SLM Corporation (SLM) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the SLM Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to our speaker, Mr. Matthew Santora, Director of Investor Relations. Please go ahead, sir.

Thank you, Angel. Good morning and welcome to Sallie Mae’s third quarter 2020 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions. Before we begin, keep in mind, our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company’s Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, the potential impact of the COVID-19 pandemic on our business, results of operations, financial conditions and/or cash flows. During this conference call, we will refer to non-GAAP measures, we call it, our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended September 30, 2020. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. And now, I'll turn the call over to Jon.

Matthew, Angel. Thank you. Good morning, everyone. Thank you for joining us for a discussion of Sallie Mae's third quarter 2020 results. Let me start by saying that I hope everyone listening today has remained healthy, and well as we continue to navigate these challenging times. Today, I'd like you to take away three messages. First, while the pandemic continues to have a dramatic impact on the economy, Sallie Mae continues to operate well relative to these expectations, and we are cautiously optimistic about the trends we are seeing. Second, as I conclude my transition to Sallie Mae, we are shifting from developing the key strategic imperatives discussed on our last call to delivering results. We look forward to sharing some of our early progress with you today. Lastly, our financial outlook is stabilizing, which gives us confidence to begin to give insights on how 2020 will end and share some thoughts on 2021. Let's begin with the current environment. The Wall Street Journal and other media outlets recently described an emerging view for the shape of a likely recovery, a K-shaped recovery. On the upper arm of that K are largely college educated individuals or businesses tied to the digital economy or supplying domestic necessities. Most of these individuals can work remotely from home and have maintained their incomes and lifestyles during the pandemic. On the lower arm of the K are the many people with lower levels of skills and education, largely in the service and tourism industries, as well as those in lower wage service professions. These individuals cannot work from home and many of their industries have been disproportionately impacted by the pandemic. As a result, unemployment for this group is materially higher, with a greater negative impact on earnings and spending. While we would never make light of the impact on this lower arm group, our customers generally skew to the upper arm of this K curve. By the nature of our business, our customers are college educated with higher incomes, a group that is faring relatively better at this point in the recession. While we generally feel good about our customers and their employment prospects, we are carefully monitoring two situations. The first is the transition into full P&I status by our most recent college graduates. Anecdotally, we hear that companies are looking to limit hiring and stay lean to help offset lost revenues due to the pandemic. At this point, however, we are seeing early signs of strength from new graduates. Usage of non-disaster forbearance, graduated repayment programs and other assistance programs for new college grads are very similar to vintages from past years. However, our experience suggests that the first year or two after graduation can be a difficult time for some customers as they get settled into their careers and adult lives. We have long observed that customers are most likely to experience financial distress during this early transition period. As such, we will continue to watch this group closely. We will learn much more about this trend between November and April as the most recent graduation cohort enters repayment. The second situation we are monitoring is the status of the federal student loan payment holiday. As you know, most of our borrowers also hold federal loans. While their average monthly payment to Sallie Mae is about $277, their payment on their federal loans is modeled based on our internal models to be approximately $400. Without an extension of this program, these federal borrowers will be forced back into repayment around the end of the year. This added payment burden may drive some level of increased financial distress. Last quarter, we recognized and anticipated these elevated risks and reserves accordingly. We continue to feel confident that the level of reserves is appropriate for the risk from these factors. The next two quarters will be important, as better or worse than expected trends represent an opportunity or risk respectively. On campus, schools continue to make progress. As we wrap up our peak origination season, which has proven to be elongated due to the impacts of the pandemic on students and schools. We have learned a few things, students want to be on campus. Schools want students to be on campus, and parents want their children to continue their journey toward adulthood, preferably living on their own. We have been impressed with how our nation's colleges and universities continue to innovate, creating solutions to ensure a safe environment for students and faculty returning to campuses. Despite headlines, our own research indicates only 15% of our colleges and universities are completely online. The remaining 85% are on-campus in one form or another. This demonstrates the incredible dedication of colleges and universities to fulfill their educational mission. We are also beginning to hear encouraging news from colleges and universities about their plans for the spring. One of our largest schools in terms of loan originations recently announced its students will continue its condensed hybrid schedule in the spring. This is a good sign. Schools are working to find ways to continue operations on-campus while managing the spread of COVID-19 at the same time. We are optimistic that the trend toward on-campus learning will continue. Shifting to results, I'm pleased to report a solid quarter. During the quarter we booked strong GAAP earnings of $0.45 per share and core earnings of $0.47 per share. Notable in these results was the provision line indicating a 3.6 million provision release. This release was driven by a combination of factors, some more and some less predictable. On the more predictable side, we built provision for our largest quarter for new commitments entered during the quarter. In addition, we released some provision given modest improvements in economic forecasts since the last quarter. However, the biggest drivers came from two less predictable factors. The first was Moody's changing its methodology for calculating college unemployment, which is a major input into our models. As a result of this calibration, the college unemployment rate forecast was revised lower, which reduced our expected life of loan losses. The second factor relates to our estimates of loan prepayment speeds. We have seen higher prepayment rates on our loans than our last models would have predicted in a declining economy. As such, we increased our estimated prepayment speeds, which has contributed to a lower estimate life of loan allowance. Steve, will discuss these changes in detail. Earlier, I mentioned the positive trends we are seeing on-campus. As a result, our peak season originations came in on the higher end of the range we discussed on our last earnings call. Third quarter originations were 1.9 billion. We are pleased with our peak season performance and believe we are on track to originate 5.3 billion of loans for the full year 2020, which is approximately 6% lower than 2019. Turning to credit. We, like other student lenders and consumer credit companies, liberally granted forbearance to customers at the outset of the pandemic because we recognize the incredible shock to the economy the pandemic was having. And we had a strong desire to care for our customers. Many of whom were going through periods of tremendous financial stress. During that initial period, our forbearance rates were in the mid-teens as a percentage of loans and repayment and forbearance. Disaster forbearance was an effective tool to help our customers through the early months of the pandemic. And I am pleased with how we have continued to assess -- assist our customers since then. Our forbearance rate is down to 4.3% at the end of the third quarter of 2020, compared to 9.3% at the end of the second quarter 2020. Steve will give you a breakdown of how customers who received disaster forbearance benefits have managed their loans since our last call. Over the last six months, you heard me talk about our strategic imperatives and our commitment to shareholder value. You will remember that our number one imperative is to maximize the profitability growth of the core business. I firmly believe if we focus on top line growth and relentlessly controlling expenses and unit costs, the company will continue to have an attractive earnings growth profile that will serve our shareholders well in the future. We recently announced a new organizational structure intended to help the company achieve its new vision. This structure will create better alignment and accountability for performance, and it will also generate efficiencies. In addition, we continue to pursue non-people related sources of efficiency across our business. This effort resulted in a one-time restructuring charge of $24 million that we booked in the third quarter of 2020, but we expect it will lead to a $50 million reduction in our annual ongoing expenses beginning in 2021. It's important to note that this is not a one and done exercise. Going forward, we will aggressively manage the growth in our expenses. Currently, 60% of our expenses are fixed costs. If we can leverage these fixed costs, control the growth of variable costs and achieve our fair share of industry growth, we are confident we can generate meaningful and sustainable earnings growth through operating leverage now and in the future. In 2019, our operating expenses were $574 million. This year, we expect our expenses excluding restructuring costs will be between $540 million and $545 million or an improvement of roughly $30 million year-over-year. It is important to note that this decrease was caused by some permanent changes that will persist, while others were driven by temporary belt tightening, given the pandemic. Driven by the recent efficiency efforts described earlier, we expect next year's operating expenses to be between $525 million and $535 million. This is inclusive of the cost of expected growth in loan service. Because of growth and some natural inflationary pressures, going forward, we do expect total operating expenses will grow year-over-year. To create real transparency around efficiency, we will therefore judge our performance on unit cost trends, which adjust for growth. Beginning next quarter, we will begin providing data on our unit cost to service. And my expectation is that we will consistently reduce unit costs by a minimum of mid-single-digits for the foreseeable future, given our focus on operating leverage and cost management. We have made additional progress toward our imperative of better allocating capital during the quarter as well. You will remember we announced our exit from the personal loan business several quarters ago. In the quarter, we identified buyers of our originated and purchased personal loan portfolios. We took the opportunity to sell these loans to reduce the risk on the balance sheet and focus our capital and management attention on the core student loan business. This resulted in a $43 million reduction to our provision for credit losses. In addition to this balance sheet change, our ASR program continues to run its natural and preset course. Our current stock price only increases the value of this program, as we anticipate our counterparty will be able to buy back more of the shares outstanding with the proceeds of our first quarter 2020 loan sale, therefore, creating more long-term value for shareholders. At this point, the ASR program is 52% complete, and on schedule to wrap-up in the first quarter of 2021. As we look to next year, the loan sale market continues to recover from the pause caused by the pandemic. Although, we have not tested this market directly, recent trends in the secondary loan market and the ABS markets suggest that market conditions should support our plans to sell loans and buy back additional side. Before we move on from the core business, I'd like to turn the call over to Steve for a more detailed review of the results of this quarter. Steve?

Thank you, Jon. Good morning, everyone. I'll continue this morning's discussion with a detailed look at the drivers of our loan loss allowance, followed by a discussion of our credit metrics and where we think they are headed. I will then discuss our NIM and finally highlight our strong liquidity, capital and reserve position. The private education loan reserve, including a reserve for unfunded commitments, was 1.8 billion, or 7.1% of our total student loan exposure, which under CECL includes the on balance sheet portfolio, plus the accrued interest receivable of $1.5 billion and unfunded loan commitments of $1.8 billion. As discussed previously, we use a discounted cash flow methodology to determine our reserve. The discount factor is approximately 70%. This means our reserve is expected to cover life of loan defaults on our portfolio of 10.2%. The provision for new commitments and outstanding private student loans was $47.6 million in the quarter. I would like to walk you through the process of calculating our loan loss allowance, not only to help you understand the current quarter, but also to provide you with a framework for forecasting the allowance in your models. When calculating our allowance, we incorporate several inputs that are subject to change from quarter-to-quarter. These include CECL model inputs, and any overlays deemed necessary by management. The most impactful CECL models -- model inputs include economic forecasts; the weighting of these economic forecasts; prepayment speeds; new volume, and this includes commitments made, but not yet dispersed; and also loan sales. I will now walk you through each of these impacts. Under CECL, the economic forecasts we use will drive quarter-to-quarter movement in the allowance. As Jon already mentioned, Moody's redefined their model for forecasting college graduate unemployment, which lowered expected future unemployment rates. In addition, their overall forecast for unemployment came down. Their projections can be seen on Page 9 of the earnings deck. The change in future expected college graduate unemployment reduced our loan loss allowance by $89 million. Turning to forecast weightings. They remain unchanged from Q2 and had no impact on the allowance. We continue to use Moody’s base and S4 forecast, each weighted 50%. To give you some context, the S4 is a severely adverse forecast. We believe using -- utilizing these forecasts in the third quarter is appropriate when taking into consideration the uncertainties in the economic environment, such as the timing of another stimulus package, the fact that there continue to be virus flare ups around the country, which generate concerns about additional lockdowns. And finally, and maybe more importantly, we do have $2.4 billion of loans entering full P&I into this uncertain environment in November and December. Let's now talk about prepayment speeds. We increased our CPR forecast in the third quarter, resulting in an additional decrease in our allowance of $68 million. Higher CPRs lead to lower balances which translate to lower life of loan losses. Our CPR forecast was not aligning with current observations and trends, which led us to increase it. Our CPR model was built using historical data that shows us substantial drop in prepayments during periods of economic stress. However, the extraordinary response by the federal government, including the suspension of federal loan payments and the injection of massive amounts of liquidity into the system have caused prepayments to remain elevated compared to historical experience. Volume, of course, is an important driver of our allowance. The third quarter is our peak season. We disbursed $1.9 billion of new student loans this quarter. But recall that a significant portion of this quarter's originations were reserved for through the provision for contingent liabilities and a provision for them is unnecessary this quarter. However, we did make additional commitments to originate $1.7 billion in the future quarters. This resulted in an increase to our allowance of $129 million. The factors described here, which met through a reduction of $28 million in our reserve are offset by other factors, including overlays and the natural accretion of our discounted reserve, among other things, resulting in a $47.6 million provision for student loan credit losses. As Jon mentioned, we sold our purchased and organic personal loan portfolios in the quarter. The portfolios were sold at a discount to par, but considerably higher than where we held them on our books net of the loan loss reserve. Unwinding the reserve for personal loans resulted in a reduction of our loan loss allowance of $51.7 million. After accounting for small provisions for our FFELP and credit card portfolios, our provision represented a $3.6 million release to our total allowance. For the next few minutes, I will be discussing our credit metrics, all of which can be found on Page 8 of our investor presentation. As Jon already mentioned, private education loans and forbearance were 4.3%, a sharp improvement from Q2’s level of 9.3%, but higher than the year ago quarter, as we would expect, given the economic impact of the pandemic. The use of disaster forbearance has declined precipitously and was under $100 million at quarter end. Our customers have transitioned very well from di-forb back to servicing their loans. Nearly 75% of the borrowers who use the disaster forbearance program are current and in repayment. This is a significant improvement over what we were saying just 90 days ago when we were reporting Q2 results. As a result, forbearance has improved to just over 4% compared to the 5 to 6% we projected in July. Private education loans delinquent 30 plus days were 3%, up from Q2 and the year ago quarter, as also should be expected. We now expect a 30 plus day delinquency will rise into the mid 3% levels in Q4 and reach 4% in mid-2021. Net charge-offs for average loans and repayment were 1.3%. This is up from Q2 and the year ago quarter. Charge-offs are beginning to tick up as the use of disaster forb has declined dramatically. We now expect net charge-offs for the full year of 2020 to total 1.24% and to total 2.3% for the full year of 2021 based on the trends we are now seeing. I can't stress enough that, forbearance, delinquency and charge-offs are all performing way better than we expected 90 days ago. The strong portfolio performance is a validation of our underwriting practices, the cosigner model we use and also the value of a higher education. Let's talk a little bit about NIM. The net interest margin on our interest earning assets was 4.79% in Q3, this is up from the prior quarter but down from the prior year. The increase in the quarter was driven by the sharp decline in our cost of funds, which brought it back in line with the yield on our investment portfolio, which was producing the prior drag. The big decline from a year ago is of course a result of our liquidity build, which is, by and large, now complete. We expect full year NIM still to be right around 4.9%. Operating expenses in our core student loan business increased 6.3% from the year ago quarter. This is due average customers increasing 7.9% but delinquent borrowers decreasing 5.2%. When we report fourth quarter results, as Jon mentioned, we will begin to provide investors with information on our unit servicing costs, which will enable you to track our progress against our efficiency goals. A brief word about second quarter operating expenses, which excluding restructuring charges, were $127 million. This compares with $142 million in the prior quarter and $154 million in the year ago quarter. While operating expenses are definitely trending lower, in this particular quarter, they did benefit from several items totaling approximately $15 million. These include lower sales and marketing expenses, as well as collection expenses due to the pandemic, a temporary benefit to our FDIC premiums, and several other items. We think the true run rate for the quarter is closer to $140 million than $127 million. Ultimately, as Jon mentioned full-year operating expenses will be around that $560 million to $565 million range, which includes restructuring costs. Finally, our liquidity and capital positions remains strong. We ended the quarter with liquidity of nearly 20% of total assets. At the end of the third quarter, total risk-based capital was 13.9% and CET1 to risk weighted assets was 12.7%. Both of these ratios are significantly in excess of regulatory well-capitalized ratios. In post CECL world, we also look at GAAP equity, plus loan loss reserves over risk weighted assets, which was a very strong 15.7%. In conclusion, our balance sheet remains rock solid in terms of liquidity, capital and loan loss reserves. I will now turn the call back to Jon.

Thanks, Steve. Before we turn the call over for questions, I'd be remiss if I didn't recognize that we were less than two weeks away from a presidential election. We continue to monitor discussions regarding student loans and remained engaged with policymakers as they develop proposals to make the higher education system work even harder for our country. We are keenly focused on providing insights and information that is helpful to our investors as they better assess the opportunities and risks involved with these proposals. It's important to start any discussion of the political landscape with perhaps a statement of the obvious. We run a very important and customer-centric business today. At nearly 2,000 schools, our full credit spectrum GAAP lending literally provides the last dollars necessary to make access to higher education, a reality for the students and families who turn to us for financing. Our underwriting is disciplined and focused on responsible borrowing. This is evidenced through our low annualized default rate, approximately 1% to 1.5% through the cycle. And the fact that 90% of our borrowers pay back our loans in 10-years or less. While we recognize the human impact of any default, we believe these rates compare extremely well against competition and other lending programs at the state or federal level. Our pricing is fair and better than many alternatives, approximately half to a third the cost of credit card debt as just one point of comparison. And our products contain many best-in-class customer features, no prepayment penalties and no application or origination fees, as examples. While we are proud of the access and opportunities our products create for students and their families, we also know that as a whole, the current system for education finance is not working well for every American. For many lower income Americans, access to loans is not enough. They need more direct financial assistance and grants. Some have taken on too much debt in the past and have little hope of repayment and are struggling under its weight. As a nation, we need to fix these issues knowing that access to higher education is a key ingredient in creating financial opportunity, economic mobility and social justice, excessive student loan debt, especially among minority families can often crowd out other investments, such as the purchase of a home that can help create real family wealth and lasting financial stability. We recognize that as a private student lender, operating with our investors, not public capital, we cannot solve every part of this problem alone. As a result, we're encouraged to see proposals like free college gain momentum in states like New York and others where income-based free tuition plans already exist. Sallie Mae continues to play an important role in helping students finance their education by complementing these programs. For example, in the year after New York's program was implemented, Sallie Mae's originations into the SUNY system fell by only 3% and have grown since then. While the government is instrumental in creating access for lower income families to achieve the dream of higher education, we look forward to continuing to support middle and higher income families, close the gap between other savings, financial aid, other loans, and the cost of tuition. As has been the case for decades, a combination of federal and state programs and private offerings will be required to help families pay for higher education. We also support proposals for bankruptcy reform, provided of course they establish appropriate safeguards to keep the system from being abused. Simple seasoning or age limits on loans that can be discharged in bankruptcy, maybe all that is necessary to safeguard the integrity of the private lending system, while allowing those in real financial distress to responsibly and fairly discharge their debts. In closing, we believe the higher education financing system needs to continue to evolve to meet the needs of all Americans. While we are proud of the role we play and the success of our customers, one risk we face is that policies enacted to fix an issue elsewhere have an unintended impact on Sallie Mae. I am however, gratified that as we continue to engage with policymakers, it has become clear to us, many legislators on both sides of the aisle understand and appreciate the unique value that Sallie Mae and private student loans provide to students and families. We look forward to working productively with any administration in Congress on these timely public policy questions to improve and enhance this important part of the economy. Thank you. And with that, Angel, let's open up the call for questions.

[Operator Instructions] And our first question comes from line Michael Kaye with Wells Fargo. Please go ahead.

Based on the direct marketing mailing given that I track, it appears that Discover mailed 7 times the volume of Sallie Mae for this peak season. This is even more than a typical 4 to 5 times over the last couple of peak seasons. I know you've been harder on your sales force than mailings. But I was wondering if you perhaps are leaving some market share on the table by not marketing as aggressively as your largest competitor?

Yes, Michael, it’s Jon. Thanks for your question. Obviously, it's hard for us to comment on why Discover or any other competitor is making the choices that they are making. I think we have incredible confidence in the analytics and models and return discipline that we put on our various marketing programs. We believe that we are sort of pushing right up to the edge of value creation of those marketing programs. We also feel like we have a very robust test and learn capability to, even in some cases, and in a responsible way, sort of push beyond those thresholds to see if there's new programs or tactics that we can develop or understand. So that's, I think, a long winded way of saying, we feel great about our level of marketing spend. And by the way, when we put that together with an incredibly strong sales force, we think that is really what drives sort of our market share, and some of the returns that you get on performance.

Just wanted to talk a little bit more about Bankruptcy Reform. Can you just provide your perspective on what you think a likelihood that we actually see Bankruptcy Reform for student loans? I'm interested in the financial impact of Sallie Mae, if something like that were implemented, particularly on a retrospective basis, and would this cause the industry to increase pricing on loans to consumers?

So, Michael, using history as our guideline, Bankruptcy Reform proposals and legislation has been around literally for as long as the private student loan has existed. And I guess -- and maybe an important point to look at was back, I think, when Congress was controlled by the Democratic Party, and they passed reconciliation to end the FFELP loan program, there was an effort to also pass Bankruptcy Reform from that reconciliation bill -- in that reconciliation bill. And they could not garner enough support to include in the bill. So there's not a tremendous amount of support for repealing the bankruptcy legislation. So, I don't know how to handicap it going forward. But I think the past is pretty good prologue. Regarding the need to reprice our loans, we don't think that would be necessary if this legislation passed, because when you look at our program it’s literally 90% cosigned and it would require not only the borrower but the cosigner to declare bankruptcy to have the loan discharged. And our cosigners are basically responsible middle income to affluent individuals with high FICO scores and pristine credit scores, and unlikely to risk that to discharge a student loan. So when we looked at it in the past, the impact on our portfolio would be very, very small. Hope that answers your question, Michael.

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

I think maybe we just drill down a little bit more in the competitive environment. You talked about in your slides about a competitor kind of leaving the market. But could you also address the consolidation loan environment and what you're seeing there? I mean, we saw some pullback in the second quarter, a little bit of a recurrence in the third quarter, and maybe just talk about that from a competitive standpoint?

So most of the consolidation trends are that they didn't disappear completely but they're far below what we were expecting to see prior to the pandemic. And this is the third quarter is when volume starts to pick up again, as borrowers graduate and go into repayment. So I'm pretty comfortable that we're not going to see a resurgence and the continuation of the trend that we were seeing pre-pandemic. Look, we continue to look for ways to protect our portfolio. And quite frankly, at current rates, if there wasn't the risk of cannibalization, we would be able to earn a reasonable return on consolidation loans given that the 4.5% to 5% yield. So it’s something that we continue to look at. But at this point in the time, it's just part of the industry's landscape and we haven't found the elixir that could stave off to consolidate them from our portfolio.

And Moshe, it’s Jon, if I comment briefly on new origination. Obviously, this year is in noisy year. You have people announcing, competitors announcing changes and their commitment to the marketplace, but by the way some of them are continuing for this year. Some of them are continuing for their current customers for this year. And of course the overlay on top of all of that is a really dynamic school environment just given the realities of COVID. And so I think our view is, it's hard at this point to get a really accurate read of what is the sort of true opportunity if some of those competitor moves on new originations. I think that will become easier to really assess over the coming -- sort of the coming 12 months. But what I can tell you is we are looking at those as real opportunities for us. And we're engaged through our school channel to make sure that as sort of people change, not just their commitment to the market, but underwriting and sort of other credit spectrum choices that we are there and really understanding those changes and competing aggressively for any good business that is left by that vacuum. We are engaging very directly in the partner channels trying to understand if any of these players have valuable partner relationships that may now be in need of filling. And we're actively doing that. Most of the big competitors in question here warrant big players in the direct-to-consumer piece, but to the question, yes, I think Michael asked earlier, we'll obviously continue to look at our direct-to-consumer marketing returns. And if those change as a result sort of competitive dynamics, obviously we'll update our assumptions there. But I think it's hard to imagine -- while it’s difficult to predict the exact impact, it's hard to imagine that the current competitive situation would not benefit us in the medium to longer term.

Great, thanks very much, Jon. And maybe just following up on that exact point. I mean particularly given that Wells was marketing as direct to the consumers you could be, and at some point, in the not too distant future, they won't be doing that at all. I mean, it really does seem like it opens up kind of like something right down your alley. But one of the things that you talked about when you when you first joined Sallie Mae was some of the opportunities to kind of broaden that consumer relationships. Any further thoughts there? Now we're kind of three months later, maybe, further thoughts on those opportunities for the company over the next several years?

Yes, Moshe. Honestly, we are in the very early stages of setting that up. And that's a unit that we put more emphasis on given the organizational changes that we just announced. And truthfully, we felt like it was important to get the right team and the right organization in place before pushing that too much further. And candidly, we also put a premium on making sure that our efficiency line, and our cost line was trending in the right way. So that has been more of the focus over the course of the last three months. We're obviously very committed at this point to continue to build our credit card business. We are looking for ways of making that even more profitable going forward. I think you should expect that we'll look for more ideas over the course of the fourth quarter and into 2021.

And your next question comes from a line of Sanjay Sakhrani with KBW. Please go ahead.

Hi, this is Steven Kwok filling in for Sanjay. Thanks for taking my question. Just the first question I had was around the NIM and specifically on the liability side. So that has been coming down nicely. I was just wondering if you could provide a little bit more color around how much more tailwind there is on the liability side, and how we should think about the NIM as we progress through next year? Thanks.

Steve, I think that the NIM has reached sort of a baseline point. The big headwind over the last year has been the fact that we've built $7 billion liquidity portfolio, which is basically invested in Federal Reserve deposits, 2-year treasury and agency debentures. We think we've reached -- we've built that liquidity portfolio now. We don't think that, that will continue to be a drag on our NIM. But quite frankly, we have reasonably long-term funding in our portfolio between longer-term deposits and ABS. So I don't anticipate any additional upside in the NIM from here.

Got it. And then just around the CECL, given all the numerous moving parts in this quarter, as we look out to the fourth quarter, would it really be just a function -- assuming the macro environment stays the same and all the outlook, would it be just a function of the unfunded commitment piece and then also the CECL catch up around the NPV of the portfolio? Are those 2 factors that we should think about or is there anything else?

Steve, I think you're on the right track there. So the fourth quarter is obviously going to be a very loan origination quarter. And we have already reserved for $1.7 billion of second disbursements for the first quarter. So the CECL reserve, if, to your point, economic forecasts are stable, and we don't make any further adjustments in our CPR, the CECL reserve should be a function of what additional volume looks like. And yes, because we do have basically a discounted loan loss reserve, basically, we have $900 million of discounted loan loss reserve, which will accrete up over time. And if you think about it in the following framework, average life of loan of 6 years, that’s really $150 million of accretion on an annual basis. So we do have that headwind for the CECL reserve. But yes, I think you're thinking about it appropriately.

And your next question comes from the line of Vincent Caintic with Stephens. Please go ahead.

First, I actually want to dig into the experience you had with New York since both candidates -- the presidential candidates seem to be supporting some sort of educational release. So just kind of want to take the learnings from the New York experience on to what might happen with the national program, if you can dig into that? I mean it seems with New York that even -- I think they were calling for 9,000 students to be eligible. There are only 30,000 that actually enrolled and just -- and they're or even thinking about rolling that back. So just sort of wondering if there's any incremental color you might have. Did you get more people signing up even though they signed up for the scholarship program? And anything else you might add?

Yes. Vincent, it's Jon. Let me start by recognizing that New York rolled out before I joined. I'll also ask Steve to jump in here liberally with any additional historical perspective. First, I think it's just important to start with the recognition that there are many submarkets within the market for higher education lending. And I think when you look at the free college proposal -- and, by the way, I think when you look at many of the proposals that are coming out of the more liberal end of the spectrum, what they're really all about is making sure that there is financial access and not a sort of paralyzing level of debt on the other side for at-risk and disadvantaged and lower income individuals. And that's really understandable. If a college education is the key to higher income and all the good things we've talked about, you want to make sure that the price tag does not help -- or does not hurt. And candidly, that's not our core customer. Do we lend to some of those customers? Of course, we're a full spectrum credit provider. But that is not our -- that is not the core of our business. And so we view, as I said in my talking point, something like the free college program as being very complementary to the programs that we offer. And so I can't speak as well to the enrollment programs originally in New York, but I think that's why you see the relatively modest decline in originations in the SUNY system, the 3% number that we talked about before. Look, going forward, I think it's even harder to project what something like a Biden free college program could look like. We obviously don't know what the exact nature of the federal contribution would be to that. We don't know exactly what the state requirements would be. And truthfully, all of that is done with the overlay of a COVID situation where states are going to have less, not more financial resources on average to contribute to discretionary programs. So while we really applaud the program because we do think it is going after a core group of customers who are needy, who are deserving and who would not have access otherwise, we really continue to believe that the impact on our business will be de minimis. And even if there is some impact, we would view that as being, quite frankly, a net-net positive to get into an overall system that worked better for all students and all families. Steve, would you add anything to that?

Yes. The only thing that I would add, and I am a proud graduate of Stony Brook University, a part of the SUNY system. The program is means tested. So it's only available to families with an income of below $125,000. It also only provides free tuition, not room and board. And then there are many, many other strings attached to it. GPA requirements and a big one is you have to pledge to stay in New York State for 5 years, otherwise it becomes an interest-free loan. So you're right, Vincent, the take-up rate or the amount of people that qualified for it was way lower than anticipated. And then the final thing that I will point out is that in the very early days of the program, the main flagship universities, Stony Brook, Binghamton, Buffalo and Albany, increased their tuition costs significantly relative to other public colleges in order to defray the costs and those that could afford to pay for college contributed to the free college for the Excelsior program. So at the end of the day, we did see an initial dip and then originations have been growing slowly in that system since they implemented the program.

Just another quick follow-up. So nice to see the personal loan sale. How much capital was freed up from that sale? And just curious if maybe that capital can be deployed towards share buybacks or what you're thinking about that freed up capital?

Sure. The freed up capital was around $70 million, and then we did release a big chunk of the loan loss allowance. Look, when we look at capital available for share repurchases, we basically have a 3-year outlook. And that portfolio is essentially going to run off over the next 2 years. So it wasn't really going to be a constraint on our share repurchase goals. But I do think that it very much reflects our strong focus on the core business going forward and the fact that we are going to allocate capital where we can get the appropriate returns.

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

Two questions. One, is it -- and this kind of goes back to one of the earlier questions. Is it fair to assume that if in 2021, your numbers come out exactly as you indicated that the reserve would just be the origination commitment and then the present valuing of the needed accretion? And is there any way you can sort of buffer yourself from these -- we'll call them the Moody's swings? I mean, it is almost like a commodity input and that you have no control over what they say, but it's a dominant part of your forecast.

So Henry, yes, I think, again, like Steve and you are on the right track. All things being equal, a good contributor to the CECL reserve will be, do loans disburse in commitments as well as the accretion of the discounted reserve factor. Your second question is a very good one. Is there anything that we can do to insulate ourselves from movement in the CECL reserve? There are 2 things that we can do. And one of them, we have already started to do, and that is sell loans and take advantage of the fact that there is a bit of an arbitrage and these loans might be better off in the hands of people that aren't constrained by CECL capital and reserves. And the other thing that we can do is take advantage of sort of a developing market for credit risk transfer trades, if these trades are common in other asset classes, they haven't been developed in the student loan market yet. Well, actually, I think Citizens did a variation on a credit risk transfer trade. So there are some derivative approaches that we can and probably will utilize in the future. However, doing those transactions, I think, is going to be more difficult to move the kind of size that we have in mind for our future loan sale program. So I think that will be one of the most impactful things that we will do going forward to limit the impact of CECL on the company and our capital generation.

Yes. The only thing I would add, I think Steve said it really well. I mean, look, let's take a step back. I think there's sort of 3 things going on. There is the implementation of CECL today, and I think all of us getting comfortable with sort of the rules of thumb to how to approximate that. And I think Steve has done a great job in his talking points and in the investor presentation of laying out a framework of the drivers of kind of that usual and typical sort of CECL reserve, right? It's the originations. It's the unfunded, it's the loan sales, change in economic environment and so forth. So to me, that's a part of it. Secondly, let's recognize, we happen to be implementing this during one of the most sort of unusual economic periods in history where you have incredible economic damage, at the very same time that you have massive fed liquidity and not just monetary but fiscal policy action taken to help mitigate the impacts. And so things like the prepayment speeds, I would hope 99 years out of 100, we're not having those discussions again because we're not in another pandemic type of situation. Although, I will admit this 100-year flood seem to be happening with a bit more frequency. And look, I think the sort of third aspect of this is we are learning, and I think people like Moody's are learning sort of what is working well and not working well as a part of the implementation. So the change -- as I said in my talking points, the change to college unemployment rate, that was something that I think they assessed, they learn, they understood it. They recognized that they probably had not been getting the attention historically it deserved. And I don't think we expect that to change again. So why do I say all of that? I think everything Steve said is right. But I think my very strong hope -- and we're going to continue to try to provide you guys real clarity on this. My real hope is that the growing pains of CECL implementation get in the rearview mirror pretty quickly because we've kind of gone through this a couple of times, and there's not any more things like the Moody's. My hope is that we're not in another pandemic situation that causes really uncertain and unpredictable dislocations. And what we really get back to is Steve's kind of core framework, which I think if you look at it, actually, sort of minus the other mitigating factors, really does a pretty good job of estimating what the CECL impacts are going to be. So long-winded way of saying, we're working it. We're going to do our best to give you guys the information you need. But we also need to recognize a little bit of it, this is just the growing pains and the current economic situation we're in.

Great. Second question, unrelated. Is it heresy for me to suggest that maybe the link between the student loan borrower and other possible products is not that strong or maybe it requires a massive amount of banking infrastructure and a full product suite to get there? But it seems like an idea that makes a lot of sense, but we just haven't seen much happen on that front.

Yes. Henry, let me take that one. And obviously, this is sort of a deep strategic question. So I'm going to have to give you kind of a little bit more of a general answer on it. Look, I think we are trying to look sort of more deeply at what opportunities make sense for us. And if I had $1 for every bank going back 25 years or more, who had gotten the bright idea to cross-sell, I would have a fair number of dollars at this point, right? That's a very obvious and clear strategic option. But to your point, I think what you have to figure out is why would a customer want to cross-buy from us? Why would, in fact, we be able to provide them with a better product, a more relevant offer, something that makes getting that next product from us a better deal than if they got it from one of our competitors in any of these categories. And as we've done the work, Henry, we sort of feel like there's 2 or 3 areas where we have some real advantage. We have deep credit and sort of underwriting insight into these customers. And by the way, with a little bit of work, we could probably even have better insight. And these are young, relatively new to credit customers, and that kind of insight is really, really valuable. Two, in a world where the average consumer by some estimates gets exposed to 3,000 to 5,000 marketing impressions a day, we do have a relationship with these customers. They are paying attention to us, especially at key points in their life. And our ability to cut through that marketing clutter and make sort of relevant offers at the right time is something that we believe is an advantage. And I think -- yes, so third thing is we have incredible context on these customers. We know when they're graduating. We probably know where they're moving to. We probably have a pretty good sense of if they're changing jobs. We can probably learn even more about them over time. So part of why we're not rushing to announce a bunch of new products and services is we're trying to be really, really thoughtful about where is there truly a compelling advantage we have. And then how do we not just decide to go build it, but how do we make the right and rational choice of do we build it? Do we partner? Do we affiliate? Do we engage in a marketing relationship? There's a bunch of different ways that we can get after it. So it is complicated. I don't think -- to your original question, I don't think it's heresy to ask that question. And again, I think as investors, you all should expect us to ask that question and have really good answers for why we would choose to engage and to offer a new product to our customers.

And your next question comes from the line of Arren Cyganovich with Citi. Please go ahead.

I think we're past an hour. So I'll be quick. The expense guidance, obviously very positive, $525 million to $535 million for next year, down from $540 million to $545 million, is that $50 million reduction, I guess, just reflective of part of that's already in for part of 2020 because you already made those reductions. Is it that why it's not quite…?

Yes. Arren, I would sort of say there's a couple of components to it. Part of it, we've already realized this year. Part of it is offsetting. And I said this in my talking points sort of temporary belt tightening that we know won't be able to be long-term sustainable. And we don't want you all counting on earnings and expense benefits from us that we don't feel are in the results of real structural change. And part of it is offsetting growth, right? We know that our servicing portfolio is likely to be bigger this year than it is -- or next year than it is this year. And there is some variable costs associated with that. So when you put all that together, I think that is, roughly speaking, the main drivers of the changes. Steve, did I miss anything on that?

No. I think you covered it pretty thoroughly, but I think the biggest impact will be in 2021. So the restructuring charge that we just announced reflected some headcount reductions, and that is yet to impact the company's OpEx in a major way. So all told, we took out about $40 million in run rate. Salary and benefit expenses and another $10 million in softer expenses, travel and things like that. But as Jon mentioned, it's not one and done. We are going to continue to focus on every line item on our operating expense budget and make sure that we are getting returns for the money that we are spending.

And then the loan balances, you kind of backed away from flat to the prepayments. Those prepayments, how much of a reduction is that going to be for private student loan balances by the end of the year? And does that change your appetite for loan sales as we get into 2021?

No. No. No. Our loan balances at the end of 2020 are going to be less than 5% lower than they were at the end of 2019. We also -- earlier in the year, we were thinking that our loan originations were going to be around $4.9 billion, and we had a much better peak season than we anticipated, and that offset some of the runoff that we're seeing in prepayments. I think your last question was, does that change your appetite for loan sales going forward? And the answer to that is a resounding, absolutely not.

And our final question comes from the line of Rick Shane with JPMorgan. Please go ahead.

I apologize if some of this has been covered. But Steve, you mentioned some ongoing loan sales. And I'm just curious, given both the supply demand characteristics in the market, presumably less production out there, tighter underwriting but more uncertainty about risk. How you think that's impacting pricing as you move into the fourth quarter and more importantly, as you head into '21?

Sure. Good question. Rick, we have an ongoing dialogue with investors in whole loans and securitized loan sales. So we know all the players, and we continue to speak with them. I think there is very high demand for our product and student loans, in general. The fact of the matter is, investors really prefer a Sallie Mae student loan over, I think, other brand names because we have a very long track record in both credit and we have an excellent and reliable servicing platform. So I think when the calendar turns into the New Year, we're going to see a substantial demand for our product at premium, similar to what we have seen in the past, all things being equal.

And now I would like to turn the call back over to our speakers for any closing remarks.

Before I turn it over to Matthew to take care of a couple of quick bookkeeping items, once again, thank you, everyone, for taking a little bit over an hour this morning. We appreciate your interest in Sallie Mae and look forward to continuing the dialogues with you as we move forward in the quarters to come. Matthew?

Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact Brian or I directly. This concludes today's call.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.