Hello, and welcome to the 2023 Sallie Mae Investors Forum Conference Call. At this time, all participants are on a listen-only mode. Please note there is a webcast associated with this call, and we encourage everyone not participating to ask the question during the Q&A to listen to the webcast instead. You can find the webcast on the company's website. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one on your telephone and then wait to hear. You would then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. I would now like to hand the conference over to Melissa Bronaugh, Head of Investor Relations. You may begin.
Thank you, Tawanna. 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 two 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 Towanna. 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 thesis 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 three and a half years ago. As you see on page four 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 three and a half 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 five 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 six, upon implementation of CECL, we increased our allowance for loan losses through a non-cash charge against retained earnings.
While this transition adjustment immediately reduced retained earnings and GAAP capital, the regulators allowed a two-year delay and a four-year phase-in period for purposes of calculating capital adequacy ratios. The last phase-in occurs on January 1st, 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 seven of the investor presentation, while we have led major indices in return on common equity, we have lagged in P/E 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, 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. In the work that we will share, I hope you will see our desired four-part investment thesis, shown on page nine, 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 multi-year 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 perspectives. 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, John, and thanks to all who have joined this evening. I'm pleased to share some of the output of our financial framework, which we've included in a series of four illustrative vignettes based on the updated investment thesis that John 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 maintain 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 a 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 five-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 an assumed market growth rate of 5%, there's a healthy balance sheet growth capacity each year. As I mentioned previously, in year 1 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 assume stepping up to approximately 5% growth and allowing that growth to increase approximately one percentage point each year thereafter until we reach 8% in year five. 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 step 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 five-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 board approval. Finally, the framework suggests capital ratios and loss absorption capacity, shown on page 14, 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 John mentioned earlier, and as these vignettes have 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 lead to steady double-digit earnings per share growth annually. All of this will be supportive of measured growth in our funding strategy and result in manageable risk. However, none of this happens without the high quality of our assets, our private education loans. Over the five-year period that we show in our framework, the expected average return on common equity is 28%.
The financial framework and the vignettes 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 output positively or negatively. 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 whether it 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 sensitivities 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 comes 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 sale premium in years two through five. 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-$0.19 better than the base case across the 5 years, and total capital return $20 million-$31 million higher than the base case across the period shown. In the downside 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-$0.26 across the five years. Capital return also declines from the base case in this scenario by anywhere from $16 million-$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 ones to low twos range versus normalizing at the midpoint. Specifically, we model 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-$0.08 from the base case across the five 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 five years, and capital return declined from the base case by anywhere from $8 million-$31 million across the same period. I will now turn the call back over to John 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 is 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.
Pete, Melissa, why don't we open the call up for some questions?
Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Moshe Orenbuch with TD Cowen. Your line is open.
Thanks. Thanks very much, and congratulations. This is a very, clear and, insightful kind of presentation. The slide 13, I think, is probably going to get a fair amount of attention. You know, you talk about having $1.4 billion of capital return potential over the, over the five-year period, while you're kind of generating a 28% return on equity. I guess the question is: first, first of all, I think that's after the CECL. That doesn't, you know, that doesn't include 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, I'll take the first crack at that. Yes, this is after consideration of the transition, final transition related to CECL. And then in terms of other forms of capital, we're just cognizant that if we continue to buy back shares in perpetuity, that has potential implications on liquidity of the stock and other things. And we would, you know, consider also special dividends or something of that sort, if that made more sense in terms of return of capital.
Got it. Thanks very much.
Thanks, Moshe.
Thank you.
Bye.
Please stand by for our next question. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is open.
Yes. Hi, thanks for taking my questions and appreciate the presentation here. It's very helpful. I was just kind of curious, you know, 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%-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?
Yeah, Jeff, it's Jon. I'll take that question. First of all, just as a reminder, you know, 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 you know loans have different charge-off characteristics through their sort of repayment history. And I think there's absolutely you know likely to be you know 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 you know sort of a slow-moving set of changes.
I think it will take, you know, 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, you know, the foreseeable planning horizon, I think we feel good about the sort of high 1, low 2 guidance or, sort of the 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 you know, maybe how we should be thinking about the broker deposit strategy, the ABS strategy, and does that have any impact on your you know, your current positioning of being asset sensitive today?
Yes. So, you know, 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, you know, 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.
Okay, great. Thank you for taking my questions.
Yep.
Thank you. Please stand by for our next question. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.
Thank you. 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 to exit the market early in the year, do you expect that market share to actually increase as we've seen when others have exited?
Yeah, Sanjay, it's Jon. You know, 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, you know, the news that was announced by the competitor that you referenced, you know, a week, week and a half ago, and, you know, trying to see what, what makes sense. You know, clearly, when you have a major competitor leave a space, you know, that creates a jump ball situation and an opportunity to go after that business. I think we certainly expect, you know, some step-up growth, you know, 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, you know, sort of their, you know, their overall sort of plans.
You know, with that said, I think we need to recognize, you know, even with that departure, this is a competitive marketplace. I'm sure we will be far from alone in terms of trying to compete for that business. And, you know, 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, you know, said simply, I think there's going to be plenty of competition. I think we certainly hope to vie 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.
We would certainly plan to show up with a perspective on that come our January earnings call.
Yeah. 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 that, the illustration.
Yeah, I think it depends a little bit on the sort of specific variables and market conditions that, you know, we would see, you know, as we headed 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, you know, slightly higher or slightly lower than, you know, what Pete outlined in, you know, in the balance sheet schedule? Perhaps. But I think, you know, we should expect flat-ish is probably the sort of name of the game as we make that last set of CECL catch-up payments.
Got it. And then, you know, 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, you know, you know, 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?
Yeah. So, this is Pete. I'll take that one. I think, you know, certainly the overall rates backdrop is a key factor in how the pricing in the loan sale market will work. And, you know, I think we're past peak rates at this point, and have, you know, as we've moved through the quarter, you know, have seen a nice improvement in the rates backdrop. So our expectation is as we move into next year, that we'll either stay consistent with this or we'll continue to move in a favorable direction.
And at the same time, you know, the opening of the books for the year with those that are involved in investing in these products creates some positive momentum in terms of, you know, volume and wanting to get deals done to start the year. So, you know, that's kind of how we thought about developing our view on the base case. And I think certainly, you know, if things migrate, you know, backwards, I think the downside sensitivity that we talked about is probably reasonable.
Yeah.
Okay.
Sanjay, the only thing I would add, just as a reminder, I think we've talked pretty extensively over the last couple of years. You know, we have what we think is a very robust and defined, you know, sort of decision tool that we use for, you know, figuring out when you know, selling loans and buying back shares creates value for our shareholders. And I think we've talked, you know, at length about the fact that there's a relative, not absolute relationship there between, you know, 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, you know, still a, you know, 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, you know, 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, you know, our conviction about, you know, sort of the robustness of that, you know, 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, or do we see any more. You know, 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?
Yeah, Sanjay, we are not updating credit guidance here today, but I think it's fair to say that, you know, the sort of goal that we set out, gosh, a quarter or two ago of, you know, normalizing net charge-offs back to the sort of high ones or low twos, 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 know, 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, but I think we feel like that is still the right goal, for us to be shooting for.
Perfect. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of Michael Kaye with Wells Fargo. Your line is open.
Hi. The first question I have is on the non-interest expense assumptions. I think it's 2% in year one and 3% in year two. I mean, it's pretty just stood out to me that it's pretty low year-over-year growth. I know 2023 had some inflation factors and other factors, but can you just talk a little bit about that assumption?
Yeah, you're sort of hitting the nail on the head there with your commentary about one-time-ish factors in the current year that makes that growth rate look low. You know, what we've really modeled here is getting to a level of operating leverage by you know, 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, you know, we feel like the numbers that we've presented here, you know, again, you know, based on the assumptions that we've outlined in the back part of the deck are attainable.
Okay. Another I know, you talked a little bit about this, about get your, funding mix expected to stay relatively stable to, the current mix, but I noticed, the NIM, I, I think I saw it step down to, 5.25%, and, you know, a decent bit lower than a five and a-- about a 5.5% this year. I mean, is some of the do you factor in, like, increased deposit costs, as now you expect more balance sheet growth, so you need to perhaps get more aggressive on, on, on your deposit, rates in the market?
I think part of that is, you know, we've talked on prior calls about the fact that we had some tailwind 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, you know, where we think the range should be.
Okay. Okay, thank you so much.
Yeah. Thanks, Michael.
Thank you. Please stand by for our next question. Our next question comes from the line of Rick Shane with JP Morgan. Your line is open.
Hey, everybody. Thanks. 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 one, year one 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, 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 start, really start that transition until after January 1st, 2025.
Yeah, I think that's a safe assumption. Again, we, you know, we wanted to be perfectly clear that we weren't trying to create multi-year 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, I just want to make sure, in terms of how we calibrate the transition, that we're starting it 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— Oh, there are my dogs. I apologize. Second thing is that, you know, 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 forcing you to change your approach in order to get back to what you were targeting.
Yeah, 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. You know, if you think about what has happened over the last couple of years, there's been a number of important moving pieces. You know, number one, we came out of the global pandemic. Number two, I think we had some operational issues that, you know, are well documented and well understood. And I think number three, you know, and probably the biggest of the factors we've made, you know, what we think are some important changes to our credit administration program, specifically as it relates to forbearance.
You know, I think as we move past all of that, you know, 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, you know, to sort of, you know, sort of regain the performance that we saw before. We are, you know, 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, you know, 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.
You know, I think we have looked long and hard at our collections, you know, strategies and our recovery strategies, and I think those are changing. And I think as we've also been clear, you know, 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, you know, 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, you know, the elevated levels of sort of charge-offs that we would have seen.
So I think it's a sort of an all of the above strategy to sort of move us back to where we were. But as we look at the, you know, sort of the fundamental underlying, you know, sort of performance of our customers, I think we feel, you know, really good that there continues to be an incredibly large number of our historic customers who are equally as successful going forward. And, you know, that's what our underwriting and other changes have reflected. So, you know, 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 to, you know, sort of put one spot down and then optimize it for, for a year or two to get it to just the right spot. So, again, you know, we have an inside view to how all of those pieces are looking. We have an inside view to, you know, how we expect, for example, underwriting changes to sort of play through, you know, as, 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, you know, we feel good that the high 1 to low 2 goal that we've set out is, you know, again, sort of the right, the right goal for us to be shooting for.
Got it. And do you think this 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?
Yeah, 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 their 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, a lot, the proof will be in the pudding, and we appreciate the answers, guys. Thank you.
Yep.
Thank you. As a reminder, ladies and gentlemen, that's star one one to ask the question. Please stand by for our next question. Our next question comes from the line of Arren Cyganovich with Citi. Your line is open.
Thanks. Just a question on, I guess, the—I'm assuming this is your view of maximizing the kind of growth potential of both revenues and earnings. But I guess to an earlier question, you're, 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 it's CECL, but, is there, is there anything else that you would, you would do rather than just continue to, to sell a pretty decent amount of loans each year?
Yeah, you know, in our base case assumption, we just assumed that, you know, we wanted to have a modest, stable, you know, sort of growth rate in the balance sheet. That, you know, that translates into meaningful, you know, growth on the income statement when you apply operating leverage and 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 or 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.
Okay.
Yeah, and-
So good.
Yeah, and I think the only thing I might add, and it kind of goes back to my intro. You know, I think if you look at the last three and a half years, again, you know, we feel, you know, really good, obviously, recognizing the last 18 months have been tough for the sector, about the TSR generating capability of this strategy. You know, at, in its simplest form, you know, returning capital to shareholders is a pretty proven way of driving TSR, and we view our number one job is maximizing total shareholder return for our investors. You know, 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, you know, a part of this strategy as well is, you know, we really believe that one of the impediments to a higher multiple, you know, is potentially the flat balance sheet we've had for the last couple of years as we've, you know, maximized sort of our performance through the CECL phase-in. We get a chance to sort of begin to really push and test on that.
And so, you know, to say it really directly, I think if we start to see tangible signs that, you know, investors are valuing the balance sheet growth, and we start to see that show up in the multiple, you know, we're not trying to be at all sort of, you know, coy about this. We will let the balance sheet start to grow faster, and I think we will all be delighted with that outcome. You know, if we don't, you know, 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, you know, the, the relative valuation disconnect between multiple and premium. We know we can do that through a strong capital return strategy.
So, you know, 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, you know, maintaining the flexibility over the control knobs to be able to, you know, sort of again, on the margin, change those volumes as we see, you know, 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, you know, we're going to do that, you know, in, you know, using whatever set of levers are most effective in the marketplace.
Okay. That's a helpful answer. Appreciate that. 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, you know, due to the, you know, the fact that the loans, some of the loans on the balance sheet become, you know, further along in their amortization, and then that just pushes that overall balance down? Is that how that works?
Yeah, generally, that's just to anticipate the seasoning of the book. And then also at the margins, to the extent, you know, charge-offs are coming in lower than that. That translates also into the provisioning as well.
Okay, got it. Thank you.
Thank you. Please stand by for our next question. Our next question comes from the line of John Hecht with RBC Capital Markets. Your line is open.
Hey, thanks. Hello, everyone.
Hi, John. How are you?
Hey, hey, good. Just on slide seven, I'm kind of looking at that scatter plot, and I can kind of sense the frustration, but I just in your stock price. But I just want to ask one question. What kind of threats do you think there are to sustaining that return on common equity over the next, you know, call it, call it the period that you've laid out for the the next five years?
Threats to retaining the sort of common equity, the return on common equity, John?
Yes.
Is that the question?
Threats to maintaining that kind of return on common equity.
Yeah, I mean, look, we, we compete in a, you know, a competitive business. I think to date, it has been a rational, competitive business in terms of, you know, marketing spend, in terms of, you know, pricing and so forth. I think if you saw, you know, sort of a large number of competitors adopting irrational sort of pricing or other behavior, which again, hasn't happened, but, you know, that could certainly be a threat. I think if there was something macro happened that really impacted credit, you know, and ability to repay in a truly meaningful way, you know, think, you know, depression, Great Recession area, you know, type of, of performance. You know, obviously, you know, that can have an impact on sort of the return on our loans.
You know, those would probably be sort of the top two of my-- on my list. But, you know, let me answer the, the sort of, anecdotal question, which is, like, I don't actually lose sleep over either of those. I think, you know, we've shown the resiliency of our loans through, you know, some pretty stressful economic environments, and we built our models, you know, off of the back of some pretty stressful economic environments. So, and, you know, I think the focus on, you know, college-educated students, that's obviously an attractive, you know, customer base for us to have, which, you know, gives us, a lot of confidence and performance. And again, you know, 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 besides this.
I think that covers it.
Yeah. Okay, that's a good answer. I mean, it's, it's what we're trying to get at. If you can sustain that, you know, 20%-25% plus return on equity, your, your stock should go up. And I guess everybody on 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, you know, 10 or 12 times earnings? What, what do you guys hear when you talk to investors?
Yeah, you know, I would point maybe to sort of two things. I think one of which we're trying to directly address through this strategy. So, you know, I think the number one is you guys have had held your balance sheet flat, gain on sale, you know, premiums may not command the same, you know, the same multiple as, you know, sort of recurring balance sheet-based revenues and earnings. And, you know, therefore, you're trading at a multiple for those reasons. I think that's, you know, squarely in the focus of what we're trying to address through this strategy, but I think that is sort of number one. You know, I think historically, the other question that has come up has been one of political risk. You know, and, you know, remember, you know, we are a private student lender.
We have nothing to do with the federal program. You know, we are a sort of a fraction of their size. 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, you know, student loan reform. We have spent a lot of time and energy on this over the last couple of years. 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, you know, 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 gap financing that we provide each and every day.
So, you know, those are the two things that, you know, 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 census 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, you know, the political risk is largely a rearview mirror phenomena, if it was ever the kind of risk that people, you know, 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, which I think you do, just keep reducing the share count and doing what you're doing. Thank you.
I love, I love buying back stock, so point taken.
Okay, thanks.
Thank you. Please stand by for our next question. Our next question comes from the line of Vincent with Stephens. Your line is open.
Hey, good afternoon. Thanks for taking my questions and great presentation. And I agree on that comment about keep buying back your stock. But I wanted to touch on other uses of the capital generation, the strong capital generation that you've been having, and just so wanted to see if you have any thoughts on the dividend. Does it make sense to buy other student loan portfolios? And, you know, 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 wanna do? You've had success with Nitro and Scholly. So just wanted to see, you know, other than the arbitrage, which I think is a good use of capital, if there's anything else you'd like to do. Thank you.
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 will hit a point of diminishing return in terms of pressure and liquidity on, you know, on the float and liquidity in the stock. So at that juncture, you know, we'd evaluate special dividends or other ways to return capital. The other part of your question is, you know, would we use that capital to invest in other things and not return it to shareholders? I think, you know, Jon's been pretty clear about, in public forums, about our strategy around M&A and growth through M&A.
That, you know, we're interested in bite-sized 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, you know, have immediate impact and are paid for by the benefit to the core business. And in regards to growth of our core lending business through M&A, and I think with the originations backdrop that we've got, the market share that we've got, you know, 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.
Okay, great. That's very helpful. Thanks so much.
Thanks, Vincent.
Thank you. 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. 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 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.