Q3 2021 SLM Corp Earnings Call
Good.
And thank you for standing by welcome to the Sally Mae third quarter 2020.
One earnings call at.
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After the speaker's presentation, there will be a question and answer session.
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I would now like conflicts over to your speaker today, Brian Cronin Vice President of Investor Relations. Please go ahead.
Yeah.
Thank you Shannon good morning, and welcome to Sallie Mae's third quarter 2021 earnings call.
My pleasure to be here today.
Record in winter, our CEO and Steve Mcgarry, our CFO.
After the prepared remarks, we will open up the call for questions before we begin keep in mind, our discussion will contain predictions expectations and forward looking statements actual results in the future may be materially different than those discussed here this could be dude.
I would judge of a variety of factors listeners should refer to the discussion of those factors in the company's Form 10-Q, and other filings with the SEC.
For Sallie Mae Super Sallie Mae. These factors include among others the potential impact of COVID-19 pandemic on our business results of operation financial condition and or cash.
During this conference call, we will refer to non-GAAP measures, we call our core earnings a description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the Form 10-Q for the quarter ended September 30th 2021. This is posted along with the earnings press release on the investors page of Sallie.
Sally Mae Dot com. Thank you I'll now turn the call over to John.
Thank you Shannon and Brian Good morning, everybody.
You for joining us for a discussion of Sallie Mae's third quarter 2021 results. Our third quarter performance represents a continuation of the success. We had in 2021 and reflects a continued.
Continuing trend toward normalcy.
I Hope you will take away three key messages today.
We've delivered strong results in the quarter second we're adding more capacity to our 2021 capital return program and third we believe we are well positioned for a strong finish.
The year and expect to continue our positive trajectory going into 2022.
Let me jump right in GAAP diluted EPS in the third quarter of 2021 was <unk> 24 cents compared to <unk> 45 in the year ago quarter.
Our results were driven by a combination of strong.
Finished chipsets performance and continued improvements in the economic outlook the.
The decline from the year ago quarter was largely driven by a substantial provision release last year, you may remember that we lowered our loss expectations at that time as the result of an improving economic outlook as.
<unk> <unk> of Covid subsided.
Private education loan originations for the third quarter of 2021 were $2 1 billion, which is up $192 million or 10, 1% over the third quarter of 2020.
Although this is a noteworthy rebound from 2020.
The <unk> falls below our original expectations, we believe.
That originations were restrained for two reasons.
First there remains significant liquidity in the system due to the federal stimulus driving equity markets and direct subsidies to schools from the higher education.
They didn't see relief fund, commonly referred to as her.
Curve provided $73 billion directly to higher education institutions and was intended to help students who are financially impacted by the pandemic.
To put this in perspective, this 73 billion.
Billion in aid represents nearly 16% of total annual spend on higher education.
Our top 10 not for profit schools received over $800 million in her funding that had to be used for direct student aid and that could be distributed at the discretion.
Our merchant of the school and without limitation.
We surveyed our top 100 schools.
84% distributed between $503000 in her funds per student.
We see the impact of this especially in our volume of lower balance loans, which.
Scratch imagine would be most impacted by this type of support you.
Year to date are loans less than $5000 were down 19% compared to the same point a year ago.
The last of the Hersey grants are set to expire during the 2021 2022 academic year.
The second factor impacting originations was the level and composition of enrollments.
80% of the schools, we surveyed reported flat two minor increases in enrollment.
The composition of enrollment also changed and impacted our business due to lower numbers of foreign students.
You would have with us co signers and fewer out of state students as students chose to stay closer to home Studer.
Students in these segments typically have a greater need for gap financing and our schools are reporting a lower percentage of these students and the current academic year.
While likely having a positive impact.
On credit these factors are clearly impacting the demand for private student loans.
Equifax reported in their September 2021, U S National consumer credit trends report that the total number of student loans, including both federal and private fell 4%.
<unk> in the first half of 2021 compared to the same period in 2020.
We believe the private student loan market grew in the low to mid single digits in the quarter, suggesting that our 10% growth likely led to market share gains if true. This represents the sixth consecutive quarter of market share gains.
Moving on credit quality at origination was consistent with past years, our cosigner rate for Q3 of 2021 was 88%, which was flat to the third quarter of 2020.
Average FICO score for Q3, 2021 was 749 versus <unk> 52 in Q.
Of 2020.
The quarter was relatively quiet from a seasonal perspective, our total loan loss provision was $138 million for the third quarter of 2021, driven primarily by a provision for new loan commitments. Additionally, we took additional reserves for.
Three is to our forbearance practices, we expect to execute in the fourth quarter.
This was offset by an improved economic outlook and higher expected recoveries.
We continue to believe that forbearance when appropriately used as effective at helping customers overcome short term financial challenges.
Steve will discuss the specifics of the quarterly changes in more detail.
In the third quarter of 2021, we aggressively executed our capital return strategy.
We repurchased 13 million shares in the quarter under our <unk> one plan at an average price per share of $18 75.
Change we have reduced the shares outstanding since January one of 2021 by 23% at an average price per share of $17 17.
And 31% since January one of 2020 at an average price per share of $15 and 19.
We have two updates to our 2021 capital return plans first our board has authorized $250 million of additional share repurchase authority incremental to the $50 million remaining of our original $1 billion to $5 billion plan.
We expect to make significant.
Significant progress deploying this $300 million in authority over the balance of the year and into January.
Importantly, this is incremental to our original capital return plans and is driven by improving performance in capital levels.
Our second important update is our board has approved.
An increase in our fourth quarter 2021, common stock dividend to <unk> 11 per share. This represents an approximate 2% dividend yield which we believe is in line with our banking peers, we believe going forward, maintaining a competitive dividend will increase the universe of interested.
Investors and add to the attractiveness of owning Sallie Mae shares.
As we have signaled with the increase in our share repurchase program, we remain committed to selling loans and repurchasing stock, especially while the current valuation arbitrage exists.
Going forward.
We expect the mix of capital return over the next several years will be approximately 20% dividend and 80% share repurchase of course all of this is subject to receiving requisite board approvals at the appropriate time.
In some late breaking news we have reached.
A preliminary agreement on indicative terms for our next $1 billion loan sale and look forward to closing the transaction in the coming weeks.
The terms, we received exceeded the terms of our first quarter sale let.
Let me say that again the terms we received exceeded the turn.
Our first quarter sale, while interest rates have ticked up since our last sale spreads have tightened and our credit performance remains strong. The successful completion of this transaction will support our belief that premiums will remain strong even in a rising rate environment.
Steve will now take you through the financial highlights of the quarter Steve. Thanks.
Thank you John Good morning, everyone, let's start with a discussion of our loan loss allowance and provision with private.
<unk> loan reserve was $1 $3 billion or five 2% of our total student loan exposure.
Terms under Cecil includes the on balance sheet portfolio, plus the accrued interest receivable of $1 4 billion in unfunded loan commitments of nearly $2 billion.
Our reserve rate is down slightly from five 3% in the prior quarter, but down significant.
Which really from seven 2% from a year ago quarter. When we were in the midst of the pandemic.
In fact, our loan loss reserve of $500 million lower than a year ago, let's look at the major variables used to calculate our seasonal reserve.
Economic forecasts and weightings.
<unk> or major inputs to our model in the second and third quarters of 2021, we used Moody's base S. One and S. Three forecasts weighted 40%, 30% and 30% respectively.
In the prior year quarter, we were using Moody's base.
Four forecasts each weighted 50%.
This resulted in a severely adverse forecast, which was appropriate given the shape of the economy and the continued uncertainties of just a year ago.
Okay, and weightings are a major driver in the year over year change in the reserve.
Prepayment speeds can also have an impact on the reserve, although I have become more stable in the current environment.
In Q3, 'twenty, one there were essentially unchanged compared to Q2, resulting in no meaningful reserve requirement changes.
However, prepay speeds were significantly higher.
Sure.
And a year ago, which was another major contributor to the year over year change.
Sure.
New commitments are also important as under fee. So we need to reserve for them as Q3 is our peak lending season, and we added $2 9 billion.
To unfunded commitments, which required a provision of $145 million to summarize forecasts and weightings in prepay speed changes were major drivers in the year over year change in the reserve, but have little impact in the change from quarter to quarter.
Higher as John mentioned, we booked $138 million provision for credit losses in our private student loan portfolio. The increase in our reserve for the potential impact on our portfolio from forbearance practice changes was largely offset by adjustments to our reserve for improvements.
Economic outlook and the performance of our loan portfolio.
Let's take a look at our credit metrics, which can be found on page eight of our investor presentation.
Private education loans delinquent 30, plus days were 2.4% of loans in repayment.
<unk> slightly from $2, one in Q2, but down from 3% in the year ago quarter.
Private education loans in forbearance were two 3% down from 3% in Q2.
Four 3% in the year ago quarter.
This is as expected given the economic improvements we've seen in the changes we've already implemented to our forbearance usage.
We continue to see credit metrics move in the right direction post pandemic base.
Based on continued strong.
<unk>, we reduced our outlook for expected defaults as you saw in our guidance. We now expect net charge offs for the full year to be just over 1.25%.
This once again represents a meaningful improvement from what we were expecting just three months ago.
Let's take.
A quick look at NIM, which you can find on page six.
Net interest margin on our interest, earning assets was 5.0% to 3% in Q3.
This is up from the prior quarter and the year ago quarter as well.
We have managed our.
The position down as we've concluded our peak lending season.
And in addition, our deposit rates have become more in line with our.
Asset yields both factors contributed to our NIM increase.
We continue to expect NIM for the full year 'twenty.
2021 to come in at <unk>, three quarters defense as a result of continued NIM expansion in the fourth quarter.
Let's turn to operating expenses, which were $141 million compared to $128 million.
In the prior quarter and $127 million in the year ago quarter.
In Q3 of 2020, one there are timing differences in our ft insurance, FDIC insurance fees and our incentive comp accruals.
Operating expenses.
In our core student loan business. Excluding these items were actually flat year over year, despite dispersed volume being up 10% and loans service being up 2%. Our focus on efficiency is unchanged and we are seeing the cost of service.
Service our portfolio moving lower.
Finally, our liquidity and capital positions are strong we ended the quarter with liquidity of 15, 8% of total assets.
And total risk based capital was 13, 7%.
<unk> and common equity tier one capital was 13, 1%.
Finally, GAAP equity plus loan loss reserves over risk weighted assets was a very strong 14, 9%.
Our balance sheet remains solid in terms of liquidity.
Capital and reserves positioning us very well to grow our business and return capital to our shareholders going forward.
To you John.
Thanks, Steve Let me wrap up with a brief description of the broader environment and provide a few comments on our outlook.
During.
<unk> costs for wages in certain activities increase and we are not immune we've also seen marketing costs to drift higher. This peak season, we continue to tightly manage costs and pursue opportunities to drive efficiency without sacrificing quality or service levels, we believe our ongoing.
During anything efficiency and unit cost focus have prepared us well for days like this as such we are not particularly worried about inflationary pressures, but are watching the trends closely.
Political environment remains constructive with the administration focused on simplifying the public service loan forgiveness.
Ongoing assess increasing talent grants and increasing funding for HBC is as previously discussed we support these types of efforts as they target assistance to those who need it most.
We also continue to broaden our brand by providing additional services and thought leadership.
This quarter, we rolled out a free new tool that helps families complete the FAFSA and as little as seven minutes and.
In addition, our how America pays for College Research report continues to garner media coverage from outlets, including Bloomberg and CNBC USA today and Fox News.
This hold this highly anticipated and industry, leading research has generated nearly 5 billion media impressions.
I'd like to conclude by discussing our guidance for the remainder of the year.
We are raising our diluted core earnings per share range to $3 55.
All tones to three <unk> to $3 60.
From the previous range of $3 15 to $3 25.
For your reference our initial guidance in January was $2 20 to $2 40.
There were multiple components that led to this increase from our second quarter guidance. The most significant.
<unk> came from continued improvement in our economic outlook and lower provisions for credit losses. This resulted in 15 of improvement.
<unk> premium levels on our fourth quarter loan sale exceeded our forecast at the beginning of the year. This contributed an additional 10.
The impact.
Impact of more share repurchases adds an additional <unk>.
We now expect private student education loan originations will be closer to the 3% to 4% annual growth as opposed to our original 6% to 7% range.
We are pleased to see that 10% growth in Q3.
2021 originations compared to Q3 2020, and believe we grew our market share in the quarter.
However, due to the factors previously described hitting our original target proved difficult while maintaining our discipline.
Our expectation is the current level of federal stimulus.
We will not continue into next academic year.
We continue to see strong performance from our borrowers and an improved outlook on credit in the future. As a result, we expect our total loan portfolio net charge offs will be between $195 and $205 million, which is down from our prior.
Meyer quarter guidance of $2 $15 million to $225 million and down from our original guidance in January of $260 million to $280 million. We believe this is a result of our continued strong focus on loss mitigation and the continued federal loan payment holiday.
Finally.
Our original non interest expense range for 2021 was between $525 and $535 million.
Due to our continued focus and discipline, we now expect to deliver expenses at the lower end of that range between approximately $525 and $530 million.
In conclusion, I am pleased with our performance in 2021 and expect to end the year strong we are originating high quality loans and gaining market share at the same time, we are controlling our expenses, while enhancing the quality of our franchise credit continues to improve finally, we are demonstrating strong.
Apple discipline by buying back stock at prices that we believe are at a discount to intrinsic value.
I believe our additional share repurchase authorization and increased common stock dividend, our proof points in our commitment to appropriate capital allocation and shareholder return.
Looking into 2002.
'twenty two we expect to continue to focus and make progress on the same strategic imperatives further proving our simple, but powerful three part investment thesis I look forward to discussing our goals for next year during our January earnings call with that Steve Let's open the call for some questions.
Thank you.
Okay.
As a reminder to ask a question you will need to press star one of your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Moshe Orenbuch with credit Suisse. Your.
Your line is open.
Great Thanks, and congrats on the on the loan sale.
I guess kind of focusing on.
Some of the last comments that you made John.
<unk>.
Prospect of that government aid kind of rolling off and some of the other trends that you mentioned.
Mentioned about more in and out of state students I mean, how.
Do you see that manifesting itself kind of into that next year's season at a high level I mean, it feels like certainly the government aid reverses and perhaps the other trends and youre kind of left with.
Is the growth of the industry.
<unk> growth kind of going to be similar to what it had been like how do you think about that in.
If you can kind of talk about that a little bit.
Yes, Moshe first of all thank you great great to hear from you and Super question.
<unk>.
A couple of thoughts here number one I think we know various.
Very specifically that the her funding.
As a an end date on it that's built into the legislation thats built into the statute and I think if you look at the current environment in D. C. It is hard to imagine that there is going to be a her four plan that comes out in light of the other priorities.
So I think we feel very very good about the end date of that program and and really no and anticipate.
Sort of when when the impact of that will begin to subside and I think we believe that that will be absolutely during the current academic year.
On the broader trend of out of state and enrollment.
Enrollments in foreign students. This is one where I think we have less direct and specific information, but I think what I would share is we have no reason to believe we have seen nothing in our research we've seen nothing and broader industry views that suggest that student trends a desire to go.
Go out of state a desire to go to the best school possible.
Foreign students their desire to come to the U S to start a I don't think we have seen anything that suggests that those trends will change as the pandemic Wang's.
So we are sharpening our pencil right now on what we think 2022 is going to look like.
From an origination perspective, but that but that's probably the most that I can say at this point given given what we know, but obviously a lot will depend especially on the enrollment trends.
How much the pandemic continues to improve and I think we're encouraged by the signs that we're seeing on both infection rates in vaccinations.
Okay.
Great. Thanks, and you mentioned also.
Additional support Pell grants and HBC views it sounds like at least from what we're hearing that there's less.
Less support in the current package for free College.
Whether its community.
College or otherwise should be you know could you just discuss.
<unk> thoughts on that.
On that aspect.
Yeah happy to buy.
By the way I think if anyone claims that they can perfectly read whats happening in D. C. Today. There are there they are probably not being totally honest or.
Or realistic, but I'm happy to provide my perspectives.
First of all I think we have said all along and I think have maintained a very clear position that our view is that the current federal programs do too much for too many and not enough for those who really need it.
So when you start.
To think about HBC used when you start thinking about Pell grants.
Those are all things that help students who have been historically really marginalized.
<unk> would not be able to afford college, otherwise, we think continuing to provide support for them is a great thing to do we.
We think it absolutely makes the reality of the American Dream feasible for students, who would not have had it otherwise and we are supportive in general is as members of the community by the way I think we've also said very clearly that those things do not have a particularly large impact on our business, it's fundamentally a different.
Customer base and not who we're going after.
I think if you look at the current proposals going on in D. C. I think theres sort of two things that had been happening I think number one I think there's been a growing recognition among many of just how regressive some.
Some of the past policy suggestions have been so you didn't ask about it but things like that cancellation.
That was all in the newspapers a year ago I think you barely hear mentioned it anymore, just because I think people have come to realize it's not great policy and.
And I think the other thing thats going on is.
The fiscal realities are creeping in.
And things like free College, even gosh free community College, which I would've been sure would have been in the build back better plan.
Now seemingly on the cutting room floor. So I think the policy debate is catching up I think good policy is starting to emerge and I think the.
Fiscal realities are coming in and I think when you put all of that together. We are very comfortable that this is a quite productive and benign political environment.
Among the best political environments, we've seen in years.
Thanks, so much.
Thank you. Our next question comes from Rick Shane of Jpmorgan. Your line is open.
Thanks, Good morning, Thanks for taking my questions today.
So when we look into 2022, and we think back about the loan sales versus the originations this year.
We're probably on track to sell.
About three quarters of your production this year.
Balance sheet will be a little bit smaller by year end I'm curious how you balance that going forward are you targeting a percentage of originations for sale or are you thinking about starting to grow the balance sheet again.
But to understand how to think about that conceptually.
Yeah, Great Great question, and let me repeat a little bit of what we've said previously and provide a little bit of new color first of all we have not set our specific plans for 2022 I think what we have said is.
<unk>.
Our general thought process is that as long as this arbitrage exists people.
People should expect us to maintain a flat ish balance sheet.
And use the proceeds of that to aggressively buy back stock and we obviously gave a little bit of further detail on that today with the 80 20 split between between.
<unk> and between dividends.
So.
<unk>.
The flattish balance sheet is really I think sort of our guide here. It's important to note we always sell a cross section of our portfolio a representative cross section of our portfolio.
So it's not just the originations we sell we sell a as close to a representative sample as as we can get.
And that's obviously important for US. It's also I think important for our buyers.
Got it okay. That's actually helpful. I had I hadn't thought about the vintage distribution and keeping that.
That.
More homogeneous that makes sense and realistically if youre getting.
Better than 12% for every loan that you sell it it's hard to resist that.
Yes, I think on the first quarter, we got closer to 13%, but yes.
Got it.
Okay. Thank you Jonathan.
Thank you. Our next question comes from Steven.
Your line is open.
Thanks. This is Steven filling in for Sanjay. Thanks for taking my question. The first one I had was just around two commentaries on the.
The yields that you're able to get to the new loan sales like if we see this condition continue into next.
Is there the ability to opportunistically take advantage of the market and perhaps to even more loan sales.
Yeah, Stephen I think you.
I think the thing we've really found this year is that the limitation on us is less.
The amount of loan sales, we can do and it is much more how quickly can we deploy the capital. So youll remember at the beginning of this year, we feel that a $1 billion tender offer it was Steve 47% subscribed to.
And so I.
I think that taught us an important lesson about how much capital you can deploy and how quickly. So I think since that time, we've really been stressing and again this is a general.
Strategy its not specific guidance is we really do favor.
A small number of smaller.
<unk> loan sales that free capital at a rate that we can productively put it to work and return it to shareholders.
I certainly think if we saw strong and robust.
<unk>.
Sort of conditions in the market for loan sales we would.
<unk> margin want to sell slightly more versus slightly less but I think we would always be tempered by.
Sort of how quickly we feel we can put that capital to work.
The downside of that is that capital sitting on our balance sheet, earning lower returns, which youll remember was a little bit of.
The rationale and explanation that Steve gave last quarter for our slightly lower NIM at the beginning of this year.
So I think part of being a good capital allocator is knowing when to sell and knowing when to buy and knowing what the hold on your balance sheet and we're trying to get that formula just right.
Got it.
What is it like a potential M&A opportunities showed tucker.
Interested in anything on the M&A side today.
Today, we just saw one of the your specialty finance peers made an acquisition within the credit card space.
Yeah, I think we've been pretty clear about this and talking about our.
Our strategic imperatives, our real goal is to build on our brand and to build on our.
Core customer franchise to play a bigger role in helping students and their families navigate the journey to end through higher.
Education.
And we like that strategy, because we think it fits well with who we are we think it fits well with what we know and by the way.
The benefits that accrue to our core business from that more than pay for the investments we would make in those capabilities products and businesses and if they turn.
Into more independent revenue generating options over time.
That's even better.
We would of course always do a smart buy versus build analysis, when we think about getting into any new business.
And we would do through the lens of capital allocation whatever we thought was the best mechanism.
To do it but let me be really clear we are not pursuing diversification for diversification sake.
We believe at this point really maximizing the value of our focus or our franchise and staying focused on being a great education solutions company is what.
What is what will get the best return for our shareholders.
Got it thanks for taking my questions.
Thank you Steven.
Our next question comes from Henry Coffey.
Wedbush Your line is open.
Yes, good morning, everyone.
When we look at the.
For us.
The $1 billion loan sale gains when we compare it to what you did in the in the first quarter of.
The gain is better and in terms of how the game really plays out.
Maybe you can talk a little bit about both the gain and any securitization transaction.
Related to this and what securitization costs it looks like today versus what it was in the first quarter.
Store Henry So I think what youre getting at is we've seen a rise in interest rates, we've seen in offsetting tightening in spreads.
<unk> market is very strong right now and in fact.
We've had some improvements in or program, which enables people to get a higher advance rate and increase the leverage in the securitization Trust, which is.
<unk>.
The secure which also helps increase the.
The value of the loans and increases the size of the residual so the market is actually very friendly right. Now we do think that the ultimate buyers of these loans will securitize.
Off of the Sallie Mae platform, but thats been the case for the web.
Several loan sale transactions that we've done so no difference really there.
So there are some sort of quote off balance sheet securitization that that get captured within the the loan sale.
And the buyer is getting not only are you getting a better gain but the end buyer of the loans is getting better.
Transact I, better lower transaction cost or better execution on their purchase so it's kind of a win win on both sides is that the way to be thinking about it.
I.
I think thats absolutely correct, they will get very good execution on the on the backend when the loans are securitized.
And I know you made some comments on this but if we were to predict balance sheet growth over the next three or four years is it fair to say that generally.
It's just going to be very modest.
Got it.
Most of the gains related to production.
We will work their way into these loan sales, which assuming that prices remain as good as they are today and that overall balance sheet levels will be about the same.
So I'll make a quick point, though I think John's probably going to want to add to it.
We haven't guided for 'twenty two.
Nonetheless, our three to five year plan, but when we map out originations and loan sales and we have talked in the past about getting down to a more stable $3 billion of loan sales per year, depending upon how origination shape out and we are optimistic that we're going to see good growth.
Forward, we do see low mid single digit balance sheet growth out in years.
Two three and four so I think the company is going to generate very strong earnings from both the core business and the.
Loan sale.
<unk> strong was that did that number you said two to three to four.
We sold $4 billion. They don't know no 10% the percent was that a percent number on.
I said, we'll probably fell $3 billion of loans in 'twenty, two and we will see low to mid single digit.
Digit balance sheet growth in years 234 of our long term debt.
Thank you Henry I think yes, Henry I think the thing that I would add on.
And Steve is exactly right. We have not offered specific guidance for next year much less going further out there are two things that I think we've.
Been very clear, we will drive our level of loan sales and remember we love. These loans. These are fabulous loans, and all things being equal we'd love to keep them on our balance sheet and continue to earn great spread income off of these loans overtime, but number one is what's the level of arbitrage between our.
Valuation and the whole loan market and I think we've been very clear that as long as that arbitrage remains attractive and we think we're a long way from it being unattractive, we're going to aggressively sell loans and buy back stock because we think it is the best way that we can create shareholder value to take advantage again.
And of that arbitrage, so that's number one.
And number two there is a very I think predictable and knowable in model Bowl impact of what happens to capital consumption as we go through seasonal phase in and as we've also talked about the loan sales to help us manage capital consumption during.
In that phase and so that we can continue to also be disciplined around shareholder capital return. So that's very model and very and very understandable I think our view is we're going to sort of be in this flattish to modest growth phase kind of likely during that period that you asked about because.
It's two factors, but I think it's also important to note that if that arbitrage window closes.
We're very happy holding these loans growing the balance sheet.
And moving forward from there and again, we would look to give guidance on that sort of year by year as we go forward with them appropriately value within appropriately.
Valued equity absolutely.
No that makes a perfect sense and it's been a great shift in focus.
For your comments.
Yes. Thank you.
Our next question comes from John <unk> with RBC capital markets. Your line is open.
Hey, Thanks, good morning, guys.
Hey, John how are you.
Hey, good good.
On that topic to the extent you can or willing to share how do you define the size of the arbitrage gap how should somebody on the outside look at that.
Yes, I mean look we've we've looked at it a couple of different ways that invite Steve to jump in here when I finish and but we have not.
It's specific guidance on it but I'm happy to tell you sort of our thought process, which as you know.
Number one we look at sort of the economic value of the loans to us we want to make sure we're getting.
Near full full or greater than full economic value to us when we sell them.
We look effectively at an.
Accretion dilution type of analysis through our multi year strategic planning effort.
And we sort of put those two things together and what we have sort of internally you can think about it as sort of a mental matrix between.
Share price multiple and loan sale.
Providing them with sort of green yellow and red zones to it in the Green zones are places, where we think on an accretion and value perspective.
Driving EPS accretion and getting full economic value. There is yellow zones, where you have to be a little bit more cautious.
<unk> underlying model assumptions in there is red zones, where you are clearly out of bounds.
We have not provided that guidance, nor will we probably ever.
But that's the thought process, we go through and I think we're pretty pretty realistic and pretty rigorous about how we've modeled that out and Steve I don't know if you'd add anything to that.
It's a different you've described it perfectly I would just add.
Earned premiums on our loan portfolio that exceed 10% or higher and we are still trading.
Six or seven multiple that's pretty squarely in the green zone that arbitrage.
Yes, it's just it seems like it's a lot of it is a matter of.
Can you get the stock as well it sounds like Youre, saying also right.
Yes, as we said earlier I think what we learned this year is that there are limits to how much you can buy back in any given day without starting to towards or overly influenced the stock price.
And again for us we want to buyback.
No as many shares as you.
The investor want to sell us at an attractive price.
But we don't really want to drive the price artificially higher in an attempt to do that we would rather go.
<unk> and slow and steady as opposed to driving spikes in valuation too to say we've done.
So yes. This is persistent this is patient we're in this for the long term value creation and we're going to continue to employ this capital return strategy to the best of our knowledge is.
As long as it makes sense okay.
Two more topics.
Steve there's been a lot of movement.
More in the provision and reserves, obviously due to the pandemic and Youll have a step down from the loan sale this quarter, but assuming a flat to modestly growing balance sheet, how should we think about <unk>.
Provision requirements going forward.
I mean the details.
So I gave you this morning in the <unk>.
<unk> of the reserve I think pretty much say at all I mean at the beginning of seasonal.
We were sort of in the ZIP code of 6% reserve for new originations.
A.
Movement, we've changed our model has changed economic environment has improved and as you can see today for the last two quarters anyway, now that things have become more stable. The reserve for the loan portfolio accrued interest receivable in new commitments has been hovering in that.
Five.
2% of the survey and I think that's the right number and clearly and in quarters, where we're not creating new commitments to meet the provision is going to be a lot lower in quarters like this.
The second and the third where we are creating new commitments.
Good thing versus new loans.
Low 5% seems to be the neighborhood these days.
Okay. Okay.
And then the last question.
You kind of you guys touched on this a bit with the loan sale that you talked about higher rates, but spreads tightened and you're still obviously picked up a nice.
Gains on the sale, but how do you think through your business metrics in a rising rate environment.
Are you concerned at all about funding cost do you think your asset yields can keep up just kind of walk us through that in a rising rate environment.
Sure. So one thing I should point out about the the loan sale.
But there isn't a lot of angst about our ability to continue to generate strong premiums in a rising rate environment. I think we probably have taken that off the table for now but keep in mind that 55% of our portfolio was variable rate and just 45% is fixed rate and our variable.
Variable rate loans have sort of a.
Base yields of 7.25% plus whatever LIBOR is so in a rising rate environment. The portfolio is going to continue to generate strong returns.
And just before I talk about the other topic.
The longer the more history, we compile the more investors become comfortable with the asset class and I think the more they're willing to pay a premium for that and as we and others have begun to sell student loans, it's generated a lot.
Out of interest in the Investor community. So we feel very good about the ability to generate strong returns and sort of any sort of environment getting back to the base portfolio. So if you look in our 10-Q youll see in a rising rate environment, we generate.
Increase in net interest income, we are positioned pretty well for a rising rate environment and.
<unk>.
Are we have very good access to both the securitization and the deposit markets where spreads.
<unk> been very very favorable and we feel good about how we're positioned for the next 12 to 18 months.
However, the economic environment turns out to the great. Thank you for taking the questions.
Youre welcome.
Thank you and I'm currently showing further questions at this.
This time I'd like to turn the call back over to Jon Witter for closing remarks.
Great. Thank you and listen I know, it's a busy season for everyone really appreciate folks dialing in and the interest in Sallie Mae.
Thank you and look forward to talking next quarter, if not before and with that Brian I'll turn it over to you for our closing orders of business. Thanks.
Ads have on and thank you for your time and your questions today, a replay of this call and the presentation will be available on the investors page at Sallie Mae Dot Com. If you have any further questions feel free to contact me directly. This concludes today's call. Thank you.
This concludes today's conference call. Thank you for participating you may.
Now disconnect.
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Thanks, Joe.
Okay.
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Yeah.
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