SLM Corporation (SLM) Q4 2019 Earnings Report, Transcript and Summary

Good morning. My name is Henry and I will be your conference operator today. At this time, I would like to welcome everyone to the 2019, Q4 Sallie Mae Earnings Call. [Operator Instructions] Thank you. Now I would like to turn the call over to our presenter today, Mr. Brian Cronin, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you, Henry. And good morning. And welcome to Sallie Mae's fourth quarter 2019 earnings call. With me today is Ray Quinlan, 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 discussions will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in the company's Form 10-Q and other filings with the SEC. 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, 2019. This is posted along with the earnings press release on the Investors page at salliemae.com. Thank you. I'll now turn the call over to Ray.

Thank you Brian and thank you all for your attention this morning. We have quite a bit of information to what’s discussed and I will want to do a brief outline of how we plan to do that and then secondarily go through those items after which we’ll go to the Q&A session. And so our outline today will be to discuss 2019 followed by our evolution over these last six years. And then the evolutionary change within the focus of the on-the-franchise going forward. After that we’ll talk about the multi-year outlook for both the industry as well as for Sallie Mae followed by capital allocation, our approach to it, the steps we've taken what has led us to this particular point and where we expect to go in the future. After that, we'll cover the impact of these changes which are asset sales, repurchases, CECL and a couple of other things on their impact on our business metrics which will be somewhat of a discontinuity given the changing profile of the company. We’ll talk about the franchise going forward and what our aspirations are, and then we will discuss 2020 guidance and the three year outlook. So turning to the first of those which is the 2019 performance. 20 19 was a very good year. Our earnings per share as you know $1.27 up from $1.07, 19% growth. Our volume came in at 5 6 plus 6%. Our efficiency ratio continues to improve somewhat dramatically from 41% in 2018 to 34.7%, a 19, 15% improvement rate on rate. Our charge-offs are on model actually a little bit better the model for last two years in a row. So credit is under control. Our NIM which was 576, it will continue to be impacted by the increase in liquidity that we've discussed in prior three quarters. And it was a good number wouldn't hit us where we wanted it to be, but it still will decrease to a number just over 5% 5.05%, 5.10%. We talked about that going forward, but that's just a reflection of additional liquidity on the balance sheet. Our expenses coming at 574 up from 557 in the prior year, plus 3% and as you'll see in the outlook, expense control is one of our shining accomplishments these last few years. And our ROE at 20.7% remains a terrific number. Consolidations were up from 991 to 1512, an increase that is largely explained by the maturation of the portfolio, but still a worrying number which we will continue to watch carefully. In this case also that as we looked at our customers, customers had a very good year. It was the year we achieved the JD.Power’s certification. We're the only ones in the industry that have that. It's a terrific credential for us and helps in all of our audiences, the schools, the regulators and the customers. Customer satisfaction 80% is an all-time high. Plus the channels have contact with them. We’ve introduced chat and chat box, right. And the satisfaction on that is running 92% and we've done over a half a million transactions. And so that's a terrific improvement in the course of this year. We have introduced the Amazon Lex Bot, which is now answering 40% of the questions that we’ve received from customers. So we are carrying up our interface with them to the channels and to the methods that they would prefer to interface with us on and the satisfaction reflects the fact that that is a good meeting of the minds. Our complaints per 100,000 customers has dropped by 42% over the last four years, almost in half, and once again reflects the items above the high satisfaction, The improvement in servicing and of course the resolution on first talk or first conversation which people are all looking for. Our credit quality continues to be flat, which is the category of good levels, 747 FICOs, Cosigner at 90%. So with that as a backdrop, let's talk about you know the lifecycle of the company. Our story continues. We had our launch and establishment in 2014 and 2015. We had rapid growth as those of you who followed us for several years know in 2016, 2017 and 2018 filling up our inventory to match our acquisition engine. We had a normalizing a profile in 2019, including capital return. And as we go forward 2020 and beyond, we will now turn to realizing the full potential of our franchise in the market with customers and with investors. We have a terrific opportunity in front of us, and we'll talk about that more as we move along. In regard to our focus, we have an evolutionary change. We are suspending personal loan originations. We have about a billion dollars in our portfolio. We accomplished what we wanted to there, which was to successfully introduce a second product with the opportunity for revenue increases. We're watching that portfolio. We have no intention of getting back into that market at the moment, but it remains an asset that we can use selectively going forward if conditions warrant it. Credit card on the other hand all continues its flight pattern. We will continue to invest in credit card and in 2020 will be a $0.05 per share investment. We'll talk about that as we go to look forward and we will be concentrating on additional services for families and students as we approach the next level of our franchise, which is to improve the core, helping people out with scholarships, college search, tutoring, paying for college and their next step in life as they go to attain employment. The need for higher education is high. We'll continue, it will expand, and it will evolve, and there'll be factors involved that include the original traditional schools distance learning, international, boot camps certification, additional credential icing, and importantly, lifelong learning. And so our outlook is that regardless of who gets elected in the United States in the election, we have a bright future with this particular audience and our way of approaching it. We expect the market growth to be between 5% and 10% 5%, 6%, 7%. We're monitoring that now, we have some guidance on it, but it's subject to additional analysis. We checked our revenue to track consistent with that, and our income to be slightly better than our revenue growth. And so, the need for education is pro GDP as and it grows faster than the GDP and we'll continue to do that for the next two decades based on the analysis that we have. Capital allocation. Phase 1 as you know, which was 14, 15, 16, 17, 18 no capital return, no dividends as we grew the company. In 2019, we started our capital, part – start with our capital program with two factors. One, establishing a dividend, which we believe should continue in perpetuity it was at $0.12 per share and we at that time identified $200 million as a buyback. We caveated that we were doing it as a transaction as opposed to a program because at that time, we still had a reasonable amount of uncertainty associated with CECL. And we said what we would do is come back in a year when CECL was known and then reset our expectations for both the company as well as for capital allocation. Well now as we speak, CECL is in place. We've done all the analysis associated with it. We've had outside vendors such as PwC and EY look at our calculations. Our regulators have gone through every step with us. So we think that's known territory taken into account in our projections. And so we expect CECL to be non-volatile. We will continue to increase our dividend. Our intention is to increase that associated with the growth in EPS. We are now initiating asset sales at $3 billion per year and the $3 billion or the gain that we expect on the sale and the capital that is freed up as a consequence of not having those assets on the balance sheet will allow us to execute on our authorized $600 million buyback. When we did that, the authorization is significant and while the price has changed quite a bit in the last 24 hours, at that time just to put it in perspective, $600 million buyback was against a $3.6 billion market cap. There'll be a 17% buyback at that time for the total company. We expect the allocation and the buybacks and the sales to continue for the next three years 20, 21, and 22. Our equity, we believe to be significantly undervalued. We have had it evaluated by several top firms. And as long as the equity is undervalued and the assets are fairly valued because the assets are extremely high quality, we will continue to exercise our discretion in buying that stock until such time as valuation approaches what we believe it should be. And so this will be an on-going program, and if we look at the capital returns that we had front from last year, the 2019 numbers with the dividend plus the pay -- for the buyback of two hundred, that we go forward with this guidance that we have given to the entire investment community over the course of four years, 2019, 2021 and 2022 the entire capital return will be approximately $1.9 billion, roughly half of our market cap. We expect our asset sales to be completed during the first quarter and we expect 80% of the buybacks to occur during the first quarter with a 20% spread out through the rest of the year. When we do these changes, which are now asset sales, buyback, CECL and the liquidity increase that I mentioned earlier. There will be significant impact on key business metrics. The EPS will be distorted. The nature of CECL which is to allocate life of loan losses to the loan loss reserve upon the day that you acquire a new customer will on an on-going basis distort our EPS. And it's also the case that of course when you're selling assets, you will distort the revenue and the earnings associated with that EPS, and when you buy back stock, it will also distort the EPS. So when we give guidance, we fully expect to articulate the path from where we were to where we are. But there will be significant changes in the level as well as the path and going forward. Those four items, CECL asset sales share repurchases and increased liquidity has to be taken into account in every income statement and metric as well as every balance sheet metric. The ROEs will be affected of course CECL lowers ROEs. I mean ROE is heavily impacted by asset sales. The efficiency ratio will be on a new trend line associated with the change in the profile of the business. The NIM as I mentioned earlier will continue to trend on down from numbers that were in the five -- these numbers out of 505, 510 and the outlook will be given year-by-year and the discretionary impact of the asset sales would be taken into account. And so, we expect to spend significant amount of time with all of our key audiences, the investors, the analysts and prospects going forward, because there's a lot to digest that we want to make sure that we are all on the same page. As we think about the franchise going forward. We will attempt to be the premium brand from college and continue education helping families and students build prosperous futures by providing access, planning outcomes and helping them responsibly fund their futures. We will help them with their key decisions especially the students but the parents are close partners on this. What do I want to study? Where do I want to go for it? What I want to be when they comes -- when the program is complete? How will I pay for it? Can I get help in getting to graduation with tutoring and other support services and how do I continue to improve my skills over the rest of my life? We will have partners in this. We are not going to build these capabilities by ourselves. There are several very attractive partners we're in the middle of negotiating with them now, and we will expect this to be a multi-year evolution changing from a narrow funder of education loans, once people have made those decisions to hopefully be a partner with families and students as they evaluate their future make decisions and then execute them in order to have a more prosperous future. We have a unique opportunity, and it's in a vital sector, and that whole sector including ourselves have a very promising future. We would like to be the go-to-resource for education. So with that in mind, key takeaways for today are 2019 was a great year. We continue to evolve the franchise. You are seeing which is the discontinuance of the personal loan originations as well as credit card growth. Expense management over the course of three years is up about 1.5% compounded. EPS in 2019 was up 20, 19% last year. The capital return program is rational. The dividends will continue and the buybacks will be on the parameters I discussed. We are obviously very closely watching the presidential election, but we don't believe that actually will have much impact on the industry. We are watching carefully consolidation loans as we look at two potential risks for the company. Our organic growth going forward will track the industry, and we expect the industry to grow 5% to 6% our revenue to grow along with that. And our EPS to grow a little bit better. In regard to specific guidance, the core earnings of $1.85 to $1.91 is a gap-to-gap comparison. It'll be a 48% from 2019 to 2020 and clearly reflects the asset sales. Provisions for credit losses at that 285 to 305 are on model as the last two years have been, the same with the portfolio net charge-offs. Originations at 6%. We'll track where the industry has been moving although as I mentioned earlier, we're doing more analytics in regard to that to see if there's increased opportunity for us on that subject. As I mentioned, expense management over the course of what will be now three years growing at 1.5% has greatly helped our profitability efficiency ratios and returns. Loan sales of $3 billion will continue. On the three year horizon, we expect the 6% growth to continue. We expect the loan sales to continue at $3 billion. We expect the balance sheet to be flat at $32 billion and the EPS will jump up on that 48%. And then as we said in the guidance, proceed after that with mid-single digits and that's a number that is tentatively out there. We've talk about it a lot I'm sure over the next year or so, and we expect to cost the capital return to continue as long as market conditions are as I described. But the dividend we believe is now just baked in part of the franchise. So with that information run by, I just want to thank you for your attention. And then let's turn to our Q&A if that's all right by. Henry, we’re ready for the questions.

[Operator Instructions] Your first question comes from Moshe Orenbuch. Please ask your question. Your line is now open.

Great, thanks, and congratulations on this you set of sort of big changes out there.

Thank you.

Great. Maybe you're fair to welcome. Maybe could you just expand a little bit on the process that you went through to come to this point. Talk a little bit about the way you think about the games that can be realized on the sale of the loans and how -- and how that market looks. And also, you know just a little bit about the process and the discussion with the regulators as to how they've kind of approach this as well?

Sure. Well first things first, how did we come to this point. We as but everyone on the phone knows effort [ph] for quite a while now, got our stock was undervalued for a variety of reasons. And we also believe that our assets are very high quality and we have tested that assumption and that turns out to be a point of consensus. And so if we were to look at where we were when we had the original analysis that let's say [Indiscernible] for the stock price at $3.6 billion market cap. It is the case that you would sell X proportion of your assets in order to get a gain and the liquidity associated with that including freeing up the capital at such a rate that a portion of your portfolio sold is less than the portion of the assets being bought back. And so there's a clear arbitrage opportunity. If you were to evaluate our entire balance sheet at what you think you could sell it for this evening, given that the credit markets are in very good shape at this point, it would exceed the market cap. And so that we thought was you know this idea that company's fourth quarter liquidation of this on an ongoing basis, we think is a mistake, and we think there's an arbitrage opportunity as long as that discrepancy exists. So it was quite compelling when you look at these stocks. And so the assets as far as what's going on there, we're in active negotiations, so I will not comment on the price of those assets but those of you who know us over a number of years know that we sold assets in 2014 and 2015 of similar quality and the market today is somewhat like that. And so -- so we'll discuss this in detail at our first quarter earnings release and when we have our April call, but right now it's in process I think it will be inappropriate to comment on specific prices. Suffice it to say, there's keen interest in our assets, including some firms bought the assets back in 2014 and 2015 who are anxious to get more, which is quite gratifying. And so we think that one, we get a reasonable price to the assets, two is, that's a market that's deep and rich and that we continue to do that on an on-going basis. Three is, the -- the equity is clearly undervalued and we will continue to buy equity as long as it is undervalued. And in regards to the regulators, the regulators require a one year budget outlook which we are happy to provide [Indiscernible] of their calendar. But in addition to that, Steve, myself and Paul Thome who is the President of our Bank on a regular basis head to Salt Lake City and San Francisco, and we discussed with the regulators not only the one year outlook that they require, but our three year outlook, just to ensure that there are no surprises between what our intentions are and how they would evaluate things. Suffice it to say, our regulatory interfaces are excellent. They are aware of everything we're doing, and that has, you know that's a base that has been covered off as we have done in the last six years. We are in a no surprises business with the regulators and they seem to find that to be a good stance.

Well, I certainly would agree with you about the price of the assets versus the price of the stock. The follow up question that I've got just has to do with, how you think about expenses you've done a really great job over the last two years in particular on that and you know it. How should we think about kind of that long term trajectory given this new strategy?

I think that the expenses as I agree with you the last two years have hit a nice plateau and as I said the 1.5% compounded growth rate has obviously helped our efficiency ratio quite a bit. We expect to continue to have ROEs that are excellent, and we will make decisions on both expenses and revenues on a cost benefit basis. And as I said, the largest variable in our forward thinking is what is the actual size of the market? Who is in it? How do they work? What do we think expenses will be in regard to capturing an appropriate market share? And so right now, I think the right thing to do Moshe is to stay with our guidance for 2020 which is excellent. And then if we make incremental investments in with any expenses, we will certainly do that with a strict discipline of cost benefit and our ROEs. But right now, our intention is to keep expenses under control, unless we see a revenue opportunity that is worth keeping. So the business model cranks along on a regular basis and then incremental changes as the world changes, we will be transparent about.

Great. Thanks and regulations on all of this in addition to exiting the personal loan business.

Thank you.

Your next question comes from Sanjay Sakhrani of KBW. Your line is now open.

Thanks. Good morning. I guess maybe just to follow up on that first line of questioning. Could you maybe Ray talk about the parameters under which the arbitrage works zone, at what share price doesn't it work? And what gain on sale amount doesn't it work? And then, Ray, you kind of talked about being the resource for education management and, and I guess I was just trying to think about what happens in year four, like do you continue to could do this if the market doesn't appreciate the value of the -- of the portfolio or kind of what did you mean by that? Are you transitioning the model to more of a consultative type model and maybe you could start there please?

Okay, sure. So two key questions. One is what is the price relationship and what's the arbitrage works, and what doesn't work. And then secondarily, as we add additional services how will we evaluate those? And so in regard to the first, as I said, if we started with parameters that were you know extent, let's say on January 1st of this year as I've run through those numbers, you can see that the balance sheet actually has a higher and a higher value than the market cap. That is clear operators opportunity, because if we liquidated those assets we start refilling them tomorrow morning and their additional income associated with that. So that play is both is an event as well as a program. So far as the relationship between a markup on the assets versus the stock price. The asset markups have been much less volatile than the equity prices. And so it's easier sometimes to think on these things, it frees one price, watch the other ones fluctuate. At what level with the fluctuating price no longer be a value. We're not giving out a number on that. We have had people estimate what it is. I don't think anyone in the -- know on phone would be surprised that it certainly is a number that is significantly higher than eight. And so as we move along on this, one is that equity price may change, but two is, we will continue to go do this until such time as we meet a number. We've had estimates and you all have estimated the value of the stock, I mean anywhere between $10 and $16 or so. We think that captures the range that we expect the franchise to improve over time. And so the asset pricing we think is relatively non-volatile. The equity pricing we will continue to pursue, we think it is still undervalued and we think it will be undervalued for quite a while largely I would say because of the political environment. I think everyone could recognize that the portfolio and the franchise are being managed properly. The ROEs are excellent. The growth rate is good. Expenses are under control. Credit is not a risk, and has not been a risk although it's always worth monitoring. And so the franchise looks good. Why is the stock price down? The answer we get frequently is politics. We don't believe that politics will have an adverse impact on us regardless of who gets elected. And so we will continue to buy the equity until we think it's appropriately valued.

And then just in terms of year four. Is there a commitment to sort of go back to the way things were done, or is -- or is that up for debate?

Everything that we do is subject to evaluation on an ongoing basis. And so, we've talked with many many students, colleges, families when you approach the issue of educating the next generation, what are the problems that you run across, what do you worry about? Where do you go for solutions? And how do you feel after that transactions has been done? And those are the needs that they have, we are trying to be responsive to that. We believe that no one has captured the share of mind associated with. I have two children. They're going to be going to college over the next two years. How do I come up to speed on this? We think that [Indiscernible] financially in general, the school pricing are all murky to most people. It's a transaction that they engage in about once every 25 years. Once when they were students typically and then 25 years later when the family has matured, there is -- no doubt there is a significant need out there for helping people make these decisions, indeed funding the college, executing that, getting the students through college to tutoring as you know, is to help in that, and then beyond that they have to get a job at some point. So, we believe that one, is those needs are out there. Two, as we think we have a reasonable chance of responding to them. Three, is that we will do that on a cost benefit basis, but we will proceed down that path, and we will do it as I said with a network of partners who have excellent capabilities. What we're attempting to do is bring them together in a place that has sufficient gravitas that people will naturally want to go there.

Okay. Fair enough. And then just one final question. On the personal loan portfolio you mentioned you'd use it selectively potentially. So, should we expect at some point you'd consider a sale if the price is right or sort of how should we think about that portfolio? Thanks.

I don't think we'll sell that portfolio. And we will just watch it, learn from it. We have no plans to originate new accounts in the future. If any that were to change we'll certainly let you know. That is not in our plan.

Okay. Thanks.

Your next question comes from Michael Kaye of Wells Fargo. Sir, your line is now open.

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Yes. That's pretty close, Michael. The actual reserve rate on the existing portfolio is a little bit higher than that, but I think you're heading in the right direction.

Okay. And I wanted to talk a little bit about consolidations. You're highlighting it is a risk. Maybe can you talk about what you've been seeing in the consolidation market? And also wanted to get your thoughts on 2020. What kind of estimate do you have? What consolidations could be in 2020?

Sure. So built into our model for 2020 we expect to see about $1.7 billion in consolidations. The consolidation market really hasn't changed all that much, Michael; it's the same players out there. The reason why we saw an uptick in consolidations this quarter is quite simply because we have the big November/December repay wave going through the books and the consolidators basically target students in the grace period and into early repayment. So, we continue to think that consolidations will level off as the portfolio matures and we continue to see consolidations trail off significantly from older repay cohorts. And of course I would be remiss if I didn't add that. We expect that the people that do consolidate are the high earners in our portfolio. And one way or another whether they consolidate or prepay year from now as they start earning bonuses that these loans will have a much shorter average life with or without consolidators from the balance of our portfolio.

Any update on the defensive product. I know you tried something, it seems like it didn't work. Was there any progress with trying something new?

No Michael. We haven't made any additional progress on a way to target our existing portfolio and retain people that are likely consolidation targets.

Okay. Thank you very much.

Your next question comes from Terry Ma of Barclays. Your line is now open.

Hey, good morning. Can you talk a little bit more about what the impact of CECL Day 2 is if we didn't sell your loans? And how much that actually factored into your strategic decision making?

Two things. One is selling the loans had nothing to do with CECL. That is -- there was no reason to get those assets off the books. They were just profitable as anything else we have which has you know, have won an excellent profile on NIM, losses, expenses and ROE. And so we should divorce the asset sale discussion from the CECL impact both Day 1 and Day 1. And I'll ask Steve to talk about one initial impact and then what happens on outgoing basis.

Yes. So, I think your question has largely been answered, but the CECL reserve, we will continue to book a life of loan, reserve for loans on the balance sheet and obviously the CECL provision guidance that we gave does includes the impact of reducing the CECL allowance as loans come off the balance sheet.

Okay. Got it. And then in terms of consolidation activity, how much does heightened consolidation activity actually impact your gain on sale margins though it was a very different market in 2014, 2015 in terms of consolidation activity when you were actually doing yourself?

So, the answer to that question is, obviously, prepay speed is a very important variable when people are calculating the value of a loan portfolio back in 2014 and 2015 when we're repricing these portfolios, the prepay speed that people were assuming was much lower than the prepay speed that they're assuming today. However, the offsets to that have been cheaper cost of funding in the market for a student loan portfolio, as well as lower expected defaults as we've demonstrated the value in the consistency of the portfolios that we manage here at the company.

Okay. Thanks. That's it for me.

Your next question comes from Rick Shane of JPMorgan. Please go ahead.

Thanks guys for taking my questions. So [Indiscernible] servicing released?

Rick, we have an awful. You have an awful connection. We got a lot of static as you asked that question. Do you want to try that again. We've literally could not decipher your question.

Okay. Can you hear me little bit better? Hey, guys. I'm going to dial back in.

Thank you Rick.

Your next question comes from Mr. Henry Coffey of Wedbush. Please go ahead, sir.

Good morning. Let me add my congratulations to the whole equation. It's been tough. And you've been delivering consistently and now you're ramping that up. So, thank you very much. Number one, and this is kind of I heard part of Rick's question and I had the same similar question. In terms of selling loans are they going to investor parties where you then sell the loans on a servicing retained basis? Or are they likely to go to other banks that or other institutions that are active in the student loan business such as Discover and Wells Fargo and Regions and P&C and the like. What are your thoughts there?

These portfolios by and large will go to investors and they are very interested in us continuing to provide our high quality servicing. So they will be sold servicing retained and ultimately end up in investment portfolios.

And to that, our core strategy is developing relationships with our customers. And so we will always retain and service all of our customers as that is the core piece of what we're doing. The franchising or the franchise is being supported by the financial calculations and activities that we're taking. But the customer relationship is the most important item in our entire venue here. So we would not sell that servicing released.

No. I mean, two more questions. One related to exactly that -- I mean that the biggest challenge of your business is how do you turn this loan into a kind of a lifetime equation. And the service packages that you're talking about providing, are these things that you get to charge for? And are you likely to put this package together by acquiring vendors? Or is it all going to be sort of third-party vendors operating under the Sallie Mae hood?

One is it's an evolving picture. Two is, the services that we're currently looking at are information providing as well as decisioning tools and some people are charging for those, some people have them as giveaway package. As we formulate our profile, we'll be very concerned with or very focused on what the market is for individual services. We will work through partners. There will be -- some of them we've identified several that have excellent, I'll call it, rifle shot type of capabilities. We expect to combine that into a platform that's more user friendly, more holistic and the pricing on it will be dependent upon the individual service.

And then in terms of the dividend should we just expect a steady payout ratio?

We should expect that. It is our goal that dividends will move with the EPS.

Great. Thank you very much.

Your next question comes from Melissa Wedel of JPMorgan. Your line is now open.

Hey guys. It's Rick. Hopefully you can hear me this time.

Yes.

Excellent. Well, it sounds like Henry address the first part of my question which is the whether or not you're going to sell the portfolio of servicing retained or servicing released. Will you provide a breakout going forward of the retained servicing portfolio so that we can model that?

Yes. We can release bank owned and bank service portfolios. And we do that now and by and large the portfolios perform identically, so yes. And you will see that performance.

Great. And the next question is, I'd like to talk a little bit about the cadence of the sales. Ray, you had indicated that the sales will be extremely front-loaded this year. And given the expected origination volumes in Q1 presumably that's a mix of Q3, Q4, Q1 2020 volume contributed to that portfolio. On an ongoing basis would you expect to generally do this as a single annual sale? Or will you go back to the historical pattern of doing a couple of sales a year?

We haven't calendarized the years beyond 2020. But for 2020, we have the inventory sitting here. We have interested buyers. As I said earlier, we're in the process of negotiating those deals. Things look very favorable. And given that the share count is important. We think that executing these things early in the year both the sale as well as the buyback is in everyone's best interest.

Got it. And then last question. In terms of gain on sale margin you guys have discussed the impact of consolidation. You've discussed the impact of lower base rates. I am curious if you think that there is any impact in terms of how buyers are looking at pools related to CECL. Is there -- to the extent I'm assuming they're securitizing them probably doesn't make a big -- it's probably not significant, but to the extent you have buyers who are considering putting the loans on balance sheet that may be a consideration as well. Have you seen a CECL related impact in terms of pricing?

No, Rick. CECL isn't really impacting the pricing of these portfolios. That's not really an issue. It's actually one of the benefits.

Okay, great. Thank you guys very much.

Actually, Rick, one other thing. Basically, what we're selling is representative samples of the portfolio. So if you're modeling purposes you shouldn't really anticipate any major changes in the companies and that is how we've done in the past.

Got it. And just so for sort of a clarification related to that. From a vintage perspective, I am assuming it is new production, so it's not going. So, we should assume that the portfolio distribution in terms of vintage or seasoning is the same. But you will be selling production that's been created within the last twelve months?

No, no, that would not be a good assumption. As Steve said, if you thought about the portfolio and all of its vintages and you said you were going to take $3 billion out of this, we would take it exactly proportional to the way the current portfolio is laid out. So the sold portfolio and the retained portfolio are virtually identical.

Okay. I misunderstood that. I assumed you meant in terms of credit quality et cetera. Thank you for clarifying that.

Your next question comes from Arren Cyganovich of Citi. Your line is now open.

Thanks. I appreciate the provision and the charge-off guidance for the year. I guess this follows a little bit on the last question. If you're selling proportionate of the entire portfolio does your NCO rates change at all from company sales?

Look, they shouldn't change dramatically. I mean, it is customary if you want to really get into the nitty-gritty to not sell 30 plus day delinquencies, so there might be a slight tick up in defaults, but we are not looking at this as having an impact on the portfolio whatsoever.

Okay. And then secondarily I think, Ray, you mentioned that you were looking to make the loan sales hopefully early part of the year. And I thought you had said something about doing share buybacks early part of the year. Do you expect to do an accelerated buyback program or would it be throughout the entire year?

We're looking at the exact execution on buybacks right now. The goal is to get the shares bought as soon as possible given as we all know the EPS is based upon the average number of shares outstanding per day through the year. And so we're attempting at this juncture to sell the assets completely by 331 and do 80% of the share buyback by 331. And then we'll do the remaining 20% as quickly as we can thereafter, but we'll probably dribble on for six months or so.

Okay. And then just lastly, what's the portion of capital that you expect to free it from the loans sales? Is it 12%?

Yes. 12% is good enough for modeling, but 11.5%.

Okay. All right. Thank you.

Thank you.

Your next question comes from John Hecht of Jefferies. Your line is now open.

Good morning. Congratulations on the strategic changes. Thanks for taking my questions. Most of my questions have been asked and answered, but I will ask that you're writing off the personal loan portfolio, it sounds like for the time being, what is the duration of that just in terms of us thinking about reducing the income from that portfolio as well as writing off the allowance tied to that portfolio?

Very short average life, John, maybe probably a year and a half remaining on it. I mean it's going to run off pretty quickly.

Okay. And then, you talk about anticipation of 6% origination growth which is consistent I guess with industry growth rates. At a high level, what can you talk about -- we see the consolidation trends, but on the front end is there any change with market participants or competitive factors there? Has that been a pretty stable market?

It's stable in proportions, so that the major competitors who are the established banks, so our cells [ph] Citizens, Discover, Wells and SunTrust, Consistent. And then there is a collection of competitors who are not those in a relatively small market share, but come and go. And so we've seen many competitors come in there for a year or two. I think so far it's actually been in more than once. And so that group of competitors is one very aggressive in their acquisitions. They run a different business plan and we are from a standpoint of whether or not volume supported versus ROE, but they have tended to come and go. And so we're monitoring them carefully. Its probably a dozen or so smaller competitors and they do change. The top group has not changed at all in the course of seven years.

Okay. Thank you guys very much.

Your next question comes from Dominic Gabriel of Oppenheimer. Your line is open.

Thanks so much for taking my questions. Can we just go through the walk of where the other earning asset portfolio would likely be so the non-loan earning assets and how they trend throughout say 2020 in particular. Do you expect to keep them at sort of this higher level? Or do you expect the fluctuation like you see where you kind of raise cash depending on where the -- or this portfolio moves around with the originations? And then how does that mix overall affect your NIM going forward? They came down a little bit as you kind of expected in the fourth quarter. Where do you think the run rate is given some of these portfolio sales and where the other earning asset balances could be moving forward? Thanks a lot.

So, Dominic, as we indicated in our three-year outlook, our balance sheet is basically going to hover around $32 billion for the next three years. I think you're talking about our liquidity portfolio which has grown dramatically over the course of 2019. We've kind of reached the level of stability here. Liquidity was 18% of our ending assets in the fourth quarter. It will stay between 18% and 19% over the course of 2020 and beyond. And that is principally solely responsible for the decline in our NIM. All other things being equal. The student loan portfolio spread has been very, very stable. And where there's some questions about how our other consumer loan assets, so personal loan portfolio, $1 billion at the end of 2019. Other consumer loans will be down to -- the personal loan portion will be down to $200 million by the end of 2022.

Okay. Perfect. That's great. And then when we just think about the -- this has kind of been touched on a bit. But when we think about the business and where the long-term vision is, it sounds like you are still thinking about being very much focused as one would expect in student lending. But what is the kind of long term trajectory on why we're doing this today? Obviously, the very generous buybacks and where the business can look to in that year four, five, six even -- potential even on the other side of a recession here, what products you could offer these client cells [ph]? Thanks.

Sure. And first things first, I think the buyback is not really generous, it's prudent and it keeping with market conditions. And so the buyback as I said, is driven by the relative price discrepancies and the value discrepancies that we see in the market. And the asset sales are separate in the sense of their financial activity to be separated from the franchise itself. From what we can see from research and from what our customers tell us, there is a tremendous need for families to make proper decisions about improving the profiles of younger people. They worry about it a lot. It's a big expense, but things are changing around it, there's tremendous amount of publicity about student borrowings in the market. People are worried about this. We think that we can provide some help to them as they make decisions. We think we can do that better than anybody else. We have a name which is logical for us to be the center of that activity. We will offer services. We will see how people respond. We will evolve with that. We know from as you know prior discussions that these cohorts is demographic of college graduates and/or other credentials people, people who are licensed airline pilots, so those types. These are the best of the next generation. Every financial services competitor wants to have an inside track with them. We believe we can strengthen our position with them as they start their adult lives and will give us an opportunity. We'll work our way through this on the credit cards through decision processes that we have. We will put everything under the heading of GFL [ph] if it works we'll do more of it. If it doesn't work we'll drop it. So there are no sacred cows in that particular. We expect this to be an on going evolution over the course of five years or so. But we are responding to problems that families need to solve. It worry about. And as I said, the publicity around, if you have a student don't get them into debt because terrible things happen which is in the papers on a regular basis scares parents. They want to make the right decision. And so we think we can be helpful in regard of that. We're not creating that need. We're trying to respond to it.

Thanks so much. I really appreciate it.

Your next question comes from Jordan Hymowitz of Philadelphia Financial. Your line is now open.

Thanks for taking my questions. My question concerns political risk. And I'm just wondering, could it be political benefit. In other words, if there really is some sort of federal program for free or reduced college, don't you think that could drive more and more people towards private schools the same way as free public schools is sort of an more and more people towards private schools. And could it that lead to more and more demand for your products as private schools are more expensive?

Yes. It is the case that if something were to be enacted that in some way its deprecated the quality of education for public schools, it certainly would drive people to private schools. And in this case also that if you look at all the candidates and talk about free college, they as you know mean free tuition, they typically mean, free tuition state universities. I have no reason to think that that's going to hurt the quality of the state universities. And the United States has 2400 colleges. It's hard to generalize about them because state universities in California are quite different than those in New York. And so, I think there'll be a lot of changes here. I think federal program, were they to somehow make it unattractive would certainly help us. But as you can see the -- if you're making a bet over the last four years in regard to the federal program or financing by the public in general and your bet was nothing happens you would have won the bet. And so, we'll see what happens. If it benefits us, that would be great. We're certainly not counting on that.

Got it. Thank you.

Your next question comes from Henry Coffey at Wedbush. Go ahead sir.

Yes. This is just a follow up question. In terms of understanding, remember the initial CECL ad. So on day one there was an ad on January the 2nd and then you're going to sell some loans by the end of the quarter and there'll be a reversal. And on the assumption that you had to report numbers every single day was, can you give us some idea of what that initial ad is now going to look like? And what it will look like once we've got the sale transaction done? It's a hit. It's a hit to capital and it's a build to the reserve so.

So, Henry, the initial ad we've disclosed that $1.2 billion, $900 million tax adjusted. We disclosed the reserve that we're going to book for CECL for the full year which is going to come in between 275 and I'm sorry, 285 to 305 and that already has built into the reduction from the loan sales which is $200 plus million. So those are all the moving pieces.

So one two up point two down.

Does that clear.

So you add a billion two to the reserve on day one.

Yes.

Which hurts equity by 900 and then we move forward from there.

That's right.

Did you said one two up, one two down, the down part was.

Now, one two up, point two down.

Okay. Thank you very much. Excellent. Thank you.

You're welcome.

[Operator Instructions] Your next question comes from Bill Ryan, Compass Point. Go ahead sir.

Good morning and thanks for taking my questions. Couple of things. Just first on the origination side. I know it's not a bellwether quarter, but the originations were down about 2% and you're kind of giving a 6% guide for plus 6% for 2020. Was there something in Q4 that may reverse out in 2020? Or do you plan on making some changes whether it's pricing what you're willing to finance little bit more non-traditional. Could you give us a little color on Q4 and then kind of the outlook? And the second thing, obviously, going through the guidance here, you put out some measures for pro forma earnings report for 2020 that you are going to be using, that's obviously been abandoned. Behind the scenes we've heard the SEC has been kind of "encouraging" companies not to use pro forma accounting. I was wondering what the decision was to kind of move away from that? Was it this background noise we've kind of heard from the SEC or basically, since you've adopted the new business model, or an updated business model that you just didn't feel the need to do a pro forma methodology? Thanks.

Sure. Two things. One is the originations in the fourth quarter, which we're down two percentages as you know. When we get to the end of the year, how the days fall turns out to be quite important for colleges payments and our disbursements which are a result of that. And so roughly $50 million, because of the way the Holiday spell didn't get posted in 2019 and will be posted, it has already been posted in 2020. And so there is that sort of push and pull over those couple of days. And so, no money is lost or gained. It's just a question of does it spill into 2019 or 2020. So that was day-by-day seasonality and it will be different every year as you might imagine. In regard to the forward guidance, clearly, the SEC wants everyone to be on GAAP and we will be. But we will be at pains to give our investors all the information that they need to calculate what we think would be the ongoing profitability of the company. But we are bound by the rules to sort of publicize and publish GAAP. We will do that. But we will make it very clear any adjustments that we're making, the funding of the provision, let's say, versus the actual losses in particular period will both be available for modeling purposes.

Thank you.

There are no further questions at this time. Please continue presenters.

Okay, well, thank you all for your attention. Very much appreciate it. And there's been a lot of information transmitted. I'm sure we will have many follow-up conversations. The changes, I should say, are all we believe very positive. They were all at our discretion. We're making these changes because we do think it's an improvement for both the franchise as well as for our investors. Not to miss the fact that 2019 was a very good year for us. The franchise continues to evolve. We are now in stage four of capital return and rational approach to that with CECL behind us with a rapid growth behind us, and we fully expect that one we will have very profitable franchise going forward, excellent returns, good growth prospects, clearly as I said, there are many unmet needs that American families have as they approach trying to do the best they can in order to ensure a prosperous future for the next generation. We think we're well positioned to take advantage of that. We think that entire segment of life that is improving human capital will grow faster than the GDP for the foreseeable future. We have a great opportunity in front of us. Our best days are in the future. Thank you very much.

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

This concludes today's conference call. You may now disconnect.