Prepared remarks
Welcome to the Sallie Mae Second Quarter 2026 Earnings Conference Call. I would now like to turn the call over to Kate deLacy, Vice President, Investor Relations. Please go ahead.
Thank you, Madison. Good evening, and welcome to Sallie Mae's Second Quarter 2026 Earnings Call. It is my pleasure to be here today with Jon Witter, our CEO; Pete Graham, our Co-President and CFO; and Melissa Bronaugh, Managing Vice President of Strategic Finance. After the prepared remarks, we will open 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 from those discussed here 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, results of operations, financial conditions and/or cash flows, as well as any potential impacts of various external factors on our business. We undertake no obligation to update or revise any predictions, expectations or forward-looking statements to reflect events or circumstances that occur after today, Thursday, July 23, 2026. Thank you, and I'll now turn the call over to Jon.
Thank you, Kate, and Madison. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Second Quarter 2026 results. Before we dive into the quarter's results, it's worth taking a moment to reflect on the strong position we enjoy today as a company. It's been just over a year since the federal PLUS reform reshaped the higher education financing landscape and created the potential for a $4.5 billion to $5 billion increase in annual originations for Sallie Mae over the next several years. Since then, we have been diligently preparing for this opportunity to serve more students and families, strengthening our product offering, investing in our capabilities and positioning the company for our first peak season under the revised federal programs. At the same time, we have remained focused on supporting our school partners and maintaining our industry-leading status as a preferred lender for more than 2,100 schools. I'm pleased to announce that we have successfully delivered all of the additional products, features and functions we planned for this peak season, including enhancements to our medical, dental, law and MBA products and the launch of our new parent loan. While peak season is just beginning and it's too early for definitive conclusions, the application and volume trends for these new products, as shared on Page 5 of our earnings presentation, are at the higher end of our expectations or better. These trends, if sustained, reinforce our confidence in both our 2026 origination estimates and the longer-term opportunity presented by changes to the PLUS programs. We are pleased with our performance and the positive trends we are seeing in credit. The changes we have made in the past to our underwriting standards and loss mitigation practices are bearing fruit. Previously distressed borrowers are successfully navigating their loan modification journey and enjoying better-than-expected success upon completion. Credit trends within our portfolio are generally consistent with or better than expectations. We believe these factors position the company for continued success in 2026 and beyond. Within that context, let's jump into the details of the quarter. GAAP diluted EPS in the second quarter was $0.29 per share. Loan originations were $716 million, up nearly 4.5% from the prior year quarter. In addition to overall growth, origination credit quality improved modestly year-over-year, with the average FICO score increasing from 754 to 755, while cosigner rates remained strong at 84%. Turning to credit. As discussed at a recent conference, we have observed activity affecting a small segment of borrowers who we believe have both the willingness and capacity to repay, yet are progressing directly through delinquency to default. Based on our analysis, we believe many of these borrowers are engaging with debt resolution providers whose services are being marketed as consolidation or refinancing solutions. We do not believe that many of these practices are in the customers' best interest, and we are committed to doing what it takes to ensure that customer interests are protected and that our recovery and settlement strategies are fully aligned with the underlying value of our loans. In response to this, we have taken deliberate steps to increase control over our post-default recoveries. While these actions create an in-year headwind to potential recoveries previously estimated at approximately $25 million in 2026, we view the impact as largely a timing dynamic and expect our internal efforts to equal or exceed this recovery level over time. In this context, we remain optimistic about our credit performance. Net charge-offs for the quarter were $113 million, up from $94 million in the prior year quarter; approximately $16 million of the year-over-year increase we believe to be attributable to these misaligned third-party debt resolution practices and the related shifts in our recovery strategies. Importantly, we do not view this as a broad-based weakening in credit. While our most recent repayment wave increased by 4%, the net charge-offs for the portfolio, excluding this small impacted segment, grew at a much slower rate. Supporting this performance is the sustained success of our loan modification programs. Borrowers in all active modification cohorts continue to have payment success rates in excess of 80% over 6- and 12-month periods. Looking specifically at borrowers who have begun to exit the programs, over 75% are consistently making payments after 3 and 6 months. We are encouraged by these results, which are performing modestly better than our expectations. Overall, we remain confident in the underlying health of the portfolio. Credit quality remains strong, borrower performance trends are stable, and the current loss pressure is concentrated, understood and manageable. Pete will now take you through some additional details. Pete?
Thank you, Jon. Good evening, everyone. For the second quarter of 2026, we generated $333 million of net interest income and $45 million of other income. Compared with the prior year quarter, net interest income decreased by $44 million, while other income increased by $16 million, driven by growth in recurring program management fees from our strategic partnership and growth in servicing fee revenue. Net interest margin was 4.75% for the quarter. As previously communicated, we expected NIM to moderate modestly during the quarter, primarily reflecting the higher liquidity levels following the loan sale completed in late March. Looking towards the second half of this year, we expect margin expansion to resume as excess liquidity is deployed into new loan originations during our peak season. As a result, we believe the second quarter will likely represent the low point for margin this year. Importantly, the underlying earnings power of the portfolio remains strong, supported by disciplined funding, attractive asset yields and continued growth in fee-based revenue streams. Private education loans delinquent 30 days or more were 3.7% of loans in repayment, an increase from 3.5% in the year-ago quarter and a decrease from 4% at the end of the first quarter of 2026. Our reserve rate was 5.89% at the end of the quarter, down 6 basis points from the prior year period, reflecting the effectiveness of our disciplined underwriting and ongoing efforts to optimize loss mitigation strategies. Our provision for credit losses was $126 million in the second quarter, down from $149 million in the year-ago quarter. Noninterest expenses were $195 million, up $28 million from the year-ago quarter. The majority of this increase was driven by one-time investments and product enhancements, as well as strategic initiatives to support anticipated growth from the federal lending reforms. Importantly, revenue growth from servicing and recurring program management fees more than offset a significant portion of these investments, resulting in an efficiency ratio of 48.6%, an increase of just 7 percentage points year-over-year. This reflects our ability to invest meaningfully in future growth while continuing to operate from a position of financial strength. As you may remember, earlier this year, we took decisive action in response to the market dislocation in our stock, which allowed us to return a significant amount of capital to shareholders through a $200 million accelerated share repurchase program. We completed the ASR during the second quarter, repurchasing a total of 9.3 million shares. The final 900,000 shares were recorded on June 30 upon completion of the program. Year-to-date, we have repurchased approximately 13 million shares or 6.5% of the shares outstanding at the end of 2025 at an average price of $21.95 per share. Since 2020, we have reduced shares outstanding by approximately 59% at an average price of $17.19 per share, underscoring our disciplined approach to long-term value creation. We have $242 million remaining under our share repurchase authorization, which we expect to substantially deploy throughout the remainder of this year. Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 18.6% of total assets. At the end of the second quarter, total risk-based capital was 13.1% and common equity Tier 1 capital was 11.8%. We continue to believe in our strategy and the solid foundation it provides to drive sustainable growth and return capital to shareholders. I'll now turn the call back to Jon.
Thanks, Pete. As we discussed today, our preparation for the evolving market landscape is beginning to translate into encouraging early indicators, and we are pleased with the momentum building across the business as we enter peak season. We believe the recovery actions we have taken have the potential to create better outcomes for both borrowers and Sallie Mae. Combined with the continued positive performance of our loan modification programs, these factors further strengthen our confidence in the durability of our portfolio. The investments we have made, together with strong credit quality and growing customer demand, position us well for the remainder of 2026. With that in mind, let's turn to our updated guidance. At this time, we are narrowing our net charge-off guidance range by maintaining the high end at $385 million and raising the low end to $365 million. We are making this change in response to our adjusted recovery practices, as detailed on Slide 8 in the earnings presentation and discussed earlier in my remarks. While we continue to expect approximately a $25 million potential impact to recoveries in 2026, a portion of this NCO impact has already been partially offset by slightly better-than-expected performance in the broader portfolio. This reinforces our confidence in the underlying credit performance in the business. We are affirming all other guidance metrics. With that, Pete, why don't we go ahead and open up the call for questions.
Questions and answers
Pete, I think you mentioned you expect the second quarter to maybe be the low point in the NIM for the year. But any color you can give us on the trajectory for that in the back half?
Yes. As we deploy the liquidity during the peak season, we'll start to normalize closer to our long-term target range of about 5%. I don't think we'll get too far up in that normal range, but I think we'll track around there for the full year.
Okay. Got it. And then any updates you can provide on ongoing conversations with the new loan sale partner? And also, any optimism you may have that buyer could help expand your credit box and the TAM?
We started this year with the goal of expanding the partnerships, and we ran a mini process similar to what we did last year with many of the same participants. We selected a partner to go into bilateral negotiations with. That's progressing really well. We're at the stage where documents are being created and traded back and forth, and we're negotiating the finer points of the economics. I feel really good about how that process is going, the openness to our asset class and their interest in both the traditional undergraduate product that we have traditionally sold and, at the margins, creating some opportunity for credit box expansion. I expect that will continue at pace and likely close in the third quarter or early fourth quarter at the latest, in time for us to potentially put some of our peak origination volume into the new partnership.
Great. I'm hoping that maybe, Pete, you could give us a little bit of additional detail as to how the current partnership is going? And how should we think about the revenue components, both periodic and ongoing from that? And if there are any differences that you've incorporated into the discussions with the new partner? Or would it be similar?
The existing partnership with KKR is going really well and according to plan. The volumes that we had anticipated for the year are coming in line with expectations. The structure of the second partnership is largely in line with the economics we have in the first partnership with some minor tweaks to different components of the structure. We feel good about how the KKR partnership has gone so far. Importantly, both KKR as well as the second partner have expressed strong interest in building capabilities for taking Graduate product. That will be the next phase after we get through peak originations this year and have more information about the makeup of our Graduate originations. Once we've completed the second partnership, we'll be in a position to share more details around components of the fees and ranges of those fees once we get beyond having just one bilateral arrangement.
Great. Okay. I wanted to also talk a little bit about credit performance. Obviously, a pretty hot topic. It is encouraging that you kept the high end of your charge-off guide range where it was, but anything that kind of approaches credit gets people a little more antsy. Jon, you had made a comment saying that you felt good about the current performance and that you had already kind of offset some of the recovery impact from those deferred recoveries. I was hoping you could expand on that. What aspects of the performance are you seeing that are better? And how does that manifest itself in your numbers over the next several quarters?
Moshe, let me provide the perspective I can. First, we appreciate credit is a sensitive topic given broader macroeconomic and other concerns. We have worked hard since the conference a month ago to provide a lot of detail about what's going on with this particular segment and how we are treating it. We're also providing data on the performance of the other components of our credit story. Let me start with loan modifications. When we changed the loan modification program, the question was always how these customers would perform when they come out the other side. We are now more than six months into observing performance for many of these customers. The data we've provided is, I hope, helpful and encouraging. We are seeing better-than-75% success rates after 3 and 6 months, which is higher than our expectations. We feel great about that and have not seen any trends in those payment rates over time that would make us less optimistic about their effectiveness. Those programs are well designed, tightly controlled in terms of entry, and the conditions and requirements for entry are diligent. We track that regularly to ensure we get the performance we expect. That is a key component and will be important for our credit story for the remainder of this year as those customers exit modifications and set new baseline expectations going forward. Regarding the core performance of the portfolio, the simple math is that the recovery gap has been estimated at about $25 million for this segment. Notably, we only raised the lower end of our guidance by $20 million, which reflects that we are seeing general strength in the rest of the portfolio that more than offsets much of that $25 million impact. I don't feel comfortable giving specific guidance by quarter; you're familiar with the normal seasonal patterns in the business. But we have gone to great lengths to delineate what we see as a timing of recovery issue versus a credit issue and remain optimistic about general credit performance.
Pete, a quick question on the NIM rebound. Noticing loan yields have come down meaningfully. Do you expect a step-up in those loan yields as we move through the back part of the year in terms of loan mix to get back towards 5%?
Some of that is a distortion because the second quarter is our lowest origination quarter and the mix of loans is different. We fully expect that as we get into the heart of our peak season, traditional yield patterns will reemerge.
Got it. And then another question on expected gain on sale. When we looked at this quarter, it seemed higher than the typical 2% you've been getting. Could you help us think about what's incorporated in your expectations for this year? Was there anything different in the mix of loans sold this quarter?
One thing to remember is when we sell newly originated loans, the price we receive upfront includes both the initial disbursement and the gain on the second disbursement, because that's how the accounting works for selling an undisbursed loan that has two component parts. That front-loads the gain for newly originated loans and can make the percentage look higher. In totality, roughly 2% is a good target for the gain on sale for flow-related loans. It will move around based on pricing grids and other factors, but that's a reasonable benchmark.
Maybe starting off with the EPS guide. Can you talk about what's contemplated in the back half EPS guide? It seems to be about 15% higher than Street expectations right now. Any color on the moving pieces would be helpful.
There are moving parts. We discussed the change in our net charge-off guidance and are operating toward the higher end of our original plan there. Although we've covered a portion of the anticipated impact from this segment of borrowers and the change in our recovery strategy, we still need to get through that in the second half of this year. Based on other activities we have in the second half, we still feel there is a viable path to the range we previously raised to last quarter. We feel good about both our updated net charge-off range and the previously released full-year earnings per share range.
Got it. And then if I think about credit for the second half, delinquencies improved sequentially this quarter. As we look out to the back half, should we expect the same seasonality as last year with elevated delinquencies in the back half? You had a sizable cohort exit extended grace this quarter.
Terry, the general seasonal patterns are probably right. A few factors will affect delinquency trends. The size of the repayment wave matters; early-to-repayment borrowers tend to experience higher financial distress. If the repayment wave is larger this year, you can see numerator-denominator effects. Another factor is that we are selling new originations now for the first time; some of those new originations are defined as in repayment based on deferral status. Loans in school tend to experience financial distress at a much lower rate. Those factors can move seasonal patterns on the margin, but broadly the seasonal patterns plus or minus those considerations are the right zipcode.
I was wondering if you could talk more about the debt resolution situation. I'm trying to understand why the pause on all recovery sales. Couldn't you just say you're not open to debt resolution companies? Walk through that a bit. Is there anything that could change that would enable you to turn those back on? Or is this a more permanent change?
Our broader recovery strategies assume that by the time a borrower reaches that part of our collection cycle, they've already gone through evaluation of their ability to pay, and settlement levels are based on the assumption those borrowers lack ability to pay. The resolution companies we're discussing are targeting customers who do have ability to pay and relying on a back door in the recovery process to acquire loans at a discount in a way that disadvantages borrowers. We made a decision to halt debt sales and pull all recoveries in-house for a period to gain control of post-charge-off recovery strategies. Once we get a handle on how this plays out, we can change strategies and potentially turn sales back on. In the short run, this is a way to get control. It's largely a timing issue because our internal recovery strategies tend to yield higher returns on balance. It's a question of in-year recoveries versus collecting over time.
Got it. And then could you talk about plans for seasoned loan sales this year and balance sheet growth expectations?
When we started the year, we anticipated loan sales to manage a flattish balance sheet. When we accelerated the loan sale in the first quarter that allowed us to do the ASR program, we indicated we'd likely do modestly more loan sales this year, sized at about $1 billion more than what we otherwise would have done, which would imply, all else equal, a slightly smaller balance sheet. That is contingent on origination levels during peak. So think about it as roughly $1 billion more in loan sales than originally guided.
I wanted to circle back on the loan yield question. Historically, the second quarter didn't tend to be down that much. Given the sales you've been doing, were there more higher-yielding loans being sold in the last two quarters? And as you think about yield recovery from here, how do we balance that against questions that the Grad opportunity and the parent opportunity might be a bit lower yielding? Help us understand those puts and takes.
Our practice on loan sales has been consistent over time; we attempt to select a random sample of our existing book, driven by concentration limits set by rating agencies for securitizations, and that hasn't changed. The partnership loan selection process follows a similar concentration approach and pricing grid, so no adverse selection between our bank book and partnership programs. Regarding the path from here, carrying extra liquidity is the key issue more so than loan yields. We're carrying a lot of excess liquidity invested at cash rates we wouldn't otherwise have. In our original plan, we would have done a loan sale in the second quarter closer to when we need liquidity for peak season. As that investment balance is deployed into higher-yielding loans, we'll blend back to an overall NIM more in line with long-term guidance—around 5%, give or take. It's a temporary, year-in timing effect driven by when we generated that liquidity.
Okay. Pete, you talked earlier this quarter about the opportunity to get the efficiency ratio down to the low 30s once you exit this growth phase. How should we think about the near-term and medium-term path, how long it might take to get back to the mid-30s, and how the second strategic partnership helps in that journey?
We provided guidance for this year on noninterest expenses and indicated a forward look into 2027 where we expected the rate of expense growth to be roughly half of the rate from last year to this year. We're not ready to update that yet; we'd like to do better. If we do better, we'll get to the low-to-mid 30s more rapidly. Regarding the partnerships, building fee-based revenue adds to the top-line denominator of the efficiency ratio. We've seen fee-based revenue grow over 50% year-over-year off a small base. As these loan sale programs scale, we'll build significantly into next year on program management fees and additional performance fees. Servicing fees will continue to build as we get scale, and the second partnership adds more scale. We intend to expand partnerships before next year's peak to cover grad volume that will originate this year. That will be important to have facilities in place as the PLUS reform increases opportunity. These factors drive positive trajectory for fee-based revenue, and as we get past year-one investments for PLUS, we'll normalize and improve efficiency in marketing and core operations.
If I could squeeze in a third question: any update on balance sheet growth impact once the third partnership comes through?
For this year, we're probably flat to a little down depending on peak season origination levels. We would probably have modest balance sheet growth aspirations for 2027, and then trend back to a low-to-mid single-digit rate of growth for the bank's balance sheet as we move forward.
I would add that we provided commentary on this in the fourth quarter earnings announcement in January, and our thinking has not changed since then.
A question on NIM: with the Grad program likely bearing lower yield and shorter duration mix with additional forward flow, what factors would get you to reevaluate the medium-term NIM target, and is that how you're thinking about 2027?
On the Grad opportunity, I don't know that it's necessarily significantly lower yield or necessarily shorter duration. There will be mix differences: MBA loans will be very short, but medical and dental and other programs will be much longer and have much higher balances than our traditional undergraduate products. It's hard to answer perfectly until we get through our first peak season and understand the mix. As a result, for the full year, we expect to be close to 5% NIM, if not a little over. Over the longer term, our past long-term guidance remains a low-to-mid 5% range for NIM.
Got it. After the 2026 class graduates in May/June, is there any data you can share about their employment trends or expectations for repayment for that new cohort in the second half?
It's too early: those graduates are still in their grace period. We won't see meaningful data until the fall when they enter repayment. Broadly, headlines indicate employers are hiring, which is different than last summer, but it's too early to make a definitive call.
Heading into peak season, can you give an update on the competitive landscape in the graduate market, any changes in pricing or the credit box? Also, you mentioned new products are trending well—are there any specific products or markets where you're meaningfully exceeding internal expectations?
Sitting in mid-July, peak is just beginning, so it's hard to infer much yet. Leading up to peak, we've seen pretty rational pricing and some modest increases in marketing activity and expense, nothing outside our expectations or plans. We will know more over the next month or two; peak season is 8 to 10 weeks, and by the third quarter we'll have a good sense. In terms of volumes, disbursements are the key measure, but we haven't started disbursing yet. The application rates we provided in the investor presentation are the best early indicator of activity; they are at or slightly above our expectations by product. It's early, but we like what we're seeing so far. Great. Thank you, Madison. I appreciate your help today and everyone's time and attention. If you have questions, please reach out to our IR team. They stand by to help. We look forward to talking to you again in the third quarter and updating you on what we hope will be a successful peak season. Thank you for your interest in Sallie Mae. Kate, we'll turn it back to you for closing business.
Thanks, Jon. Thank you for your time and questions today. A replay of this call and the presentation will be available on the Investors page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.
Thank you. This concludes today's Sallie Mae Second Quarter 2026 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful evening.