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Sallie Mae (NASDAQ:SLM)
Q4 2020 Earnings Call
Jan 28, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sallie Mae 2020 Q4 Earnings Call. [Operator Instructions] After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]

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

Brian J. Cronin -- Vice President, Investor Relations

Thank you, Angel. Good morning, and welcome to Sallie Mae's Fourth Quarter 2020 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include, among others, the potential impact of COVID-19 pandemic on our business, result of operations, financial conditions and/or cash flows.

During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results, can be found in the earnings supplement for the quarter ended December 31, 2020. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you.

I'll turn the call over to Jon.

Jonathan Witter -- Chief Executive Officer

Brian, Angel, thank you. Good morning, everyone. Thank you for joining us for a discussion of Sallie Mae's fourth quarter and full year 2020 results. To say 2020 was an unprecedented year is an understatement, we were tested as individuals and as a nation, but we persevered with resilience and resolve. I want you to walk away today with three key messages. First, we delivered strong results in 2020 despite the many challenges we faced. Second, I believe we are positioned to continue that performance trend in '21 by executing the strategies we have previously discussed. Third, we will begin '21 with a significant return of capital to shareholders. A specific plan is currently being finalized.

GAAP EPS in the fourth quarter was $1.13 compared to $0.32 in the year-ago quarter. Our full-year 2020 GAAP EPS was $2.25 compared to $1.30 in 2019. This includes the gain on sale from the January 2020 loan sale. Our results for the year and fourth quarter were driven by a combination of strong business performance, reactions to the pandemic and some timing related changes. Let me start with the discussion of our business performance. Originations ended the year at $5.3 billion. While down 5% year-over-year as a result of the pandemic, we believe this level of originations is a testament to the importance of education to our customers and the power of our franchise.

Originations' quality was consistent with past years. Our cosigner rates were 86% compared to 87% in 2019 and average FICO scores were 749 versus 746 in 2019.

Market share through the end of September was 54%, up 0.5% as we compete for volumes from competitors who are leaving the industry. We executed a $3 billion loan sale in the first quarter of 2020. The proceeds funded a $525 million accelerated share repurchase program. The ASR was completed this week. We were able to repurchase in total 58 million shares at an average price of $9.01. This equates to 14% of the shares outstanding at the beginning of 2020. We received 44 million of those shares in the beginning of the program and the remaining 13.3 million shares we'll settle this week.

In 2020, we enhanced our focus on the core business by selling our Upromise business and our personal loan portfolio. We raised $500 million in unsecured debt and used some of the proceeds to successfully retire 37% of our Series B preferred stock. Finally, we were able to reduce our planned 2020 expenses by $18 million. Additionally, we implemented a $50 million reduction to our expense base in '21 and future years as a result of the restructuring efforts we announced last quarter.

During the fourth quarter, we continue to experience changing impacts on our business from the pandemic. In this case related to the economic outlook and assumed prepayment speeds in our CECL loss estimates. Based on an improving economic outlook, we changed the economic scenarios used in determining our CECL allowance calculations from the previous 50:50 base S4 waiting back to our standard approach. In addition, we have, continue to adjust our assumed prepayment rates in response to changing customer behavior. While Steve will discuss both changes in more detail, the impact of these pandemic-related changes coupled with the reserve release related to our early 2021 loan sale that I'll discuss next reduced our provision by $316.4 million in the fourth quarter, bringing our loan loss reserve down to $1.466 billion.

Finally, there were some impacts to our 2020 earnings that were strictly the result of timing. At the end of 2020, in response to strong market conditions and inbound inquiries, we decided to start our 2021 loan sale process earlier than for the 2020 loan sale. In keeping with GAAP, those loans were moved to held for sale in December of 2020. This change in designation mandated a release of the CECL reserves for those loans which flowed through our income statement. Previously, we expected this reserve release to happen in Q1 2021 coinciding with the sale and the booking of the gain. This $206 million release accounted for $0.41 of EPS in 2020. Said simply, our full-year core EPS would have been $1.82 excluding this reserve release.

We do not expect this split year result to reoccur. The financial impacts of the January 2020 loan sale were contained within one calendar year and we expect the same to be true for the remainder of 2021 and beyond. We will more fully discussed the loan sale and capital return in a few moments. It's worth noting despite all of the challenges and moving pieces caused by the pandemic, this $1.82 a share result is just $0.06 lower than the midpoint of our initial guidance for 2020.

While loss expectations are still elevated since the start of the pandemic, we were able to partially offset these impacts through tight expense control and other actions. Steve will now take you through some specifics on 2020 and the details of these pandemic and timing impacts. Steve?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Thank you, Jon. Good morning, everyone. I will continue this morning's discussion with a detailed look at the drivers of our loan loss allowance and the rest of our financials, followed by a discussion of the capital structure changes we have made. And finally, highlight our strong liquidity, capital and reserve position. The private education loan reserve including a reserve for unfunded commitments was $1.5 billion or 6.5% of our total student loan exposure, which under CECL includes the on-balance-sheet portfolio, plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of $1.7 billion. Our reserve at 6.5% of our portfolio is down significantly from 7.1% in the prior quarter.

As a reminder, we use a discounted cash flow methodology to determine our reserve and that discount factor is approximately 70%. I would now like to walk you through the process of calculating our loan allowance to help you understand the current quarter. This will be a core component of our quarterly earnings discussions going forward. We incorporate several inputs that are subject to change from quarter to quarter. These include model inputs and any overlays deemed necessary by management. The most impactful model inputs include economic forecasts, their weightings, prepayment speeds, new volume including commitments made, but not yet dispersed and loan sales.

Under CECL, the economic forecast we use are key and will drive quarter to quarter movement in the allowance. As Jon already mentioned, we've changed the mix and weightings of the forecast we used in the models in the fourth quarter. Specifically, we moved from using Moody's base S4 forecast weighted 50% each to a more balanced mix of Moody's base S1 and S3 forecast weighted 40%, 30%, 30%. As a reminder, we moved to Moody's base and S4 in the second quarter due to the uncertain economic environment. The significant increase in forbearance usage, we were seeing and uncertainty about how it would play out.

This environment persisted throughout the third quarter as well. However, as the fourth quarter came to an end, the economy and the outlook continue to improve and we were seeing steady performance in our portfolio, including recent repay cohorts. As a result, we concluded it would be appropriate to revert to the more balanced mix described earlier. This is, in fact, what we determined to be best practices in normal environments when we were preparing for CECL and is the mix of forecasts recommended by Moody's to capture a multitude of probable economic outcomes. The change in scenarios and weightings reduced our reserve requirement by $31 million.

Turning to prepay speeds, as we have discussed in past calls, this has been a watch item since the pandemic began. Our CPR forecast as modeled was not aligning with current observations and trends. The model was built using historical data that shows a substantial drop in prepayments during periods of economic stress and this never materialized. In Q3, we increased it from 2% to 4%. In Q4, we increased it again to align with observations of how prepayments are trending in our portfolio. This change reduced our reserve requirement by an additional $77 million.

Volume, of course, is an important driver of our allowance, while the fourth quarter is a quiet quarter. For new loan originations, we did enter into new loan commitments of over $500 million, which required us to increase our reserve by $37 million. Finally, as Jon already discussed but it's worth repeating, loan sales had a big impact on the provision, moving loans to held for sale in December, through our early January transaction reduced the reserve by $206 million.

The factors I enumerated here net to a reduction of $288 million in our reserve and they were offset by other factors including overlays and the natural accretion of our discounted reserve among other things, resulting in a negative $316 million provision for credit losses. For the next few minutes, I'll go over our credit metrics, which can be found on page 9 of our presentation. For our held for investment portfolio, loans and forbearance were 4.3%, flat to Q3's level but slightly higher than 4.1% in the year-ago quarter. This is expected given the economic impact of the pandemic.

Loans delinquent 30-plus days were 2.8% of loans in repayment down from the 3% in Q3, but unchanged from 2.8% a year ago. We now expect that 30-plus day delinquencies will rise into the high 3% in mid-2021 and then trend lower for the remainder of the year. Net charge-offs as a percentage of average loans in repayment were 1.52%, up from 1.24% in the year ago quarter. The full year of 2020 charge-offs totaled 1.17%, which is unchanged from 2019.

Looking ahead, we expect the charge-offs for 2021 will increase to around 1.8% for the full year based on our current forecasts. The large wave of loans that entered P&I in Q4 is performing very well compared to prior-year's repayment cohorts as measured by things like early roll into delinquency and cure trends in the collection chart.

I would like to point out that our delinquency and charge-off forecasts while higher are informed by our CECL model and have declined steadily since the peak of the pandemic as the outlook has improved, and our inputs have changed. This, of course, is a big positive, and I should reiterate that we are very well reserved for the expected outcome in 2021 that I just described. Wrapping up conversation about credit, the strong performance of our portfolio continues to validate our underwriting, the cosigner model and of course the value of higher education.

Turning to net interest margin on page 6 of the deck, our NIM on interest earning assets was 4.82% in Q4, up from the prior quarter, but down from the prior years as interest rates have moved dramatically. Full year net interest margin was 4.81%. This is slightly lower than anticipated, principally due to higher cash balances and investment securities. Looking ahead to 2021, we expect very little change and we believe that our NIM will come in right around 4.75%.

Few words on opex, 2020 operating expenses excluding restructuring fees were $538 million compared to $574 million for 2019, 6% lower. The significant reduction in expenses was driven by exiting the personal loan business, scaling back on credit card investments during the pandemic and our overall cost cutting efforts. Put it into perspective, operating expenses in our core student loan business declined 9% from the year ago quarter, while average customers increased 4%. We will continue to focus intently on generating operating efficiencies, and clearly, our initiatives are already paying off.

Finally, in the fourth quarter we did several transactions that improved our capital efficiency. First, we issued $500 million, 5-year unsecured debt, portion of the proceeds of this issue will be used for share repurchases. Secondly, we repurchased nearly 1.5 million shares of our preferred stock at $0.45 on the dollar. This transaction created equity, which enables the company to repurchase common stock.

Turning to liquidity and our capital positions, they are very strong. We ended the quarter with liquidity of 19.7% of total assets. At the end of the fourth quarter, total risk-based capital was 15%, common equity to Tier 1 risk-weighted assets was at 14%. And in the post-CECL world, we also look at GAAP equity plus loan loss reserves over risk weighted assets, which came in at a very strong 16%. Our regular regulatory capital ratios are well in excess of well capitalized. In conclusion, our balance sheet is rock solid in terms of liquidity, capital and loan loss reserves, positioning us very well to grow our business and return capital to shareholders in the future. Thank you.

Now, turn the call back to Jon.

Jonathan Witter -- Chief Executive Officer

Thanks, Dave. In addition to delivering strong 2020 results, I also believe we are well positioned to continue that trend into 2021. Key to this belief is an expectation that we will operate in an improving external environment. On the COVID front, I am heartened by the continued positive developments around vaccines. While the spring semester is setting up to be much like this fall with students returning to campus on a shortened hybrid schedule, we are optimistic that because of the vaccines schools and students will be operating under more normal conditions this fall, which should have a positive impact on originations. Unemployment, especially for those with a college education continues to trend in a positive direction. In December, this rate declined to 3.8% from 4.2% in November and remains notably lower than the 6.7% national unemployment rate. The federal government continues to support taxpayers with additional stimulus and federal student loan borrowers with payment relief now through at least September 30 of 2021. These efforts should positively impact our borrowers' ability to service their loans.

Finally, despite the tremendous political activity and turmoil of the last few months, our assessment of the political environment and likely policy priorities has not changed dramatically since our last call. Before I elaborate further, let me congratulate our 46th President of United States, as the CEO of a company headquartered in Delaware, we take special pleasure in congratulating our own Joe Biden along with Kamala Harris who makes history on a number of critical dimensions as our Vice President.

It's worth noting, we believe strongly in the power of our products and services in helping customers achieve the dream of higher education. Our core product, the private student loan is incredibly customer friendly with features such as no application or prepayment fees, attractive pricing compared to other GAAP financing options and a full spectrum thoughtfully underwritten approach. These factors allow our customers to be successful with our product, as evidenced by our low default and charge-off rates. In addition to our core lending product, we also offer a variety of other products, services and programs to help our customers plan for and navigate the challenges of attending college. These include tools to help customers find scholarships, complete their financial aid applications more easily plan for the transition to college, complete their degrees and get launched on strong footing. I am proud to announce that in keeping with this focus, this week we officially launched a new scholarship program with the Thurgood Marshall College Fund to meet the needs of minority students and those from marginalized communities.

Our Bridging the Dream Scholarship Program will provide $1 million a year over the next three years to help students not only access, but importantly complete college. With all of this said, we recognize that not all student lending products and programs can claim the same positive results. We also recognize that loans are not the right financing option for all, especially for those with less access to financial resources. As such, we continue to support thoughtful policy changes to increase access and affordability of higher education while controlling the inflation of costs.

This is key to affording the dream of higher education to all who can benefit from it, which we know is a key ingredient in promoting economic mobility and social justice. In this context, we look forward to working with the Biden administration and our continued efforts to increase access, affordability and college completion for all Americans.

I have received several questions about the future direction of the CFPB and potential impacts to our business from a change in our regulatory environment. As I said earlier, we are committed to running a customer-centric business and we treat that as our North Star or our mission. Doing right by our customers for us is not dependent on any particular regulatory focus, we enjoy a productive relationship with the CFPB and expect to do so going forward. While one cannot predict future regulatory priorities, we are confident in our customer focus, practices, operations and products and look forward to working with the CFPB to strengthen our business and better serve students, their families and our communities.

As we move into 2021, we believe focusing on four key strategic imperatives in this improving environment positions us for continued success. We will obsess over the performance of the core business and believe we have opportunities to enhance top and bottom line performance, which will be further strengthened through share repurchases. In that context, our guidance for '21 is the following. GAAP diluted earnings per share of between $2.20 and $2.40, private education loan origination growth of 6% to 7% year-over-year. And consistent with our outlook for the spring and fall semesters, we expect loan originations to be down in the first half of the year and up sharply during the fall semester. We expect non-interest expense to end 2021 between $525 million and $535 million. As Steve said earlier, this reflects our continued focus on efficiency and operating leverage. And we expect our total loan portfolio net charge-offs will be between $260 million and $280 million.

Let me conclude with a discussion of one of our four strategic imperatives, which is capital allocation and return. Before going into details about our 2021 capital plans, let me step back and provide a bit of context. Core to our investment thesis and strategy are three main beliefs, first, we can attractively grow earnings beyond 2021 because of market growth and dynamics and a focus on operating leverage. Second, especially post CECL implementation, we can deliver attractive organic payout ratios to investors while funding balance sheet growth because of the high ROEs of our loans. And third, as proven risk managers we can deliver more predictable cash flows. In this context, one might ask why we are selling these attractive loans.

The simple answer is that as a committed capital allocator, we believe there is a real dislocation between whole loan pricing and our current stock price. This dislocation creates an arbitrage opportunity to sell loans and aggressively return capital to shareholders. As long as this arbitrage exists, our plan is to continue to operate in a hybrid originate and sell model and to aggressively allocate and return capital. While we will likely reduce our focus on loan sales as organic capital generation increases and this is when CECL is more fully implemented, we will likely always engage in some loan sales to demonstrate external value and maintain a ready funding source.

Regardless, we will remain a committed champion of the principles of capital allocation and return. Enabling this multi-year capital return strategy, our board has approved a $1.25 billion share buyback authorization, which expires in January of 2023. In keeping with our past practices, we would expect to fully utilize this authorization well before its expiration. As I mentioned earlier, the finance team was busy in the final days of 2020 working with potential investors on our next loan sale, which was completed in early January.

We held an auction for a representative sample of $3 billion worth of loans from our portfolio and we received bids from eight different bidders all with full tranche orders for the loans. In the end, we were able to achieve low double-digit premiums on these loans, which is a validation of the quality of our portfolio and the strength of the current loan sale market. The gain on sale for these loans will be recorded in the first quarter of 2021. We felt it was critical to sell loans early in the year to capitalize on the robust loan sale market and our plan is to sell an additional $1 billion of loans later in this year. We expect this will result in a relatively flat to slightly down balance sheet year-over-year with some uncertainty, given the wider than normal variation in peak season outlook caused by the pandemic. We are finalizing our capital return strategy for the year. This will include the return of a significant amount of capital made available by the recent loan sale debt offering organically generated capital and from other sources. We expect to announce the details of our capital return strategy in the very near future.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani -- KBW -- Analyst

Thanks. Good morning and good results. I guess, I wanted to break apart the $2.20 to $2.40 outlook and I know you mentioned Jon the double-digit gain on sale, but maybe we could just talk about those pieces, the gain on sale, the capital return assumption and any reserve releases expected inside the numbers.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Sure, Sanjay. So, look, the $2.30 midpoint is basically derived from some very supportable assumptions. We've got the 4.75% NIM in there. We already talked about the gain on sale for the first $3 billion being in the low double-digits. We received a very strong premium on that sale. We're factoring in another sale late in the year, an additional billion at what we expect to be a very attractive premium. I'll have that topic off of the past. Our co-party -- counterparty is still working on their sale of the loans that they purchase. So, I don't want to give too much specificity on the price to help our buddies out, it was a great transaction and we look forward to working with them again in the future. So, we don't want to give too much specificity on that.

There is, obviously, a very large slug of share repurchase in the $2.30 midpoint. We have not announced the form and the timing of that share repurchase, but I think Jon has given you all the appropriate commentary for you to try and factor in when and how large that will be. There will absolutely be more information coming very shortly.

And finally, I will point out that there is not, I saw in a couple of the notes, some people are wondering if there is another reserve release late in 2021 associated with an additional sale. There is not, the number is clean, the CECL assumption supporting, the provision are along the lines of the -- CPR increase in the 40-30-30 base S1, S3 that we provided. So, look, a very clean number for 2021. And it's -- I'll take the liberties and say, if you move take the gain out of '20 and move it into '21. We are going to generate some very substantial EPS growth. And as Jon alluded to in his prepared remarks, if we keep with this hybrid originate and sell strategy, we will generate earnings growth in '22 and beyond. But, of course, we don't want to start giving you guidance for the next calendar year. Hopefully that helps, Sanjay. But I would be happy to answer any further modeling questions.

Sanjay Sakhrani -- KBW -- Analyst

No, no, thanks, Steve. So, I guess, I completely agree with the comments that at these gain on sale levels, it seems like the arb makes sense. Is there any appetite to do even more than the $1 billion later this year and given the gains are so high -- the gain on sale rates are so high?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

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

Sanjay Sakhrani -- KBW -- Analyst

Got it.

Jonathan Witter -- Chief Executive Officer

Yeah. And Sanjay, if I could add to what Steve said and I agree with him. Look, this is clearly a balancing act and a matter of both analysis but also a little bit of judgment and intuition. We love the quality of our loans. We think they're great loans by the way, clearly, investors do as well with the kinds of premiums that we've been talking about. But if you think about it from our perspective, they provide very profitable, very high return and very stable cash flows for the business.

We love holding those loans on our balance sheet. That's a great business for us, but we also recognize the incredible importance of returning capital to shareholders always, but especially in the form of share buybacks. During these types of dislocations. There are or there is upper limits on how much capital you can return at any one given point in time. So, I think, we are really trying to strike the balance and do it in a very thoughtful way of being extremely true and extremely aggressive to our commitments around strong capital allocation and return.

I hope we started to prove that last year, I suspect we will continue to earn that reputation this year. But we also back to sort of the strategic description we also like the ability, especially post CECL of growing our balance sheet and organically generating capital and we think that's an important part of our long-term valuation basis. So, we will endeavor to get that balance right. I am sure on any given point in time there will be some disagreement about whether we could do more do less, but I can assure you there is no conversation inside the company that gets more discussion with me Steve and our board then getting the right balance of capital retention versus capital return.

Sanjay Sakhrani -- KBW -- Analyst

Appreciate it. Thank you.

Jonathan Witter -- Chief Executive Officer

Thanks, Sanjay.

Operator

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

Michael Kaye -- Wells Fargo -- Analyst

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

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Sure, Michael. So, look, the loss forecast is very much an output of our loan loss reserve CECL credit model. So, one of the reasons why you've seen it come down dramatically over the course of the last few quarters is because the outlook has improved and we've changed our inputs. While anecdotally we absolutely agree with you that the federal payment holiday is supporting our customers and absolutely helping overall cash flows and performance in our portfolio, at this early stage, we cannot really triangulate it and tell you how much of a factor that is and what it may or may not offset.

But the bottom line is, we are seeing a very positive performance in our portfolio across the board. And absolutely, the federal stimulus programs and the monetary policies being employed by the government are helping, but I think it really is at the end of the day a testimony to the value of a college education that we've talked about consistently over the years.

Michael Kaye -- Wells Fargo -- Analyst

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

Jonathan Witter -- Chief Executive Officer

Yeah, Michael, it's Jon, let me take those in reverse order. I don't think it's our place to comment on SoFi's plan. They are a great and able competitor and we love competing against them, but we'll let them answer their own questions. I think, on the question of refi, look, this really comes down in my mind to what I have always referred to as cannibalization math. And at the end of the day, if we could perfectly predict who was likely to refi, we would be extremely aggressive at coming in and effectively cannibalizing our own book before others could do it.

I think, at this point, we have not found a way that from an economic and return perspective makes that that refi that cannibalization math work for us. So, said simply, we would have to offer sort of new products and new services to too many customers who likely would have stayed with us anyway. And so from an economic perspective and a return on capital perspective, it's not the right choice for us today. But it is obviously a driver of our business. It is obviously something we are focused on. We will continue to look very, very hard at sort of where are the options for us to improve the retention of our customers and our book.

Wherever we can find the opportunities through marketing and analytics to jump in and to do that better, of course, we will do that. But we have not yet found the economic model there that we think is right. I will say, and you didn't asked this, Michael, but I'll just put a little plug in, in addition to refi, we are generally very interested in assuring that our customers get off on strong financial footing. So, more than refi the real question is, do we help customers borrow a responsible amount of money, do we give them the tools to understand how to repay their debts quickly and efficiently, do we help them get to the point where their student loans are not an impediment to their living the kind of life they want to live.

And so I think, in addition to refi products, we will be very, very focused on that. And at the end of the day, I think if our customers are extremely successful with their loans, the likelihood that they would seek to refi for many of them is going to be lower anyway. So, we'll take a couple of different-pronged approach on this, but at the end of the day, the specific refi question really comes down to the math and the ability to do that in an efficient and economically value creating way.

Michael Kaye -- Wells Fargo -- Analyst

Thank you very much.

Jonathan Witter -- Chief Executive Officer

Yeah. Thanks, Michael.

Operator

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

Mark DeVries -- Barclays -- Analyst

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

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

I mean, Mark, look, we look at our stock price, I think, the same way you all do. And we all know what ingredients go into feeding what a PE should be. And when we look at our cost of capital growth rates etc., we think we should have a PE rate being conservative in the high-double digit -- mid double-digits, mid teens. We don't think that's out of the question. So, we think that the stock price should trade much higher than it does.

We think the arb works at premiums as low as 6%, 7%, 8% and we think if we were, I'm looking across the table of my boss here before I say this, we think that if we were paying a 10 multiple for the stock, it would still be a reasonable arbitrage to do.

Mark DeVries -- Barclays -- Analyst

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

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

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

Mark DeVries -- Barclays -- Analyst

Okay. Got it. Thank you.

Operator

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

Rick Shane -- J.P. Morgan -- Analyst

Hi, guys. Thanks for taking my questions. Steve, when you were answering that last question, I'm kind of thinking you're sitting at the table holding up 10 fingers and looking for the knot. Anyway, as we think about the transaction that you -- the loan sales this quarter and another $1 billion later in the year, I'm curious what the mix is on in-school versus in-repayment. And I'm also -- and you made the comment that you don't expect that there will be a reserve release associated with the second sale this year. Is that because those will be loans that will already be held-for-sale? Or is it because there is a net on -- through the year so that, for example, the CECL reserve builds, but then it's released. And so on a net basis, it doesn't make any difference, but we should think about that in terms of the contours in the quarter.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

So, let me first clarify that just so that there is absolutely no confusion. So, in the guidance, we have the loan sale taking place within the calendar year. So, whatever reserve -- whatever reserving we need to do for the year is already in the provision, which is in our guidance, if that makes sense. The point that I was trying to clarify is in our 2021 guidance, we do not have a back end reserve release for loans that will be sold in 2022, which I think is a very important point to lay out. So, does that make sense to you before I go on the mix of the loan sale?

Rick Shane -- J.P. Morgan -- Analyst

Absolutely. Yeah, that totally makes sense. Yeah.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

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

Rick Shane -- J.P. Morgan -- Analyst

Got it.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

But that's a right approach if we take the loan sales.

Rick Shane -- J.P. Morgan -- Analyst

Thank you so much.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

You're welcome.

Rick Shane -- J.P. Morgan -- Analyst

Perfect. Thanks, guys.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

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

Jonathan Witter -- Chief Executive Officer

Sure, Moshe, it's Jon. Happy to and I'll invite Steve to sort of jump in on this. I mean, look, first of all, I think it goes without saying that when you're talking about sort of capital return in the way that we are, where we have sold sort of producing assets, to redeploy that capital, there's a premium on time, right. We don't really want to have large amounts of that cash that previously would have been earning nice spreads in the form of loans sitting on our balance sheet. So, we would like to deploy the capital as quickly as we can. By the way, that's part of what we liked about the ASR program. Last year, it gave us a good mechanism for deploying at least the lion's share of the capital very, very quickly. So, number one is, is speed.

Number two is kind of market conditions. We always want to understand the depth and nature and sort of levels of the market and where we think we are, and so we'll take into account sort of market conditions with an eye toward execution. And third, and you should assume we've already planned for this in the comments. We look at what our kind of capital needs, uses and sources are throughout the year to really make sure that we've got the timing right, because obviously we want to make sure that we've got the right level of capital, not just at the end of the year, but kind of throughout the year.

So, I think it really comes down to -- we prefer to do it faster rather than slower. We look a little bit at market conditions. And we look a little bit about sort of flows over time and we put all that together. But at the end of the day, there's only -- and you're as well familiar with this as anyone, there's only a few different options for how you can deploy the level of -- sort of capital that we are talking about here. And I think you should expect that our answer is going to be one of those very small number of options.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thanks. Maybe just on the core business trend, in terms of the yield on the portfolio has been pretty resilient, deposit costs are moving down, your expenses have been positive relative to at least our expectations, maybe in line with your own. Just talk a little bit about the core profitability of the company, kind of -- as we go through 2021?

Jonathan Witter -- Chief Executive Officer

Yeah, I mean, Moshe, let me sort of divide that a little bit into sort of market dynamics, and what I would consider to be sort of more longer term fundamentals. I think, and by the way, this is going to sound a little bit like a -- sort of a look back on 2020. We are always going to be a little bit subject to environmental factors. If we have a major recession caused by a pandemic or other forces and interest rates get driven down, that's obviously going to have an impact on our business. I think, CECL undoubtedly, while it creates a lot of visibility and does some wonderful things, it certainly does create a little more volatility, especially during times of real economic change, like we've seen. So, there's always going to be those kinds of factors that I think hit our financial results.

But if I kind of put those to the side for a minute, because those are things that if we could predict, candidly, Steve, and I would probably go into a different business than we're in today. But if we could predict those things perfectly, but when I think about the core of the business, the core of the business is really, really strong. And we tried to outline this in sort of our longer-term investment thesis. We generate nice growth in our industry. And you can come up with whatever you think is the right long-term growth rate, we've got some internal views. It may not be tech level growth rates, but I think for a well established part of the environment, the growth rates that we see for private student loans, we think are attractive.

And for us, we think they are even more attractive, because of what we shared with you all during our last call, which is, we have an incredibly efficient and scale and fixed cost driven operating model. So, we can take what is nice growth, and we can translate that into really nice growth through operating leverage. And that's a trick and a trade that's as old as business itself, but it's one that Steve and I and the rest of our executive committee and team are incredibly, incredibly focused on. But I think you should expect especially on a unit cost basis that every year we will get better and better and better, because we understand that that's part of driving what you guys should really care about, which is the overall earnings growth of the company.

I think, the second thing that really jumps out at me about the business and I'm not sure everyone appreciates it, we have very nice and attractive ROEs on our loans. These are good profitable loans. While by the way, being very customer friendly, because we underwrite them carefully and there's not huge loss content there. We fund them in an efficient way, and we've got efficient operations. And so the great thing about having those attractive ROE loans is they generate a bunch of earnings organically.

And that's a little bit masked during these times of stock price dislocation, it's a little bit masked CECL implementation. But I think you should expect in the long-term, these are loans that will allow us to fund balance sheet growth, and at the very same time generate meaningful amounts of organic capital. And we sort of took the time to talk about that today, because we want folks to understand the current loan sales in the context of where we're going, which is very much this view of high -- relatively high, you put your number on an earnings growth, nice payout ratios driven by sort of the return on equity of our loans.

And I think we've certainly proven over the last year or so that we can manage the risk in this portfolio well. So, that investment thesis, I would just come back to it, because that's really how I feel, that's how Steve feels, that's how our management team and Board feels about the quality of the business. And I've been here coming up on a year now, the deeper I get into it, the more excited I am about the fundamentals of what I think this business can do over time.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thank you.

Operator

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

Jordan Hymowitz -- Philadelphia Financial -- Analyst

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

Jonathan Witter -- Chief Executive Officer

Jordan, I think, it's a great question. And I think sort of strategic context, strategic environment, is again a question we think long and hard about. Let me offer a couple perspectives. But I think all of these will be sort of affirming of your general direction. Number one, in my career in banking, what I think you normally see during times like this is people see high ROE, reasonably growth businesses, and they come running in. And I think what has been interesting is, there doesn't seem to be more competition coming in, in fact, you could argue that there is a little bit less.

Now, I think, there are some real structural barriers to doing this business well. It is a vastly different product from an underwriting perspective. It is a vastly different product from a customer experience and management perspective. Think about sort of the process of taking someone who's 18 years old with no education and managing them and servicing them all the way through, they have a career and they are now repaying. And so, it is a hard business. It's not like going from one installment loan business into another installment loan business. The fundamentals really are very, very different.

So, in our outlook, we compete and we plan like we're going to have really, really tough competition. And by the way, we do have some really tough competition, and some of the players that you talked about, we feel, give us a great run for our money in the marketplace and we're happy to compete against them every single day.

But we plan like we're going to have people coming in, that's why we're so focused on efficiency, that's why we're so focused on the performance of our core business. Candidly, our hope would be to maintain our high market share and maintain our ROEs. And if the competitive dynamics are such that we can enhance those, that's great. But we don't plan that this is going to be less competitive. We plan that it's going to be more and we look to quite frankly just deliver better value to our customers and kind of keep on top of our game.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

I would add one thing.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Okay. And...

Jonathan Witter -- Chief Executive Officer

Yeah. Please, Steve.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

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

Jordan Hymowitz -- Philadelphia Financial -- Analyst

I mean, last fall just Wells Fargo had a 20% to 25% share, they're out of the business. It seems like both Citizens and CollegeAmerica are at best flatlining. So, you really only have one comp competitor, you should be gaining share. And the other thing I would throw out is, maybe for your next slide deck, if you look at the Canadian banks or the Australian banks or other pseudo oligopoly high margin businesses, they all traded mid-teens. I mean, I think you should be buying back your stock, at least toward that level in that regard. I mean, that's really where a company with a 20% ROE and close to 50% market share that does a very favorable service to Americans who trade.

Jonathan Witter -- Chief Executive Officer

Jordan, I think, we have covered our very strong and healthy commitment to taking advantage of this arbitrage. I think, Steve did a wonderful job of answering the question earlier about what are the levels at which we would still consider our stock to be sort of worthy of significant repurchases. I think, our internal view is not largely dissimilar from yours. But look, I think what you're hearing from me and Steve, is competitive dynamics can change on a dime. And the very worst thing a company can do is to say we've got a big moat and a big position and we can take it for granted, we're not ever going to do that.

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Okay. Thank you.

Jonathan Witter -- Chief Executive Officer

Yeah. Thank you.

Operator

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

Henry Coffey -- Wedbush -- Analyst

Yes, good morning, I feel a little deflated not because I'm going to ask really stupid questions. In terms of thinking about provision expense for 2021, there's been so much noise around that item. What are the key components? What level of -- I know you -- we've been thinking sort of somewhere between 8% and 10% reserves for new loans then you've got a discounting factor, which seems to be running $30 million to $40 million a year. So, as we put together our provision estimate for 2021, what are those basic components and have they changed given your shift in economic assumptions?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Great question, Henry. Look, our current reserve is around -- well, is 6.5% of our portfolio as I described it earlier. We do have excess -- not excess, additional reserves above the normalized run rate. Put that into perspective, pre-pandemic, the reserve was running around 5.8%, if I remember correctly. So, as things normalize toward the end of the year, the reserve will come down as we look out toward 2022.

But I think we've had enough volatility now. And if you try and put the pieces together and take -- one of the things you're going to need to do and this is going to sound like an advertisement for Moody's services is follow their economic forecasts, because it's a very important input into our CECL reserve. So, we look at a two-year supportable outlook. We reserve for the next two years based on the model, and then we revert to mean default. So, it's very difficult to give you a precise formula. But I think if you go with that 6% to 6.5% of the portfolio, you won't come up too far off.

Henry Coffey -- Wedbush -- Analyst

All right. Thank you. And then kind of going back to some of Jordan's questions. You have a real unique insight into how we'll sort of call it 20 year old to 35 year old or 40 year olds are performing. Are you seeing a real cut between your borrowers who have college -- they completed college, they have college education, they have mobility. They are not tied down to rent your time kind of jobs. They are professionals, be it nurses, teachers, professionals, lawyers, etc. Are you seeing kind of a real split in how your borrowers are performing versus how the other slice of life the non-college educated borrowers are performing because it seems were sort of evolving into two economies here.

Jonathan Witter -- Chief Executive Officer

Yeah. Henry, it's Jon. Look, there's been a lot written on this in the press sort of the K-shaped recovery, the differential impacts of college versus non-college education. I think, there was a journal set of graphs, maybe in the last day or two that I saw come across my desk. But I think absolutely, I think, everything that we see in the macroeconomic and other data that we buy and consume, and I think we've tried to say this very clearly, I think, Steve has said it, we see it playing out in our loss provisions.

There is no doubt that in this economic downturn we have seen a huge disparity between those who have completed college. And I think the completion is really an important part of that and folks who haven't. And I think part of that is the nature of the industries that have been impacted. Certainly, if you look at where folks without college education tend to work, it's in hospitality, it's in bars and restaurants, it's in construction, those are things that I think have gotten sort of more heavily hit. So, I think, part of it is sector specific. But I also think part of it is just having the skills to compete for jobs in what is a dramatically new economy.

So, yes, we absolutely see those in our numbers. I think, they are partially why you've seen the -- sort of the up and down in provision through the course of this year. If you go back in the middle of the year, we didn't have good line of sight to how the unemployment trends would cure a big part of why we're back to our base model as we've seen them cure in the ways that we've talked about, I think, we covered that in our talking points. But we absolutely see that divergence. And candidly, and this is sort of my personal view.

My guess is, that is going to be the reality going forward, which further puts pressure on our mission and sort of the focus we're taking. Higher education is going to become even more important when it comes to social justice and economic mobility and providing opportunity for disadvantaged communities and we're excited to play that broader social role. We're happy to be a part of such an important part of the economy. So, thank you for the question.

Henry Coffey -- Wedbush -- Analyst

Great. Thank you very much.

Operator

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

Jonathan Witter -- Chief Executive Officer

Angel, I think, you're handing it back to Jon Witter, but that's OK. Folks, I'll be really brief. I know we're over on time. Thank you for your continued interest and engagement with Sallie Mae. And more importantly, thank you for what I know has been a really tough ride through the course of 2020. There have been a lot of moving parts in our business. There's been a lot of ups and downs. I hope we've done a good job in communicating those to you in a way which is as clear and transparent as it can be. But I also know it's taken a lot of extra time and effort from you, and we really appreciate you guys getting it right. So, with that, Brian, I think I'm going to turn it back to you to close.

Brian J. Cronin -- Vice President, Investor Relations

Great. Thank you for your time and your questions today. Replay of this call and the presentation is available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Brian J. Cronin -- Vice President, Investor Relations

Jonathan Witter -- Chief Executive Officer

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Sanjay Sakhrani -- KBW -- Analyst

Michael Kaye -- Wells Fargo -- Analyst

Mark DeVries -- Barclays -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Jordan Hymowitz -- Philadelphia Financial -- Analyst

Henry Coffey -- Wedbush -- Analyst

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