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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 originations 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.
分析師問答
Pete, I think you mentioned you expect 2Q to maybe be the low point in the NIM for the year. 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 around 5%. I don't think we'll get too far up in that normal range, but I think, plus or minus, we should track 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 the buyer could help expand your credit box and the TAM?
Yes. We started this year with the goal of expanding the partnerships. 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 in the stage where documents are being created and exchanged 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 undergrad product that we have historically sold, but also 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. Pete, could you give us additional detail on how the current partnership is going? How should we think about the revenue components, both periodic and ongoing from that? Are there any differences you've incorporated into discussions with the new partner, or would it be similar?
The existing partnership with KKR is going really well and on plan. The volumes we anticipated for the year are coming in line with expectations. The structure of the second partnership is largely similar to the economics of the first partnership, with some minor tweaks to different components. We feel good about how the KKR partnership has gone so far. Importantly, both KKR and the second partner have expressed strong interest in building capabilities for taking Grad product. That will be the next phase after we get through peak originations this year and have more information about the makeup of our Grad 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.
Great. I wanted to also talk about credit performance. It's a hot topic. It's encouraging that you kept the high end of your charge-off guide where it was, but anything that approaches credit gets people a little more antsy. Jon, you commented that you felt good about current performance and that you had partially offset some of the recovery changes. Could you expand on that? What aspects of the performance are better? How does that manifest 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 a conference a month ago to provide detail about what's going on with this particular segment and how we are treating it. We are also providing data on performance of other components of our credit story. Let me start with loan modifications. When we changed the loan modification program, the question was how these customers would perform when they come out the other side. We now have more than six months of outperformance with some cohorts. We are seeing better-than-75% success rates after 3 and 6 months. That is higher than our expectations. We feel great about that and have not seen trends in those payment rates that would make us anything less than optimistic about their effectiveness. Those programs are well designed and tightly controlled in terms of entry and conditions, and we monitor them regularly. Regarding core portfolio performance, the recovery gap has been estimated at about $25 million for the segment in question. Notably, we only raised the lower end of our guidance by $20 million, which reflects the general strength in the rest of the portfolio that more than offsets the full $25 million impact. I am not comfortable providing specific guidance by quarter; you know the normal seasonal patterns in the business. But we have gone to great lengths to delineate what we see as primarily a timing-of-recovery issue versus a broad credit issue, and we remain optimistic about general credit performance based on what we see today.
Pete, a quick question on the NIM rebound. Noting 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 toward 5%?
Yes. Some of that is a distortion because the second quarter is our lowest origination quarter and the mix of loans coming in is different. We fully expect that as we reach the heart of peak season, traditional yield patterns will reemerge.
Got it. And then a question on expected gain on sale. It seemed higher than the typical 2% this quarter. 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 upfront price we receive includes both the initial disbursement and the gain on the second disbursement because of how accounting works for undisbursed loans with two components. That front-loads some of the gain with newly originated loans and may affect what you calculate. In totality, around 2% is a reasonable target for gain on sale for flow-related loans. It will move around based on pricing grids and mix, but that's a good 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. Any color on the moving pieces would be helpful.
There are moving parts. We discussed the change in our net charge-off guidance. While we've covered a portion of the anticipated impact from this borrower segment and changed our recovery strategy, we still have to get through that over the second half of the year. Based on other activities in the second half, we still feel there's a viable path to the previously raised EPS range from last quarter. We feel good about both our updated net charge-off range and the previously released full-year EPS range.
Got it. And then, thinking 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 likely similar. A few factors will affect delinquency trends. The size of the repayment wave matters—early-to-repayment borrowers tend to experience financial distress at higher levels. So a larger wave this year could create some numerator-denominator effects. Also, we're selling new originations now for the first time; some of those are defined as in repayment based on deferral status, and loans in school tend to have lower financial distress rates. Those factors can move seasonal patterns modestly, but the seasonal patterns themselves remain a reasonable guide, keeping these considerations in mind.
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 resolutions? Walk through that a bit. Is there anything that could change that would enable you to turn those back on, or is this more of a permanent change?
Our broader recovery strategies assume that by the time a borrower reaches that part of our collection cycle, they've already been evaluated for ability to pay. Settlement levels in our traditional strategy were based on the assumption that those borrowers lacked ability to pay. The resolution companies we've referenced are targeting customers that do have an ability to pay and are relying on the back door in our recoveries process to acquire loans at a discount in a way that disadvantages borrowers. We decided to halt all debt sales and, for a period, bring all recoveries in-house to get control of post-charge-off recovery strategies. Once we better understand how this plays out, we can change our strategies and potentially resume sales. In the short run, this is about getting control. Over time, our internal recovery strategies have yielded higher returns, so this is largely a question of in-year recoveries versus collecting over time.
Got it. Could you also 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, which enabled the ASR program, we indicated we likely would do modestly more loan sales this year—sized at roughly $1 billion more than we otherwise would have. All else equal, that would imply a slightly smaller balance sheet. That is contingent on the level of originations during peak season, but you should think about it as about $1 billion more 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. I know there's noise with the sales. Were there more higher-yielding loans sold in the last two quarters? And as we think about yield recovery, how do we balance that against the Grad opportunity and parent opportunity, which might be lower yielding? Help us understand those puts and takes.
Our loan sale practice is consistent over time: we attempt to select a random sample of our existing book, largely driven by concentration limits from rating agencies around securitization takeouts. That hasn't changed. Partnership loan selection follows a similar approach and pricing grid—no adverse selection between our bank book and partnership programs. Regarding the path to year-end, carrying extra liquidity is the main issue rather than yields on loans. We're holding additional liquidity invested at cash rates that we wouldn't have otherwise. In our original plan, we would have done a loan sale in the second quarter closer to when we needed liquidity for peak season. As that investment balance is reduced and reinvested into higher-yielding loans, NIM should blend back to a level more aligned with our long-term guidance—around 5%—though final positioning will depend on how the rest of the year materializes. This is primarily a temporary timing issue.
Pete, you previously discussed getting 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 to that target and how long it might take to get to mid-30s? How does the second strategic partnership help in that journey?
When we set guidance for this year on noninterest expenses, we noted a forward look to '27 where we expected the rate of expense growth to be roughly half the rate of growth from last year to this year. We're not ready to update that yet. I'd say we'd like to do better than that; if we do, we'll reach low-to-mid 30s more rapidly. As we build fee-based revenue through partnerships, that adds to the top-line denominator of the efficiency ratio. We've had fee-based revenue growth in excess of 50% year-over-year off a small base, and with scaling from these loan sales we'll continue to build. With the first partnership, we'll grow program management fees and performance fees; servicing fees will increase as we scale. The second partnership will add scale and support fee revenue growth. We also intend to expand partnerships next year to cover grad volume that will originate this year, which is important to capture the opportunity from PLUS reform. Together, these elements support a positive trajectory for fee-based revenue and improved efficiency after the one-time investments for PLUS preparation.
If I could squeeze in a third, any update on how you're thinking about balance sheet growth once the third partner comes through?
For this year, we're probably flat to slightly down depending on peak originations. We would likely have modest balance sheet growth aspirations for 2027, and then trend to low-to-mid single-digit growth of the bank's balance sheet as we move forward.
I would add we provided commentary on this in the fourth quarter earnings announcement in January. Our thinking has not changed since that time.
This is Yuna on John Hecht's line. One more question on NIM. With the Grad program potentially bearing lower yield and shorter duration, and the forward flow additional forward flow, how might that change how you think about the balance sheet growth and what factors would get you to reevaluate the medium-term NIM target? Is that how you're thinking about 2027?
On the Grad opportunity, I don't know that it's necessarily significantly lower yield or shorter duration. There will be a mix issue: 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 undergrad products. It's hard to fully answer until we get through our first peak season of originations and understand the mix. As a result, it's hard to give additional forward-looking guidance beyond saying that for the full year we'll be close to 5%, if not a little over. Over the longer term, our past long-term guidance remains our point of view: the low-to-mid 5% range for NIM.
Got it. After the 2026 class graduated in May/June, is there any data you can share about their employment trends or expectations that might inform repayment for the second half for that cohort?
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 from the headlines last summer, but it's too early to make a call.
Heading into peak season, can you give an update on the competitive landscape in the graduate market—any changes in pricing or credit box? Also, you mentioned new products are trending well; are there specific products or markets where you're meaningfully exceeding internal expectations?
Caroline, in mid-July peak is only a couple of days old, so it's early to draw conclusions. Leading up to peak, we've seen fairly rational pricing, which continues. We've seen some modest pressure on marketing expense and modest increases in marketing activity, nothing outside the range we anticipated and planned for. We'll know much 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. Regarding volumes, disbursements are the most important measure, and we haven't started disbursing yet. The application-rate data in the investor presentation is our best early indicator of activity levels; by product it's at or slightly above expectations for this point. 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 feel free to reach out to our IR team. They stand by ready to help. We look forward to talking to you again in the third quarter and updating you on what we hope will be a really successful peak season. Until then, thank you for your interest in Sallie Mae. Kate, we're turning it back to you for some 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.