Everyone, thank you for attending our Fireside Chat with Sallie Mae. My name is Vincent Caintic. I'm Stephens, Specialty Consumer Finance Analyst, and I'm pleased to be hosting the Sallie Mae executive team. To my immediate left is Pete Graham, our new CFO of the company, and to his left, Jon Witter, CEO of the company. I also want to introduce Melissa Bronaugh, Head of Investor Relations. So if you're interested in Sallie Mae, of course, please speak with Melissa. Maybe just to start off, Jon and Pete, if you could give some introductory comments and background on Sallie Mae.
Sure. You know, Sallie Mae is technically a 45-year-old or so company, but it's really a relatively new company in the last seven years, eight years since we executed our spin from our sister company, Navient. We focus primarily, really exclusively in the private student lending space. So we, we consider ourselves to be a gap financer. So when people have found all the subsidized money, family support, scholarships, and other sources of higher education financing, there's usually a small increment that's left. They tend to come to us for that amount. So our average loan size is about $12,000 per loan. A typical customer has, you know, somewhere between 1 and 2 loans with us.
And we really do consider ourselves to be the last sort of marginal dollar that enables access to and completion of higher education to become a reality for those students. We originate every year, you know, sort of roughly $6 billion-$7 billion of loans. Those loans tend to be highly attractive loans. Think of them as sort of low- to mid-20% ROE loans. And we do that through a variety of school channels and traditional marketing channels that I'm sure, Vincent, we can talk about in more detail. We are the market leader. We've got, you know, mid-50% market share, depending on the quarter. And we think that allows us to both invest appropriately in the business and really have sort of the right brand for continued success.
Great. Thank you. Pete, I don't know if you had any opening comments.
Yeah, no, I'm new in the chair. I've been with the company a couple of months now, and just in the CFO chair post-earnings, taking over from Steve, who's been in the company for an extended period of time. You know, really excited to be joining this company. It's very mission-focused, and higher education was transformative for my life. I'm also the parent of two college graduates, so I think you know, the mission really resonates with me. And the other great thing about this company is, as Jon highlighted, you know, strong financial profile and equally focused on shareholder value creation.
Great.
So it's a good combo. Excited to be here.
Where were you coming from when you were-
Sure. So I've previously I was the CFO at PRA Group in Norfolk, Virginia, and I was in that role for about seven years. I spent about a decade and a half at GE Capital prior to that, and started my career with KPMG.
Okay, great. Thank you for that. I do love having frequent audience participation, so every 10, 15 minutes or so, I'll pull one for questions. Always feel free to interject. Definitely love the investor questions. So maybe just starting to set the stage for the industry dynamics in student lending. We've been hearing a couple of things. We've got the government effectively extending student loan payment moratoriums through October of 2024. During the earnings season, we've heard at least two of the in-school private student loan competitors, they're starting to question their involvement in the business, and then the refi market is tough with higher rates. So if you could maybe set the stage for how you see your portion of the student loan market.
Yeah, we are optimistic about the private student lending space and our particular prospects. You know, recognizing it continues to be an uncertain economic environment. But if I sort of dig down a little bit, Vincent, into why we're optimistic, and I'll touch on some of the things you asked about. You know, one, yes, the federal loan payment holiday has ended. For the last couple of months, students have been making payments. We look at that both in aggregate and in a segmented view best we can. We can't do it perfectly, but we can do it pretty well. As of yet, we've not seen any material impact on our business from the restart of federal student loans.
As you said, consolidations, which is not our business, continue to, I think, be challenged by a force of a combination of sort of economic and, and sort of other factors. But the net, sort of implication for that is our consolidations, depending on what quarter to quarter you're looking at, are down somewhere between 35%-50%, sort of year-over-year. And that's on the back of some previous reductions in past years. So we're really seeing the rate of consolidations slow dramatically. That's obviously a good thing in terms of us being able to see more value from the loans that we originated along the way. You know, it doesn't get a lot of attention, but I think the legislative climate has changed pretty dramatically in the student lending space.
I joined the company 3.5 years ago and, you know, I can tell you the discussions in D.C. about the federal program, sort of the right and appropriate role of the private program. You know, and I think the sort of proposed reform agendas and sort of thoughts that are circulating, I think are really very, very thoughtful and very, very additive to our business. So I think this is probably the best legislative agenda that, you know, maybe we have seen, sort of legislative environment that we have seen in our history. And there's been a lot of talk recently about the regulatory environment.
You know, certainly since the early part of this year, when you know, some banks faced some difficulties, there has been an enhanced and increased level of regulatory conversation. You know, Vincent, our philosophy has always been to be really proactive with our regulators, to try to sort of work in a very collaborative way, to try to make investments ahead of their expectations, so we're not having to catch up to, you know, or respond quickly. It sounds like not all of our competitors have found themselves in that exact same position. We certainly understand that.
That happens from time to time, but we really appreciate the sort of relationship we have with our regulators and feel like we continue to try to live that philosophy of staying sort of ahead of expectations and sort of managing our business in the right way. And so when you put all of that together, I think the market remains competitive. We like the market to be competitive. We think we're better when we face good competition. We think our customers are better served. But I would describe it as sort of, you know, reasonable and manageable levels of competition and, you know, one that's, I think, really productive for us to continue to do well going into the future.
Great, thank you for that. Maybe if you talk about the student lending product and your student lending product, and talk about the advancements that you've made out there. I mean, when we think about student lending, maybe, you know, lending tends to be sort of a commodity, but yet you have the largest market share by far. You've been innovative in many different products. So if you could talk about that and your vision.
Yeah, gosh, there's a bunch of different ways that we could go into that, you know, question. I think, you know, we tend to think about innovation in our core business on a couple of different sort of axes or themes. You know, number one, I think there's a real question of how do we effectively market and acquire new customers? And if you think about where this market has transformed from and where we think it's going, it's pretty profound. You know, if you go back 10 or 15 years, it was all about direct mail and relationships with schools. You know, direct mail is still, you know, a channel for us. It's a more important channel for some others. The school channel is always gonna be important.
That direct connection to schools is sort of a critical part of our lifeblood. But the rest of, I think, the marketing formula has really evolved pretty dramatically. And clearly, it went to, you know, a much more digital and search-oriented model, and I think what we're seeing today is it's even evolving beyond that. So you know, I think the idea of buying search terms and sort of showing up on Google, that will always be a part of our business, but we really fundamentally believe that the best way to sort of drive cost-effective, you know, low CTA, high market share, is to really pursue a more content-based and relationship-based marketing approach.
you know, our goal is to establish relationships with as many customers as we can, we're thinking about higher education, to deepen those relationships by adding real value to them and engaging them in a particular dialogue with the brand. you know, if they have a need for a student loan, to be the natural choice there.
And so if you think about, for example, some of the investments we've made in helping people fill out their federal aid form, their FAFSA form, if you think about some of the investments and acquisitions we've done around helping people find and apply for and get access to scholarships, those are things that you might raise your eyebrow and say, "Well, how is that in the direct benefit of a private student lender?" And the answer is, those are real sources of value for those customers; it attracts customers to the brand, and it allows us to have a much more organically derived acquisition strategy. So lots of work, I think, on the marketing side. You know, I think, I think secondly, there's a lot of innovation going on on the customer servicing side.
And we are blessed to have a really young, really vibrant, really digitally-oriented core group of customers. If you have teenage kids, you probably know they're more comfortable texting you than they are talking to you. And that is a wonderful opportunity for us to continue to invest in capabilities that better serve our customers, and quite frankly, are also cost advantage to us. And so, you know, I think the servicing environment continues to change pretty dramatically. And then I think if you think about sort of the third core of our business and sort of the third driver of economics, it's really around sort of loss mitigation and credit. And there, I think we continue to innovate pretty, pretty significantly.
We, I think are continuing to refine and get, you know, even better and better at, at underwriting. And every year, we sort of continue to fine-tune and, you know, make better our sort of both pricing and decision engines. We are getting, I think, even more sophisticated when it comes to what I would call general credit administration. So how do we work with customers even before they experience financial distress, to really make sure that we're doing all we can to put them on a path to, to viability? And then lots of work around what do we do with customers when they become delinquent, and even eventually when they charge off.
And that can be, you know, new collection strategies, new platforms, you know, new sources of data that we look at to figure out programs that might be available to them. And it goes all the way through to how do we collect and recover? And I think we outlined on our last earnings call some of the enhanced recovery strategies, for example, that we're putting in place that we think will be better for us going forward. So, you know, those three areas of innovation, you know, innovation around cost to acquire and market share, innovation around servicing, and innovation around sort of overall credit performance from cradle to sort of grave, if you will.
Not to use a negative example there, but I think those are really sort of the areas that we're focused on to drive performance and enhancement of the business.
That's great.
Yeah.
It's... You've also acquired some other value-added products like Nitro-
Yeah
and Scholly. So if you could talk about that, are there other, other capabilities or adjacencies that you're looking to do?
Yeah, you know, our acquisition strategy, if you know us at all, you know we really obsess about the notion of capital allocation and sort of use of capital. And so, we don't consider ourselves to be a broadly acquisitive company, but we like doing acquisitions, if they fit into a very specific mold, or a very specific sort of set of criteria. And, you know, what we think about are, what are acquisitions that have real benefit to our core business? So they can be paid for, you know, really directly by, you know, very tangible benefits to the core. What are the ones that are relatively small in scope? So, you know, if we can keep the price tag low, that obviously reduces the risk of us doing any particular acquisition.
But I think, Vincent, to your point, what are also the acquisitions that have some interesting options in them? You know, that we're not basing the purchase price and the valuation on, but they could grow into something that's a little bit more interesting going forward. I think both Nitro and the Scholly acquisition fit those criteria, right? They were hugely beneficial to the core through the marketing advantages that I just described. They were all right-sized when it came to price, you know, really pretty de minimis in the grand scheme of what Sallie is all about. They all have these interesting growth options. For example, in Scholly, Scholly has embedded in it, you know, a really nice little business hosting scholarships.
And so they not only help connect people to other scholarships, but if you wanna own, you know, sort of issue a scholarship, if you're a not-for-profit organization, if you're a celebrity, if you're someone who wants to do that, there's a great little revenue business there that probably should be bigger than it is today. They have a great business there around sort of offers and monetizing the customer traffic that comes through to their website.
And when you think about the fact that we have now, as a company, a relationship with half of all households whose, you know, kids are thinking about higher education, the next year, seniors, that's a pretty powerful group of customers and a pretty large group of customers that we can start to think about, you know, sort of, serving up offers to, that might be of real value to them and have a true revenue creation potential for us. Now, you know, to set everyone's expectations, those businesses are really small today. When I use the word option, I use that really purposefully. But I think they all have the ability to turn into something bigger.
But again, done in the context of what we call a sure-footed strategy, paid for by the core, small in size, interesting option value, and I think we'll look forward to doing acquisitions and building businesses that continue to meet those three criteria.
Perfect.
Yeah.
I wanted to pause to see if there's any audience questions. All right. Great. Maybe switching to credit a bit. It was nice to see the benign credit trends this quarter. What is your confidence level that credit can't remain benign, and your expectations for what's affecting credit?
Yeah, look, for anyone who's ever heard me answer a credit question, you know I'm gonna start with my usual disclaimer, which is the credit gods come down and punish those who say, you know, that, you know, that the economic environment is benign and there's not gonna be any issue. So, I obviously can't have any better crystal ball on what's happening macroeconomically, and macroeconomic conditions obviously can have a big impact on credit. So with that disclaimer, we are feeling really pretty good about the normalization of credit, and I think what we've described in past calls as sort of the return to normalcy. So for those who haven't followed us as closely, you know, a couple of years ago, we implemented a number of changes to our credit administration practices.
We did that for a host of reasons that we thought were, really important and value-adding at the time. But one of the impacts of that is some of the programs that we, you know, either altered or moved away from, were programs that were effective, and we saw an increase in, delinquencies, and we saw an increase in charge-offs during that period of time, in addition to, you know, some of the sort of normalization of things coming out of COVID. I think this year, you know, we've worked really hard, and we've made and continue to make changes again, you know, sort of from beginning to end of... You know, starting with underwriting, credit administration, collections practices, recovery practices, you know, legal strategies and the like.
I think we've been pleased with what we've seen as the sort of stabilization of credit in 2023. But our goal, make no mistake, and we think it's still very achievable, is to get back to what we think is a more normalized level of annual net charge-offs, kind of in the high 1%-low 2% range. It may take us, you know, another year or two to get fully back to that, but I think you should expect we will continue to show, you know, regular and persistent improvement on that path. We continue to implement new programs, some as recently as this week, that we think will continue our journey back in that area.
And we'll continue to monitor performance and sort of tailor and modify and evolve our strategies as we see fit.
And you spoke about the credit gods, and so maybe I'll delve into—and actually, maybe if you can take a step back and talk about your customer. How is the potential student or, and the potential student thinking about, you know, entering college or engaging with the product? And then, how is—what do you think about credit trends broadly as sort of interested?
Yeah. So, you know, as I said at the beginning in the intro, you know, we really consider ourselves to be, you know, predominantly the gap funder. And so the way we work with our customers is, you know, what we would say is, "Look, first of all, you should find all the money that you don't have to pay back." And whether that's, you know, scholarships, whether that's financial aid from your university, whether that's family assistance, you know, I think our view is, you know, it is prudent for every student to get all the free money that they possibly can.
And so when you look at the tools that we create digitally, when you look at the advice that we give customers when we talk to them, it's always starting with, "Let's find the free money." Right behind that, the question is, "Let's find the subsidized money." And for many of our students, there are subsidized federal loans out there that they qualify for, and because they're subsidized by the government, not cost, or sort of economically feasible for us to compete with that. You know, I think our view is, you know, for what you have left, you know, we'd love to be helpful to you.
And so we engage with customers around that through, you know, our school channels, where we show up as, you know, preferred lenders on, you know, over 2,000 schools' lists out there, or roughly 2,000 schools' lists. You know, we do that through our tools that we provide for free to our customers as they sort of engage and do their planning. We do that through our sales channels. So if customers call up and have questions about the products that we offer, we've got a great team of folks who will help work with them on that. But the goal is really to sort of engage in, in sort of that, that gap, that gap funding piece.
When I think about the broader credit trends, and I think it also bears true for the broader origination trends, you know, I think the real question that, you know, sort of is at the center of our thinking is: Do we believe in the future that the world is gonna be a more skilled place than it is today, and that having more skills will earn you higher lifetime wages and compensation than if you have fewer skills? I don't feel like I'm going out at all on a limb by saying we believe the world will be a more skilled place, in the future. And we believe that, you know, most students will need training, education, that may look different from a traditional four-year college, to actually go and to, and to get that, that training.
In fact, you know, our fastest-growing school, and our best credit-performing school is not a traditional four-year college. It is something different. And so we, we really feel like, you know, as long as skills are in demand, as long as skills are garnering higher lifetime wages, as long as the unemployment rate for folks with those skills remains low, and college unemployment continues to be probably the single best proxy, you know, for our credit performance. It's a complicated formula, but it's probably the single best one. We think our credit outlook will, will be, you know, sort of, again, relatively small with the right tip of the hat to the credit gods, notwithstanding.
Perfect.
Yeah.
Yeah. If you could delve a bit deeper on some of the profitability metrics. If you could, let's touch on NIM. It's held steady for a while. Maybe the market expectations maybe changed a little bit this week. But if you could talk about how the rate environment, whether it's higher for longer or whether it's even due for you, and how do your deposit rates, your yields react, and how competitive are you?
I'll take that.
Yeah.
I'll take that one. So yeah, you pointed out our NIM's been relatively steady, sort of approaching 5.5%, you know, currently. And you know that we've had some benefit from repricing as we've come through sort of a step change in rates. We run a match book, so it's not like we're taking a position on rates necessarily, but our assets have tended to reprice quicker than our liability stack has, so it's been a little bit of a tailwind that we think will normalize. And because we're running a match book, sort of higher for longer doesn't really matter.
It's more about how do you move through that transition period at either a step change up, which we've just experienced, or, you know, what happens when rates start to float down. So I think, you know, we're of a position that, you know, based on how we're running our funding book, we can maintain that kind of low 5% range going forward.
One of the... I think, so you've been funding a lot of your balances through your deposits. Your deposit growth has been strong. Maybe you could talk about the loan sales side of the business a bit. So it's-- I think it's been impressive you've been able to sell, and you're able to execute another $1 billion. You've had a steady sort of executing history on that. I think in the third quarter, you also gave commentary, maybe implying a slowdown, maybe in loan sales going forward. If you could talk about why, and how should we think about that crossover between selling loans and retaining loans on the balance sheet?
Why don't I take the first part on sort of the market dynamics-
Yeah.
and you can
Sure.
You can take the second part after. So think about it as whether we're, although we do deposit fund, in large part, we also fund ourselves through the ABS markets with on-book securitizations. And when we're doing these, these whole loan sales, the buyers typically are going to be a large financial institution, either a bank or an insurance company. And they're taking down the, you know, the whole portfolio, but then they're, you know, turning around and securitizing those, those loans through the, through the ABS market. And we have a premier, you know, platform in the space. Many of the loan sales we've done, the buyers have turned around and used our platform and to securitize the assets.
So there's a broad overlap of the investors in our, you know, funding securitizations versus the investors that are sort of backstopping and funding the, you know, the loan sale process. As I said, we've got a preeminent platform in the space and, you know, broad investor coverage and interest in the asset class in general. So we feel like that's an ongoing strength and one that, you know, we'll continue to be able to leverage, whether that's for on-book funding of balance sheet growth or for continued loan sales in the future.
Yeah. Vincent, and if I pick up and talk a little bit about sort of how we see the balance sheet and capital allocation strategy evolving going forward. You know, let me first start by backing up a little bit. And again, for folks who have watched us for a while, you will remember that our, you know, our current strategy of maintaining a flattish balance sheet, selling loans, and buying back shares was really born of two parents. We had kind of an arbitrage parent. We saw a huge disconnect between the premiums and the value of our loans as whole loan sales versus the implied value in our equity. And we saw there being a very clear opportunity to sell loans and buy back stock and create real value.
But it also had a second parent called capital management. And, you know, for those of you, again, who have been studying us, you know that, you know, we are approaching the tail end here of our CECL phase-in. And every year for the last few years, and we have two payments left, one this January, one January of 2025, you know, we're, you know, allocating roughly a quarter of a billion dollars, I think it's $225 million or so, at each year to those CECL top-up payments. By the way, we have loved our historic strategy. You know, the recent dip in financial stocks notwithstanding, if you look at our TSR over the last three and a half years since we've implemented that strategy, we are really pleased with it on both an absolute and a relative basis.
But what has clearly changed is we are now in our planning horizon, and my guess is many of you in your planning horizons, able to start to look past the end of that CECL phase-in. And so we have, I think the really exciting opportunity to think about how do we want to sort of deploy that roughly $250 million of incremental capital each year to best create value for shareholders going forward. While what I said before is true, and we've loved the TSR performance of our stock, you know, I think if we're self-critical, you know, the one thing we haven't seen is as much of an improvement in the multiple of our stock as I would have liked to have seen and I would have expected.
And so I think going forward, you know, our thinking is to try to balance two things. Number one, we want to absolutely continue to embrace the strategy that we have been employing, that I think has worked really, really well. I do not anticipate, can't predict it perfectly, but I do not anticipate that we would be meaningfully stepping away from our current strategy of selling loans and buying back stock as long as that arbitrage exists. But secondly, and at the same time, you know, I do think that showing some degree of balance sheet growth and organic earnings growth, you know, is important to really demonstrating the higher multiple that I think this business deserves.
So we are working through the finer points of it, but I think, you know, I would expect, again, can't promise, you know, absolutely, but I would expect that 2024 would probably be the last year that we would maintain a flattish balance sheet. And that my guess is, after that, we would expect the balance sheet to grow, you know, at a modest pace. Think of that, you know, perhaps as sort of mid-single digits. The nice thing about that level of growth is if you combine that with really strong operating leverage, you know, sort of mid-single-digit balance sheet growth can translate into, you know, upper single or lower double-digit organic earnings growth.
Really, I'm just thinking there of EPS growth minus the loan loss reserve and premium that we would free from any loan sale. We feel like that level of balance sheet growth, you know, allows us to start to create a real appreciation of the organic growth story that, again, we think is really important for, you know, a higher multiple. It's also important to note that if you model that out, you know, because of the strong originations we have, because of the slowdown in consolidations that we've talked about, we can do that and continue to sell a, you know, very meaningful number of loans and continue to engage in very meaningful share buyback.
and so I think, you know, at times I've gotten sort of a little bit of a sense that, you know, investors view this as an either/or. We do not view this as an either/or. We view this as a both/and. We can both, you know, grow the balance sheet at a measured pace, and I think begin to create an organic growth story that is exciting. And I think we can very credibly continue the strategy that has created so much value over the course of the last, you know, sort of call it three and a half years. You know, and of course, you know, that also gives us the dials to be dynamic over time.
So if we see that the multiple is really starting to expand and we're getting paid for that, you know, balance sheet growth and that organic earnings growth, we can always do slightly more of that. And if we find that we're not getting paid for that, and the multiple continues to be low, well, then, of course, great capital allocation suggests you sell more loans, you buy back more undervalued stock, and you continue the strategy that, again, has been, has been really, really working for us. So, so we think that there's a wonderful opportunity here. Again, I would encourage investors to think about this as the both/and. And I would encourage investors to think about this as, you know, a strategy that we will lean into, you know, as opposed to a dramatic change in any one given year.
We think that demonstrates sort of the exact kind of balance that we're looking for. We do know that this is a topic of real interest, so we are planning in the early to mid part of December, what I think will be sort of a call, where we will go through some more of our detailed thinking on this to really help sort of outline what this would look like, kind of over the course of the next, you know, couple of years, and maybe even a little bit further out. We hope that that will give folks a bunch of good information as they start to think about modeling and guidance and projections for 2025 and beyond.
Okay, great. Thank you.
Yeah.
Other than graduation growth-
Yeah.
There's no obvious big reasons for your multiple, I mean, your course of doing?
You know, there's a bunch of theories. You know, we have a pretty robust strategy process and, you know, I think, you know, low implied, you know, sort of high quality, organic growth, I think is certainly at the top of the list, and I think we would work that. You know, I think you could argue being, you know, a relatively small model line, you know, could have an impact on that as well. We would hope that investors would see the value creation potential and sort of look through that, but we know, you know, that may not be happening. But I think my view is, you know, let's solve this one piece at a time.
I think coming out of CECL, the one thing we know we can solve next, you know, is starting to show some really good, high-quality, organic growth, you know, not to the detriment of what we think is the core strategy that has been powering our TSR so far, so far. I think we'll solve that next, and then hopefully we'll see the multiple expansion, and if we don't, then, you know, we'll figure out what's after that.
That's a good, good, good question. So I do think the stocks are cheap. But I think you touched on a couple of things. So one, people are worried about credit with duration, so we get a couple of those questions I hear about a lot. When we see some of the competitors start to are voicing concerns about student loans, that tends to maybe generate a contagion effect, but I think you differentiated in your business and your strength and your market share versus others. But that's another conversation that I've been having. Some of the regulatory aspects as well, like there I think for as long as I've covered Sallie Mae, there's been this question about whether student lending is going to exist, in what form, and all that.
And so we've had those discussions over the years as well. But I think through all that time, you've been posting a high single-digit EPS growth and a lot of capital generation.
Yeah.
And so it's just looking at the financial performance through all of the headlines and the noise-
Yeah.
- You've been consistent.
Yeah, and I think I would add to it. I think what we have shown over the last couple of years is we can generate really significant total shareholder return without multiple expansion. And I think what every investor should understand is, you know, we live and die by our TSR. It is the number one thing that I focus on. I can assure you, my management team knows it's the number one thing that I focus on. They know it's the number one thing that I focus on. And I think if the answer is we continue to generate superlative TSR by doing what we're doing, we're going to do that. I think if there is a chance for us to solve the multiple question, we're going to do that, but we're going to do that smartly.
We're going to do that in a measured way. You know, we're going to do that in a way that doesn't forget what has driven the value for us over the course of the last three and a half years. And so, you know, I view this, again, I used this word before, as, you know, a dynamic opportunity. We have, you know, post January of 2025, you know, $250 million every year of excess capital that we can figure out how to deploy. So, you know, logic tells you, you know, life should only be better, all other things being equal, you know, after the end of CECL phase in than before. So the question is: How do we take advantage of that great opportunity, and how do we do that in the smartest way?
We think, you know, the plan that we're putting together now allows us to start again, to lean into that, but to lean into that with a real reverence for, you know, not abandoning or walking too far away from a strategy that has served us well.
Just correct me if I'm wrong, but the number of students in college, is that right, or maybe more?
... Yeah, I would answer that question I think in two ways. You know, one, enrollment's been pretty flat. Cost of attendance has been going up. That's obviously a benefit to our business.
How much cost of attendance going up?
It depends on the year, but can be-
Last two years.
5, 6, 7%. And I would also sort of say this, I think, it is true that cost of attendance at traditional four-year colleges has been flat. I think the question that I would ask is: do you believe over the next five or 10 years, we are going to be living, as I said before, in a more or less skilled world than we are today? And I would argue we're gonna be living in a more skilled world. And, you know, I think the second question is, you know, are people, you know, able to afford to acquire those skills more or less than they have been in the past? And I think it's certainly not gonna be more. So they're going to need financing.
They're going to need help in being able to acquire those skills to, you know, create the economic sort of life and trajectory that they want for themselves and, and for their families. And, you know, we love our traditional four-year business, but we love our other school partners who are innovating and creating other kind of programs that add skills to investors. And we look forward to meeting schools and students wherever they are in realizing their higher education dreams. And if it's in traditional four-year attendance, great. If it's in high quality, underlying high quality alternative programs, and we have a very robust process for ensuring that, then we're happy to meet them there as well.
Great. Let's see if there's any more investor questions. There's a lot to deconstruct from your comments.
Yep.
I appreciate that.
Yeah.
A lot of, a lot of detail there. So first on that, that $225 million of capital that you are allocating-
Yeah
... to CECL now, and you're gonna-
Yeah
have that. So maybe if you could talk about the three or the different ways you can deploy that capital. So how much can $225 million generate in terms of on-balance sheet growth versus, of course, you could always, you know, return capital to shareholders. And I guess a third view would be, you have these tuck-in M&A opportunities. Like, how would you want to maybe define, like, those?
You wanna take that, or you want me to take it? You take that. Okay, perfect. Yeah. So, it is obviously hard to sort of give projections of capital going forward, but I think some rough justice numbers, and, Pete, keep me honest here. But, you know, the way I think about it is, you know, if we have, you know, $225 million today, that's been going to CECL. If you have, you know, maybe just under $100 million today, that's going to dividends, and if you have, you know, over the last couple of years, it depends a little bit, but think of it as, you know, probably $300-ish million going to share repurchases. You know, and that's maintaining sort of a relatively flattish balance sheet.
You know, I think that's sort of the excess capital stack that we've been talking about, 'cause obviously during that time, the balance sheet has sort of grown and changed a little bit, but it's relatively in, you know, in that mix. I think, you know, our view would be, you know, loan sales probably don't change all that much as we start to grow the balance sheet. Again, you guys can run your own projections, but it may surprise you. You know, 5% balance sheet growth is relatively modest when you look at what's happening from an origination perspective and a consolidation perspective. So you know, that loan sale and sort of share buyback piece is, you know, you know, there's probably not moving a lot.
You know, and my guess is, you know, if you think about—and again, I'm doing quick math here, but, you know, call it 13%, you know, capital and, you know, a 6% or 6.5%, sort of, you know, loan provision, 6% loan provision. You know, you can sort of envision the kind of balance sheet growth that two hundred and fifty million can start to fuel. So, you know, that's sort of the basic math of it. You know, to your question of how do you use capital? You know, you can pay dividends, you can grow the balance sheet, you can sell loans and buy back shares, you know, and/or you can buy things. You know, I would expect the buy things part would be relatively small or zero.
Again, I think I've been pretty clear about our acquisition strategy, which one of my three, you know, sort of defining characteristics is they have to be small. So those should not be big numbers that have a material impact on sort of the rest of the strategy. I think we are fine-tuning what we think is the right division between dividend growth and balance sheet growth, and that's certainly something that we'll talk about, you know, in more detail in December and when we get into more specific guidance in January and beyond. But I would think about those three things, you know, dividends, balance sheet growth, and loan sale, share buyback, as the sort of three primary avenues for, you know, for capital use.
You know, I think we are excited about the ability to pull on the levers to get to the most value-creating combination of each of those three.
Thank you for that.
Yeah.
So maybe two more topics on what you discussed. So if you grow the balance sheet mid-single digits with operating leverage, you should be able to grow earnings-
Yeah
... you know, high, high, single to low double. Can you talk about the operating leverage in more detail, your ability to scale up expenses?
Yeah, you know, look, the last couple of years from an OpEx perspective, I think have been challenging for every company, and I think for us. You know, we're not pleased with the year-over-year OpEx increase that we've seen, for example, in the last year. You know, if you decompose it, you know, there's a chunk of that that I think is really inflationary driven. And certainly, I think wage inflation and the Great Resignation and the challenges that I think we and every company have had on attracting and retaining talent have certainly been a part of it. Those factors certainly seem to be waning. And I think we're getting back to a far more normalized environment.
And I think we've been very clear and transparent that for the last couple of years, we have also made what we think have been some really important investments. Investments in our martech stack, which I think have, you know, helped to drive some of the, you know, market share and origination gains we've seen. But I think we've also made investments in, you know, risk and regulatory and other areas. Certainly, you know, the changes, for example, that we've made in our credit administration practices, I think are well communicated and well understood. You know, obviously, any business will always make some level of investments, but I think it is our expectation that, you know, the sort of, timing and temperament of those investments should again normalize back to, you know, some more historically kind of averaged levels.
And, you know, on top of that, I think we've shared pretty broadly, you know, our cost structure, you know, is roughly a 60% plus fixed cost structure. And fixed costs don't stay flat. There's some inflationary pressure in fixed costs, but they certainly don't go up with volume. And so I think when you put all of those things together, you know, thinking about, you know, you know, getting strong operating leverage, you know, and is that, you know, costs going up, you know, $0.50, $0.60 for every $1 of revenue? Like, you know, I think we're still working through the exact details of what we think we can do and continue to be, you know, well managed, doing what we need to do from a regulatory expectations perspective and investing appropriately for the business.
But I think we believe there's a really nice opportunity to get more operating leverage going forward than what we've seen during this, you know, I think, very unusual COVID inflationary period that we've been, that we've been living through. And again, you know, our expectation is we'll give, you know, sort of more thoughts on that in December. That will obviously be baked explicitly into guidance when we get to, you know, January and giving explicit guidance for the year. But I think we are optimistic that with the right effort and the right focus, you know, the combination of moderate balance sheet growth and operating leverage is a pretty powerful combination for a business like ours. And we look forward to trying to deliver that for our investors.
Great. So we are out of time, but if there's any last audience questions we could see? Yep.
How did the P&L of the universities look like? Because I'm thinking the pricing power they have. I don't know, but I think these scholarships become pretty broad, that population is coming down, I don't know. So are those balance sheets available to universities that are stressed or no?
Yeah. I am probably not the right person to comment on the balance sheet for universities. You know, I think the only thing I might feel comfortable saying is, I am sure it is a tale of an infinite number of cities. You know, there are certainly, and we see it, you know, universities out there that I think are more stressed. And there are certainly cases of, you know, universities merging or closing that have made the press recently. And I think at the other end of the spectrum, I think there are universities that are doing really extremely well.
I think there is no doubt that universities will continue to need to innovate, to both increase the value of their, you know, their degrees, but to also make sure that the cost of that attendance is linked to the value of those degrees. But, you know, I think we feel strongly that there's lots of universities engaged in that work, but I'm probably not the right person to comment more broadly on that.
Any last closing remarks?
I think I would just say in closing, you know, thank you everyone for your interest in Sallie Mae. You know, we, we think it is a really exciting business. It is, a unique business. And, you know, between Melissa, Pete, and myself, you know, and the rest of our team, we are happy to engage to help people understand our business and get your questions answered. So if we didn't answer them here or during one of the sessions, during the conference here today, we hope folks will reach out, and happy to engage as appropriate.
Thank you, Jon. Thank you, Pete. Thanks for your time.
Thank you.