am about the fundamentals of what I think this business can do over time.

Okay.

Thank you.

And our next question comes from the line of Jordan Hymowitz with Philadelphia of Finance. Please go ahead.

Thanks, guys.

Was wondering if we could spend a minute on the competition on the business I mean, we all know it's a 20% of Aro <unk>, we all know the dynamics of favorable but.

Can you help me understand like.

You have of the largest market share your competitors oven discoveries seem to be well the thing on the vine in an environment with less and less competition, what type of growth rate 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 listen I think it's of Great question, and I think sort of.

Strategic contact strategic environment is again, a question, we think of long and hard about.

Let me, let me offer a couple of 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 range.

Will the 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.

From an underwriting perspective.

It is a vastly different product from a customer experience and management perspective think about.

Sort of the the process of taking someone who is 18 years old with no education, and managing them and servicing them all the way through they have of career and they are now re pain.

And so it is a hard business, it's not it's not like going from one installment loan business into another installment loan business the <unk>.

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 Candida.

Candidly, our hope would be to maintain our high market share and maintain our Roe.

And if the competitive dynamics are such that we can enhance those thats great, but we don't plan that this is going to be less competitive we plan that it is 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.

I think you've covered it perfectly but while we are very focused on operating efficiency, we are not complacent and spilled 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 of that.

We are best in class.

On the top of the industry.

I mean last follow up just wells Fargo ahead of 20% to 25% share of their out of the business. It seems like both citizens and College America Bad.

Flatlining. So you really only of one competitor you should be gaining share on the other thing I would throw out as maybe some of your next slide deck. If you look at the Canadian banks of the Australian banks or other pseudo oligopoly high margin businesses. They all trade at mid teens, I mean, I think you should be buying back your stock at least.

Or does that level.

In that regard I mean, that's really where a company with the 20% Roe.

Close to 50% market share of that does a very favorable service So American true training.

Jordan.

I think we have covered our very strong and healthy commitment to taking advantage of this arbitrage I think Steve did a wonderful job of answering the question earlier about what.

What are the levels at which we would still consider our stock to be sort.

Of worthy of significant repurchases I think our internal view is is not largely dissimilar from yours.

But look I think what you're hearing from me and Steve is competitive dynamics can change on a dime and the very worst thing of company can do is to say, we've got a big moat in a big position and we can take it for granted we're not ever going to do that.

Okay. Thank you.

Yes. Thank you.

And our next question comes from the line of Henry Coffey with Wedbush. Please go ahead.

Yes, good morning, I feel a little deflated, because I'm going to ask really stupid question.

And in terms of thinking about provision expense for 2021.

The spend so much noise around that item.

What are the key components what level of I know you.

Then thinking sort of somewhere.

Somewhere between eight and 10%.

Reserves for new loans, then you've got of discounting factor, which seems to be running 30 to 40 million of year. So as we put together our provision estimate for 2021.

What are those basic components.

Have they changed given your shift in economic assumptions.

Great question Henry.

Look of our current reserve is around well is six 5% of our portfolio as I described earlier, we do have.

2022, but I think we've had enough volatility now and if you try and put the pieces together.

And.

<unk>.

One of the things that youre going to need to do and this is going to sound like an advertisement for Moody's services follow their their economic forecast because it's a very important.

Put into our seasonal reserves. So we look at two year.

Supportable.

Look we reserve for the next two years based on the model and then we revert to mean default. So so it's very difficult to give you.

On a precise formula, but I think if you go with the six to six 5% of the.

The portfolio.

Don't come up too far off.

Alright. Thank you and then and then kind of going back to some of Jordan's questions.

You have of real unique insight into how will sort of call. It 20 to 35 or 40 year olds are performing.

Are you seeing of real cut between.

Your borrowers who have call. It the completed college the have college educations they have mobility.

Theyre not tied down to two to rent your time kind of jobs. They are professionals be it nurses teachers.

Okay professionals lawyers et cetera.

Are you seeing kind of a real split and how your borrowers are performing versus how you.

The other the other slice of life. The non college educated borrowers are performing because it seems we're sort of evolving into two economies here.

Yes.

Henry It's John.

Look there has been a lot written on this in the press sort of the K shaped recovery of the differential impacts of.

Macro economic and other data that we buy and consume and I think we've tried to say this very clearly I think Steve has said, we see of playing out in our loss provisions there is no doubt that.

In this economic downturn.

We have seen a huge disparity between those who have completed college and I think the completion is really an important part of that and folks who haven't.

And I think part of that is the nature of the industry that have been impacted.

I think part of it is sector specific but I also think part of it is just having the skills to compete for jobs in what is a dramatically new economy. So.

So yes, we absolutely see those in our numbers I think they are partially why you've seen the NAV.

So it would be up and down in provision through the course of this year and if you go back in the middle of the year. We didn't have good line of sight to how the unemployment trends would cure a big part of why we're back to our base model as we've seen them cure in the ways that we've talked about I think we covered that in our talking points, but we absolutely see that divergence.

And candidly and this is sort of my personal view. My guess is that is going to be the reality going forward, which further puts pressure on our mission.

And sort of the focus we're taking higher education is going to become even more important when it comes to.

The social justice and economic mobility, and providing the opportunity for disadvantaged communities and we're excited to play that broader social role, we're happy to be of part of such an important part of the economy.

Thank you for the question.

Great. Thank you very much.

Ladies and gentlemen at this time I would like to hand, the conference back over to Mr. Steve Mcgarry for closing remarks.

Angel I think youre handing it back to Jon Witter, but thats okay.

So I'll be really brief I know we're over on time. Thank you for your continued interest and engagement with Sallie Mae and more importantly, thank you for what I know has been a really tough ride through the course of 2020, there have been a lot of moving parts in our business. There's been a lot of ups and downs I hope we are.

Done a good job in communicating those to you in a way, which is as clear and transparent as it Ken day, but I also know it's taken a lot of extra time and effort from you and we really appreciate you guys getting it right. So with that Brian I think I'm going to turn it back to you to close great. Thank you for your time on your questions today, a replay of this call and the presentation is available on the <unk>.

Investors page at Sallie Mae Dot 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.

Q4 2020 SLM Corp Earnings Call

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