SLM Corporation (SLM) Earnings Call Transcript & Summary

Hello, and welcome to the 2023 Sallie Mae Investor's Forum conference call. [Operator Instructions]. I would now like to hand the conference over to Melissa Bronaugh, Head of Investor Relations. You may begin.

Thank you, [ Towanda ]. Good evening, and welcome to the 2023 Sallie Mae Investor Forum. It is my pleasure to be here today with Jon Witter, our CEO; and Pete Graham, our CFO. After the prepared remarks, we will open the call for questions. Before we begin, Keep in mind that our entire presentation today constitutes forward-looking statements and information and is based on various and multiple assumptions described in our presentation. Statements that are not historical facts, including statements about our beliefs, opinions or expectations and statements that assume or are dependent upon future events are forward-looking statements. Forward-looking statements and information are subject to risks, uncertainties, assumptions and other factors that may cause actual results in the future to be materially different from those reflected in the forward-looking statements. These factors include those discussed on Page 2 of our written presentation materials and in our filings with the SEC. Listeners should refer to those factors in connection with today's presentation. Thank you. Now I will turn the call over to Jon.

Thank you, Melissa and Towanda. Good evening, everyone. Thank you for joining us for Sallie Mae's 2023 Investor Forum. We are excited to discuss the evolution of our balance sheet and capital return strategy with you this evening. We hope that you will come away with a deeper understanding of our evolved investment basis and an appreciation as to why we feel like this is the right time for this change. For those of you who may be newer to our story, let me rewind the tape and provide context for our current strategy, which we started approximately 3.5 years ago. As you see on Page 4 of our investor presentation, there were two primary reasons why we thought that our current loan sale and share repurchase strategy was a winning approach at that time. Number one, we saw a disconnect between the premiums that we could achieve by selling loans in the market and their implied premium as evidenced through our equity valuation. Simply said, we saw a clear value creation opportunity in selling loans and buying back shares. The second reason this strategy made sense at that time relates to capital management and discipline. You'll remember that at the same time, we began implementing the strategy, we were also adopting CECL. The reserves that we carry as a private student lender are significant and we knew that we would not have the ability to grow our balance sheet, phase in CECL and return meaningful capital to shareholders simultaneously. The program we put in place that still exists today was to manage that need and take advantage of that opportunity. We believe our program has been successful. We have bought back approximately half the company over the past 3.5 years, and have been able to successfully maintain strong regulatory capital ratios, while phasing in half of the $836 million that resulted from our day one CECL adjustment. As you see on Page 5 of our investor presentation, we have also generated absolute and relative total shareholder returns during this time that have meaningfully outperformed key indices and competitors. What has changed today is that the end of the CECL transition is now in our planning horizon, and we are able to start to look past the impact any transition adjustments might have on regulatory capital. As shown on Page 6, upon implementation of CECL, we increased our allowance for loan losses through a noncash charge against retained earnings. While this transition adjustment immediately reduced retained earnings and GAAP capital, the regulators allowed a 2-year delay and a 4-year phase-in period for purposes of calculating capital adequacy ratios. The last phase-in occurs on January 1, 2025. As such, we have the exciting opportunity to think about how we want to deploy that incremental capital each year to best create value for shareholders. While we've been pleased with the TSR performance of our stock, we have not seen as much improvement in the multiple of our stock. As you can see on Page 7 of the investor presentation, while we have led major indices and return on common equity, we have lag in PE ratio. While not shown, this trend also holds when looking at the relationship between return on common equity and price to tangible book value. So as we think about the evolution of our balance sheet and capital allocation strategy, we would like to balance two things: First, we want to continue to embrace our legacy strategy that has been successful. Selling loans and buying back stock is a proven strategy as long as the arbitrage conditions exist. Second, we believe that measured balance sheet growth, coupled with operating leverage, will lead to strong organic revenue growth, EPS growth and return on common equity. We believe this performance will be recognized and deserving of a higher multiple. We have built a strategy that attempts to satisfy both of these objectives. And the work that we will share, I hope you will see our desired four-part investment thesis shown on Page 9 come to life. Specifically, we expect to generate strong and predictable balance sheet growth, strong EPS performance and return on common equity, meaningful capital return and all of this with manageable risk. As you see on Page 10 of our investor presentation, to demonstrate the power of this strategy, we have developed a simplified financial framework with several assumptions based largely on the most recent financial performance of our company discussed during our third quarter earnings call. In instances where there was a compelling reason for not using the most recent financial performance data, we have indicated the reasoning behind that decision in the appendix to the investor presentation that we published just before our call this evening. I want to stress, this simplified model is not meant to be a substitute for the more detailed modeling that many of you complete. Moreover, the simplified illustrations are not meant to serve as multiyear guidance. We do think this is a useful tool in explaining our strategy in detail and provides a useful conceptual check as you develop your more detailed perspective. I'm now going to turn the call over to Pete to walk through some of the data that is output from this simplified financial framework that you can find in our presentation beginning on Page 11. Pete, over to you.

Thanks, Jon. And thanks to all who joined this evening. I'm pleased to share some of the output of our financial framework, which we have included in a series of four illustrative vignettes based on the updated investment thesis that Jon discussed earlier. The purpose of these illustrations is to provide a general sense of how our evolved thesis might translate into performance under the assumptions documented. We expect that these simplified views will provide a useful framework as analysts and investors develop their own more detailed and dynamic assumptions and models as well as their own conclusions about how the key metrics presented in these illustrations may evolve over time. Before I start, I want to reiterate some of the high-level themes underpinning the framework. First, this framework is intended to highlight what's possible after we complete our phase-in of the CECL transition adjustments. We maintained a flattish balance sheet in the first year and then allow the balance sheet to grow in subsequent years at a modest pace. That level of growth when combined with operating leverage is expected to translate into strong earnings per share growth. Second, an expected continuation of our solid originations combined with the slowdown and stabilization of consolidations that we've experienced this year means we should be able to grow the balance sheet modestly, while continuing to sell a meaningful number of loans. We expect this combination of growing recurring earnings and continued loan sales will create significant capacity for return of capital to shareholders. With that, I'll move into the illustrations. On Page 11 of the presentation, you can see that over a 5-year period, our base case envisions utilizing loan sales to support moderate and accelerating balance sheet growth with market share in excess of 50% and assumed market growth rate of 5%. There's a healthy balance sheet growth capacity each year. As I mentioned previously, in year one of our base case, we envisioned keeping a relatively flat balance sheet, here presented as 2% growth. In year two of the base case, we assumed stepping up to approximately 5% growth and allowing that growth to increase approximately 1 percentage point each year thereafter until we reach 8% in year 5. This base case indicates we could expect to continue the loan sale arbitrage strategy that has worked so well for us in a meaningful way while also growing the balance sheet at a measured pace. In year one, loan sales are expected to be approximately equal to levels seen over the last several years and only stepped down modestly with balance sheet growth. Growing the balance sheet at a measured pace will also enable us to grow our funding strategy at a measured pace alongside. While we think the assumptions shown in this base case are a reasonable framework, we expect to be opportunistic on the margin when it comes to the exact level of balance sheet growth and loan sales in any given year. If the arbitrage is stronger due to higher expected loan premiums and/or lower multiple of the stock, we may decide to sell marginally more loans. The opposite is also true. However, at this point, it's hard to imagine pushing balance sheet growth or loan sales to the extremes. Going forward, we expect some level of balance sheet growth and some level of loan sales in every year. As the balance sheet grows and loan sales moderate, this framework suggests an evolution of the earnings profile, and this is illustrated on Page 12. Assuming the balance sheet begins to grow, credit continues to normalize. Net revenue, which excludes the gain on sale of loans and associated provision release is expected to grow modestly. As illustrated, growing net revenue when coupled with an improvement in operating leverage results in strong earnings per share growth rates. Through growing recurring earnings and continued loan sales, this framework suggests meaningful capacity for capital return as illustrated on Slide 13. Based on this simplified framework, we would expect to return over $2 billion to shareholders over the 5-year period. We have paid a consistent dividend for the past several years. However, as our earnings grow, we expect that the dividend will grow alongside. We also expect to use a portion of the proceeds from continued loan sales to buy back shares. And in addition, we'll look to deploy that capital in other ways, if more attractive to shareholder return. Of course, all of our capital return initiatives are subject [ to ] approval. Finally, the framework suggests capital ratios and loss absorption capacity shown on Page 14 and remain strong under this base case scenario. And we expect to hold ample capital to meet the U.S. Basel III requirements. Another measure of loss absorption capacity of the balance sheet is the ratio of GAAP equity and loan loss reserves to risk-weighted assets, which we also expect to remain very strong, even as we allocate capital for the growth of our balance sheet. Turning to Slide 15. As Jon mentioned earlier, and he has been [ yet so ] hopefully illustrated, balance sheet growth and capital return are not mutually exclusive. With expected originations growth in the mid-single digits and continued loan sales supporting that measured growth, we expect to be able to create significant capacity for return of capital to shareholders. At the same time, we anticipate that expanding recurring revenue will be to steady double-digit earnings per share growth annually. All of this will be supportive of measured growth in our funding strategy and results of manageable risk. However, none of this happens without the high quality of our assets, our private education loans. Over the 5-year period that we show in our framework, the expected average return on common equity is 28%. The financial framework and the vineyards shown on Pages 11 through 14 of the presentation, are meant to represent a base case scenario resulting from a set of assumptions. We know, however, that there are a variety of things that could change for any one of those assumptions, and that may influence the resulting up but positively or negative. We've included in the presentation some sensitivities on key assumptions that Melissa is going to walk through now. Melissa?

Thanks, Pete. When we developed this simple financial framework, we developed the assumptions for our base case around recent financial performance discussed in detail in our third quarter earnings call and as described in the appendix to the presentation. However, we know that performance can vary from quarter-to-quarter. Whether it changes seasonally as borrowers enter full principal and interest repayment in waves, whether it moves based on changing macroeconomic circumstances or weather is influenced by the competitive landscape we know and our listeners should know that there is space for variation in performance outside of what we have presented as our base case scenario. Two variables that we know can have a significant impact on results are loan sale premiums and credit performance. We wanted to provide sensitivity to show how the illustrative results change when these two variables are modified. What is interesting, as you will see, is that the power of our strong ROE loans come through and that our strategy is expected to be robust across various sensitivities. On Page 17, you will find the results from the loan sale premium sensitivity. As Pete mentioned, our base case assumes a 6% loan sale premium in year one and then a 7% loan sales premium in years 2 through 5. In our first sensitivity, we assume that interest rates and spreads heal faster and we see a 7% premium in year one with an 8% premium attained thereafter. This scenario is an upside scenario and has a positive impact on both EPS and total capital return with EPS anywhere from $0.13 to $0.19 better than the base case across the 5 years, and total capital return $20 million to $31 million higher than the base case across the period shown. In the downsized loan sale premium scenario, we assume that interest rates and spreads stay depressed at the levels we saw during much of 2023 or 5.5% across the periods shown. In this scenario, EPS declines from the base case by between $0.06 and $0.26 across the 5 years. Capital return also declined from the base case in this scenario by anywhere from $16 million to $33 million across the same period. Turning to our credit performance scenarios shown on Page 18, you will remember our base case assumes a 2.25% net charge-off rate in year one followed by a 2% net charge-off rate in year two and thereafter. Our first sensitivity, our upside scenario assumes net charge-off rates normalize to the lower end of our high 1s to low 2s range versus normalizing at the midpoint. Specifically, we modeled a net charge-off rate of 2.15% in year one and a 1.9% net charge-off rate in year two and thereafter. EPS and total capital return are impacted positively by this upside scenario with EPS increasing anywhere from $0.05 to $0.08 from the base case across the 5 years and total capital return increasing over the base case by $4 million in year one, all the way to $10 million in year five. In our second credit performance scenario, we assume net charge-offs remain at 2023 levels or at approximately 2.4%. In this downside scenario, EPS declines from the base case by between $0.09 and $0.30 across the 5 years and capital return declines from the base case by anywhere from $8 million to $31 million across the same period. I will now turn the call back over to Jon for some closing remarks.

Thanks, Melissa. As I mentioned earlier this evening, we are excited by the evolution of our strategy and believe that what we have shown through our base case scenario was compelling. What we are most excited about when we look forward is that we believe this strategy allows for flexibility and should enable us to continue to grow earnings and return capital to our shareholders in a meaningful way. As Pete said earlier, if loan sale premiums are robust and the arbitrage is substantial, we may grow the balance sheet at a slower pace. If loan sale premiums are lower or multiples expand meaningfully, we may slightly accelerate the rate of balance sheet growth. Again, as Pete said, it's unlikely that we would go fully to either extreme. With that, I'm sure there are many questions on the minds of our analysts and investors. So Pete, Melissa, why don't we open the call up for some questions.

[Operator Instructions] Our first question comes from the line of Moshe Orenbuch with TD Cowen.

The Slide 13, I think, is probably going to get a fair amount of attention. You talk about having $1.4 billion of capital return potential over the 5-year period while you're kind of generating a 28% return on equity. I guess the question is, first of all, I think that's after the CECL -- that doesn't the CECL phase and that's already accounted for. Could you confirm that? And then also just you talk about other forms of capital return. Could you talk about what might be of interest to you and how you would think about deploying that $1.4 billion of excess capital?

Sure. This is Pete. I'll take the first crack at that. Yes, this is after consideration of the final transition related to CECL. And then in terms of other forms of capital, we're just cognizant if we continue to buy back shares in perpetuity, that has potential implications on liquidity of the stock and other things that we would consider also special dividends or something of that sort if that made more sense in terms of return of capital.

Our next question comes from the line of Jeff Adelson with Morgan Stanley.

Was just kind of curious, you've had your NCOs kind of reset at a higher run rate versus where it was pre-COVID. I know you're talking about this high 1% to low 2% expectation. Just curious, do you expect that as maybe you start to hold on to more of your loan book, grow the balance sheet that maybe you'll start to see the charge-off rate migrate down a bit lower as you stop selling off more of the front book that has lower losses?

Yes, Jeff, it's Jon. I'll take that question. First of all, just as a reminder, we obviously sell off as close to a representative sample of our loans in each of the loan sales we've done to date as possible. There's obviously some exceptions to that on the margin, but we really do try to keep that as representative as we can. I think it is absolutely the case that loans have different charge-off characteristics through their sort of repayment history. And I think there's absolutely likely to be some seasoning of the loan portfolio that could very likely have an impact on sort of expected net charge-off rates over time. My guess is that will be sort of a slow moving set of changes. I think it will take quite a number of years for that to really play through. So Yes, I think the theory of what you're saying is, I think, right. I think in practice for the next few years, at least the foreseeable planning horizon. I think we feel good about the sort of high 1, low 2 guidance or sort of a rule of thumb that we've given you.

Okay. And I guess just in terms of growing the balance sheet, can you maybe dive into how you plan to pursue funding for the balance sheet growth? And maybe how we should be thinking about the broker deposit strategy, the ABS strategy? And does that have any impact on your current positioning of being asset sensitive today?

Yes. So the strategy that we've used to fund the balance sheet to date using a mix of deposits and ABS is the same strategy that we will use going forward. And part of the benefit of a modest rate of growth is that the funding need grows at a modest pace alongside that as well. So I would say the relative mix of deposits and deposit types as well as the relative proportion of ABS to deposits, we would expect to continue to be relatively the same as we move in the next few years.

Our next question comes from the line of Sanjay Sakhrani with KBW.

I guess my first question is on the market share. I know you're using the 2022 market share. But with the big player kind of exiting the market, announcing their intention eggs in the market early in the year, do you expect that market share to actually increase as we've seen when others have exited?

Yes. So Sanjay, it's Jon. We will certainly give origination guidance in January, and it should come as no surprise to anyone. We are obviously chewing on and working on the news that was announced by the competitor that you referenced, 1.5 weeks ago and trying to see what makes sense. Clearly, when you have a major competitor leave a space that creates a jump ball situation and an opportunity to go after that business, I think we certainly expect some step-up growth due to that change. Exactly when that happens and exactly how that happens, I think we're still working through as we try to better understand sort of their overall sort of plans. With that said, I think we need to recognize, even with that departure, this is a competitive marketplace. I'm sure we will be far from a loan in terms of trying to compete for that business. And I think we will also look long and hard at "are there parts of that business that are more valuable or less valuable to our specific model and to sort of our specific sort of underwriting performance". So said simply, I think there's going to be plenty of competition. I think we certainly hope to buy and compete for all the business there that we see as attractive, but we're not prepared at this point with specifics around what that could mean for originations, but we would certainly plan to show up with a perspective on that come our January earnings call.

Yes. And maybe just a second part to that question. To the extent that you are able to take share, should we assume in your illustration that it would be plowed back into loan sales or retained? Or does that just depend on different variables. I'm just trying to think through how it affects the illustration.

Yes. I think it depends a little bit on the sort of specific variables and market conditions that we would see as we head into next year. I think, though, Sanjay, a safe assumption is through the last year of CECL phase-in, flat-ish balance sheet is probably the right mental model. Now could that be slightly higher or slightly lower than what Pete outlined in the balance sheet schedule perhaps. But I think we should expect flattish is probably the sort of name of the game as we make that last set of CECL catch-up payments.

Got it. And then the loan sale premiums you guys are assuming are obviously much higher than where they were last quarter. I'm just curious, has there been a change in the market dynamics, given rates have come off their highs or what gives you the confidence that we'll actually get there? And to the extent that they remain as low as they were in the third quarter, would that have an effect on the strategy?

Yes. So this is Pete, I'll take that one. I think, certainly, the overall rates backdrop is a key factor in how the pricing in the loan sale market will work. And I think we're past peak grades at this point and have -- as we've moved through the quarter, have seen a nice improvement in the rate backdrop. So our expectation is as we move into next year that will either stay consistent with this or we'll continue to move in a favorable direction. And at the same time, the opening of the books for the year with those that are involved in investing in these products create some positive momentum in terms of volume and wanting to get deals done to start the year. So that's kind of how we thought about developing our view on the base case. And I think certainly, if things migrate backwards, I think the downside sensitivity that we talked about is probably useful.

Yes. And Sanjay, the only thing I would add, just as a reminder, I think we've talked pretty extensively over the last couple of years. Yes, we have what we think is a very robust and defined sort of decision tool that we use for figuring out when selling loans and buying back shares creates value for our shareholders. And I think we've talked at length about the fact that there's a relative not absolute relationship there between sort of equity valuation and loan sale premium. There is nothing in this sort of strategy evolution that moves us away from that disciplined approach. That is still kind of a tool that we will use. We will continue to evolve and sort of enhance those tools, I'm sure, as we always do. But there is obviously a level of loan premiums where it wouldn't make sense. And I think at that point, we would also stick to our conviction about sort of the robustness of that tool and that decision framework.

Got it. May I ask one more question on just the credit stats? That [ 2.2% ] level, I mean, obviously, we've seen a little bit, I don't know slippage or it just -- it seems like that rate has kind of gradually gone up in terms of what you're targeting, I'm just curious if that 2.2% sort of peaks out here, do we see any more -- in a stable macro backdrop. Is this sort of the high that we should expect on average going forward? Or can that change based on mix or something?

Yes. Sanjay, we are not updating credit guidance here today, but I think it's fair to say that the sort of goal that we set out, gosh, a quarter or two ago of normalizing net charge-offs back to the sort of high 1s or low 2s. I think this team still believes is an achievable goal. We continue to work on that, and we continue to implement improvements and enhancements every day. And I think you should expect to hear more about that in the next earnings call and each earnings call sort of beyond that. So again, we're not updating here, but I think we feel like that is still the right goal for us to be shooting for.

Our next question comes from the line of Michael Kaye with Wells Fargo.

The first question I have is on the noninterest expense assumptions. I think it's 2% in year one and 3% in year two. I mean, it's pretty -- it just fit out to me it's pretty low year-over-year growth. I know 2023 had some inflation factors and other factors. But could you just talk a little bit about that assumption?

Yes, you're sort of hitting the nail on the head there with your commentary about onetime-ish factors in the current year that makes that growth rate look low. What we've really modeled here is getting to a level of operating leverage by the third year in the projection that we think is clearly attainable. And so we just sort of step into that over time in this base case. And we feel like the numbers that we've presented here again, based on the assumptions that we've outlined in the back part of the deck are attainable.

I know you talked a little bit about this, about your funding mix, you expected to stay relatively stable to the current mix. But I noticed the NIM, I think I saw it step down to 5.25% and a decent bit lower than the 5.5% this year. I mean is some of the -- do you factor in like increase the deposit cost as now you expect more balance sheet growth, so you need to perhaps get more aggressive on your deposit rates in the market?

I think part of that is, we've talked on prior calls about the fact that we had some tailwinds into the NIM this year as a result of the pricing mismatch between assets and liabilities. We think that's going to normalize. And the assumption we've used here is sort of smack in the middle of where we think the range should be.

Our next question comes from the line of Rick Shane with JPMorgan.

Most of my questions have been asked. But I just want to make sure that we are actually calibrating this correctly. When we think about year 1, year 1 is 2024. And that's why the balance sheet growth is modest because you're not fully phased in, and that's consistent with the response that you gave to Sanjay. I just want to make sure because year one suggests year one of the transition, but you're not -- you also sort of indicated you're not going to really start that transition until after January 1, 2025.

Yes. I think that's a safe assumption. Again, we wanted to be perfectly clear that we weren't trying to create multiyear guidance here, but that's probably a safe assumption for year one.

Understood. And again, I don't take it as guidance. I just want to make sure in terms of how we calibrate the transition that we're starting in the right time frame. And obviously, that 2% growth in year one is consistent with really beginning the transition more in earnest in 2025. So that's the first thing. Then second thing is, that, again, you've had some questions today about credit outlook, and there was some commentary. We think that the 2% -- the high 1s, low 2s is the right target. But it also feels like you're having to make adjustments in terms of protocol in order to achieve that. I'm curious if there's actually something underlying the credit that is different that is foreseen to change your approach in order to get back to what you were targeting.

Yes, Rick, and I'm going to try to sort of tie this back. I think we've talked about this on some past calls, but I think it's a really important question. If you think about what has happened over the last couple of years, there's been a number of important moving pieces. Number one, we came out of the global pandemic. Number two, I think we had some operational issues that are well documented and well understood. And I think number three, and probably the biggest of the factors we've made what we think are some important changes to our credit administration program, specifically as it relates to forbearance. I think as we moved past all of that. It is, and I think we've been consistent on this, it is not a single silver bullet solution. There's a whole variety of steps that we are taking to sort of regain the performance that we saw before. We are, if you think about what our previous program was, it was a very flexible program. We are replacing that with far more focused and tailored programs that, in many respects, have the same goal and aspiration, which is to help our customers who have an ability and a willingness to pay, get back on their feet and back to sort of financial health but that's taken some work. I think we have looked long and hard at our collections strategies and our recovery strategies. And I think those are changing. And I think as we've also been clear, we continue every year to look at who is more versus less successful than our underwriting models would have predicted. And we, every year, make refinements to those underwriting models, sort of recognizing, changing customer preferences, behaviors and sort of macroeconomic conditions. And I think as we've said on past calls, we did a bit more of that underwriting sort of fine-tuning in the last couple of years than in a typical year. And you would expect that given the elevated levels of sort of charge-offs that we would have seen. So I think it's sort of an all of the above strategy to sort of move us back to where we were. But as we look at the sort of the fundamental underlying sort of performance of our customers, I think we feel really good that there continues to be an incredibly large number of our historic customers who are equally as successful going forward. And that's what our underwriting and other changes have reflected. So a multipronged approach. And by the way, those are all strategies that get sort of optimized and updated each year. So you don't land on the perfect spot on year one. You've got a, sort of, put one spot down and then optimize it for a year or two to get into just the right spot. So Again, we have an inside view to how all of those pieces are looking. We have an inside view to how we expect, for example, underwriting changes to sort of play through as customers come out into P&I, it's impossible for us to share all of that information externally. But I think it's through that combination of factors that we feel good that the high 1 to low 2 goal that we've set out is again, sort of the right goal for us to be shooting for.

Got it. And do you think the stake in the ground is a little bit -- that yes, lifetime losses on a cohort are going to be higher, but one of the reasons that you think charge-offs are coming down is that there's a pull-forward effect that because of what occurred, you're experiencing charge-offs in certain cohorts earlier in the life than you would have previously anticipated?

Yes. I don't want to sort of try to explain the totality of a credit performance through one variable. But I think it is fair to say that there are certainly customers where we are seeing the loss emergence curves change and normalize at different rates than they previously did. And that's part of what's going into sort of our thinking and our planning.

Okay. Obviously, the proof will be in the pudding and we appreciate the answer, Thank you.

Our next question from the line of Arren Cyganovich with Citi.

Just a question on, I guess, the -- I'm assuming this is your view of maximizing kind of growth potential of both revenues and earnings. But I guess to an earlier question, you're doing such a high ROE, why not let the balance sheet grow more. What are the factors that will impede that? I'm assuming you could CECL, but is there anything else that you would do rather than just continue to sell a pretty decent amount of loans each year?

Yes. In our base case assumption, we just assumed that we wanted to have a modest, stable sort of growth rate in the balance sheet that translates into meaningful growth on the income statement when you apply operating leverage down to the earnings per share line. And it also gives us a very stable profile in terms of funding of the balance sheet. That's not to say at the margins, as we've indicated. We might do a little more, a little less of the loan sales versus balance sheet growth. But I think in terms of a base case moving forward here, we felt like this sort of modest level of growth was most appropriate.

Arren, I think the only thing I might add, and it kind of goes back to my intro. I think if you look at the last 3.5 years, again, we feel really good, obviously, recognizing the last 18 months have been tough for the sector about the TSR generating capability of this strategy. In a simplest form, returning capital to shareholders is a pretty proven way of driving TSR. And we view our #1 job is maximizing total shareholder return for our investors. As I said in my intro, we would love to see as a part of that TSR journey, multiple expansion. We'd love to see that. And by the way, we think this business is completely deserving of a materially higher multiple than where it currently trades at. And I think a part of this strategy as well is we really believe that one of the impediments to a higher multiple is potentially a flat balance sheet we've had for the last couple of years as we've maximized sort of outperformance through the CECL phase in, we get a chance to sort of begin to really push and test on that. And so to say it really directly, I think if we start to see tangible signs that investors are valuing the balance sheet growth and we start to see that show up in the multiple. We're not trying to be at all sort of coy about this. We will let the balance sheet start to grow faster. And I think we will all be delighted with that outcome. If we don't, we still place a real premium on total shareholder return and we know we can generate that as long as the arbitrage conditions exist, which is the relative valuation disconnect between multiple and premium. We know we can do that through a strong capital return strategy. So I don't mean this to sound at all like a compromise, but I think we are trying to walk a line here that is very respectful of a proven strategy that's created a lot of value and a desire to move the multiple. And I think maintaining the flexibility over the control knobs to be able to, sort of, again, on the margin change those volumes as we see actual performance play out. So I think that's really the strategic underpinning of what we're trying to do here, but it all comes back to we want to drive total shareholder return. We'd love to do that through multiple, but we're going to do that in using whatever set of levers are most effective in the marketplace.

Just a quick one on the assumption for allowance for loan losses. You have that coming down 10 basis points per year. Is that just due to the fact that some of the loans on the balance sheet become further along in their amortization and then that just pushes that overall balance down? Is that how that works?

Yes, generally, that's just to anticipate the seasoning of the book. And then also at the margins to the extent, charge-offs are coming in lower than that. That translates also into the [ provisioning ] as well.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Just on Slide 7, I'm kind of looking at that scatter plot. And I can kind of sense the frustration, but in your stock price, but I just want to ask one question, what kind of threats do you think there are to sustain that return on common equity over the next, call it, the period that you've laid out for the next 5 years?

Threats to retaining the sort of common equity, the return on common equity, Jon is that the question?

Quest to maintaining that kind of return on common equity.

Yes. I mean, look, we compete in a competitive business. I think to date, it has been a rational competitive business in terms of marketing spend, in terms of pricing and so forth. I think if you saw, sort of, a large number of competitors adopting irrational sort of pricing or other behavior, which, again, hasn't happened, but that could certainly be a threat. I think if there was something macro happened that really impacted credit and ability to repay in a truly meaningful way. And I think depression, great recession area type of performance. Obviously, that can have an impact on sort of the return on our loans. Those would probably be sort of the top 2 on my list. But let me answer the sort of anecdotal question, which is like I don't actually lose sleep over either of those. I think we've shown the resiliency of our loans through some pretty stressful economic environments, and we built our models off of the back of some pretty stressful economic environment. So -- and I think the focus on college-educated students, that's obviously an attractive customer base for us to have, which gives us a lot of confidence in performance. And again, competitive intensity can change, but it's not clear to me that there's something that would drive that competitive intensity to change overnight. But Pete, I don't know if you have other thoughts beside this?

I think that covers it.

Yes. Okay. That's a good answer. I mean it's what we're trying to get at if you can sustain that 25% plus return on equity, your stock should go up. And I guess everybody in the line has opinions on it, but what do you think -- what do you hear is maybe the one or two primary objections as to why your stock doesn't trade at 10 or 12x earnings. What do you guys hear when you talk to investors?

Yes. I would point maybe to sort of two things. I think one of which we're trying to directly address through this strategy. So I think the number one is you guys have held your balance sheet flat, gain on sale premiums may not command the same multiple as sort of recurring balance sheet-based revenues and earnings, and therefore, you're trading at a multiple for those reasons. I think that's squarely in the focus of what we're trying to address through the strategy, but I think that is sort of number one. I think historically, the other question that has come up has been one of political risk. And remember, we are a private student lender. We have nothing to do with the federal program. We are a sort of a fraction of their size. And -- but yet, when you start to talk about federal loan reform for student loans, it's very easy to shorten that and just talk about student loan reform. We have spent a lot of time and energy on this over the last couple of years. And I actually think that the proposals that are being discussed today in a bipartisan way in Washington, are really thoughtful proposals. I think they are very balanced, very pragmatic. And I think all maintain an important role for a company like Sallie Mae and our competitors to continue to provide the kind of GAAP financing that we provide each and every day. So those are the two things that in my travels, I have heard most regularly. I think we're trying to solve one, and I think if someone really took a dispassionate senses of sort of the political environment and the position and the important role that we play in the marketplace. My guess is most would determine that the political risk is largely a rearview mirror phenomena if it was ever the kind of risk that people, I think, feared.

Okay. Helpful. And I would just say my editorial comment would be just keep buying back the stock and don't worry about liquidity. If you believe all of this, what I think you do, just keep reducing the share count and doing what you're doing.

I love buying back stock, so point taken.

Our next question comes from the line of Vincent with Stephens.

I wanted to touch on other uses of the strong capital generation that you've been having. And just -- so I wanted to see if you have any thoughts on the dividend? Does it make sense to buy other student loan portfolios, and to the point earlier about that competitor's $10 billion portfolio that's out there. Or are there other capabilities or investments that you'd want to do? You've had success with Nitro and Scholly. So I just wanted to see, other than the arbitrage, which I think is a good use of capital, if there's anything else you'd like to do.

Sure. This is Pete. I'll take first crack at that. So again, I think what we were trying to highlight there was just the fact that return of capital via share buyback at some point we'll hit a point of diminishing return in terms of pressure and liquidity beyond the float and liquidity of the stock. So with that juncture, we'd evaluate special dividends or other ways to return capital. The other part of your question is would we use that capital to invest in other things and not return it to shareholders. I think -- Jon has been pretty clear about in public forums about our strategy around M&A and growth through M&A that we're interested in bite-size acquisitions that have a benefit to our core business. And I think we've been very disciplined in terms of making sure that any acquisitions we're doing have immediate impact and are paid for by the benefits of the core business. And in regards to growth, of our core lending business through M&A. But I think with the originations backdrop that we've got, the market share that we've got, we'd be better off just ramping up more originations than we would be purchasing a book to grow our outstanding balances. So that would be my point of view on buying a competitor's book.

At this time, I would like to turn the call back over to Jon Witter for closing remarks.

Thank you again, Melissa, Towanda, Pete, for all your help in getting ready today. Thanks, everyone, for your interest on the call. I know we have run out of time. It is possible that folks had additional follow-up questions or people may not have gotten their questions answered. As always, our IR team led by Melissa is standing by to be of help and assistance to you as you get your questions answered, and then fully digest and internalize the data that we've shared. And I would just say thank you all for your continued interest in Sallie Mae. We are excited about this course that this strategy puts us on and look forward to talking with you more about our performance at the end of January when we report out on fourth quarter earnings and talk about guidance for 2024. So I hope everyone has a great holiday season. Again, thank you for your interest and we look forward to continuing the dialogue. Have a great evening.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.