All right. Good Good morning, everybody. Before we get started, I'm just gonna read some disclosures real quickly. For important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, happy to welcome Pete Graham, CFO of Sallie Mae to our conference. Second year coming here. Good morning. Yeah, good morning. Good to be here. Thanks for coming. Maybe, Pete, we could just kick off with the evolution of Sallie Mae here, before we get into the nitty-gritty. Talk to us about the Sallie Mae story, how it's evolved in recent years. Anything you think that's unappreciated about your story? Yeah, great. Thanks, thanks for having us here. Good to be here again this year. I think a good starting point, really, for talking about where we are in our evolution is the investor forum that we did in December of 2023. There we laid out kind of a hybrid growth and capital return strategy that called for us to begin to grow the balance sheet modestly after we got past the CECL phase-in, which the final piece of that was the first part of this year. We would continue to use loan sales to moderate the rate of growth of the balance sheet, continue to optimize the business, and drive operating leverage into the business. Really, the idea is modest but accelerating growth of organic earnings, call it, you know, mid to high single digits, coupled with operating leverage that should lead to double-digit earnings per share growth over time, all the while generating meaningful capital for return to shareholders. It is a really balanced profile. That modest rate of growth allows us to, you know, to grow the balance sheet, does not create extra stress on the funding of the bank's balance sheet. We have been really pleased with our performance under that framework. 2024 was the first full year. We took advantage of the exit of a big competitor and were able to take a good amount of market share upon that exit. Grew, in exceeding our expectations for the year, grew 10% year-over-year growth in originations. That enabled us to grow the balance sheet a little bit faster than what we had in that initial framework. The initial framework called for us to grow 2%. We actually grew about 3%. If you peel that back, we exited a legacy FFELP portfolio, kinda low-yielding, legacy non-core business. Our actual, you know, PSL balance growth was more in the 5% range. Really kinda jumped a year ahead in the overall strategy. We were really happy with that. It has been well received by investors. Okay, great. And maybe as we think about the next step in your evolution, you know, there's been a lot of discussion over student loan reform recently. We have the federal student loan program potentially moving to the private market in a few years, in particular the PLUS programs, depending on what makes it through the Senate at this juncture. Can you talk about how meaningful some of those proposed changes from the House are, and how meaningful that can be for the private industry in Sallie Mae? Yeah, I think, you know, this whole congressional process is one that, you know, sometimes is a little puzzling when you're sitting on the outside looking in. You know, the reconciliation process itself, we know that the House has put forth a bill that does have some elements of federal student loan reform as part of that proposal from the House Republicans. We also know that that's only, you know, half the story and that the Senate still has to act. As of today, they have not completed their process. But we do expect for there to be some common elements of reform in the federal program that will ultimately come out of this process. It's too early to kinda put a pin in the opportunity, just given, you know, the actual elements of the final bill will matter. I think the really great news is that, you know, we're, you know, kinda weeks, months away from something that we've been advocating for, for many years, which is reform in the federal programs. It's long been our belief, and I think there's bipartisan consensus that the federal program does too much for too many and not enough for the ones who truly need it. The way that the federal programs are run, with, you know, sorta unlimited ability to borrow under certain programs, the fact that they're not underwritten, it's really created this situation where students and their families are truly borrowing too much and beyond their capacity to repay. We're optimistic that, in the coming months, there'll be some meaningful reform, and we're, you know, preparing ourselves to be ready for that. You touched on some of the common elements that might come out. Still early here, obviously, but maybe touch on what you think comes out or what's more likely to get pulled back. Is it more the some of the more complex elements, perhaps? Yeah, there were some features in the House bill that I think, you know, like average cost of program and things like that, that would be pretty difficult to sorta operationalize in terms of running an overall program. I would expect that, you know, perhaps some things like that might get modified or simplified. Again, it's too early to kinda really give a report card on exactly what's gonna happen until we see that final bill. Okay, great. You know, if we think about the potential competition in this market that opens up down the line here, Sallie Mae's had a distribution advantage over the competition. In today's world, you've got more than 2,000 college relationships across the U.S. Do you think that advantage is gonna carry over to the graduate side as well? Maybe just comment on the structural setup there. I mean, I think there's been some speculation that the graduate borrower maybe is a little bit savvier. Can they get a loan outside of the preferred list or not? Yeah, I think one thing that is important to understand is that both with regard to undergrad as well as graduate loans, they still have to go through a kind of a certification process with the school. We do believe that the relationships that we have built over many decades, and we've got the largest relationship management and sales force in the industry. We've got, as you said, relationships with over 2,000 schools. We do think that's gonna still continue to be a differentiator for us. To your point on are graduate students different or savvier, I guess what I would say, the typical, you know, graduate student has generally, you know, got their undergrad, gone and worked for a period of time before making the decision to go back to grad school. They are different in a number of ways from our typical undergrads, right? They have got an actual credit history. Our undergrad borrowers generally are, you know, sorta high school grads. They might have had part-time work. They are, you know, very thin file, you know, credit profiles, if they have a file at all. That is heavily dependent on the co-signer, typically a parent, and the credit rating that comes with that. The graduate borrowers, you know, in large part tend to have their own credit profile. They have got a work history. They have got a payment history. You know, there is a bit of a different, sorta credit dynamic to that. We still do have the option for co-signing in the grad space. but they will likely have an ability to qualify for, you know, underwritten loans outside of the federal program in a way that maybe undergrad borrowers would not be able to. you know, again, we're evaluating the potential for reform and grad lending reform is a big piece of that. on your savviness point, also, I would say, you know, it's our hope, whether they're grad students or whether they're undergrads, that they are doing their sorta due diligence around the loan terms and making sure that there's a good return on the investment for them in terms of how much they're borrowing versus their ultimate, you know, sorta earnings potential after graduation. You know, one question we've gotten is there is a small in-school graduate market today, and, you know, less than 10% of your volumes last year, I believe, were graduate-based. Can you just comment on why that market exists today and how that might structurally compare or defer to what comes out? Yeah, I think it's without a doubt the primary competitor we have currently in the grad space is the PLUS program. It's an unlimited borrowing, un-underwritten program. So it's very hard to compete, with a, you know, with a responsible lending product against that type of competition. So that's, you know, probably indicative of why the size of our grad program is what it is. I think, look, I think that, you know, the potential for reform here will drive good public policy, but it'll also create some opportunity for the, you know, for the private market to step in and fill a responsible role. We're looking forward to being ready to do that. Okay. And, you know, you touched on the graduates, having history and, and potentially having worked already. How should we think about the credit quality of that potential new borrower or that new market as compares to maybe where your 2% or so loss rate sits today and your 3% delinquency rate sits? Yeah, again, we follow a risk-based pricing, you know, methodology. We'll continue to do that even as we expand in the grad space. As I said, they have a slightly different credit profile, a more developed credit profile, than the typical undergrad borrower. We'll keep the same sorta underwriting and pricing discipline that we currently employ, as we move forward and look to take advantage of that change in the market. At this juncture, I don't think that changes in any way our view of our long-term sorta credit trajectory and getting to that kinda high 1s, low 2% annualized net charge-off rate. Okay. Maybe switching gears a bit, also on the student policy side, there's maybe been, maybe not policy, but just relevant news is, you know, there's been some concern over international students maybe not coming to the U.S. as much anymore. How large of a base is that for Sallie Mae today, and, and how impactful might some of the recent actions we've seen out there affect you? Yeah, our programs that we have in place require that either the borrower or the co-signer be a citizen or a legal U.S. resident. And as a result of that, we have a very low exposure to that sorta international student base. You can debate the merits of the policies around that, but I do not think it is really gonna have any material impact on our business. Okay. And just if we also switch gears again, focus more on the capital market side, you did a $2 billion loan sale earlier this year. You saw really strong execution of nearly 10%. Talk to us about what we should be expecting over the remainder of the year, how do market conditions look today, and what does the demand look like in comparison to the prior sale? Yeah, I think, you know, this loan sale strategy that we've had in place has been, you know, really critical for us, in terms of managing the overall size of the balance sheet. We've executed on that strategy now for a number of years through different sorta both interest rate as well as, sorta market dynamics. That has proved to be a, you know, a continuing source of capacity for us. The other dynamic that's happened in the market is, you know, the exit of now two major bank competitors from this space over the last few years. As those processes have been run, there have been large portfolios for bid at one time, a lot of investors doing work around those portfolios, getting smarter on the asset class. Obviously, in a process like those, only one group wins the bid. You know, the backdrop of that, though, has created a much broader sorta investor base that understands the asset class, that has done the work, and is interested in the profile of the assets. I mean, it's kind of a unique consumer credit type. It has got duration. It's got high credit quality, low losses, and so it is very attractive in the context of the broader sorta trends around private credit. We have seen strong interest from private credit in being involved, not so much directly with us, but in the background as investors in the takeout securitizations that the buyers ultimately tend to do. In the context of, you know, current year, really the expectation you should have around additional loan sales, it'll be just like it was last year, which is the growth of our balance sheet's really gonna be the governor of the amount of loan sale. Timing will be somewhat dependent on when we think there is an optimal window for us to do another loan sale this year. You know, the environment's changed fairly dramatically since February when we closed that first loan sale. You know, April ushered in a period of a lot more uncertainty in the capital markets. I would say that, you know, over the course of the last few years, as we've executed on this strategy, we've had, you know, good transactions done in a variety of different markets. We're confident that there is, you know, still broad demand for the asset class and, you know, TBD on when and where we do another loan sale this year. Okay, understood. As we kind of touched upon the strategic vision you laid out at the investor forum once again, you know, you touched on how you've been able to execute on this plan so far. As it relates to the potential of a new private market opening, could you talk us through how your strategic priorities might shift if that comes through? Does it change your views on balance sheet growth, how much you wanna hold? I think, you know, you've alluded to potential new avenues to the whole loan sale strategy or alternatives. Could you touch upon that a little bit and what that looks like? Yeah, I think, maybe it'd be a opportune time to sorta rewind the tape a little bit on the strategy. You know, when Jon took over as the CEO in 2020, he realized three things very quickly. And that was, that you couldn't grow the balance sheet in a meaningful way, phase in the CECL, you know, requirements, and return capital to shareholders. Big believers in capital return to shareholders didn't really have an option on implementing CECL. So the first phase of the strategy was hold the balance sheet flat while we did the CECL phase in, and continue to return meaningful capital to shareholders, from the loan sale proceeds. That was a huge success over the course of that time period, depending on when you cut the tape, $14 billion-$15 billion of loan sales and repurchased over half the outstanding float of the company. The second phase of that strategy really started in 2023, as I kinda highlighted some of the points on that previously. You know, really focused on modest growth of the balance sheet, continued to do loan sales to moderate the rate of growth, focused on, growing, earnings per share at kind of a, a double-digit level through both organic growth and driving operating leverage into the business. That, you know, again, we feel like we're off to a good start on that. We're in year two of a five-year framework. As we sit here today, I think about kinda four key priorities for the, for the business in order of priority. First and foremost is for us to continue to execute on our core strategy as we outlined in 2023, continue to invest and optimize the core business, and continue to deliver the value that that sorta framework provides, committed to hitting our guidance for this year and continuing to strive to meet or exceed the five-year framework, you know, with the guidance this year. It's interesting. We're about a year ahead of where we thought we would be in that, in that five-year framework. So that feels good. The second priority for us is really being ready for that potential for meaningful federal reform, from both an operating perspective, product perspective. You know, we don't know the exact form that it will take, but we do know it's imminent. We wanna make sure that our organization is really ready to help the schools, the students, and their families deal with whatever the impacts are that come from reform in the federal program. That is really the second area of focus. The third is getting to your question, which is sorta funding. You know, we have been thinking for some time about alternatives to our loan sale process, particularly in the context of creating something that is not as dependent on sorta specific transactions in capital markets that can be very dependent on market conditions as and on the day, and trying to think about ways that we can build more durable and resilient alternatives to both our bank funding as well as the existing loan sale programs. That is something that we have got a big focus on. I think that'll be important from a perspective of creating a different earnings profile and one that might be valued more positively by investors versus a series of capital markets transactions. I think it'll also create a more resilient source of capital for expanding originations in the business. As we think about, you know, that in the context of volume that could come from potential reform in the federal system, I think that'll be a big benefit there. Over time, it could also be a way for us to maximize on our originations capabilities and expand originations beyond what we would wanna put into our bank funding model. That's item number three. The fourth is really to achieve our sorta aspirations around education services. We bought a couple of small companies in the last few years, Nitro and Scholly. Those have formed the base of a, you know, an organic content-based, customer engagement engine that's really had a dramatic impact on our core business in terms of, you know, pull through into the front of the customer relationship and creating a lower, overall, you know, marketing cost for, for the business. I think there's more potential there, and we're exploring creation of additional products and services that will further engage our customers, fulfill our mission, and create additional, capital-like sources of fee-based revenue over time. Those are the four areas of focus. Again, first and foremost is, you know, meeting our expectations on guidance for this year and continuing to execute on the forum framework. We have some other exciting things in the hopper as well for the future. If I just double-click on number three there for a minute, any sorta early thoughts on what you'd be looking at, and when should investors be on the lookout for what that could be or timing of that? Yeah, I think putting an exact timeline on it, probably not ready to do that at this point. I think it's something that is strategic in nature, and so we'll take the appropriate amount of time. We've been thinking about it for some period of time now. If you put an endpoint on it and, you know, we'd like for that to be an additional source of, you know, capital that will enable us to be ready for federal student loan reform, that kind of gives you an endpoint of when we'd like to be ready. You know, assuming student loan reform comes through, does that shift the way you think about operating leverage as you laid it out, or is there potential for more to fall to the bottom line, or do you think you'd wanna kinda stick with the 60%? Yeah, I think, you know, the 60% that we laid out in the framework, I think was a good starting point. I think aspirationally we'd like to continue to, you know, optimize our core business. We continue to make investments in, you know, technology that improve the customer journey, but at the same time, they also give us the additional capacity of, you know, digitizing and, you know, turning the business into more of a fixed cost base by making those technology investments. I don't think the reform, you know, opportunity really changes our mindset around that per se. I do believe that the business that we've created does have, you know, the capacity to scale to whatever the opportunity is, and scale in a way that probably doesn't have a step change in terms of the cost of that. I would point to kinda the example of 2024 when we were able to, you know, have outsized growth versus our expectations, take market share that came as a result of the exit of a competitor, increased marketing costs and the like, and still came in below the midpoint of our expense guidance, original expense guidance for the year. I think there is still that type of capacity for us as we move into next year and think about the potential for additional volume coming from the federal programs. Okay, great, great. As we sorta think about the last 10 minutes of the conversation here, I wanted to talk about credit. You know, your credit losses have migrated higher versus pre-COVID. Can we just maybe rewind a little bit and talk about why that is, how much of that has to do with a bit of a tougher backdrop for today's students that are graduating versus maybe some regulatory shifts and some changes in your underwriting and loss mitigation programs? Sure. I think the thing to keep in mind when you compare, sorta pre-COVID to now is that, you know, pre-COVID we were still in a portfolio build phase. We really started building our balance sheet at spin in 2014. The portfolio then was not seasoned as it is now in terms of, you know, full vintages in, you know, in P&I repayment. That is the main driver for sorta lower losses in that time period compared to the, you know, to the guidance that we are giving for where we think our loss rates are gonna settle in is that seasoning element in the portfolio. The other thing to keep in mind is, pre-2021 we had broad use of judgmental forbearance as our main tool for managing borrower stress in the portfolio. When we ceased that practice, that caused a spike in delinquencies and charge-offs because we did not have a complete tool set to help borrowers. We have rolled out these new modification programs and borrower assistance programs in fourth quarter of 2023, and we feel like they are performing well. The success metrics within the programs, that people that get into the programs are where we would expect them to be. We did tighten enrollment eligibility in the third quarter of last year as we again learned from the programs and continue to refine them. We felt like we might be giving mods to people that could survive on their own and so moved the eligibility period later in the delinquency cycle. All those things really are going into kind of a stabilization period here in the programs. The enrollments are down off their peaks, you know, as we go through the months this year. We will have a graduation sorta wave, if you will, from the programs later in, in the fourth quarter and first quarter of next year. We will be looking to release more information, you know, as the, as the success metrics and the like become more evident to us there. We feel good about the program design. We think that it's helping borrowers be successful. We like the fact that these programs require payment of some sort versus our old tool, which did not require any payment. On balance, we think it's, you know, it's good for managing our, you know, our credit losses. It's good for helping the borrowers get on, you know, solid footing and establishing good payment habits. we're optimistic about, you know, the continued evolution of the programs. You know, once you start hitting that graduation wave, you've talked about the strong success rate so far. How do you think about the credit characteristics or, you know, repayment, likely to repayability of those consumers as they roll out going forward once those payment, you know, those terms reset back to normal? Yeah, again, our expectation is, you know, and the thing to keep in mind is, you know, the peak stress in our portfolio is the, you know, sorta new to payment, you know, grads, and that first kinda 12 to 18 to 24 months of being out on their own, starting to, you know, collect a paycheck in a meaningful way for the first time, starting to make their own bill payments. And so that's sorta what these programs are designed to help with. You know, obviously not 100% of the people in the programs are going to be successful in their exit, but we expect that we will, just as we've had good success levels of borrowers in the programs making their payments, we expect that there will be good success levels of people stepping back into their contractual terms and setting themselves up for success over the longer term. Could you also maybe just comment on what you're seeing in the near term, maybe quarter to date, if you have any sort of color on the credit so far? You know, we've continued to see positive trends in terms of, you know, the overall credit performance. You know, we're committed to the guidance that we've given for the year and don't see anything in the second quarter results that would cause us concern about hitting guidance for the full year. Okay. And, you know, one thing we didn't quite touch on there was you did make some underwriting changes too in previous years. When do you think those benefits will start to accrue? Is it, is it, you know, maybe starting in 2026, 2027 once you get to that repay wave? Yeah, I think that, again, you know, we did over the last few years, as you mentioned, sort of at the margins tighten our underwriting box. That tends to have a lag effect, right? If it's a freshman, it's gonna be four years, you know, on average, it'll be a couple of years before those changes start to manifest themselves. We expect that it'll start to be a little bit of a credit tailwind as we go into next year, and it'll continue to build, you know, as those underwritten cohorts come into full P&I. Again, it's not gonna be a huge step change, but it's another element that gives us confidence in our overall long-term, you know, guide around net charge-off rates. Just one last from me on credit. As you kind of look at slower enrollment and the prospect of AI maybe damaging job growth for new graduates from here, do you view this as an opportunity or a challenge, maybe as younger folks go after non-traditional fields? Yeah, I think the market continues to evolve. You know, we have seen, you know, the reports around demographics and high school grads and the like. I think that's one that is imminently manageable. It's sort of a modest decline over a multi-year period. I think that, you know, the overall core market, this year, we've seen increased, you know, levels of application on, on FAFSA year- over- year. That sets us up for a good, I think, peak season this year. The market does continue to evolve. Over the last few years, you know, we've continued to expand our pro for-profit sort of originations. You know, the thing to think about there is in the for-profit space, we tend to, you know, focus on sorta high-profile things like pilot training programs, nursing programs, and, you know, sorta non-traditional but still very meaningful certification-type programs that will, you know, generate good returns for the borrowers. The other thing I would say is as we engage on these alternative, you know, type programs, we do a full underwriting of the programs and the schools themselves. We wanna make sure that, you know, there's a good ROI for the investment for the borrower. You know, that's gonna lead to good credit outcomes for us. It's been exciting to see some of the growth in those opportunities for us. You know, we continued the evaluation of different, you know, sorta non-traditional, you know, education options. I think that's gonna be a continuing evolution of the overall marketplace for higher education. Okay, great. And just to wrap up, I mean, you touched on your priorities before, but are there any other strategic priorities you wanted to highlight there, or did we already cover those? No, I think those are the four. You know, again, fully committed to guidance for this year and continuing to try and exceed the five-year framework. We're getting ready for the potential for reform, and believe that to be more imminent now than it has been at any time in the past. Mm-hmm. We're ready from a funding capacity and operating capacity to take advantage of that. We continue to explore alternative funding capabilities that'll be a complement to our bank funding capabilities and our existing loan sale processes. We'll look to optimize our ed services business and create capital-like fee streams over time. Really, really excited about the future, and we feel like those are the right things for us to be focused on as a company. All right, sounds great, Pete. Yeah. I think we're out of time, so thanks for joining us today. Yeah, thanks for having us. As always. Yep, pleasure. Take care.