SLM Corporation (SLM) Q1 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to Sallie Mae's First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Brian Cronin, Vice President of Investor Relations. Please go ahead.

Thank you, Regina. Good morning, and welcome to Sallie Mae's first quarter 2021 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 March 31, 2021. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I will now turn the call over to Jon.

Brian, Regina, thank you. Good morning everybody. Thank you for joining us today for a discussion of Sallie Mae's first quarter results. It has been one year this week since I joined the company, and I am incredibly proud of the hard work of the Sallie Mae team and what we've accomplished during what can only be described as difficult times. We're off to a fast start in 2021, executing our strategy and delivering strong results. We are encouraged by the trends toward normalcy, driven by vaccine distribution, and we're particularly encouraged by what this implies for colleges and universities in the fall. I hope you walk away today with three key messages. First, we've delivered strong results in the quarter. Second, we're executing our 2021 capital return program as expected. And third, I believe we are well positioned to continue our performance trend this year by executing against our core strategies. GAAP EPS in the first quarter was $1.75 compared to $0.87 in the year ago quarter. Our results for the first quarter were driven by a combination of strong business performance, improvements in the economic outlook, and gains from the sale of loans. Let me start with the discussion of our business performance. Private education loan originations for the first quarter were $2.1 billion, while down 10% year-over-year as a result of the pandemic's impact on the overall market. We believe this is a strong start to the year and positions us well to achieve on our full year goals. Remember, the first quarter of 2020 originations were not meaningfully impacted by the pandemic. Our market share results for the first quarter will be available in the next few weeks, however, we are coming off a very strong 61% market share in the fourth quarter of 2020. Originations quality was consistent with past years. Our cosigner rate was 89% compared to 88% in the Q1 2020 quarter. Average FICO scores were 751 versus 746 in the year ago quarter. We executed a $3.16 billion loan sale in the first quarter of 2021, and recorded a gain on sale of $399 million. This is just under a 13% gain on sale for these loans, which represents a new high watermark for our loan sale program. Our credit continues to be a highlight as we emerge from the pandemic. Private education loan annualized net charge-offs for the first quarter were 1.29% compared to 1.52% in the fourth quarter of 2020. Delinquencies are especially important in the first quarter of the year, and that number reflects the initial performance of the new graduate vintage of loans that entered P&I in the fourth quarter of the previous year. I'm happy to report this performance is in line with past cohorts, despite all of the challenges of the last year on the economy as a whole. During the first quarter, the economic outlook and assumed prepayment speeds in our CECL loss estimates impacted our reserves. As we have discussed on past calls, these aspects of CECL are difficult to forecast because of the change in assumptions around macroeconomic environment. While Steve will discuss both changes in more detail, the impact of these forecast-related charges was a negative provision of $226 million in the first quarter, bringing our loan loss reserve down to $1.193 billion, which includes the reserve for unfunded commitments. In the first quarter, we made tremendous progress against our capital return strategy, some of which we have discussed during our January earnings call. On January 28th, we completed the $525 million accelerated share repurchase program, and received 13 million additional shares of common stock over what had been returned in 2020. This was an extremely successful program, where the company repurchased 58 million shares of common stock in total, at an average price per share of $9.01. On February 2nd, the company announced the commencement of a modified Dutch Auction tender offer to purchase up to $1 billion of the company's common stock. On March 16th, the company purchased 28.5 million shares of its common stock at a purchase price of $16.50 per share for a total purchase price of approximately $472 million. Although not fully subscribed, we were pleased with the outcome of the tender offer for two reasons. First, we were able to repurchase a significant number of shares in a short period of time and added attractive price. Second, we believe the subsequent share price movement and the 47% participation rate, demonstrate that investors believe in the fundamental value of the franchise. Soon after the tender closed, we began aggressively buying shares using a 10b5-1 program. Through April 20th, we spent $370 million to buy back 20 million shares at an average price of $18.51 through this program. I think, it's important to keep our regular and persistent capital return program in perspective. In 2021, we have repurchased 16.5% of the shares outstanding at the beginning of the year. Since January 1 of 2020, we have repurchased 26% of the shares outstanding at that time. Said again, in a little over a year, we have repurchased a little bit over a quarter of the shares outstanding since we began our strategic capital return program. As of April 20, 2021, we have $485 million in authority left under the original $1.25 billion authority granted under our 2021 share repurchase program. Although we have made considerable progress in our stock price, we remain committed to our strategy of selling loans and using the proceeds to repurchase stock, while the price is undervalued and we are facing in CECL. Before I turn the call over to Steve to discuss the quarter's financial results in more detail, I'd like to take just a moment to reflect on the progress we have made over the last year. On a Q1 to Q1 year-over-year basis, we have increased GAAP net income by 77%, reduced our operating expense by 15%, reduced our common shares outstanding 26%, and that's again, since the beginning of 2020, and increased our GAAP EPS by 101%. Although the macroeconomic environment has added volatility to the results over this last year. I hope you'd agree, we are making progress against our strategic imperatives. Steve will now take you through the financial highlights of the quarter. Steve?

Thank you, Jon. Good morning, everyone. I will continue this morning's discussion with a detailed look at the drivers of our loan loss allowance, the discussion of the key components of our income statement, and finally, our strong liquidity and capital position. The private education loan reserve, including reserve unfunded commitments was as Jon mentioned, $1.2 billion or 5.4% of our total student loan exposure. Under CECL this includes beyond balance sheet portfolio, plus the accrued interest receivable and unfunded loan commitments of $457 million. Our reserve at 5.4% of the portfolio is down significantly from 6.5% in the prior quarter. As you know, we incorporate several inputs that is subject to change from quarter-to-quarter when preparing our allowance for loan losses. These include CECL model inputs and overlays deemed necessary by management. The most impactful CECL model inputs include economic forecasts, the forecast weightings, prepayment speeds, new volume, and of course, loan sales. I will now walk you through each of these impacts. Under CECL, the economic forecast we use drive quarter-to-quarter movement in the allowance. As discussed before, we used Moody's base S1 and S3 forecast, weighted 40%, 30% and 30% respectively. The forecast used and their weightings were unchanged from the prior quarter. The economy and the outlook continue to improve as you are all aware. The forecast for unemployment for college graduates declined on average 1%, a near 25% reduction in projected unemployment. This contributed to the decline in our reserve needs. 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. As a result, we implemented a new CPR model in the quarter. The new model and the improved economy resulted in a considerable increase in prepay speeds. The faster prepay speeds we use to model cash flows this quarter also of course reduced our reserve needs. We do think we are in pretty good shape regarding our probability of default and cash flow models, and don't think they will contribute any additional volatility over the course of the year. Moving to volume. Volume is an important driver of our allowance supports. While the first quarter is a large disbursement quarter for the spring semester, recall that many of these loans were reserved for at the time of commitment in the fall of 2020. New loan commitments this quarter were at $843 million, which required us to increase our reserve requirement by $40 million. The reserve for the vast majority of the loans we sold this quarter was released in the prior quarter as you may recall. Therefore, loan sales had no meaningful impact on the reserve this quarter. The factors described here in addition to other factors, including overlays and the natural accretion of our discounted reserve, resulted in a $222 million provision for credit losses in our private student loan portfolio. For the next few minutes, I'll be discussing our credit metrics, which can be found on Page 8 of our investor presentation. For our held for investment portfolio, which this quarter is the entire portfolio, private education loans in forbearance were 3.7%. This is down from 4.3% in Q4 of 2020 and 6.2% in the year ago quarter, as we would expect, given the economic improvement we have seen and expect to continue. Looking at delinquencies, private education loans 30 plus days delinquent were 2.1%, which was down from 2.8% in Q4 and 3.2% in the year ago quarter. While these results were very positive, we do still expect that 30 plus day delinquencies will rise into the 3% in mid-2021 and then trend lower for the remainder of the year. Turning to charge-offs. Charge-offs as a percentage of average loans in repay were 1.29%, up from 1.05% in the year ago quarter, but down from the 1.52% Jon quoted in the prior quarter. Again, we do still expect that charge-offs for 2021 will increase to around 1.8% for the full year 2021 based on our current forecasts, but of course, we are very well reserved for these expected outcomes. Let's talk now about net interest margin, which you can find on Page 6 of the deck. NIM on our interest earning assets was 4.4% in Q1, and this was down from the prior quarter and the year ago quarter. And then, slightly lower in the quarter due to our high cash balances, which were driven by the stickiness of deposits in this current liquid environment and the proceeds from the January loan sale remaining on our books a little bit longer than anticipated. However, we are quickly deploying this cash and capital, and expect NIM for the full year of 2021 to still come in at the 4.75% area that we discussed in January. Let's talk about operating expenses. OpEx was $125 million in the quarter compared to $122 million in the prior quarter, but $147 million in the year ago quarter. Operating expenses in our core student loan business decreased 15% from the year ago quarter, despite the fact that loan service increased 3%. This is obviously driven by the sharp cost reductions generated by our Q3 2020 restructuring. While we are on the topic of operating expenses, we have talked about providing some unit cost information. On that front, our target cost to service loan for the full year of 2021 was roughly $5.75 a month on average. But breaking this down into its components, it causes roughly $4.25 to service a current loan but $27.50 to service a delinquent loan. These numbers will obviously have some seasonality. These numbers also have our planned efficiencies embedded in them. Our goal is to leverage our cost structure and technology to drive our unit costs down without sacrificing either customer experience, our recovery efforts or our well-managed servicing practices. Through the volatility from quarter-to-quarter, we expect that we will report out on our success on this front annually. Finally, our liquidity and capital positions are very strong. We ended the quarter with liquidity of 25% of total assets. At the end of the first quarter, total risk-based capital stood at 13.8%, and common equity tier 1 to risk weighted assets was at 13.5%. Very strong ratios, well above -- well capitalized. Finally, in the post CECL world, we also look at GAAP equity plus loan loss reserves as a measure of our capitalization, and that was a very strong 15% at the end of the quarter. Our balance sheet remains solid, in terms of liquidity, capital and loan loss reserves, which positions us very well to grow our business and return capital to shareholders. Thank you. Back to you, Jon.

Thanks, Steve. I hope you all agree that we executed well in the first quarter and that you share my belief that we are well positioned to continue that trend throughout 2021. Key to this belief is an expectation that we will operate in an improving external environment. On the COVID front, I'm heartened by the continued positive development around vaccines. It's really hard to believe that students will be ramping up the spring semester over the first few -- over the next few weeks and quickly making plans for the fall. Our original guidance for originations in 2021 was built on the assumption that the first part of the year would be much like the fall of 2020, and the second half of the year would benefit from schools operating in more normal conditions. Early indications from schools regarding their fall of 2021 plans indicate just that. By and large, most schools are indicating that they will be operating in a completely on-campus experience. We believe this normalcy is exactly what students and their families are looking for and expect a strong rebound in attendance. Unemployment, especially for those with a college education, continues to trend in a positive direction. The average college graduate unemployment for the first quarter of 2021 was 3.8% compared to 4.1% in the fourth quarter of 2020. This remains notably lower than the current 6.0% national unemployment rate. The federal government continues to support taxpayers with additional stimulus and federal student loan borrowers with payment relief through at least September 30, 2021. These efforts should positively impact our borrowers' ability to service their loans. Finally, on the political front, we are beginning to see higher education priorities from the new administration being discussed. We believe that any proposals that focus on assisting lower income students and families achieve the dream of higher education or targeted debt assistance proposals are important and complement our business well. We continue to look for ways to educate and aid lawmakers to help create good policies that will improve outcomes for students and families. I'd be remiss if I also didn't mention our Corporate Social Responsibility Report, which was released earlier this month. I think one lesson we can take away from the last year is the very real importance of owning responsibility: responsibility to each other, our communities, and to our planet. This is true of individuals, of governments, and it's certainly true with the companies that have the privilege to operate and serve customers and our communities. This is a responsibility we take very seriously here at Sallie Mae. This year's Corporate Social Responsibility Report reflects the strides we have made to achieve our mission to power confidence as students begin their unique journeys and to deliver a healthier, more inclusive, adjust and equitable world. I'm encouraged by the progress we continue to make, and I'm excited about the work that lies ahead. Let me conclude with a brief discussion of our 2021 guidance. We continue to 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. Therefore, we'd like to update and reaffirm our 2021 guidance. We are raising our GAAP diluted earnings per share range to $2.95 to $3.15 from the previously announced $2.20 to $2.40. There are two main components that lead to this increase in our original range. First was the result of the changes in our CECL reserve, which should be viewed as non-recurring in the future. This represents approximately $0.55 of the guidance increase. The additional approximately $0.20 increase is due to the strong execution in our core business drivers and outlook for our loan sale program. As a reminder, this guidance includes an additional $1 billion of loan sales in Q4 of 2021 that we had disclosed on the last earnings call. We are affirming the rest of our previously announced guidance, specifically private education loan origination growth of 6% to 7% year-over-year. And consistent with our outlook for the spring and fall semesters, we expect loan originations to be down in the first half of the year and up sharply during the fall semester. We expect our non-interest expense to end 2021 between $525 million and $535 million, and this reflects our continued focus on efficiency and operating leverage. And we expect our total loan portfolio net charge-offs will be between $260 million and $280 million. With that, Brian, let's open up the call for questions. Thank you.

[Operator Instructions] Our first question will come from the line of Michael Kaye with Wells Fargo.

Hi. Good morning. I wanted to talk a little bit about that NCO guidance which was unchanged that seems to me like the trends are a little bit better. You know, correct me if I'm wrong, but I recall last quarter you were thinking delinquencies will rise to the high 3% by mid-2021, but now I thought Steve said to about 3%. So can you just explain that?

Yeah. So no, Michael, our guidance on delinquencies and charge-offs are basically unchanged. I did say in the fourth quarter, and I think I repeated today that -- delinquencies should rise above 3%, potentially into the mid-3s, and then goes [ph] lower from there. And we did stick with our charge-off guidance of the $260 million to $280 million. The fact of the matter is, look, the folds were much lower in '20 than the first quarter of '21 than we would have expected. We do have a backlog of defaults that we have reserved for. And you know, it is a fact that as we move through 2021, we will use significantly less COVID type forbearance, what we call disaster forbearance in the past. We have continued to use that, although at a much lower rate to cure defaults and delinquency buckets. We will be dialing that back significantly over the coming months and quarters. And look, we do think that it is prudent to remain reserved for the potential default of that backlog of loans that we have in our pipeline.

Okay. Thank you. Could you talk a little bit about any changes in how you're approaching the market for the 2021 peak season with one of the larger players in the sector having exited? I was just wondering if perhaps could you spend more on marketing or hiring more salespeople as more market share stands up for grabs now?

Yeah, Michael. It's Jon. I'll take that one. Look, we've talked about this on the last couple of calls, and obviously, there has been a lot of changes in the competitive intensity in the market, you know not the least of which is the departure of a major and quality competitor. I want to start with a very clear statement there, which is, we really obsess over and care deeply about the profitability of our loans, the ROEs of our loans. And I think, the most important thing is that, we've maintained very strong discipline around, as Steve mentioned earlier, our cost to service, but also our cost to acquire. Those are pretty big drivers of the lifetime return on -- return on -- investment return on equity on those loans. And so, there are limits to how far and how, sort of, much we will spend to chase volume and we really do try to be extremely disciplined around that. With that said, we believe that this is a great opportunity for us to continue to show and demonstrate our commitment to the marketplace. So in conjunction with our marketing and sales teams, we've looked hard not just at our level of sales force resources, but the way that we are deploying against opportunities in schools, you know really apply what I would describe as tried and true and tested sales force management practices. As we've talked about it in a number of calls before, we continue to invest. We think very effectively in our direct to consumer marketing efforts. And we continue to also invest in our other programs like our partnership channels, which are a meaningful source of origination -- high quality origination for us. And so, we are -- we think are doing the right things to drive that growth. But I think as we've also talked about on previous quarters, we know that the pandemic impacted enrollment. We know it didn't impact enrollment evenly across all origination channels. And we know that not every student, not every family will rejoin their sort of journey to their higher education aspirations at exactly the same time and exactly the same way. So I think, we think it will take a -- probably a peak season or two for things to really normalize again. But we're encouraged by the fourth quarter results that we talked about before, and we'll continue to focus on this as a real opportunity for us in the future.

Okay. Thank you very much.

Yeah.

Your next question comes from the line of Moshe Orenbuch with Credit Suisse.

Great, thanks. So Steve, I think, when you talked about -- actually, the question really is for both, Jon and Steve. But when Steve talked about where he thought the stock would have been fairly valued back, you know when you talked about this year's plan, you talked about a number in the 20s, and thankfully, the stock is approaching there. Could you talk just about how you think about the trade-off still between the ability to -- I mean, clearly you're going to complete this program, but how do you think about that trade-off now between the loan sale and stock buyback?

Moshe, it's Jon. Thanks for that question. As you can imagine, it's one that we talked about really extensively internally. Let me -- let me break my answer into a couple of pieces. Number one, for folks who maybe haven't listened to past calls, we are rock solid committed to the notion of strong capital allocation and capital return. It is one of our key strategic pillars, and the idea of being a great capital allocator and capital returner is something that is not a sort of a fly by night notion for us, it's going to be as long as I'm CEO an enduring part of what we do going forward. With that said, over time, you know, sort of, how we generate excess capital and how we deploy excess capital will undoubtedly change. And I think, as we've talked about on previous calls, we fully expect that through CECL implementation, we will move from a model that is somewhat more reliant on loan sales to a model that is somewhat more reliant on organic capital generation. We will in all likelihood continue to sell some amount of loans to improve the value of the asset and to keep the channel open, but I think that mix will likely shift. And I think the way we deploy the capital will also likely shift, from something that is far more focused today on share buybacks, something that is more balanced between the various ways of us deploying and returning capital. The real question is, when do we start to make that pivot, and I think obviously the CECL implementation is going to happen on a known timeframe in a known pattern. I think the pivot from share buybacks to a broader strategy is something where we will really look at sort of multiples and valuation. So Steve and I talk regularly about where we are from a multiple perspective and where we should be. We think in that discussion a lot about the factors that go into any good multiple analysis, what's our implied cost of capital, our assumed growth rates, with capital return, profitability, all the things a good sophisticated financial analyst would sort of bring into it. And I think, we have obviously views that may change over time about where that multiple is. We're probably not going to sort of stake ourselves out to a specific multiple where the strategy will shift, because it could obviously change. But I think it's fair to say that we feel like we're still probably at least several turns of the valuation multiple away from where we feel like we should be. And so, I think the assumption should be that our current strategy will largely persist for some period of time, but folks should expect again that capital allocation and capital return. My hope is that we're talking about that in an evolutionary way every quarter from here on now.

Great. Thanks. And I think your commitment to that capital allocation is pretty clear. Just a quick follow-up. Jon, you mentioned that $0.20 of that guidance increase was not related to the change in CECL and related to better operating trends. Without asking for specific guidance for years past 2021, but is it reasonable to assume that those amounts should kind of persist?

Yeah, sure. Look, Moshe, we are -- one of the things that I think investors miss when they look at us on the long run is that, we are going to continue to grow our earnings steadily over the coming years. There might be some several -- originate [ph] we'll sell $4 billion of loans this year that might decline to $3 billion of loans next year, but the trajectory for our earnings is decidedly sloping upward. And look, we have only really just begun to pull the levers inside the company, which is to continue to focus on the efficiencies that we know that we can continue to generate and to continue to gain a wider share of the market that we plan. So yeah, our outlook is very, very positive for our earnings power [indiscernible].

Great. Thanks, Steve, and Jon.

Your next question will come from the line of Sanjay Sakhrani with KBW.

Hi. This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. Just the first one, just around the $1 billion of loan sales that is expected in the fourth quarter. Within the guidance, what type of gain on sale is being assumed there and is there the potential to, if the environment remains strong, to do more than the $1 billion? Thanks.

So Steven, what we have embedded in our guidance is a premium that is slightly lower than what we just reported, but not significantly so. Regarding selling additional loans, at this point in time, we think that that's pretty much off the table despite where premiums may or may not end up. I mean, we have -- we've generated a significant amount of capital that we still haven't even deployed yet this year. So we want to keep things on a somewhat steady pace as we move forward. So I wouldn't expect -- you shouldn't expect us to change the loan sales in 2021.

Yeah, Steven, it's Jon. I think, the only thing I would add to what Steve said and it's a little bit of a broader answer, but I think it's important to say it. We really -- as we've talked about on a number of calls here, we believe that loan sales are a great way of taking care or taking advantage of this arbitrage that exists today between the whole loan markets in the current value of our equity in the market. So that's obviously why we're being so aggressive there. And as Steve said, the cap on that is really how effectively we can deploy that capital. I do want to remind everyone that our real goal and I think we've started to talk about this in past calls is to have and to generate very, sort of, stable, predictable, high quality, high profit and growing earning streams. So we like, but these loans are tremendous. These are really attractive loans. We want to keep as many of these loans on our balance sheet for their full life as we possibly can. We think that will drive that persistent, consistent, predictable earnings flow going forward. And if we can marry that with the kind of focus on top line growth and market share that Steve just talked about and really effectively manage risk along the way, we think that is a winning combination. So recognize every day, we're sort of striking this balance of wanting our cake and eating it too. We want to take advantage of this incredible arbitrage, but we really like these loans as well and think they will drive a very attractive valuation for us in the future. So the reason we're not just looking at loan premium is, we are interested in earnings and growth today, but we are also very, very interested in creating a long runway of predictable and attractive earnings growth in the future, and that is effectively sort of the balancing act, Steve and I, and our Board will continue to make.

Got it. That's very helpful. And then just a follow-up question around the political front. Is there anything that you're seeing that they are monitoring from the new administration? Thanks.

Yeah, look, I think on the political front, we are encouraged by the sort of the thoughtfulness of the debate and the discussion, and we are encouraged by the types of proposals that we are seeing being floated, not just now by the Biden administration, but I think Biden leadership within both houses of Congress. So we've talked on a number of occasions on this call about things like free community college and free sort of state university -- public university education for families below particular income levels. I think, the popular number today is about $125,000 a year. Those are proposals that continue to get, I think, a lot of attention and a lot of traction. And by the way, we very much support. We think they drive access to education, which again as we've talked about on past calls, is a key determinant to economic, mobility, social justice, and really achieving the American dream that so much a part of our society. We are really encouraged by what we think is very thoughtful discussion going on right now around debt forgiveness -- I'm sorry, around our loan forgiveness. And I think what has really come to the surface is just how regressive and expensive large scale loan forgiveness is. And if I have to read the tea leaves, I think where that's leading us to is probably if there are debt or loan forgiveness type proposals, you know them being far more targeted on people who really have a demonstrated need versus something that is broad and across the Board. You throw in that, some of the other proposals like expansion to Pell Grants, and so forth. These are all things that we think serve an incredibly important social benefit, but I think they also have the added benefit of being highly complementary to our business model as we've disclosed in the past. So I will sort of never assume that the current political environment is the ever -- forever political environment. Things can certainly change, but I think we are optimistic and supportive of the discussions and have been ongoing.

Got it. Thanks for taking my questions.

Yeah. Appreciate it.

[Operator Instructions] Our next question will come from the line of Rick Shane with JP Morgan.

Good morning guys. It's Melissa on for Rick today. I wanted to understand your thinking around the reserve rate level. Currently, it's 5.4% this past quarter, but we've seen that [ph] a little bit. Can you talk about how you think about that in your framework and how the interplay between the reserve rate level and the modeling you do on the macro side?

Sure. So look, unfortunately with CECL, we are beholden to the models and the economic forecasts that drives the life of loan CECL reserve. We -- CECL was introduced at the absolute worst time and we've seen our reserve go from 6% at the starting point to as high as 8.5%, and now it's dropped back down to 5.4%. We think given the current ingredients that that reserve is probably appropriate as a life of loan loss reserve. As you probably know from following us, we originate loans within expected life of loan loss rate of around about 9.5%. Obviously, we have many cohorts of route [ph] there that have already experienced a significant amount of their defaults. But when you take that into consideration and the fact that we do use a discounted cash flow model to calculate in our CECL reserve, 5.4% feels probably like it's about right. Although, look, the college unemployment rate, which is the biggest ingredient or the most important explanatory variables in our model, I think, pre-pandemic posted around low to mid 2s and we still very much have high 3 and 4 handles in our reasonable and supportable period. So the reserve could very well come down as the move to normalcy continues. Hopefully that captures the spirit of your question, but that is how we think about the CECL reserve here at the company.

Yeah, that's incredibly helpful. Thank you. As a follow-up question, I'm just curious on what you're hearing from your university partners in terms of sort of the college applications fund this year coming out of COVID with the expectation of being on-campus next year. Curious what you're hearing from them if anything around how this compares to serve a pre-COVID environment? Thank you.

Yeah, Melissa. Thank you. I think, at this point, most of what we're hearing from universities falls more into the sort of anecdotal space than it does into the specific data space. So take everything that I'm about to say in that context. But I think, what we are absolutely hearing from the vast majority of our college partners is that they expect the fall to be, you know if not a full return to sort of normalcy, largely a return to normalcy. I am sure that there will be exceptions to that, but I think that is their expectation coming in. I think the only color I would add on top of that is, you really have to imagine the pandemic through the lens of an individual student or an individual family. And there are a group of students and families who have just powered through their education and have said, hey look, regardless of the hybrid model and the economic uncertainty, we're going to keep moving forward. And by the way, I think that speaks to the resilience we've seen in our originations last season and this season. I think there is a second group of people who said, gosh, maybe I will take a year off even though my other opportunities aren't as rich, aren't as attractive, because I just don't believe in the hybrid model and I really want to sort of wait till things return to normal. And we expect many of those people to come right back into the system next year. And these are all the people who have taken GAAP years, I think, is sort of the most, you know sort of classic label of that. But I also think it's really important to recognize that there are certainly students and families out there who have delayed college because of the very real economic damage that has been done by this pandemic and resulting recession. And as I point out, whenever I get the chance, my guess is, some of those students will come flooding back in right away, some of those students will come back in over the course of the next semester or two or three. And my guess is, some of those students will not ever come back unfortunately. They will have missed the window for them to get to their higher education and will be sort of permanently part of a mini lost generation of folks who otherwise probably would have gone to college. I think the problem is, we've never gone through anything like this before. So it's really hard for us to quantify what that looks like and what those numbers are. As we said, we're very, I think, supportive of the guidance we've given around originations for the remainder of this year, but a little bit like what I referred to earlier. I think, it's going to take a year or two to really see all the trends normalize and to understand how those different cohorts of students sort of come back into the system and sort of where and how they engage in the higher education marketplace.

Our next question will come from the line of Arren Cyganovich with Citi. Please go ahead.

Thanks. Maybe you could just talk a little bit about the consolidations to third-parties, they came down a little bit quarter-over-quarter, year-over-year. What's the outlook there and expectations?

Yeah. Sure, Arren. So, look, consolidations is part of being in the business. We watch the trends obviously very, very closely. Since our portfolio started to age, call that into '19 -- 2019, we haven't seen any real discernible increase in the trend of loans being consolidated away as a percentage of our portfolio. We watch where consolidations coming from, what cohorts, are they increasing or decreasing. And what we see is a steady state. Loans go into grace, they tend to consolidate pretty quickly, and then the pace slows down. I was just looking at chart a couple of days ago and that trend continues. So this quarter's consolidations were pretty much composed of the last two repay cohorts and the contribution from the prior cohorts is down significantly. If that trend was to change, we would become very concerned. It has not. We continue to look for ways to, you know stem the flow of loans that get consolidated away from the balance sheet, as Jon mentioned earlier. We really, really like these high-quality loans. They generate very high ROEs. The fact of the matter is, the consolidation business is a very, very low ROE business and not something we think is appropriate for us to participate in at this time. And something that I've said, I think, very often in the past is the loans that consolidate away or you know held by very high income, very high credit quality individuals. They're going to consolidate away -- anyway and the weighted average lines [ph] of those loans are fairly short. So look, bottom line is, we continue to monitor the trends and look for the silver bullet. We haven't found it just yet, but we think our business functions very well, and we can generate very strong returns and earnings growth while the consolidation activity continues.

Thanks. And maybe we could just touch a little bit on the net interest margin. You mentioned it dipped a little bit in the first quarter. I believe, there's typically some seasonality with your cash balances easily. How much was that? And the other was on the broker deposits. It didn't really come down much from a rate perspective quarter-over-quarters with the outlook on that decline there?

So look, we were very, very cash rich this quarter. We had more liquidity than we would have liked to. The deposit market is extremely, extremely sticky. I think we're probably not the only bank that is seeing deposits stay on the balance sheet when we're priced to have a lower balance. I'm speaking specifically about our retail/Internet deposit base. But we did also expect to spend $1 billion sooner than we did with the tender offer, which unfortunately was only participated at a rate of 47%. That impacted the NIM as well. But look at the end of the day, I think the important thing is that the liquidity will run off. We will spend the capital. And for the full year, we will hit a NIM of 4.75% and I think that that's going to be a sustainable level which is pretty attractive in the banking industry for the medium-term as well.

And just on the broker deposits, do you expect that rate to continue to decline?

So our broker deposit, we typically take long term brokered deposits, and we have not been very active in that marketplace. What we do is we swap them to fund our variable rate portfolio. We've had some runoff in broker deposits. We don't expect to refill that bucket of funding until later in the year when we make our peak season disbursements. So, yeah, that could decline a little bit before it increases.

Thank you.

Your next question will come from the line of Vincent Caintic with Stephens.

Hey, thanks. Good morning. Just have a couple of quick questions. So first on capital return. So you've indicated you have $485 million left, and of course, you have the upcoming sales. Just sort of wondering -- and your CET ratio is also pretty high, 13.5%. I was just wondering, when you're thinking about what's the right level of your CET1 ratio is and kind of how fast you think you might get there?

So we tend to focus on our total risk-based capital ratio, which we need to maintain a good margin above the well capitalized level. Most of our capital is CET1 anyway. So our target for total risk based capital is, let's call it, 12%. We ended the quarter with 13.8%. On our current trajectory of capital return, that ratio should decline a little bit, but if we stick with our current capital return strategy, we will actually end the year higher as opposed to lower than where we ended the current quarter.

Okay. Got you. So it's sort of -- yeah.

So look, what we really want to do is, there has been an incredible volatility in our CECL reserve and clearly that impacts our capital account significantly. So we will stay on our current course of capital return until we see some stability in our CECL reserve.

Okay. Got it. That's helpful. Second on the NIM. So I appreciate the color about the excess liquidity you had. I guess, if you could help us maybe understand if you didn't have that excess liquidity, would you be at that 4.75% now and is that something where -- you know now that you used that liquidity in the second quarter, we should just expect that to quickly ramp up and so for the full year you're at 4.75%.

That is a very good question. Yes, we should glide back up towards that 4.75% area.

Okay, helpful. And then, this is last one for me. So the CECL reserves were impacted by prepayment speeds and you looked at -- you've done a different model on prepayment speeds. I'm wondering how much of that sort of prepayments were affected by the customers having really strong cash positions. It seems like stimulus or things like that have resulted in loan balances being paid off across the consumer lending industry. So sort of wondering if that's a big driver of prepayment speeds. And so, when you set your pre-payment speeds, is that something you expect to last for a while or once consumer cash balances come down, maybe the prepayment speeds start to extend again? Thank you.

So that's a very good question and a very accurate observation. The fact of the matter is that, our prepay model basically looks at 10 years of data. And the last couple of quarters of prepay speeds may very well -- let's all agree that they are absolutely elevated by stimulus checks, the federal student loan holiday, et cetera., all of the things that has been going on in the economy to support it. Whether or not -- so, to put a finer point on it, those payments will continue probably up through September 30, as the federal student loan holiday is going to continue. So I think it would take probably several quarters of sharp declines in prepayment speeds for it to impact the CECL reserve in a meaningful way, if that makes sense. I mean, these models are trained on long-term data and it takes a reasonable period of time for just a couple of quarterly observations to skew it. And what we're really looking at is the last -- the 10-year average prepay speeds on our portfolio is somewhere around 9%, and that's sort of at the root of our current model. Long-winded rambling answer, but I think it would take significant decline in current prepay speeds to offset our outlook.

Great. That's very helpful. Thanks much.

You're welcome.

Our final question will come from the line of Jordan Hymowitz with Philadelphia Financial.

Thanks for taking my questions guys. When I look at your company, I mean, you have no branches and you're basically all digital so to speak or in person. Why are you guys at neobank, so to speak, and if you thought about comparing yourselves more to a neobank, especially one that actually makes money with a very high return on assets. Or said in a different way, "if neobank might be interested in merging with you for the assets that you have"?

Hey, Jordan. It's Jon. Thanks. Thanks for your question. Look, it's -- it's hard and I'm probably not the right person to opine on the current valuation of neobanks. I think, what we are really focused on is delivering on our core investment thesis, which we think is really, really attractive. And quite frankly, I would put up pound for pound against anybody, and I would boil that down into three pieces. Number one, we think we provide very attractive earnings growth. You think about the natural rate of growth in the private student lending market, you think about the 60% fixed cost base that we have, you think about the ability to turn that into even more attractive earnings growth through operating leverage, and all the ingredients that go into that, a real brand, real customer connection, real relationships with schools. We very much like our earnings growth trajectory. As we've talked about, we very much like our capital return trajectory, both pre and post CECL. And we're not at the phase of our development of having to absorb all this capital to grow. I think we've been very thoughtful about how we make sure we share sort of the benefits of these incredibly profitable loans with our investors so that they get paid every day, every quarter. And look, I think, we are more and more demonstrating the incredible risk management power of this franchise, both credit risk and political risk. Certainly, the great recession and the pandemic, I think, has demonstrated the incredible resiliency of these loans, the power of the college education, the power of the cosigner model. And look, I think the discussions we've had and how we're seeing the political discourse unfold suggest that private student lending continues to be regarded as an incredibly positive and important part of the overall higher education tool kit to make college affordable and accessible. So we love that investment threshold -- or I'm sorry, that investment thesis. We think it compares well to anybody's investment thesis. We're not stock analysts. It's not our job to go and say, you know who is better or worse valued and where is the upside and the downside. Quite frankly, that's for you all to decide. But I think we would put ourselves up against anyone in that regard. We obviously don't comment on plans for acquisitions, mergers or what if scenarios. But I think, hopefully, our Board has demonstrated across the Board that we are laser focused on creating shareholder value not in an abstract way, but in a very tangible way, and that's something that we will always take extremely seriously.

Okay. And if I could just follow-up on that. We talk about profitability, I mean, you've really guide, but if you take out the gains on sale, your returns on equity are around 30% on a core basis, I mean, it's dramatically more profitable than almost any other financial institution and growing much faster, I mean, I just think that's part of the story is well known as it should be?

Jordan, Brian Cronin right now was sweating bullets that we're going to get rid of him and hire you as our Head of Investor Relations. But look, I mean, we very much like the profitability of our loans and you heard me say it earlier when we were talking about marketing growth. I would rather be incredibly profitable and only modestly growing than rapidly growing and not profitable. I mean, it is one of the super powers of this business is to have incredibly high ROE loans. By the way, that is what in a post-CECL world allows us to organically generate capital while we are growing our balance sheet, right. And when you really understand that a new model is out, it is a very, very, very, very powerful thing. So thank you for the plug. Yes, we agree, and as long as I'm here, we will do everything in our power to safeguard the profitability in the ROEs of our loans. We think they are incredibly attractive.

Okay. And you know, a long time ago, when we all had a little more hair [ph], JP Morgan and JC Flowers almost spot you guys at 20 times earnings with more regulatory clarity and more scarcity value, maybe someone else will see that opportunity again?

We will -- you know, again, we don't comment on any of those types of discussions, Jordan, but we are committed to shareholder value return.

Thank you.

Yeah.

With that, I will turn the conference back over to management for any closing remarks.

Thank you everybody. Listen, we know it's a busy morning. There's a lot going on, and we know that your time is valuable, especially during these key earnings weeks. Appreciate your interest in Sallie Mae. And really please let us know if there's any additional thoughts or perspectives that we can provide to clarify the information. So with that, Brian, I think I'm handing the call back over to you.

Thanks, Jon. And thank you for your time and your questions today. A replay of this call and the presentation are available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call. Thanks.

Thank you all for joining. You may now disconnect.