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Sallie Mae (NASDAQ:SLM)
Q3 2021 Earnings Call
Oct 21, 2021, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Sally Mae Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session to ask a question during the session. [Operator Instructions] I would now like [Technical Issues] conference over to your speaker today, Brian Cronin, Vice President of Investor Relations. Please go ahead.

Brian Cronin -- Vice President, Investor Relations

Thank you, Shannon. Good morning, and welcome to Sallie Mae's third quarter 2021 earnings call. It is my pleasure to be here today with Jon Witter, our CEO; and Steve McGarry, our CFO. After the prepared remarks, we will open up the call for questions.

Before we begin, keep in mind our discussion will contain predictions, expectations and forward-looking statements. Actual results in the future may be materially different than those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors in the Company's Form 10-Q and other filings with the SEC. For Sallie Mae, these factors include among others the potential impact of COVID-19 pandemic on our business, results of operation, financial conditions and/or cash flows.

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 Mae.com. Thank you. I will now turn the call over to Jon.

Jonathan Witter -- Chief Executive Officer

Thank you, Shannon and Brian. Good morning, everybody. Thank 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 continuing trend toward normalcy.

I hope you will take away three key messages today. First, 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 to 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 $0.24 compared to $0.45 in the year-ago quarter. Our results were driven by a combination of strong business performance and continued improvements in the economic outlook. 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 the impact 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, this 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 Emergency Relief Fund, commonly referred to as HEERF.

HEERF provided $73 billion directly to higher-education institutions and was intended to help students who were financially impacted by the pandemic. To put this in perspective, this $73 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 HEERF funding that had to be used for direct student aid and that could be distributed at the discretion of the school and without limitation. We surveyed our top 100 schools. 84% distributed between $500 and $3,000 in HEERF funds per student. We see the impact of this especially in our volume of lower balance loans, which you would imagine would be most impacted by this type of support. Year-to-date, our loans, less than $5,000 were down 19% compared to the same point a year ago. The last of the HEERF grants are set to expire during 2021, 2022 academic year.

The second factor impacting originations was the level and composition of enrollments. 80% of the schools we surveyed reported flat to minor increases in enrollment. The composition of enrollment also changed and impacted our business due to lower numbers of foreign students with US cosigners and fewer out-of-state students, as students chose to stay closer to their home. Students in these segments typically have a greater need for GAAP financing and our schools are reporting a lower percentage of these students in 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 US National Consumer Credit Trends Report that the total number of student loans, including both federal and private, fell 4% 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 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 7.9 versus 7.52 in Q3 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 changes 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, is effective at helping customers over times 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 a 10b5-1 plan at an average price per share of $18.75. We have reduced the shares outstanding since January 1st of 2021 by 23% at an average price per share of $17.17 and 31% since January 1st of 2020 at an average price per share of $15.19.

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 $1.25 billion plan. We expect to make 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 and capital levels.

Our second important update is our Board has approved an increase in our fourth quarter 2021 common stock dividend to $0.11 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 me say that again, the terms we received exceeded the terms of our first quarter sale. While interest rates have ticked up since our last sale, spreads have tightened 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?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Thank you, Jon, and good morning everyone. Let's start with the discussion of our loan loss allowance and provision. The private education loan reserve was $1.3 billion or 5.2% of our total student loan exposure, which under CECL includes the on-balance-sheet portfolio plus the accrued interest receivable of $1.4 billion and unfunded loan commitments of nearly $2 billion. Our reserve rate is down slightly from 5.3% in the prior quarter, but down significantly from 7.2% in the year-ago quarter when we were in the midst of the pandemic. In fact, our loan loss reserve is $500 million lower than a year ago.

Let's look at the major variables used to calculate our CECL reserve. Economic forecasts and weightings are a major input to our model. In the second and third quarters of 2021, we used Moody's Base S1 and S3 forecasts weighted 40%, 30% and 30% respectively. In the prior-year quarter, we were using Moody's base in S4 forecast, 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. Forecasts 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 it has become more stable in the current environment. In Q3 2021, they were essentially unchanged compared to Q2, resulting in no meaningful reserve requirement changes. However, pre-pay speeds were significantly higher than a year ago, which is another major contributor to the year-over-year change in the reserve. New commitments are also important, as under CECL 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 and pre-pay speed changes were major drivers in the year-over-year change in the reserve, but had little impact in the change from quarter-to-quarter. As Jon 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 in the 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, up slightly from 2.1% in Q2 but down from 3% in the year-ago quarter. Private education loans and forbearance were 2.3%, down from 3% in Q2 and 4.3% in the year-ago quarter. This is as expected, given the economic improvements we have seen and the changes we have already implemented through our forbearance usage.

We continue to see credit metrics move in the right direction post pandemic. Based on continued strong performance, 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 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. The net interest margin on our interest earning assets was 5.03% in Q3. This is up from the prior quarter and the year-ago quarter as well. We have managed our liquidity position down, as we 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 of 2021 to come in at 4.75% 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 and 2021, there were timing differences in our FD insurance -- FDIC insurance fees and in 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 loan service being up 2%. Our focus on efficiency is unchanged and we are seeing the cost to 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% and common equity Tier 1 capital was 13.1%. Finally, GAAP equity plus loan loss reserves over risk weighted assets was a very strong 14.9%. Our balance sheet remained solid in terms of liquidity, capital and reserves, positioning us very well to grow our business and return capital to our shareholders going forward.

Back to you, Jon.

Jonathan Witter -- Chief Executive Officer

Thanks, Steve. Let me wrap up with a brief description of the broader environment and provide a few comments on our outlook. During inflationary times, cost for wages in certain activities increase and we are not immune. We've also seen marketing costs 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 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.

The political environment remains constructive, with the administration focused on simplifying the public service loan forgiveness process, increase in Pell grants and increase in funding for HPC use. 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 in as little of 7 minutes. In addition, our How America Pays for College Research report continues to garner media coverage from outlets including Bloomberg, CNBC, USA Today and Fox News. All told, 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 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 impact came from continued improvement in our economic outlook and lower provisions for credit losses. This resulted in $0.15 of improvement. Expected premium levels on our fourth quarter loan sale exceeded our forecast at the beginning of the year. This contributed an additional $0.10. The impact of more share repurchases adds an additional $0.03.

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 the 10% growth in Q3 of 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 ROE discipline. Our expectation is the current level of federal stimulus 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 million and $205 million, which is down from our prior quarter guidance of $215 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 million 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 million 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 capital 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 are proof points in our commitment to appropriate capital allocation and shareholder return.

Looking into 2022, 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.

Questions and Answers:

Operator

[Operator Instructions]. Our first question comes from Moshe Orenbuch with Credit Suisse. Your line is open.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks and congrats on the loan sale. I guess kind of focusing on the -- some of the last comments that you made, Jon. The prospect of that government aid kind of rolling off and some of the other trends that you mentioned about foreign 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? It feels like certainly the government aid reverses and perhaps the other trends and you're kind of left with the -- is the growth of the industry growth kind of going to be similar to what it had been, like how do you think about that and what you can kind of talk about that a little bit.

Jonathan Witter -- Chief Executive Officer

Yeah, Moshe, first of all, thank you. Great to hear from you and super question. A couple of thoughts here, number one, I think we know very specifically that the HEERF funding has an end date on it that's built into the legislation, that's built into the statute. AI think if you look at the current environment in DC, it is hard to imagine that there is going to be a HEERF floor plan that comes out in light of the other priority. So, I think we feel very, very good about the end date of that program and really know and anticipate sort of 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 enrollments and 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've seen nothing in our research, we've seen nothing and broader industry views, that suggests that student trends, a desire to go out of state, a desire to go to the best school possible, foreign students, their desire to come to the US to study, I don't think we have seen anything that suggests that those trends will change as the pandemic wanes. So, we are sharpening our pencil right now on what we think 2022 is going to look like from an origination perspective, but that's probably the most that I can say at this point given what we know. But obviously a lot will depend, especially on the enrollment trends of how much the pandemic continues to improve and I think we're encouraged by the signs that we're seeing on both infection rates and vaccinations.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. And you mentioned also the additional support Pell grants and HPC use. It sounds like, at least from what we are hearing, that there is less -- just less support in the current package for free college, whether it's community college or otherwise. Could you just discuss thoughts on that aspect?

Jonathan Witter -- Chief Executive Officer

Yeah, happy to. And by the way, I think if anyone claims that they can perfectly read what's happening in DC there, they're probably not being totally honest 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. And so, when you start to think about HPC use, when you start to think about Pell grants, those are all things that help students who have been historically really marginalized and/or would not be able to afford college otherwise. We think continuing to provide support for them is a great thing to do. 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 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 are going after.

I think if you look at the current proposals going on in DC, I think there's sort of two things that have been happening. I think number one, I think there has been a growing recognition among many of just how regressive some of the past policy suggestions have been, so you didn't ask about it, but things like debt cancellation, that was all in the newspapers a year ago. I think you barely hear mention of it but anymore just because I think people have come to realize it's not great policy.

And I think the other thing that's going on is the fiscal realities are creeping in and things like free college, even gosh free community college, which I would have been sure would have been in the Build Back Better plan, are 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, probably among the best political environments we've seen in years.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks so much.

Operator

Thank you. Our next question comes from Rick Shane, J.P. Morgan. Your line is open.

Richard Shane Jr. -- J.P. Morgan -- Analyst

Thanks. Good morning and 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, you'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? Just help us understand how to think about that conceptually.

Jonathan Witter -- Chief Executive Officer

Yeah, 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've not set our specific plans for 2022. I think what we have said is, our general thought process is that as long as this arbitrage exists, people should expect us to maintain a flattish balance sheets 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 buybacks and between dividends. So, 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 a -- as close to a representative sample as we can get. And that's obviously important for us, it's also I think important for our buyers.

Richard Shane Jr. -- J.P. Morgan -- Analyst

Got it, OK. That's actually helpful. I hadn't thought about the vintage distribution and keeping that HMH more homogeneous. That makes sense. And realistically, if you're getting better than 12% for every loan that you sell, it's hard to resist that.

Jonathan Witter -- Chief Executive Officer

Yeah, I think in the first quarter we got closer to 13%, but yes.

Richard Shane Jr. -- J.P. Morgan -- Analyst

Yeah, got it, OK. Thank you, Jonathan.

Operator

Thank you. Our next question comes from Steven Kwok with KBW. Your line is open.

Steven Kwok -- Keefe, Bruyette & Woods -- Analyst

Thanks. This is Steven filling in for Sanjay. Thanks for taking my question. The first one I had was just around your commentaries on the yields. Are you able to get to the new loan sales? I guess if we see this condition continue into next year, is there the ability to opportunistically take advantage of the market and perhaps to even more loan sales?

Jonathan Witter -- Chief Executive Officer

Yes, Steven. 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 you'll remember, at the beginning of this year we feel that $1 billion tender offer. It was, Steve, 47% subscribed to. And so, I think that taught us an important lesson about how much capital you can deploy and how quickly.

So, I think since that time what we've really been stressing -- and again this is a general strategy, it's not specific guidance, is we really do favor a small number of smaller 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 sort of conditions in the market for loan sales, we would on the 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 because the downside of that is that capital sitting on our balance sheet earning lower returns, which you'll 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.

Steven Kwok -- Keefe, Bruyette & Woods -- Analyst

Got it. And what if like a potential M&A opportunity shows up? Are you guys interested in anything on the M&A side? Today, we just saw one of the your specialty finance peers made an acquisition input in -- within the credit card space.

Jonathan Witter -- Chief Executive Officer

Yeah, I think we've been pretty clear about this and talking about our strategic imperatives. Our real goal is to build on our brand and to build on our sort of core customer franchise to play a bigger role in helping students and their families sort of navigate the journey to and 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, any 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, gosh, 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 for us 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 will get the best return for our shareholders.

Steven Kwok -- Keefe, Bruyette & Woods -- Analyst

Got it. Thanks for taking my questions.

Jonathan Witter -- Chief Executive Officer

Yeah, thank you Steven.

Operator

Our next question comes from Henry Coffey Jr. [Phonetic] with Wedbush. Your line is open.

Henry Coffey -- Wedbush Equity Research -- Analyst

Yeah, good morning everyone. When we look at the $1 billion loan sale gain and we compare it to what you did in the first quarter, the gain is better. And in terms of how the gain really plays out, maybe you can talk a little bit about both the gain and any securitization transactions related to this and what securitization costs looks like today versus what it was in the first quarter.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

So, Henry, so I think what you're getting at is, we've seen a rise in interest rates, we've seen an offsetting tightening in spreads. The securitization market is very strong right now and in fact we've had some improvements in our program, which enables people to get a higher advance rate and increase the leverage in the securitization trusts, which is -- which also helps increase 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 them off of the Sallie Mae platform, but that's been the case for the last several loan sale transactions that we've done, so no difference really there.

Henry Coffey -- Wedbush Equity Research -- Analyst

So there are some sort of "off-balance sheet" securitizations that get captured within 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 -- better -- lower transaction cost or better execution on their purchase so that it's kind of a win-win on both sides. Is that the way to be thinking about it?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

I think that's absolutely correct. They will get very good execution on the back end when the loans are securitized.

Henry Coffey -- Wedbush Equity Research -- Analyst

And I know you made some comments on this, but if we were to predict balance sheet growth over the next 3 years or 4 years, is it fair to say that generally it's just going to be very modest, that will -- most of the gains related to production will work their way into these loan sales, assuming that prices remain as good as they are today and that overall balance sheet levels will be about the same?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

So, I'll make a quick point and I think Jon is probably going to want to add to it, but we haven't guided for 2022, no less our 3-year or 5-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 going 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...

Henry Coffey -- Wedbush Equity Research -- Analyst

What was that number, you said two, three to four?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

We sold $4 billion...

Henry Coffey -- Wedbush Equity Research -- Analyst

No, the percent, was that a percent number or...

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

No, I said we'll probably sell $3 billion of loans in 2022 and we will see low to mid single digit balance sheet growth in years two, three, four of the long-term...

Henry Coffey -- Wedbush Equity Research -- Analyst

Thank you.

Jonathan Witter -- Chief Executive Officer

Yeah, Henry, I think the thing that I would add -- 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 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 over time.

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 buyback stock because we think it is the best way that we can create shareholder value to take advantage again of that arbitrage. So, that's number one.

And number two, there is a very I think predictable and knowable and modelable impact of what happens to capital consumption as we go through CECL phase-in. And as we've also talked about, the loan sales help us manage capital consumption during that phase and -- so that we can continue to also be disciplined around shareholder capital return. So, that's very modelable 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 of those 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.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

With an appropriately valued equity.

Jonathan Witter -- Chief Executive Officer

With an appropriately valued equity. Absolutely.

Henry Coffey -- Wedbush Equity Research -- Analyst

No, this makes all perfect sense and it's been a great shift in focus. Thank you for your comments.

Jonathan Witter -- Chief Executive Officer

Yeah, thank you.

Operator

Our next question comes with Jon Arfstrom from RBC Capital Markets. Your line is open.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, thanks, good morning guys.

Jonathan Witter -- Chief Executive Officer

Hey, Jon, how are you?

Jon Arfstrom -- RBC Capital Markets -- Analyst

Hey, good. On that topic, to the extent you can or are willing to share, how do you define the size of the arbitrage GAAP? How should somebody on the outside look at that?

Jonathan Witter -- Chief Executive Officer

Yeah, I mean -- look at that yeah, I mean, look, we've looked at it a couple of different ways. I invite Steve to jump in here when I finish. And -- but we've not provided specific guidance on it, but I'm happy to tell you sort of our thought process, which is, 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 premium with sort of green, yellow and red zones to it. And the green zones are places where we think on an accretion and value perspective we're driving EPS accretion and getting full economic value. The yellow zones where you have to be a little bit more cautious of the underlying model assumptions and there is red zones where you're clearly out of bounds. So, 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 realistic and pretty rigorous about how we've modeled that out.

Steve, I don't know if you'd add anything to that.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

No, I think you've described it perfectly. I would just add, we can earn premiums on our loan portfolio that exceed 10% or higher and we're still trading at a 6 or a 7 multiple.

Jonathan Witter -- Chief Executive Officer

That's pretty squarely in the green zone.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

...of arbitrage...

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah, just it seems like it's a lot of -- it's a matter of, can you get the stock as well, it sounds like you're saying also, right?

Jonathan Witter -- Chief Executive Officer

Yeah, 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 contort or overly influenced the stock price. And again for us, we want to buy back 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 low and slow and steady as opposed to driving spikes in valuation to say we've done more.

So, this is persistent, this is patient. We're in this for the long-term value creation and we're going to continue to sort of employ this capital return strategy to the best of our knowledge as long as it makes sense.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Okay, just two more topics. Steve, there has been a lot of movement in the provision and reserves, I mean obviously due to the pandemic and you'll have a step-down from the loan sale this quarter. But assuming a flat to modestly growing balance sheet, how should we think about provision requirements going forward?

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

I mean the details that I gave you this morning in the components of the reserve I think pretty much say it all. I mean at the beginning of CECL we were sort of in the zip code of 6% reserve for new originations. A couple of things have changed, our model has changed, the economic environment has improved, and as you could see, today for the last two quarters, anyway now that things have become more stable, the reserve for the loan portfolio, the accrued interest receivable and new commitments has been hovering in that 5.2% of the [Indecipherable]. And I think that's the right number. And clearly, in quarters where we're not creating new commitments, the need to provision is going to be a lot lower in quarters like the second and the third where we are creating new commitments and disbursing new loans. Low 5% seems to be in the neighborhood these days.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Yeah, OK. And then the last question, you kind of -- you guys touched on this a bit with the loan sale and you talked about higher rates, but spreads tightened and you still obviously picked up the 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.

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

So one thing I should point out about the loan sale, and I know that there is 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 is variable rate and just 45% is fixed rate. And our variable rate loans have sort of a base yield of 7.25% plus whatever LIBOR. 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 are willing to pay a premium for that. And as we and others have begun to sell student loans, it's generated a lot of interest in the investor community. So, we feel very good about the ability to generate strong returns in sort of -- any sort of environment..

Getting back to the base portfolio, so if you look at our 10-Q you'll see in a rising rate environment we generate a small increase in net interest income. We are positioned pretty well for a rising rate environment. And our -- we have very good access to both securitization and the deposit markets where spreads have been very, very favorable and we feel good about how we're positioned for the next 12 months to 18 months, whatever the economic environment turns out to be.

Jon Arfstrom -- RBC Capital Markets -- Analyst

Great, thank you for taking the questions.

Jonathan Witter -- Chief Executive Officer

You're welcome.

Operator

Thank you. And I'm currently showing [Technical Issues] questions at this time. I'd like to turn the call back over to Jon Witter for closing remarks.

Jon Arfstrom -- RBC Capital Markets -- Analyst

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.

Brian Cronin -- Vice President, Investor Relations

Thanks, Jon, 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 sallymae.com. If you have any further questions, feel free to contact me directly. This concludes today's call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Brian Cronin -- Vice President, Investor Relations

Jonathan Witter -- Chief Executive Officer

Steven J. McGarry -- Executive Vice President and Chief Financial Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

Richard Shane Jr. -- J.P. Morgan -- Analyst

Steven Kwok -- Keefe, Bruyette & Woods -- Analyst

Henry Coffey -- Wedbush Equity Research -- Analyst

Jon Arfstrom -- RBC Capital Markets -- Analyst

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