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Edited Transcript of SLM earnings conference call or presentation 23-Jan-20 1:00pm GMT

Q4 2019 SLM Corp Earnings Call

RESTON Jan 27, 2020 (Thomson StreetEvents) -- Edited Transcript of SLM Corp earnings conference call or presentation Thursday, January 23, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Cronin

SLM Corporation - Senior Director of IR

* Raymond J. Quinlan

SLM Corporation - Executive Chairman & CEO

* Steven J. McGarry

SLM Corporation - Executive VP & CFO

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Conference Call Participants

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* Arren Saul Cyganovich

Citigroup Inc, Research Division - VP & Senior Analyst

* Dominick Joseph Gabriele

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* Henry Joseph Coffey

Wedbush Securities Inc., Research Division - MD of Equities Research

* John Hecht

Jefferies LLC, Research Division - MD & Equity Analyst

* Jordan Neil Hymowitz

Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager

* Michael Robert Kaye

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Moshe Ari Orenbuch

Crédit Suisse AG, Research Division - MD and Equity Research Analyst

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Sanjay Harkishin Sakhrani

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Terry Ma

Barclays Bank PLC, Research Division - Research Analyst

* William Haraway Ryan

Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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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)

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.

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Brian Cronin, SLM Corporation - Senior Director of IR [2]

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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 discussion 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 the 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.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [3]

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Thank you, Brian, and thank you all for your attention this morning. We have quite a bit of information to discuss, and I will, one, 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.

So our outline today will be to discuss 2019, followed by our evolution over these last 6 years and then the evolutionary change within the focus of the -- on the franchise going forward. After that, we'll talk about a multiyear 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; their impact on our business metrics, which will be somewhat of a discontinuity given the change in profile of the company; talk about the franchise going forward and what our aspirations are, and then we will discuss 2020 guidance and the 3-year outlook.

So turning to the first of those, which is the 2019 performance. 2019 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 billion, plus 6%. Our efficiency ratio continues to improve somewhat dramatically from 41% in '18 to 34.7% in '19, 15% improvement rate-on-rate. Our charge-offs are on model, actually a little bit better than the model for the last 2 years in a row. So credit is under control. Our NIM, which was 5.76%, it will continue to be impacted by the increase in liquidity that we've discussed in prior 3 quarters, and it was a good number. We hit on where we wanted it to be, but it still will decrease to a number just over 5%, 5.05%, 5.10%. We'll talk about that going forward, but that's just a reflection of additional liquidity on the balance sheet.

Our expenses came in at $574 million, up from $557 million 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 million to $1.512 billion, an increase that is largely explained by the maturation of the portfolio but still a worrying number, which we will continue to watch carefully.

It is a case also that as we looked at our customers, customers had a very good year. It was the year we achieved the J.D. Power 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 at 80% is an all-time high across the channels of contact with them. We've introduced a chat and chat box -- bot, and the satisfaction on that is running 92%. We've done over 0.5 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 receive from customers. So we are carrying 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 4 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 at a very good level, 747 FICOs, cosigners at 90%.

So with that as a backdrop, let's talk about the life cycle of the company. Our story continues. We had our launch and establishment in 2014 and '15. We had rapid growth. As those of you who followed us for several years know, in '16, '17 and '18, filling up our inventory to match our acquisition engine. We had a normalizing of 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 $1 billion in our portfolio. We accomplished what we wanted to there, which was we successfully introduced 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, continues its flight pattern. We will continue to invest in credit card and in 2020 will be $0.05 per share investment. I'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, will continue, it will expand and it will evolve. And there will be factors involved that include the original traditional schools, distance learning, international boot camps, certification, additional credentializing and importantly, life-long 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 expect 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 it grows faster than GDP and will continue to do that for the next 2 decades based upon 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 start with our capital program with 2 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. 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 nonvolatile.

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 for 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. That would 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 3 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 the valuation approaches what we believe it should be. And so this will be an ongoing program. And if we look at the capital returns that we had from last year, the 2019 numbers with the dividend, plus the buyback of $200 million, we go forward with these guidance that we have given to the entire investment community over the course of 4 years, in 2019, '20, '21 and '22, 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 a 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 ongoing 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 pathing going forward. Those 4 items, CECL, asset sales, share repurchases and increased liquidity, have to be taken into account in every income statement metric as well as every balance sheet metric.

The ROEs will be affected. Of course, CECL lowers ROEs. The 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 5.8s, numbers that are 5.05%, 5.10%. And the outlook will be given year-by-year and the discretionary impact of the asset sales will be taken into account.

And so we expect to spend a 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, and we want to make sure that we are all on the same page. As we think about the franchise going forward, we attempt -- we will attempt to be the premier brand for college and continuing education, helping families and students build prosperous futures by providing access, planning outcomes and helping them responsibly fund their futures. We would 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 do I want to be when the program is complete? How will I pay for it? Can I get help in getting into 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're 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 multiyear 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 this 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 '19 was a great year. We continued to evolve the franchise, which is the discontinuance of the personal loan originations as well as credit card growth. Expense management over the course of 3 years is up about 1.5% compounded. EPS in '19 was up 20% -- 19%, my mistake. The capital return program is rational. The dividends will continue, and the buybacks will be on the parameters that I discussed. We are, obviously, very closely watching the presidential election, but we don't believe it actually will have much impact on the industry. We are watching carefully consolidation loss as we look at 2 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 GAAP-to-GAAP comparison. It will be up 48% from 2019 to 2020 and clearly reflects the asset sales. Provisions for credit losses at that $285 million to $305 million are on model as the last 2 years have been, same with the portfolio net charge-offs. Originations at 6% will 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 3 years growing at 1.5% has greatly helped our profitability efficiency ratios and returns. Loan sales of $3 billion will continue.

On the 3-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 at 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'll talk about it a lot, I'm sure, over the next year or so. And we expect the capital return to continue as long as market conditions are as I described, but the dividend, we believe, is now just a 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 Q&A if that's all right, Brian.

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Brian Cronin, SLM Corporation - Senior Director of IR [4]

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Henry, we're ready for questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Moshe Orenbuch.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [2]

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Great, and congratulations on this set of big changes out there. Ray, 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 gains that can be realized on the sale of the loans and how that market looks? And also just a little bit about the process and the discussion with the regulators as to how they've kind of approached this as well?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [3]

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Sure. Well, first things first, how did we come to this point? We, as everyone on the phone knows, have for quite a while now thought our stock was undervalued for a variety of reasons. And we also believed 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, $8-and-change for the stock price and at $3.6 billion market cap, it is a 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 proportion of your portfolio sold is less than the proportion 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 -- this idea that the company is worth more in liquidation than it is 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 '14 and '15 of similar quality and the market today is somewhat like that. And 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, and I think it'd be inappropriate to comment on specific prices. Suffice it to say, there is keen interest in our assets, including some firms that bought the assets back in '14 and '15 who are anxious to get more, which is quite gratifying. And so we think that, one, we will get a reasonable price to the assets; two is that the market that's deep and rich and that we continue to do that on an ongoing basis; three is the equity is clearly undervalued, and we will continue to buy equity as long as it is undervalued.

In regard to the regulators, the regulators require a 1-year budget outlook, which we are happy to provide apropos 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 discuss with the regulators, not only the 1-year outlook that they require, but our 3-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 -- that's a base that has been covered off, as we have done in the last 6 years. We are in no-surprises business with the regulators, and they seem to find that to be a good stance.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [4]

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Well, Ray, 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 2 years, in particular, on that. And it -- how should we think about kind of that long-term trajectory given this new strategy?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [5]

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I think that the expenses as -- I agree with you, the last 2 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 high 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 in incremental changes, as the world changes, we will be transparent about.

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Moshe Ari Orenbuch, Crédit Suisse AG, Research Division - MD and Equity Research Analyst [6]

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Great. And congratulations on all of this, in addition to exiting the personal loan business.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [7]

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Thank you.

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Operator [8]

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Your next question comes from Sanjay Sakhrani of KBW.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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I guess maybe just a follow-up on that first line of questioning. Could you maybe, Ray, talk about the parameters under which the arbitrage works? So at what share price doesn't it work? At what gain on sale amount doesn't it work? And then, Ray, you kind of talked about being the resource for education management, and I guess I was just trying to think about what happens in year 4. Like do you continue to do this if the market doesn't appreciate the value 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 can just start there, please.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [10]

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Okay. Sure. So 2 key questions. One is what is the price relationship at which the arbitrage works and when doesn't it 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 extant, let's say, on January 1 of this year, as I run through those numbers, you can see that the balance sheet actually is a higher -- at a higher value than the market cap. That's a clear arbitrage 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 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, freeze one price, watch the other one fluctuate.

At what level would the fluctuating price no longer be of value? We're not giving out a number on that. We have had people estimate what it is. I don't think anyone on the phone would be surprised that it certainly is a number that is significantly higher than $8. 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 anywhere between $10 and $16 or so. We think that captures the range, and we expect the franchise to improve over time. And so the asset pricing, we think, is relatively nonvolatile. 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 can 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 the 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.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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And then just in terms of year 4, is there a commitment to sort of go back to the way things were done? Or is that up for debate?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [12]

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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 transaction 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, "Gee, I have 2 children. They're going to be going to college over the next 2 years. How do I come up to speed on this?" We think that, past that, 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, they 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 is 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.

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Sanjay Harkishin Sakhrani, Keefe, Bruyette, & Woods, Inc., Research Division - MD [13]

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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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [14]

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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 of that were to change, we'd certainly let you know. That is not in our plan.

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Operator [15]

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Your next question comes from Sir Michael Kaye of Wells Fargo.

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Michael Robert Kaye, Wells Fargo Securities, LLC, Research Division - Senior Analyst [16]

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What's the fair way to think about the impact of the loan sales on your provision expense guidance that came in lower than I was thinking? I believe that provision expense guidance is net of the loan sales. I mean is it as simple as taking that $3 billion times 6.7% reserve rate to get like a $200 million benefit, so really absent the sales provision expense would have been $485 million to $505 million?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [17]

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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.

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Michael Robert Kaye, Wells Fargo Securities, LLC, Research Division - Senior Analyst [18]

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Okay. And I want to talk a little bit about consolidations. You're highlighting it as 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 where consolidations could be in 2020?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [19]

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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 a year from now as they start earning bonuses, that these loans will have a much shorter average life with or without consolidators in the balance of our portfolio.

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Michael Robert Kaye, Wells Fargo Securities, LLC, Research Division - Senior Analyst [20]

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

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [21]

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

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Operator [22]

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Your next question comes from Terry Ma of Barclays.

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [23]

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Can you talk a little bit more about what the impact of CECL day 2 is if you didn't sell your loans? And how much that actually factored into your strategic decision-making?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [24]

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Well, 2 things. One is selling of 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, as 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 2. And I'll let Steve to talk about one initial impact and then what happens on an ongoing basis.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [25]

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

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Terry Ma, Barclays Bank PLC, Research Division - Research Analyst [26]

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Okay, got it. And then in terms of consolidation activity, how much does heightened consolidation activity actually impact your gain on sale margins? It was a very different market in 2014, '15 in terms of consolidation activity when you were actually doing your sales.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [27]

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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 '15 when we were pricing 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 and the consistency of the portfolios that we manage here at the company.

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Operator [28]

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Your next question comes from Rick Shane of JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [29]

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First of all, when you (inaudible) servicing retained or servicing released?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [30]

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Rick, we have an awful -- you have an awful connection. We got a lot of static as you asked that question. You want to try that again. We literally could not decipher your question. (technical difficulty)

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Operator [31]

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Your next question comes from Mr. Henry Coffey of Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [32]

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Let me add my congratulations to the whole equation. It's been tough, and you've been delivering consistently, and now you're amping 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? Will 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 PNC and the like? What are your thoughts there?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [33]

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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.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [34]

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Yes. 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 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.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [35]

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Nice. I mean 2 more questions, one related to exactly that. I mean the biggest challenge of your business is how do you turn this loan into 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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [36]

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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.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [37]

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

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [38]

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

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Operator [39]

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Your next question comes from Melissa Wedel of JPMorgan.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [40]

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

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [41]

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Yes, much better.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [42]

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Well, it sounds like Henry addressed 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?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [43]

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Yes, 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'll see the -- yes, you will see that performance.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [44]

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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 '20 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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [45]

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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.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [46]

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Got it. And then just 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 rate. 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. It 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?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [47]

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

Actually, Rick, one other thing, basically what we're selling is representative samples of the portfolio. So for your modeling purposes, you shouldn't really anticipate any major changes in the company's performance.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [48]

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Similar to our performance.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [49]

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And that is how we've done it in the past.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [50]

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Got it. And just 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 12 months.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [51]

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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, "Gee, we're going to pay $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.

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Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [52]

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

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Operator [53]

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Your next question comes from Arren Cyganovich of Citi.

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Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [54]

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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 these sales?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [55]

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Look, they shouldn't change dramatically. I mean it is customary that 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.

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Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [56]

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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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [57]

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We're looking at the exact execution on the 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 3/31 and to do 80% of the share buyback by 3/31, and then we'll do the remaining 20% as quickly as we can thereafter. But it'll probably dribble on for 6 months or so.

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Arren Saul Cyganovich, Citigroup Inc, Research Division - VP & Senior Analyst [58]

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

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [59]

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11.5%.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [60]

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

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Operator [61]

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Your next question comes from John Hecht of Jefferies.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [62]

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Congratulations on the strategic changes. 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 running off the allowance tied to that portfolio?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [63]

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Very short average life, John, probably 1.5 years remaining on it. I mean it's going to run off pretty quickly.

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John Hecht, Jefferies LLC, Research Division - MD & Equity Analyst [64]

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Okay. And then you talk about anticipation of 6% origination growth, which is consistent, I guess, with the industry growth rates. At a high level, what can you talk about with respect -- 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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [65]

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It is stable in proportions so that the major competitors who are the established banks of our sales, Citizens, Discover, Wells and SunTrust, consistent. And then there is a collection of competitors who are not those and have relatively small market share, but come and go. And so we've seen many competitors come in there for a year or 2, I think, so far, has actually been in more than once. And so that group of competitors is, one, very aggressive in their acquisitions. They were in a little bit different business plan than we are from a standpoint of whether or not volumes supported them versus ROE, but they have tended to come and go. And so we're monitoring them carefully. It's probably a dozen or so smaller competitors, and they do change. The top group has not changed at all in the course of 7 years.

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Operator [66]

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Your next question comes from Dominick Gabriele of Oppenheimer.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [67]

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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? It came down a little bit as you kind of expected in the fourth quarter. What do you think the run rate is given some of these portfolio sales and where the other earning asset balances could be moving forward?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [68]

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So Dominick, as we indicated in our 3-year outlook, our balance sheet is basically going to hover around $32 billion for the next 3 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 the -- well, there's some questions about 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 of it will be down to $200 million by the end of 2022.

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Dominick Joseph Gabriele, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [69]

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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 with, obviously, the very generous buybacks and where the business can look to in that year 4, 5, 6, even -- potentially even on the other side of a recession here of what products you could offer these clientele?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [70]

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Sure. First things first, I think the buyback is not really generous. It's prudent and in keeping with market conditions. And so the buyback, as I said, is driven by the relative price discrepancies, the value discrepancies that we see in the market, and the asset sales are separate in the sense that their financial activity to be separated from the franchise itself. From what we can see from research and from what our customers tell us is 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 is a tremendous amount of bad publicity about student borrowing 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 this cohort is demographic of college graduates and/or other credentialized 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 card through the decision processes that we have. We will put everything under the heading of, gee, 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 item. We expect this to be an ongoing evolution over the course of 5 years or so. But we are responding to problems that families need to solve, they 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 to that. We're not creating that need. We're trying to respond to it.

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Operator [71]

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Your next question comes from Jordan Hymowitz of Philadelphia Financial.

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Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [72]

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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 has drawn even more and more people towards private schools? And could that lead to more and more demand for your products because private schools are more expensive?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [73]

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Yes. It is the case that if something were to be enacted that in some ways deprecated the quality of education for public schools, it certainly would drive people to private schools. And it is the case also that if you look at all the candidates and you talk about free college, they, as you know, mean free tuition, they typically mean free tuition in state universities. I have no reason to think that that's going to hurt the quality of the state universities. And United States has 2,400 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 the federal program, if were they to somehow make it unattractive, would certainly help us. But as you can see the -- if you are making a bet over the last 4 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.

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Operator [74]

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Your next question comes from Henry Coffey at Wedbush.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [75]

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Yes. This is just a follow-up question. In terms of understanding, remember, the initial CECL ad. So on day 1, there was an ad on January 2, and then you're going to sell some loans by the end of the quarter and there will be a reversal. And on the assumption that you had to report numbers every single day to us, 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 to capital, and it's a bill to the reserve. So...

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [76]

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So Henry, the initial ad, we disclosed at $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 million and -- I'm sorry, $285 million to $305 million. And that already has built into the reduction from the loan sales, which is $200-plus million dollars. So those are all the moving pieces.

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [77]

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So $1.2 billion up, $0.2 billion down.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [78]

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Does that clear up the question?

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [79]

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Wait, wait. So you add $1.2 billion to the reserve on day 1, which hurts equity by $900 million, and then we move forward from there?

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [80]

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That's right.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [81]

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You said $1.2 billion up, $1.2 billion down. The down part was...

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [82]

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No, $1.2 billion up, $0.2 billion down.

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Steven J. McGarry, SLM Corporation - Executive VP & CFO [83]

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Yes.

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Henry Joseph Coffey, Wedbush Securities Inc., Research Division - MD of Equities Research [84]

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Okay. Oh, okay. Excellent.

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Operator [85]

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(Operator Instructions) Your next question comes from Bill Ryan, Compass Point.

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William Haraway Ryan, Compass Point Research & Trading, LLC, Research Division - MD & Senior Research Analyst [86]

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Couple of things. Just first on the origination side. I know it's not a bellwether quarter. But if 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, a little bit more nontraditional? Can you give us a little color on Q4 and then kind of the outlook? And the second thing, obviously, going through the guidance, you put out some measures for a pro forma earnings report for 2020 that you're 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?

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [87]

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Sure. Two things. One is the originations in the fourth quarter, which were down 2%, as you note. 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 holidays fell didn't get posted in 2019 and will be posted -- 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'll 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 a particular period will both be available for modeling purposes.

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Operator [88]

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

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Raymond J. Quinlan, SLM Corporation - Executive Chairman & CEO [89]

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Okay. Well, thank you all for your attention. We very much appreciate it. And there's been a lot of information transmitted. I'm sure we'll 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 4 of capital return and we got 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 that they can in order to ensure a prosperous future for the next generation. We think we are 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.

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Brian Cronin, SLM Corporation - Senior Director of IR [90]

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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 of salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

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Operator [91]

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