SLM Corporation 2026 Q3 Earnings Call

Please go ahead. Thank you, Leslie.

Good evening, and welcome to Sallie Mae's third 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 Bernot, Managing Vice President and Deputy CFO. 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, October 22nd, 2026. Thank you, and I'll now turn the call over to Jon.

Thank you, Kate and Leslie. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's third quarter 2026 results. The third quarter was a strong one for Sallie Mae, reflecting solid operating performance and continued execution against our strategy. Tonight, we'll discuss our results, changes in the market environment, how our outlook has evolved, and why we remain confident in the long-term trajectory of the company. Let me begin with an update on our strategy. Over the last several years, we have been building a more diversified and flexible funding model. Last year, we launched our strategic partnerships business with our inaugural partner, KKR, adding a third funding channel alongside our bank balance sheet and whole loan sales. Tonight, we are pleased to announce that we have completed a strategic partnership with Sixth Street for an initial three-year term.

Sixth Street has committed to purchase a minimum of $1.5 billion in newly originated private education loans annually, with the first year inclusive of an initial seed portfolio of $600 million in seasoned loans. This transaction is substantially similar to our first strategic partnership. We look forward to providing additional details about our strategic partnerships business in the near future following the completion of the seed sales. Adding a second partner further validates our strategic partnerships model. Together, our strategic partnerships with KKR and Sixth Street enable growth by expanding our origination capacity with access to scalable and capital-efficient funding, makes us less dependent on short-term capital market conditions, and generates recurring and predictable program management and servicing fees. Our next priority in this area will be developing flow capability for our graduate loan products now that we are completing our first peak season following PLUS reform.

With that strategic context, let me turn to peak season. Loan originations for the third quarter were $3.4 billion, representing 15% growth over the year-ago quarter and the highest quarterly origination volume in our history. We are particularly pleased with the growth we have seen in graduate loans. You will remember that we invested significantly in building new products, credit programs, marketing strategies, and other capabilities to compete aggressively to serve these customers post-PLUS reform. In Q3, graduate originations were up 119% year over year, with an average FICO score 9 points higher than the overall average of new origination in the portfolio. This peak season has been elongated. Last-minute changes to federal rulemaking, systems challenges, and other factors caused school delays in delivering financial aid packages and the resulting certification process. As a result, peak season activity has continued well into October and is arguably still underway today.

For October month to date, we have seen a 35% increase in disbursements year over year. We believe that stronger than normal volume will continue into the fourth quarter, and that by year-end, our full-year originations will be in line with our guidance of 12%-14% growth. We have said consistently that this first peak season would afford an important learning opportunity. We now have a more complete view of federal rulemaking, first-hand experience about how both schools and students will respond to the updated federal program, and more insight into the actual mix of student loans demanded. We are currently in the early stages of processing and analyzing that data, and will surely continue to learn more about the nature of the PLUS opportunity.

We look forward to sharing our insights with you as appropriate later this fall and continue to be excited about the potential for future originations growth. Let me turn to the existing portfolio. Private education loan net charge-offs were $90 million in the third quarter. These results were modestly above our expectation, with the increase concentrated within the segment of borrowers affected by the misaligned third-party debt resolution practices we have previously discussed. Results within our non-affected segment were in line with or slightly better than our expectations. Furthermore, as you can see on slide 9 in our earnings presentation, our loan modification program continues to outperform expectations. Let me provide an update on the impacted segment we discussed earlier this year. As previously communicated, we implemented a number of changes to create a more customer-aligned recovery approach. We are beginning to see the positive impact of those strategies.

For example, using AI, we've reviewed all relevant collection and recovery calls and observed a 50% decline in mentions by borrowers of relevant players and practices during the month to date in October. While we are pleased with the general performance of these strategies, adoption by customers already in the later stages of delinquency and more fully engaged with these debt resolution providers has been slower than we initially expected. As such, we are now estimating net charge-offs for the year will be moderately higher than we believed last quarter. Last quarter, we estimated an approximately $25 million impact of these practices to our 2026 net charge-offs, driven by a decision to suspend many recovery efforts. At that time, we believed we could absorb the increase into our original guidance range of $345 million-$385 million, although likely at the upper end.

We now expect to see modest additional pressure on gross charge-off from these customers, leading us to increase our estimated impact in the year from $25 million to $45 million. As such, we are increasing our full-year net charge-off guidance to $400 million-$420 million with a midpoint $45 million higher than that of our original range. As we have said, we believe that customers who are charging off as a result of these questionable practices have a significantly higher ability to repay than a historically charged-off customer. We have started to see our first few recoveries from this population through our enhanced strategies. While it is a very small sample, we are seeing meaningfully higher recovery rates. Assuming this trend continues, this bodes well for future performance. Pete will now take you through some additional financial highlights of the quarter.

Pete? Thank you, Jon. Good evening, everyone.

For the third quarter of 2026, we generated $339 million of net interest income and $46 million of other income. Compared with the prior year quarter, net interest income decreased by $34 million, while other income increased by $15 million, driven by growth in recurring program management fees from our strategic partnership and year-over-year growth in servicing fee revenue. Net interest margin was 4.85% for the quarter, up 10 basis points from the prior quarter. While interest rate volatility and higher long-term rates created some headwinds during the period, actions that we purposefully and proactively took earlier this year helped offset a portion of that pressure. Specifically, we extended the duration of our funding to better align with the growing proportion of fixed-rate loans in our portfolio.

Those actions increased the weighted average life of our deposits to 37 months from 23 months at the end of 2025 and moved us into a more neutral interest rate risk position. Private education loans delinquent 30 days or more were 4.2% of loans in repayment, an increase from 4% in the year-ago quarter. Our reserve rate was 5.89% at the end of the quarter, down four basis points from the prior year period, reflecting disciplined underwriting and ongoing work to optimize loss mitigation strategies. Provision for credit losses was $214 million in the third quarter, primarily reflecting the impacts of significant originations growth in the period. Non-interest expenses were $221 million, up $40 million from the year-ago quarter. The increase was driven largely by investments made to support peak season and position the company for growth in a changing federal student lending environment.