Q4 2019 Earnings Call
Forced telling me Greening school all lines have been placed on mute to prevent any background noise. There will be a question and answers crushing if you would like to ask question. During this time see please press star one of the number one on your telephone keypad. If you would like to withdraw your question, perhaps the apparel Keith Thank you know.
Like the trying to go over a two hour per cent for today Mr., Brian Cronin Vice President of Investor Relations. Sir you May begin your conference.
Thank you Henry and good morning, welcome to Sallie Mae's fourth quarter 2019 earnings call with me today is right women, our CEO and Steve Mcgarry our CFO .
After the prepared remarks, we'll open up the call for questions.
Before we begin to keep in mind or discussion will contain predictions expectations and forward looking statements.
Actual results in the future may be materially different than does discussed here that could be due to a variety of factors listeners should refer to the discussion of factors in the company's Form 10-Q in other filings with the FCC.
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 31st 2019.
It was posted along with the earnings press release on the investors page Sallie Mae Dot com. Thank you I'll now turn the call or the right.
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 outlined about how we plan to do that and then secondarily goes through those items after which we'll go to the Q and a session.
So our outlined today would be to discuss 2019.
Followed by our evolution over the last six 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 Walter Sallie Mae followed by capital allocation or approach to it the steps we've taken a what has let us to this particular point at where we expect to go in the future.
After that we'll cover the impact of these changes, which are asset sales repurchases sea salt and a couple of other things on their impact on our business metrics rollout, which will be somewhat of a discontinuity given the change profile. The company talk that franchise going forward and water aspirations are.
And that we will discuss 2020 guidance and these three year outlook. So turning to the first of those which is the 2019 performance 20, Nike wasn't very good year, our earnings per share. If you know colleagues 27 up from a dollar 719% growth our volume came in at five six plus 6% or.
Efficiency ratio continues to improve somewhat dramatically from 41% in 18% to 34.7% in 19, 15% improvement right on rate our charge offs are on model actually a little bit better than model for last two years in a row. So credit is under control, our NIM, which was 570.
He six it will continue to be impacted by the increase in liquidity that we've discussed in prior three quarters and it was good number would hit on where we wanted it to be but it's still will decrease to a number trust over 5% Bible five 510 talked about that going forward, but that's just a reflection of additional liquidity on the balance sheet.
Our expenses committed 574 up from 557 in prior year, plus 3% as you'll see in the outlook expense control is one of our a shining accomplishments. These last few years and or are we at 20.7% remains a terrific number.
Validations were up from 991 to 15 12 and increase that is largely explained by the maturation of the portfolio, but still a worrying number which we will continue to watch carefully.
Its case also that as we looked at our customers customers had very good year. Once a year, we achieved the JD powers certification or where the only once in the industry that have that it's a terrific.
So.
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 for us the channels of contact with them.
We've introduced the chat and chat box Lat am satisfaction on that is running 92% and we've done over half a million transactions and so that's a terrific improvement in the course of this year, we have introduced the Amazon Lex spot, which is now entering 40% of the questions that we receive from customers. So we are Terry or.
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 mines.
Our complaints per 100000 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 where first conversation, which people are looking for our credit quality content.
Used to be flat, which is the category level 747, Ficos are co centers 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 in establishment in 2014 and 15, we had rapid growth as those you followed us for several years now in 16, 17, and 18 filling up our inventory to match or acquisition engine, we had a normalizing a profile in 2019.
Including capital return and as we go forward 2020, NB on 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 where suspending personal loan originations, we about $1 billion in our portfolio. We accomplished what we wanted to their which was very 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 and the other hand continues its flight pattern. We will continue to invest in credit card and in 2020 up will be a five cents per share investment I talked 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 call Colavita College search tutoring pain for college and their next step in life as they go to attain employment.
Hi, Rich occasion is high will 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.
Sorry outlook is that regardless of who gets elected in United States any election, we have a bright future with this particular, what against and our wave approaching it we expect the market growth to be between five and 10% 567, we're monitoring that now we have some guidance on it but it's subject to a.
Additional analysis, we set our revenue to track consistent with that and our income to be slightly better than our revenue growth.
So the need for education is pro GDP as it grows faster than GDP and we'll continue to do that for the next two decades based funding analysis that we have capital allocation.
Just one 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 whore sovereign our capital program with two factors one establishing a dividend, which we believe should continue in perpetuity. It was at 12 cents per share and we at that time again.
If I $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 reasonable amount of uncertainty associated with Cecil and we said what we would do is come back any year. When Cecil was known and then reset our expectations for both the company.
As wells for capital allocation well now as we speak Cecil is in place we've done all the analysis associated with it we've had outside vendors such as yet Pwc and you why look at art calculations that 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 to see sold to beat the on 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 a $3 billion for the gain that we expect honest sale and the cash.
Capital that is freed up as a consequence of not having to us assets on the balance sheet will allow us to execute on our authorized 600 million dollar buyback.
When we did that the authorization is significant and low price has changed quite a bit analysts 24 hours at that time, just put it in perspective 600 billion dollar buyback was against a $3.6 billion market cap that'd be a 17% buyback at that time for the for that.
Total company, we expect the allocation and the buybacks and the sales to continue for the next three years 2021, and 22, our equity we believed to be significantly undervalued we.
We have had a evaluated by several top firms on 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 devaluation 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 to pay the buyback of 200. We go forward with these guidance that we have given to the entire investment community over the course of four years 2019, 2021 and 22 the entire capital return will be approximately 1.9.
Billion dollars roughly half of our market cap.
We expect our asset sales to be completed during the first quarter, we expect 80% to the buybacks to occurred during the first quarter with 20% spread out through the rest of the year.
When we do these changes which are now as asset sales buyback Cecil 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 sea, salt, which is to allocate life of loan losses to the loan loss reserve. Upon today that you acquiring 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 as and when you buy back stock.
It will also distort dps so would we give guidance we fully expect to articulate the path from where we work to where we are but there will be significant changes in the level as well as the path and going forward. Those four items Cecil asset sales share repurchases and increase liquidity has to be taken into account in every incomes.
Shipment metric as well as every balance sheet metrics.
The are always will be affected of course diesel lowers our are we.
Are we is heavily impacted by asset sales the efficiency ratio will be on a new trend line associated with the change in a profile the business. The NIM as I mentioned earlier, we'll continue to trend on down from numbers that were in the five east numbers at a five or five 510, and the outlook will be given year by year ended discretion.
Larry impact of the asset sales would be taken into account.
So we expect to spend a significant amount of time with all of our key audiences the investors analysts and prospects going forward because theres a lot to digest that we want to make sure that we're 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 partnerships on this what do I want to study where do I want to go for it what I want to be when it comes when these program is complete how will I pay for it.
Get help in getting to graduation, with tutoring and other support services and how do I continue to improve by skills over the rest of my life. We will have part SNS, we not going to build these capabilities by ourselves. There are several very attractive partners were 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 north having more prosperous future, we have unique opportunity and it's in a vital sector and the whole sector, including ourselves.
Very promising future, who would like to be the go to resource for education.
So.
That end mine.
Key takeaways for today Art 19 was great year, we continue to evolve the franchise.
We are seeing which is the discontinuance of the personal loan originations wells credit card growth expense management over the course of three years is up about 1.5% compounded.
Yes in 19 was up 20, a 19% stake the capital return program is rational dividends will continue into 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 losses, 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 five 6% our revenue to grow along with that and our EPS to grow a little bit better.
In regard to specific guidance.
Core earnings of $1.85 to $1.91 is a gap to GAAP odd comparison, it will be a 48% from 2019 to 2020 and clearly reflects the asset sales provisions for credit losses at that to 85 to three or five are on model as the last two years had been saying with the portfolio net charge offs.
Rich nations at 6% will track, where the industry has been moving although as I mentioned earlier, we are doing more analytics in regard to that to see if theres improve increased opportunity for us on that subject as I mentioned expense management over the course of what will be now three years growing at one of the half percent has greatly helped our profitability efficiency ratio.
And returns loan sales of $3 billion will continue.
On a 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 EPS jump up on at 48% and then as we said in the guidance per seat after that with mid single digits and Thats a number that is tentatively out there we will talk battle.
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 this now chosen based 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 acuity Thats right Brian .
Henry we're ready for questions.
At this time I would like to remind everyone in order to ask a question press Star did the number one on your telephone keypad, we'll pause for just a moment to compile the culinary roster.
Okay.
Your first question comes from Moshi arent boots.
Sure.
Please.
Ask your question. Your line is now open.
Great Thanks and congratulations.
On this.
Instead of sort of big changes out there.
Great maybe could you.
Sure sure to welcome Jim 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 there can be realized on the sale of the loans and how 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 approach this as well.
Sure.
Well first things first how did we come to this point.
We as everyone on the phone knows have for quite awhile now called our stock was undervalued for a variety of reasons.
And we also believes that our assets are very high quality and we have tested that assumption that turns out to be up eight point of consensus and so if we would to look at where we where when we had the original analysis at let's say eight and change for the stock price at 3.6 billion dollar market cap.
It is the case that you would sell X proportion of your assets north to get a gain and liquidity associated with that putting freeing up the capital at such a rate. That's 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, what you think you could sell it for this evening given that the credit markets aren't very good shape at this point it would exceed the market cap and so that we thought was this idea of the company's fourth point liquidation that is ongoing basis. We think is a mistake and we think theres arbitrage opportunity as long as that discrepancy exist.
So it was is quite compelling when you look at these stocks up.
The assets.
As far as what's going on there were in active negotiations I will not comment on the price of those assets, but those of you who know us over a number of years now that we sold assets in 14, and 15 of similar quality and the market today is somewhat like that and so so will discuss in detail at our first quarter earnings release.
And what we have our April call, but right now it's in process I think maybe inappropriate to comment specific prices suffice it to say there is keen interest in our assets, including some firms that what the assets back and 14 15 were anxious to get more which is quite gratifying.
So we think that one we will get a reasonable price to the assets to is that's a market thats deep and rich and that we continue to do that ongoing basis. Three is the at 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 one year budget outlook, which.
We are happy to provide the apropos of their calendar, but in addition to that Steve myself a call Tom Who's 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 wired pensions are and how they would evaluate things suffice it to their rate our regulatory interfaces are excellent they're aware of everything we're doing on and that has that's a base that has been covered off as we have done the last six years, we are in and no surprises business with the regulators and they seem to find that to be a good staff.
Yes.
Well certainly would agree with your best the price of the assets versus the price of the stock through 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.
How should we think about kind of that long term trajectory given this new strategy.
I think that Dean expenses.
I agree with you. The last two years have had a nice plateau in us into one of the half percent compounded growth rate as obviously helped our efficiency ratio quite a bit.
We expect to continue to have always that are excellent and we will make decisions on both expenses in 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 does 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 Russia 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.
As a strict discipline of cost benefit and I are always.
Right now our intentions as a keep expenses under control unless we see your revenue opportunity that is worth keeping so the business model price lot of radio basis, and an incremental changes as the world changes we will be transparent.
Great. Thanks, and congratulations 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 a follow up on that first line of questioning could you maybe ray talk about the parameters under which the arbitrage work. So at what share price doesn't work at what gain on sale amount doesn't work and then.
Yeah, right, 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 do this at the market doesn't appreciate the value of the shape of the portfolio or kind of what did you mean by that are you in transitioning the model.
More of Consultative type model.
And maybe you could just start there please.
Okay sure. So two questions one is what its price relationships, which the arbitrage works and what doesn't work and then secondarily as we add additional services, how we'll evaluate those.
And so in regard to the first as I said, if we started with parameters that work extent.
I'd say on January Onest of this year.
As I've run through those numbers you can see that the balance sheet actually has a higher at a higher values any market cap that is a clear arbitrage opportunity because if we liquidated those assets, we start refilling them Tomorrow morning.
And there were additional income associated with that so that play as 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. So it's easier sometimes to think on these things. It frees one price watch the other one fluctuate at what level with the fluctuating price no longer be a value where.
Not giving out a number on that we have had people estimate what it is.
I don't think anyone in the nail on phone would be surprised that is certainly.
A number that.
Significantly higher than eight.
And so as we move along on this one is that equity price may change, but too 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 devalue the stock.
Anywhere between.
$10 and $16 or so we think that captures the range that we expect the franchise to improve overtime 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.
The political environment, I think everyone can recognize that the portfolio and the franchise.
Our being managed properly. The are always are excellent growth rate is good expenses are under control credit is not risk.
And has not been a risk, although it's always worth monitoring.
So the franchise looks good why is the stock price down the answer we get frequently as politics. We don't believe politics will have adverse impact on us regardless of who gets elected.
So we will continue to buy the equity until we think is appropriately value.
And then just in terms of year or is there a commitment to certain go back, though the way things or Don or is or is that up for debate.
Everything that we do is subject to evaluation on 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 did you go for solutions.
How do you feel after that transaction has been done.
Those are the needs that they have we're trying to be responsive to that we believe that no. One has captured the share of mine associated with GE I have two children, they're going to be going to college over the next two years.
Satellite come up to speed as we think that fast 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 25 years later when the family has matured.
There is there is no doubt there is a significant need out there for helping people make these decisions. Indeed funding the college executing that getting to students through college to tutoring as you know the 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 too as we think we have a reasonable chance.
As in responding to them free is that we will do that on 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. While we're attempting to do is bringing them together in a place that has sufficient probably to us 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 prices 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 that we have no plans to originate new accounts in the future of any of that were to change. We certainly that is not in our plan.
Okay. Thanks.
Your next question comes from Mr., Michael Kaye of Wells Fargo. Sir Your line is now open.
Hi, what's fair way to think about the impact of the loan sales.
Your provision expense guidance. It came in lower than I was thinking I believe that provision expense guidance. It's got up to loan sales I mean does it as simple as taking about 3 billion times, 6.7% reserve right to get might that 200 million dollar benefit so really absent the cells.
Provision expense would have been.
45 to five of our.
Yeah, that's that's pretty close Michael the the actual reserve rate on the existing portfolio is a little bit higher than that but I think you're you're having on the rights or us.
Okay.
And one or talk a little bit about consolidations and you're highlighting it as a risk maybe can you talk about what.
You've been seeing and the consolidation market and also wanted to get your thoughts on 2020, what kind of estimate do you have worked consolidations could be in 2020.
Sure so built into our into our.
Model for 2020, we expect to see about $1.7 billion and 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 and 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 and the Grace period and into early repayments. So we continue to think that consolidations will level off as the portfolio matures and we continue to see consolidations trail off significantly from hold.
Sure we pay cohorts.
Core so I'd be remiss, if I didnt add that we expect that the people that do consolidate or 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 it.
Without consolidated some of the balance of our portfolio.
Any update on defensive product I know you tried something it seems like it didn't work.
Any progress with trying something there.
Oh, no Michael we haven't made any additional progress on away the target.
Our existing portfolio and retain people that are likely consolidation targets.
Okay. Thank you very much.
Thanks.
Your next question comes from Terry Man of Barclays. Your line is now open.
Hey, good morning can you talk a little bit more about what the impact to see so Dave too.
Is that if you didn't sell your loans and how much that actually factored into your strategic decision making.
Let me know two things one is selling the loans had nothing to a seasonal.
That is you know there was no reason to get those assets of books, there, which is profitable as anything else, we have which as you know what an excellent profile on NIM losses expenses Endara week.
And so we should divorce the the asset sale.
Discussion from diesel impact both day, one end date to all as Steve to talk about one initial impact and then what happens on ongoing basis.
Yes so.
I think your question is largely been answered but.
The seasonal reserve, we will continue to book a life of loan.
Reserve to loans on the balance sheet and obviously the the the Cecil provision guidance that we gave does include the impact of reducing the seasonal allowance as loans come off the balance sheet.
Okay got it and then in terms of consolidation activity, how much does tighten consolidation activity actually impact your gain on sale margins. It was very different market in 2014 15 in terms of consolidation activity when you actually doing your sales.
So.
The answer 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're pricing these portfolios.
The prepay speed that people were assuming was much lower than the prepay speed that there assuming today. However, the offsets to that have been cheaper cost of funding in the market for student loan portfolio as well as lower expected defaults as we've demonstrated.
The value in the consistency of of the portfolios that we manage your company.
Okay. Thanks, Thats it from me.
Your next question comes from Rick Shane.
<unk> Morgan.
Go ahead.
Thanks, guys for taking my call.
Yes.
Hello.
Welcome servicing retained or servicing released.
[noise], Rick Rick we have an awful you have an awful connection we got a lot of static has to ask that question you want to try that again, we've we've literally could not decipher your request.
Okay.
With that.
[noise], [noise], hey, I'm going to toggle back again.
Thank you Rick.
[noise]. Your next question comes from Mr. Henry Coffey.
Bush.
Please go ahead Sir.
Good morning, and let me add my congratulations to the whole.
So the whole equation.
Hi, it's been it's been tough and you've been delivering consistently and now you're 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 will you then sell the loans on a servicing retained basis or are they likely to go to other banks that or other institutions.
Interactive into in the student loan business such as.
Discover and wells Fargo, and regions and and PNC and the like.
No what are your thoughts there.
These portfolios by and large we'll 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 on our core strategy.
As developing relationships with our customers. So we will always retain and service all of our customers as that is the core piece of what we're doing the franchise to franchise is being supported by the financial calculations that 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, the biggest challenge or 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 our are these things that you get to charge for and are you like.
Really too.
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 its involving picture to is the services that we're currently looking at or information, providing a false decision seasoning tools.
And some people are charging for those some people have them as giveaway package as we formulate our profile will be.
Very concerned with we're very focused on what is the market is for individual services. We will work through partners are 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 Mivisa window of JP Morgan.
Let's now open.
Hey, guys. It's Rick hopefully can you hear me this time.
Yes.
Well thought out of.
It sounds like Henry addressed the first part of my question, which is the whether or not going to sell the portfolio servicing retained or servicing released.
Will you provide a break out going forward of.
The retain servicing portfolios that we can model lap.
Yes.
Yes, we can release, we can release.
Bank owned and Bank service portfolios, and we do that now and by and large portfolios perform identically. So yes.
I knew you will see the yes, you will see the woman's.
Great and the next question is I'd like to talk a little bit about the cadence of the sales.
Ray you 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 when 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 necessarily we're in the process of negotiating those deals.
So very favorable and given that the share count is important we think that executing these things early in a 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 rate I am curious if you think that there is any impact in terms of how buyers are looking at pools related to Cecil.
Is there to the extent I'm, assuming there securitizing them.
Probably does it 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 seasonal related impact in terms of pricing.
No Rick Cecil isn't really impacting the pricing of these portfolios.
Let's not really emission and it's actually one of the benefits.
Okay.
Great. Thank you guys very much actually up.
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 company's similar to what we've done last year.
We've done the path.
Got it and just.
So the first 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 assumed 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 now, though that would not be 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.
Dollars out of this we would take it exactly proportional to the way to current portfolio as laid out so the sold portfolio and to retain portfolio or 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 our own Seguin seen that Vic.
Seeding your line is now open.
Thanks, I appreciate the provision and charge offs guidance for for the year. The I guess this fall as a little bit on the last question, if you're selling proportionate of the entire portfolio does your NCL rate change at all from from these 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 the falls, but we are not looking at those as having a.
The 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.
Got you had said something about.
Doing share buybacks early part of the or do you expect to do a and accelerated buyback program or would it be.
Throughout the entire year.
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.
To sell the assets completely by 331% to 80% of the share buyback by 331.
And we'll do the remaining 20% as quickly as a CAD thereafter, but I'll, probably driven a lot for six months or so.
Okay, and then just lastly, with whats the person portion of capital that you expect to free approval on sales of 12%.
Looking ahead.
12 cents is good enough for modeling, but 11 on behalf.
Okay.
Alright, thank you.
Thank you.
Your next question comes from John Kuch.
Jefferies Your line so thing.
Morning.
Congratulations on the strategic changes on the thanks for taking my questions. Yes. Most of my questions have been asked and answered, but I will ask.
Yeah, you're running off the personal portable personal loan portfolio. It sounds like for the time being what does the duration of that just in terms of us thinking about.
Reducing the income from that portfolio as well as you're running off the loudest tied to that portfolio.
Very short average lives John have you, probably a year and a half remaining on it I mean, it's going to run off pretty quick.
Okay, and then you talked about anticipation of 6% origination growth, which which is consistent I guess with industry growth rates at a high level. What can you talk about what we see the consolidation trends, but on the front end is there any change with market participants are competitive factors there has that been a pretty stable.
The market.
It is stable and proportions, so that the major competitors, who are the established banks of ourselves citizens discover wells Suntrust.
Consistent.
Then there is a 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 into there for a year or two I.
I think so far it's actually been in more than once.
And so that group of competitors is one very aggressive in your acquisitions, they run a little bit different business plan and we are from standpoint of whether or not volumes important at versus our early.
But they have tended to come and go.
So we're monitoring them carefully is probably a dozen or so a smaller competitors and they do change the top group has not changed at all in the course of seven years.
Great. Thank you guys very much.
Your next question comes from Dominic Gabriel I was hoping heimer. Your line is now open.
Hi, Thanks, so much for taking my questions. We just go up 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 so they twentys 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 and 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, whereas when we think the runway rate is given some of these portfolio sales and whereas the other earning asset balances could be mindful and thanks a lot.
So dominic.
As we indicated in our three year outlook our balance sheet.
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 20 my team we've kind of reached the level of stability here liquidity was 18% of or.
Ending assets in the fourth quarter. It will stay between 18 and 19% over the course of 2020 and beyond and Matt is principally solely responsible for the decline in our NIM all other.
Things being equal those student loan portfolio spread has been very very stable.
And the with those some questions about our other consumer loan assets. So.
Personal loan portfolio billion dollars at the end of 29 team other consumer loans will be.
Down to.
The personal loan portion I 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 is 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.
So thinking about being very much focused as one would expect in student lending, but what is the kind of long term trajectory on on why we're doing this today.
With obviously the very.
Generous buybacks and where the business.
Can look too in that year 456, and.
Potentially even on the other side of a recession here what products you could offer these these clientele.
Thanks.
Sure.
And first things first I think the buyback is not really generates its prudent.
And in keeping with market conditions, and and so the buyback as I said is driven by the relative price discrepancy the value discrepancies that we see in the market.
And the asset sales are separate in a sense of their financial.
Tivity odd to be separated from the franchise itself.
From what we can see from research and from what our customers tell us out there's 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 when things are changing around it tremendous amount of bad publicity about student borrowing in the market.
People 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 this cohort is demographic up.
College graduates and or other credential ice people people, who are license airline pilots. So those types beside the best of the next generation every financial services competitor lots have inside track with them. We believe we can strengthen our position with that as they start their adult lives on that will give us an opportunity we'll work our way through this on the credit cards.
Session processes that we have we will put everything under the heading.
If it works, we'll do more of it if it doesn't work will drop it. So there are no sacred cows in that particular, we expect us to be an ongoing evolution over the course of five years or so.
While we are responding to problems that families need to solve a worry about it as I said.
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.
To make the right decision and so we think we can be helpful. In regard that were 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, Philadelphia Financial your line smelting.
Thanks for taking my question My question concerns political risk and I'm, just wondering it'd be political benefit in other words, if they're really use some sort of.
Federal program for.
Were you reduce college Joey you think that could drive more and more people towards private schools. The same way as pub free public schools is drawing even more and more people towards private schools and could that lead to more and more demand for your products is private schools are more expensive.
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 case also that if you look at all the candidates and talk about free College are they as you know mean free tuition. They typically mean greed tuition state universities.
No reason to think that thats going to hurt the quality of state universities.
And United States has 2400 colleges.
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, where they to somehow make it unattractive would certainly help us.
But as you can see the if you were making a bet over the last four years in.
In regard to the federal program or financing by the public in general and your bet was nothing happens you would have one Tibet.
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 had Wedbush go ahead, Sir Yes, yes. This is just a follow up question in terms of understanding I remember the initial Cecil ad.
So on on day, one there was an add on January the second and then you're going to sell some loans by the end of the quarter and they'll 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 you know that initial AD is now going to look like and what it will.
Like once we've got the sale transaction done.
It's a hit that it's a hit the capital and it's a build to the reserve so.
Okay. So Henry the the initial led we disclose at $1.2 billion 900 right.
Dollars tax adjusted.
We disclosed the reserve that we're going to book preseason will for the full year, which is going to come in between.
To 75, and I'm, sorry to 85 to three or five and that already has built into the reduction from the loan sales, which is you know 200 plus million million dollars. So those are all the moving pieces.
So one two up 0.2 down.
Does that does that clear up lightweight slipped.
So so you you add a billion to to the reserve.
On day one.
Yes, which would charts equity by 900.
And then.
We move forward from there.
That's right said, one two up one two down the downtick part was a one to 1.2 down yeah.
Okay. Okay. Thank you very much excellent. Thank you.
You're welcome.
Again, if you would like to ask question press hard and there are number one on your telephone keypad.
Your next question comes from Bill Ryan Compass Point go ahead Sir.
Good morning, Thanks for taking my questions a couple of things just first.
On the origination side.
I know, it's not a bellwether quarter, but at the originations were down about 2%.
And your kind of giving a 6% guide for plus 6% for 2020.
As there was there something in Q4 that may reverse out in 2020 or do you plan on making some changes whether its pricing what you're willing to finance.
Little bit more non traditional 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're you put out some measures for pro forma.
Earnings report for 2020 that youre going to be using that's obviously been abandoned.
Behind the scenes, we've heard the fccs been kind of quote encouraging.
Companies not to use pro forma accounting I was wondering.
What the decision west to kind of move away from that was it. This background noise, we kind of heard from the FCC or basically since you've adopted the new business model. We're 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 were down 2% as you note.
When we get to the ended the year housing days, all turns out to be quite important for colleges payments.
And our disbursements, which are results of that as a roughly $50 million because of the way the holidays fell.
Didnt 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 monies loss or gain is just a question of spill into 2019 or 2020. So that was day by day seasonality and it'll be different every year as you might imagine.
In regard to the forward guidance include the FCC whatever he went to be on gap 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.
We are bound by.
Rules too.
To.
Publicizing published a gap, we will do that but we will make it very clear.
Adjustments that were making the funding of the provision lets say versus the actual losses and particular period, we'll both be available for modeling purposes.
Thank you.
There are no further questions at this time please continue presenters.
Okay, well. Thank you off your retention very much appreciate it.
And there's been a lot of information tramping I'm sure. We will have many follow up conversations.
The changes I should say our oil we believe very positive they are all at our discretion Howard 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 wasn't very good for year for US. The franchise continues to evolve. We are now in stage four of capital return and got rational approach to that with seasonal behind us with a rapid growth behind us.
We fully expect that one we will have very profitable franchise going forward excellent returns good growth prospects on 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 are well positioned ticket.
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 into future. Thank you very much.
Great. Thank you Ray and thank you for your timing your questions today, a replay of this call and the presentation will be available on the investment pace as Sallie Mae that problem. We have any further questions feel free to contact me directly. This concludes today's call.
This concludes today's conference call or any now disconnect.