Q3 2026 SLM Corp Earnings Call

October 22, 2026

Operator: Welcome to the Sallie Mae Third Quarter 2026 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.

Operator: Welcome to the Sallie Mae Q3 2026 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the prepared remarks. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality.

Speaker #2: Welcome to the Sallie Mae third quarter 2026 earnings conference call. At this time, all participants have been placed in listen-only mode, and the floor will be open for your questions following the prepared remarks.

Speaker #2: If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two.

Speaker #2: So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you require operator assistance, please press star zero.

Operator: Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Kate deLacy, Vice President, Investor Relations. Please go ahead.

Speaker #2: I would now like to turn the call over to Kate deLacy, Vice President and Investor Relations. Please go ahead.

Kate deLacy: 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 Bronaugh, 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.

Speaker #3: 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; Kate Graham, our co-president and CFO; and Melissa Bernardt, managing vice president and deputy CFO.

Speaker #3: 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.

Speaker #3: 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-K and other filings with the SEC.

Speaker #3: For Sallie Mae, these factors include, among others: results of operations, financial condition and/or cash flows, as well as any potential impacts of various external factors on our business.

Kate deLacy: 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, 22 October 2026. Thank you, and I'll now turn the call over to Jon.

Speaker #3: 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 22, 2026.

Speaker #3: Thank you, and I'll now turn the call over to Jon.

Jon Witter: Thank you, Kate and Leslie. Good evening, everyone. Thank you for joining us to discuss Sallie Mae's Q3 2026 results. The Q3 was a strong one for Sallie Mae, reflecting solid operating performance and continued execution against our strategy. Tonight, we will 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 3-year term.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: Tonight, we are pleased to announce that we have completed a strategic partnership with Sixtreet for an initial three-year term. Sixtreet 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.

Jon Witter: 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.

Speaker #4: 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.

Speaker #4: Adding a second partner further validates our strategic partnerships model. Together, our strategic partnerships with KKR and Sixtreet enable growth by expanding our origination capacity with access to scalable and capital-efficient funding, make us less dependent on short-term capital market conditions, and generate recurring and predictable program management and servicing fees.

Speaker #4: 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.

Jon Witter: With that strategic context, let me turn to peak season. Loan originations for the Q3 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 originations 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: In Q3, graduate originations were up 119% year-over-year, with an average FICO score nine points higher than the overall average of new originations in the portfolio.

Speaker #4: This peak season has been elongated. Last-minute changes to federal rulemaking, systems challenges, and other factors caused schools delays in delivering financial aid packages, and the resulting certification process.

Speaker #4: 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.

Jon Witter: 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 Q4, and that by year-end, our full-year originations will be in line with our guidance of 12% to 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, firsthand 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.

Speaker #4: We believe that stronger-than-normal volumes will continue into the fourth quarter, and that by year-end, our full-year originations will be in line with our guidance of 12% to 14% growth.

Speaker #4: 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, firsthand 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.

Speaker #4: 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.

Jon Witter: 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 Q3. These results were modestly above our expectations, 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.

Speaker #4: 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.

Speaker #4: 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 expectations, with the increase concentrated within the segment of borrowers affected by the misaligned third-party debt resolution practices we have previously discussed.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: We are beginning to see the positive impact of those strategies. For example, using AI, we 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.

Jon Witter: For example, using AI, we have 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 to $385 million, although likely at the upper end.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: At that time, we believed we could absorb the increase into our original guidance range of $345 million to $385 million, although likely at the upper end.

Jon Witter: We now expect to see modest additional pressure on gross charge-offs 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 to $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?

Speaker #4: We now expect to see modest additional pressure on gross charge-offs from these customers, leading us to increase our estimated impact for the year from $25 million to $45 million.

Speaker #4: As such, we are increasing our full-year net charge-off guidance to $400 to $420 million, with a midpoint that is $45 million higher than the midpoint of our original range.

Speaker #4: 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.

Speaker #4: We have started to see our first few recoveries from this population through our enhanced strategies. And while it is a very small sample, we are seeing meaningfully higher recovery rates.

Speaker #4: Assuming this trend continues, this bodes well for future performance. Pete, we'll now take you through some additional financial highlights of the quarter. Pete?

Pete Graham: Thank you, Jon. Good evening, everyone. For Q3 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.

Speaker #5: Thank you, John. Good evening, everyone. For the third quarter of 2026, we generated $339 million of net interest income and $46 million of other income.

Speaker #5: Compared with the prior year quarter, net interest income decreased by $34 million, while other income increased by $15 million. This was driven by growth in recurring program management fees from our strategic partnership and year-over-year growth in servicing fee revenue.

Speaker #5: 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.

Speaker #5: 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.

Pete Graham: 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 Q3, 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.

Speaker #5: 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.

Speaker #5: Our reserve rate was 5.89% at the end of the quarter, down 4 basis points from the prior year period, reflecting disciplined underwriting and ongoing work to optimize loss mitigation strategies.

Speaker #5: 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.

Speaker #5: 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.

Pete Graham: At the same time, we have been laser-focused on non-interest expense management during the year and have been performing better than our original expectations year-to-date. on 1 October, we executed a restructuring plan to better align resources with the company's strategic priorities and improve operating efficiency. Our year-to-date and expected future outperformance will allow us to absorb these restructuring charges within our full-year guidance range. Without these one-time expenses, non-interest expense would have come in at the low end of the range, but will now be closer to the high end of the range. This restructuring aligns resources to our long-term strategy, and combined with our continued focus on disciplined expense management, should help us return operating expense growth to more normalized levels as we move into 2027, even recognizing that we expect to achieve continued significant originations growth during that time.

Speaker #5: At the same time, we've been laser-focused on non-interest expense management during the year and have been performing better than our original expectations year to date.

Speaker #5: On October 1, we executed a restructuring plan to better align resources with the company's strategic priorities and improve operating efficiency. Our year-to-date and expected future outperformance will allow us to absorb these restructuring charges within our full-year guidance range.

Speaker #5: Without these one-time expenses, non-interest expense would have come in at the low end of the range, but will now be closer to the high end of the range.

Speaker #5: This restructuring aligns resources with our long-term strategy and, combined with our continued focus on disciplined expense management, should help us return operating expense growth to more normalized levels as we move into 2027.

Speaker #5: Even recognizing that, we expect to achieve continued significant originations growth during that time. We continued to return capital to shareholders during the third quarter.

Pete Graham: We continued to return capital to shareholders during Q3, repurchasing 5.1 million shares at an average price of $25.69. Since the beginning of the year, we have repurchased 18.1 million shares at an average purchase price of $23.02, representing 9% of the shares outstanding. Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 15% of total assets. Total risk-based capital was 12.5%, and common equity Tier 1 capital was 11.2%. We continue to believe in our strategy and the foundation it provides to support sustainable growth and return capital to shareholders. I will now turn the call back to Jon.

Speaker #5: We repurchased 5.1 million shares at an average price of $25.69. Since the beginning of the year, we have repurchased 18.1 million shares at an average purchase price of $23.02.

Speaker #5: Representing 9% of the shares outstanding. Finally, our liquidity and capital positions remain solid. We ended the quarter with liquidity of 15% of total assets, total risk-based capital was 12.5%, and common equity Tier 1 capital was 11.2%.

Speaker #5: We continue to believe in our strategy and the foundation it provides to support sustainable growth and return capital to shareholders. I'll now turn the call back to John.

Jon Witter: Thanks, Pete. Let me close with a discussion of recent market trends and how they have caused us to change some nearer-term plans and the resulting financial outlook. As many of you have undoubtedly tracked over the last month, interest rates have moved significantly higher, and capital market conditions have become more volatile and challenging. Consequently, as we both gauged external indications of interest and ran our own internal valuation models, we came to believe that the likely premium we would receive on any loan sale in this environment would be below our minimum acceptable threshold. Generally, our strategy has been to engage in regular way seasoned loan sales only when they represented an attractive economic trade versus our other alternatives.

Speaker #4: Thanks, Pete. Let me close with a discussion of recent market trends and how they have caused us to change some nearer-term plans, as well as the resulting financial outlook.

Speaker #4: As many of you have undoubtedly tracked over the last month, interest rates have moved significantly higher, and capital market conditions have become more volatile and challenging.

Speaker #4: Consequently, as we both gauge external indications of interest and ran our own internal valuation models, we came to believe that the likely premium we would receive on any loan sale in this environment would be below our minimum acceptable threshold.

Speaker #4: Generally, our strategy has been to engage in regular ways—seasoned loan sales—only when they represented an attractive economic trade versus our other alternatives.

Jon Witter: However, in this instance, we determined that we could create more shareholder value by retaining the loans on our balance sheet and earning at a roughly 5% NIM over time, rather than selling at the current indicated premium levels. The low cost matched funding of our bank, together with the flexibility afforded by our strategic partnerships model, creates a distinct strategic advantage. This positioning allows us to remain selective rather than be compelled to pursue actions dictated by market conditions. Given that the markets remain elevated and volatile, at this time, we do not anticipate executing our final loan sale for the year, which was previously planned for October. We appreciate that this could create an in-year EPS impact for 2026. However, we have committed to being a disciplined capital allocator and believe this change in plans will drive a meaningfully greater shareholder value creation in the future.

Speaker #4: However, in this instance, we determined that we could create more shareholder value by retaining the loans on our balance sheet and earning a roughly 5% NIM over time, rather than selling at the current indicated premium levels.

Speaker #4: The low-cost, matched funding of our bank, together with the flexibility afforded by our strategic partnerships model, creates a distinct strategic advantage. This positioning allows us to remain selective, rather than be compelled to pursue actions dictated by market conditions.

Speaker #4: Given that the markets remain elevated and volatile at this time, we do not anticipate executing our final loan sale for the year, which was previously planned for October.

Speaker #4: We appreciate that this could create an in-year EPS impact for 2026. However, we have committed to being disciplined capital allocators and believe this change in plans will drive meaningfully greater shareholder value creation in the future.

Jon Witter: It's important to note several things. First, we do not expect this change in loan sale plans to substantially impact our 2026 share buyback activity. We still expect to exhaust most of our current share repurchase authorization before the end of the year. Second, this does not reflect a permanent change to our loan sale program expectations, as we see several factors that could potentially allow us to earn above-threshold premiums, even in a higher-for-longer future. While we certainly cannot predict future market conditions, we currently believe that meaningful loan sales will be a part of our 2027 plans and beyond. We've outlined a number of moving pieces that impact our full-year outlook. In summary, primarily as a result of our decision not to execute an additional whole loan sale, we are lowering our full-year 2026 EPS guidance to $1.95 to $2.05 a share.

Speaker #4: It's important to note several things. First, we do not expect this change in loan sale plans to substantially impact our 2026 share buyback activity.

Speaker #4: We still expect to exhaust most of our current share repurchase authorization before the end of the year. Second, this does not reflect a permanent change to our loan sale program expectations, as we see several factors that could potentially allow us to earn above-threshold premiums, even in a higher-for-longer future.

Speaker #4: While we certainly cannot predict future market conditions, we currently believe that meaningful loan sales will be a part of our 2027 plan and beyond.

Speaker #4: We've outlined a number of moving pieces that impact our full-year outlook. In summary, primarily as a result of our decision not to execute an additional whole loan sale, we are lowering our full-year 2026 EPS guidance to $1.95 to $2.05 a share.

Jon Witter: As mentioned earlier, we are raising our full-year net charge-off guidance range to $400 to $420 million. We are reaffirming our non-interest expense and origination guidance. In conclusion, I know we've given you a lot of information this evening, so let me try to sum up the key takeaways. First, we continue to be excited about the PLUS opportunity and believe the investments we have made and performance this quarter position us well for future origination spread. Second, our loss mitigation and credit strategies, including loan modifications, are generally performing as intended, if not better, and position us well to manage credit performance going forward. Third, we've been good stewards of our expense dollars and spent wisely in 2026.

Speaker #4: As mentioned earlier, we are raising our full-year net charge-off guidance range to $400 to $420 million. We are reaffirming our non-interest expense and origination guidance.

Speaker #4: In conclusion, I know we've given you a lot of information this evening, so let me try to sum up the key takeaways. First, we continue to be excited about the Plus opportunity and believe the investments we have made and performance this quarter position us well for future originations growth.

Speaker #4: Second, our loss mitigation and credit strategies, including loan modifications, are generally performing as intended, if not better, and position us well to manage credit performance going forward.

Speaker #4: Third, we've been good stewards of our expense dollars and spent wisely in 2026. We expect to land within our non-interest expense guidance range for the year, even after expenses, and believe we are set up to return to a more normalized expense growth rate going forward.

Jon Witter: We expect to land within our non-interest expense guidance range for the year, even after absorbing one-time restructuring expenses, and believe we are set up to return to a more normalized expense growth rate going forward. Finally, we have built a true strategic advantage in our flexible funding strategy and are positioned well to maximize shareholder value creation across a variety of macroeconomic environments. We believe all this sets us up for continued growth and long-term shareholder value creation into the future. With that, Pete, why don't we go ahead and open up the call for some questions?

Speaker #4: And finally, we have built a true strategic advantage in our flexible funding strategy and are positioned well to maximize shareholder value creation across a variety of macroeconomic environments.

Speaker #4: We believe all of this sets us up for continued growth and long-term shareholder value creation into the future. With that, Pete, why don't we go ahead and open up the call for some questions?

Operator: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask you pick up your handset when posing your questions to provide optimal sound quality. Our first question comes from Jeff Adelson, Morgan Stanley. Please go ahead. Your line is now open.

Speaker #2: Thank you. The floor is now open for questions. At this time, if you have a question or comment, please press star 1 on your telephone keypad.

Speaker #2: If at any point your question is answered, you may remove yourself from the queue by pressing star 2. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality.

Speaker #2: Our first question comes from Jeff Adelson with Morgan Stanley. Please go ahead. Your line is now open.

Jeff Adelson: Hey, good morning, guys. Thanks for taking my question. I guess just given the current market environment, obviously that is why you are taking the EPS guide down. Can you just help us understand how much of a whole loan sale you were thinking originally was going to be in this year, in the back half of the year? I know it is still early and you have not put it out yet, but can you maybe help everyone understand how you are thinking about 2027 in terms of early indications of guidance? Should we be assuming you do another similar case of whole loan sales next year on top of the partnerships? Are you including any plans for a third partnership to be announced? I think everyone would appreciate a better sense of what 2027 looks like.

Speaker #5: Hey, good morning, guys. Thanks for taking my question. I guess, just given the current market environment, obviously that's why you're taking the EPS guide down.

Speaker #5: Can you just help us understand how much of a whole loan sale you were thinking originally was going to be in this year, in the back half of the year?

Speaker #5: And I know it's early, and you haven't put it out yet, but can you maybe help everyone understand how you're thinking about 2027, in terms of early indications of guidance?

Speaker #5: Should we be assuming you'll do another similar case of whole loan sales next year, on top of partnerships? Are you including any plans for a third partnership to be announced?

Speaker #5: And just, I think everyone would appreciate a better sense of what 2027 looks like. And should we look at the investor forum path as maybe some sort of indication of how you're thinking about that?

Jeff Adelson: Should we look at the investor forum path as maybe some sort of indication of how you are thinking about that? Thanks.

Speaker #5: Thanks.

Pete Graham: Yeah. Thanks for the question. There is a lot in there, so I will maybe take it in stages. I think in context of the size of the loan sale, you will recall when we pulled forward earlier in the year, pulled forward and did a $2 billion loan sale to take advantage of market dislocation and launch the ASR. We said kind of on balance, we felt like that would add roughly $1 billion to our total loan sale sort of plan for the year. So it is in sort of that kind of a zip code. The other thing that always goes into the factor of the size of our loan sales in any given year is sort of the equation of the level of originations coupled with our commitments to partners and the balancing feature of the non-bank's balance sheet.

Speaker #3: Yeah, thanks for the question. There's a lot in there, so I'll maybe take it in stages. I think in context of the size of the loan sale, you'll recall when we pulled forward earlier in the year—pulled forward and did a $2 billion loan sale—to take advantage of market dislocation and launch CASR.

Speaker #3: We said, kind of on balance, we felt like that would add roughly $1 billion to our total loan sale sort of plan for the year.

Speaker #3: So it's in sort of that kind of a zip code. The other thing that always goes into the factor of the size of our loan sales in any given year is sort of the equation of the level of originations, coupled with our commitments to partners, and the balancing feature of our bank's balance sheet.

Pete Graham: We came into this year thinking we would likely be flat balance sheet to slightly down. We aspired to add a second partner, which Jon announced earlier on the call. I think in the context of sizing, in that billion-dollar range is probably the right way to think about that. The second part of your question really was around what does this mean for the future? I think again, we feel like the current environment is a temporary thing as in any given quarter, there can be conditions in the market that make it suboptimal to execute a whole loan sale. We think we are in that kind of a situation now with the peak rates, a high degree of volatility in terms of the near-term outlook. We believe that will stable as we go into next year.

Speaker #3: And we came into this year thinking we would likely be flat balance sheet to slightly down. And we aspired to add a second partner, which John announced earlier on the call.

Speaker #3: So, I think, in the context of sizing, kind of in that billion-dollar range is probably the right way to think about that. The second part of your question really was around what does this mean for the future?

Speaker #3: I think, again, we feel like the current environment is sort of a temporary thing, as in any given quarter there can be conditions in the market that make it suboptimal to execute a whole loan sale.

Speaker #3: We think we're in that kind of situation now, with sort of peak rates and a high degree of volatility in terms of the near-term outlook.

Speaker #3: And we believe that will stabilize as we go into next year. In the context of, what does that mean for next year?

Pete Graham: In the context of what does that mean for next year? I think our base case is we return to an environment that allows for premiums that are above a minimum threshold level. In that type of scenario we are probably looking at flat balance sheets and maybe single-digit growth of the balance sheet. We will meet our commitments to partners.

Speaker #3: I think our base case is we return to an environment that allows for premiums that are above a sort of minimum threshold level. And in that type of scenario, we're probably looking at flat balance sheets and maybe single-digit growth of the balance sheet.

Speaker #3: We'll meet our commitments to partners, and we've now added a second significant flow commitment from State Street that we need to consider as we plan for funding of our originations profile.

Pete Graham: We have now added a second significant flow commitment from Sixth Street that we need to think about as we plan for funding of our originations profile. Then we will use the loan sales as we always do to manage capital and create capital for return to shareholders, at the same time managing the rate of growth of our balance sheet.

Speaker #3: And then we'll use the loan sales, as we always do, to sort of manage capital and create capital for return to shareholders, while at the same time managing the rate of growth of our balance sheet.

Jeff Adelson: Okay, thank you. If I could just follow up on the net charge-off guidance. I appreciate the color around the third-party issue. You expect to see a modest additional pressure on gross charge-offs. I think you cited an increase of about $20 million impact there from $25 million to $45 million, but then you took the full year guide up at the midpoint by $45 million. Could you help us understand maybe where the rest of that $45 million, I think it is $25 million difference is coming from, if it is not the third-party issue?

Speaker #5: Okay, thank you. And if I could just follow up on the net charge-off guidance, I'd appreciate the color around the third-party issue. You expect to see a modest additional pressure on gross charge-offs.

Speaker #5: I think you cited an increase of about $20 million impact there, from $25 million to $45 million, but then you took the full-year guide up at the midpoint by $45 million.

Speaker #5: So, could you help us understand maybe where the rest of that $45 million—I think it's a $25 million difference—is coming from, if it's not the third-party issue?

Speaker #5: Thanks.

Jon Witter: Yeah, Jeff, we tried to lay that out as clearly as we could for you. I think when we had originally updated guidance back in Q2, it was really in reflection of the 25 million estimate that we had put out largely through the pausing of certain recovery efforts. I think what we said at that time is we thought we could cover that within our original range, but it would be at the higher end. That took us up closer to that higher end of the initial range. I think as we went ahead and reset guidance, we felt like it was appropriate with the additional 20 just to reset that midpoint to midpoint. I do not think there is anything else in what you are asking about.

Speaker #4: Yeah, Jeff, we tried to lay that out as clearly as we could for you. I think when we had originally updated guidance back in the second quarter, it was really in reflection of the $25 million estimate that we had put out, largely through the sort of pausing of certain recovery efforts.

Speaker #4: And I think what we said at that time is, we thought we could cover that within our original range, but it would be at the higher end.

Speaker #4: And so that sort of took us up closer to that higher end of the initial range. And I think as we went ahead and reset guidance, we felt like it was appropriate, with the additional $20, just to reset that midpoint to midpoint.

Speaker #4: So, I don't think there's anything else in what you are asking about. I think it's just the reflection of last quarter—us believing we can stay in the range, albeit at the high end.

Jon Witter: I think it is just a reflection of last quarter us believing we can stay in the range, albeit at the high end, and us now recognizing that we have crept out of that and feeling like we should reset it in a more traditional way.

Speaker #4: And us now sort of recognizing that we have crept out of that, and feeling like we should sort of reset it in a more traditional way.

Jeff Adelson: Got it. Okay, great. Thanks for taking my question. Oh, sorry, go ahead.

Speaker #5: Got it. Okay, great. Thanks for taking my question. Oh, sorry again.

Pete Graham: I was just going to say, to be clear, it is all related to this third-party issue.

Speaker #3: I just wanted to clarify that everything is related to the third-party issue.

Jon Witter: That is right.

Speaker #4: That's right.

Operator: Thank you. Our next question comes from Sanjay Sakhrani with KBW. Please go ahead. Your line is now open.

Speaker #2: Thank you. Our next question comes from Sanjay Sagroni with KBW. Please go ahead; your line is now open.

Sanjay Sakhrani: Thank you. Appreciate you guys doing what is right in terms of the loan sales. I guess as we think about what an acceptable rate would be, can that happen if rates are still in flux as we get out to next year? I am just curious, how much capacity do you guys have to balance sheet loans into next year in terms of the equity?

Speaker #6: Thank you. I appreciate you guys doing what's right in terms of the loan sales. I guess, as we think about what an acceptable rate would be, can that happen if rates are still in flux as we get out to next year?

Speaker #6: And I'm just curious, how much capacity do you guys have to balance sheet loans into next year in terms of the equity?

Pete Graham: Yeah. Thanks for the question, Sanjay. I think if you think about even in a higher for longer scenario, which there were some recent articles around that and surveys of economists, even in those sort of longer-term outlooks, they had the 10-year Treasury at a lower point in H2 of next year than where it currently sits. We do not obviously price off of 10-year Treasury, but I think that is an indication that even in kind of the most bear case scenario for loan sales, there will be relief from here. I think there is more to it than just interest rates, although that is certainly a piece of it.

Speaker #3: Yeah, thanks for the question, Sanjay. I think if you think about—even in a higher-for-longer scenario, which there were some recent articles around that and surveys of economists—even in those sort of longer-term outlooks, they had the 10-year Treasury at a lower point in the second half of next year than where it currently sits.

Speaker #3: We don't, obviously, price off of the 10-year Treasury, but I think that's an indication that even in kind of the most bear-case scenario for loan sales, they'll be relieved from here.

Speaker #3: I think there's more to it than just interest rates, although that's certainly a piece of it. I think there's also the aspect of just sort of uncertainty about where we're going from here.

Pete Graham: I think there is also the aspect of just sort of uncertainty about where we are going from here, and the fact that in the current environment also, there is a lot of other activity in the ABS space that is sort of pulling investor demand into higher yielding product. Think about all the ABS that is funding the AI trades at this point. So again, I think there are a lot of things unique to this quarter that create the market conditions that we feel is not generally appropriate. But I do not think that is a permanent thing, and we see a path to that being a more stable environment for our loans next year.

Speaker #3: And the fact that, in the current environment, there's also a lot of other activity in the ABS space that's sort of pulling investor demand into higher-yielding products.

Speaker #3: Think about all the ABF that's funding the AI trades at this point. So again, I think there are a lot of things unique to this quarter that create the market conditions that we feel aren't generally appropriate.

Speaker #3: But I don't think that's a permanent thing. And we see a path to that being a more stable environment for us going into next year.

Sanjay Sakhrani: Okay. Just to be clear, Pete, just on the capacity that you have to grow, would you have to pull down originations given the capital levels? Or how much flexibility do you have on CET1 to sort of aid that growth if you have to balance sheet it is, I guess.

Speaker #6: Okay. And just to be clear, Pete, just on the capacity that you have to grow, would you have to pull down originations given the capital levels?

Speaker #6: Or how much flexibility do you have on CET-1 to sort of aid that growth if you have to balance sheet it?

Pete Graham: Yeah, I think the balance sheet is in great shape. Again, the capital buffers that we carry to sort of all the regulatory thresholds are pretty substantial. I think that the addition of a second partner here gives us some additional sort of funding capacity in terms of flow originations. As Jon sort of said in his prepared remarks, the next thing we are working on, and we have already started dialogue around it, is additional flow capacity for graduate originations. So I think the building of capacity there gives us an additional lever in addition to growing the balance sheet.

Speaker #3: Yeah, I think the balance sheet’s in great shape. Again, the capital buffers that we carry to all the regulatory thresholds are pretty substantial.

Speaker #3: I think that the addition of a second partner here gives us some additional sort of funding capacity in terms of flow originations. As John sort of said in his prepared remarks, the next thing we're working on, and we've already started dialogue around it, is additional flow capacity for graduate originations.

Speaker #3: So, I think the building of capacity there gives us an additional lever, in addition to growing the balance sheet.

Sanjay Sakhrani: Okay, great. Thank you very much.

Speaker #6: Okay, great. Thank you very much.

Operator: Thank you. Our next question is from Terry Ma with Barclays. Please go ahead. Your line is now open.

Speaker #2: Thank you. Our next question is from Terry Ma with Barclays. Please go ahead. Your line is now open.

Terry Ma: Hey, thank you. Good evening. First, I just want to make sure I have the right pieces to the revised EPS guide. Can you just confirm whether or not the gain on sale from that second partnership is included in this guide, or is that a Q1 2027 thing? Then obviously credit costs are factored into the revised EPS guide. But any sense you can give us on how long that third-party collection issue should impact credit costs? Is there anything else you can do to help ring-fence the issue?

Speaker #7: Hey, thank you. Good evening. I guess first, I just want to make sure I have the right pieces to the revised EPS guide. Can you just confirm whether or not the gain-on-sale from that second partnership is included in this guide, or is that a first quarter $27 million thing?

Speaker #7: And then, obviously, credit costs are factored into the revised EPS guide. But any sense you can kind of give us on how long that third-party collection issue should impact credit costs?

Speaker #7: Is there anything else you can do to kind of help ring-fence the issue?

Jon Witter: Yeah, Terry, let me start with the third-party debt collection issue, and then I will turn it over to Pete to talk a little bit more about your guide question. Look, I think it is obviously a little bit hard to say with certainty how long that matter is going to last, because unlike things like pure credit trends, there are active players, sort of industry participants on the other side, and they may change their strategies, they may change their approaches. We will obviously have to adapt. With that said, I think we are really pleased with what we are seeing so far. We have, as I said in my prepared notes, we have put in place actions that we think are really forceful and effective actions. We think they create a much more aligned structure with our customers and help us address the situation.

Speaker #4: Yeah, Terry, let me start with the third-party debt collection issue, and then I'll turn it over to Pete to talk a little bit more about your guide question.

Speaker #4: Look, I think it's obviously a little bit hard to say with certainty how long that matter is going to last because, unlike things like pure credit trends, there are active players—sort of industry participants—on the other side, and they may change their strategies.

Speaker #4: They may change their approaches, and we will obviously have to adapt. With that said, I think we're really pleased with what we are seeing so far.

Speaker #4: As I said in my prepared notes, we have put in place actions that we think are really forceful and effective. We believe they create a much more aligned structure with our customers and help us address the situation.

Jon Witter: We are seeing really positive early indicators of success of those actions in our operational data. I think I mentioned on my prepared remarks the volume reduction we are seeing in our call listening. But there are others that I will not go into for a variety of reasons that I think give us confidence that this is starting to get real traction. By the way, anecdotally, I think we are starting to see some change in behavior, positive change in behavior on the part of some of these players in a way that is constructive and supportive. I think all of that leads us to believe that, absent some material change in their strategic posture, that we are on the downward slope of this.

Speaker #4: We are seeing really positive early indicators of success of those actions in our operational data. I think I mentioned in my prepared remarks the volume reduction we are seeing in our call listening.

Speaker #4: But there are others that I won't go into, for a variety of reasons, that I think give us confidence that this is starting to get real traction.

Speaker #4: By the way, anecdotally, I think we are starting to see some positive change in behavior on the part of some of these players, in a way that is constructive and supportive.

Speaker #4: And I think all of that leads us to believe that, absent some material change in their strategic posture, we are on the downward slope of this.

Jon Witter: I'd be hesitant to put out there an exact number, an exact timing of it, but I certainly think we expect next year's impact to be meaningfully less than what we saw this year.

Speaker #4: I'd be hesitant to sort of put out there an exact number, an exact timing of it, but I certainly think we expect next year's impact to be meaningfully less than what we saw this year.

Pete Graham: I think the other thing I'd add there is the recovery profile of these borrowers, as Jon said, is much different than our normal charge-offs. So that's going to be additive to the recovery curve as we move into next year.

Speaker #3: And I think the other thing I'd add there is the recovery profile of these borrowers, as John said, is much different than our normal charge-offs.

Speaker #3: And so that's going to be added to the recovery curve as we move into next year.

Jon Witter: Yeah. Great point, Pete.

Speaker #4: Yeah. Great point, Pete.

Pete Graham: The second part of your question was around whether our updated guidance range included the gain on sale from the second strategic partnership with Sixth Street. Yeah, that's included in our guidance for this year.

Speaker #3: The second part of your question was around whether our updated guidance range included the gain on sale from the second strategic partnership with 63. Yes, that's included in our guidance for this year.

Terry Ma: Got it. Okay. That's helpful. Then maybe just on the restructuring, help us maybe reconcile. Almost a year ago and early this year, you guys indicated incremental investment dollars to address the Grad PLUS opportunity. So obviously very optimistic around that. Now you are restructuring, shrinking. Maybe just help us understand that and just confirm that you still view the TAM expansion as a real opportunity. Thank you.

Speaker #7: Got it. Okay, that's helpful. And then maybe just on the restructuring, help us reconcile a bit. Almost a year ago, and early this year, you guys indicated incremental investment dollars to address the Grad Plus opportunity.

Speaker #7: So, obviously, very optimistic around that. Now you're kind of restructuring, kind of shrinking. Maybe just help us understand that, and just confirm that you still view the TAM expansion as a real opportunity.

Speaker #7: Thank you.

Jon Witter: Yeah, Terry, we absolutely still see the TAM expansion as a real opportunity. I think in the numbers that Pete described was an expectation of continued investment in things like marketing and probably at a lower pace, still some product and system and capability enhancements going into next year. But I would encourage you to go back and look at our OPEX trajectory over the last 5 or 7 years. I think we have managed that really well in terms of annual growth. It has been a source of pride for us. Obviously, we felt it was important last year to get out in front of this opportunity, both from a capability perspective, but also a marketing spend perspective. I think we did that. I think you see the results of that in our peak season volumes. But that was never the end of the game for us.

Speaker #4: Yeah, Terry, we absolutely still see the TAM expansion as a real opportunity. And I think in the numbers that Pete described, it was an expectation of continued investment in things like marketing, and probably at a lower pace, still some product, system, and capability enhancements going into next year.

Speaker #4: But I would encourage you to go back and look at our OPEX trajectory over the last five or seven years. I think we've managed that really, really well in terms of annual growth.

Speaker #4: It's been a source of sort of pride for us. Obviously, we felt it was important last year to get out in front of this opportunity both from a capability perspective, but also a marketing spend effectiveness or a marketing spend perspective.

Speaker #4: I think we did that. I think you see the results of that in our peak season volumes, but that was never the end of the game for us.

Jon Witter: We know we have a business that we can continue to refine and optimize. We know we have ability to continue to find efficiencies in what we do every day. We knew as we continued to build and evolve our strategy, there were resources that maybe did not fit as much going forward with our new priorities as they did with our previous priorities. We do a certain amount of this, Terry, every year. I think this year, for a variety of reasons, ended up being a bit more consequential than what we have seen in the past. But we think it should demonstrate our commitment to being great stewards of our expense budget. We also think it gives us what we need to continue to invest in growth going forward.

Speaker #4: We know we have a business that we can continue to refine and optimize. We know we have the ability to continue to find efficiencies in what we do every day.

Speaker #4: And we knew, as we continued to build and evolve our strategy, there were resources that maybe didn't fit as much going forward with our new priorities as they did with our previous priorities.

Speaker #4: So, we do a certain amount of this, Terry, every year. I think this year, for a variety of reasons, ended up being a bit more consequential than what we have seen in the past.

Speaker #4: But we think it sort of demonstrates our commitment to being great stewards of our expense budget, and we also think it gives us what we need to continue to invest in growth going forward.

Terry Ma: Got it. Thank you.

Speaker #7: Got it. Thank you.

Operator: Thank you. Once again, if you do have a question, you may press star and one on your telephone keypad at this time. Our next question comes from Don Fandetti with Wells Fargo. Please go ahead.

Speaker #6: Thank you. Once again, if you do have a question, you may press star one on your telephone keypad at this time. Our next question comes from Dawn Fendetti with Wells Fargo.

Speaker #6: Please go ahead.

Don Fandetti: Hi. Can you talk a little bit about your near-term NIM expectations? It looked like the broker deposit rate went up a good bit this quarter and we have heard some competitors talk about just more competition for deposits. If you could just dig in a little bit on that.

Speaker #8: Hi, can you talk a little bit about your near-term NAM expectations? It looked like the broker deposit rate went up quite a bit this quarter, and we've heard some competitors talk about just more competition for deposits.

Speaker #8: If you could just dig in a little bit on that.

Pete Graham: Yeah, sure. I think in the discussion of NIM, it is important to sort of reflect on what has changed in our environment over the course of this year, and how that impacts NIM. So one of the big drivers on NIM this year was the fact that we pulled forward that big loan sale in Q1. We were carrying a lot of excess liquidity in a time period in the year when we have very low originations, and that caused us to have sort of a dramatic low point for NIM in Q2. At that time, we said our expectation was that as we funded peak season originations, that would draw that down and we would get some normalization. So that is the biggest factor on NIM in the current year.

Speaker #3: Yeah, sure. I think in the discussion of NAM, it's important to reflect on what's changed in our environment over the course of this year.

Speaker #3: And how that impacts NAM. So, one of the big drivers on NAM this year was the fact that we pulled forward that big loan sale in the first quarter.

Speaker #3: We were carrying a lot of excess liquidity in a time period in the year when we had very low originations, and that caused us to have sort of a dramatic low point for NAM in the second quarter.

Speaker #3: And at that time, we said our expectation was that as we funded peak season originations, that would draw that down, and we would get some normalization.

Speaker #3: So that's the biggest factor on NAM in the current year. I think, at the margins, some of the extension of our duration in the portfolio certainly has somewhat of an impact.

Pete Graham: I think at the margins, some of the extension of our duration in the portfolio certainly has somewhat of an impact. But I feel good about that, right? We came into the year off of a peak season last year that had been very heavily focused on fixed-rate originations. So we needed to make sure that we matched the duration of that profile accordingly. So we extended duration on our deposits over the course of H1, roughly, to close down the interest rate exposure that we had to rising interest rates. I feel pretty good about the timing of when we did that in the context of overall market volatility.

Speaker #3: But I feel good about that, right? We came into the year off of a peak season last year that had been very heavily focused on fixed-rate originations.

Speaker #3: And so, we needed to make sure that we matched the duration of that profile accordingly. So, we extended the duration on our deposits over the course of the first half of the year, roughly.

Speaker #3: To close down the interest rate exposure that we had to rising interest rates. And I feel pretty good about the timing of when we did that, in the context of overall market volatility.

Don Fandetti: Got it. I guess my follow-up, just wanted to clarify, I think on the new fund, there is a seed seasoned loan sale of $600 million. When would that take place? Would those have kind of good historical margins? Then if we can just talk, I saw there was like $1.4 billion moved to held-for-sale. Can you just talk about that?

Speaker #8: Got it. I guess my follow-up, I want to clarify—I think on the new fund, there's a seed season loan sale of $600 million.

Speaker #8: When would that take place? And would those have good historical margins? And then, if you can, just talk—I saw there was $1.4 billion moved to held for sale.

Speaker #8: If you could just talk about that.

Pete Graham: Yeah. A portion of the seed portfolio closed just at the end of the quarter, and the remainder will close in the early part of Q4. In the context of the held-for-sale portfolio, keep in mind that there will be the sort of regular commitments to the forward flow under the KKR deal, in addition to these new held-for-sale associated with seed portfolio.

Speaker #3: Yeah, so a portion of the seed portfolio closed just at the end of the quarter, and the remainder will close in the early part of the fourth quarter.

Speaker #3: In the context of the held for sale portfolio, keep in mind that there will be the sort of regular commitments to the forward flow under the KKR deal.

Speaker #3: In addition to these new held-for-sale assets associated with the seed portfolio.

Don Fandetti: Okay, thanks.

Speaker #8: Okay. Thanks.

Operator: Thank you. Our next question comes from Rick Shane with J.P. Morgan. Please go ahead.

Operator: Thank you. Our next question comes from Rick Shane with JPMorgan. Please go ahead.

Speaker #6: Thank you. Our next question comes from Rick Shane with JP Morgan. Please go ahead.

Rick Shane: Hey. I need to get my questions in before Don because he asked pretty much what I wanted to focus on. I just want to make sure we understand one thing. The held-for-sale portfolio is substantially larger than it has been. Some of that has to do with the Sixth Street transfer, some of that has to do with the KKR flow. I am wondering if there is a timing issue here. You guys thought you were going to sell loans in Q4. Presumably, you have to sort of assume that you did not know that on 30 September. Is there going to be some migration from the held-for-sale or the available-for-sale portfolio to held-for-investment in Q4, and what are the implications of that?

Speaker #5: Hey, I need to get my questions in before Dawn because he asked pretty much what I wanted to focus on. But I just want to make sure we understand one thing.

Speaker #5: The held-for-sale portfolio is substantially larger than it's been. Some of that has to do with the 6-3 transfer. Some of that has to do with the KKR.

Speaker #5: Flow. But I am wondering if there's a timing issue here. You guys thought you were going to sell loans in the fourth quarter. Presumably, you have to sort of assume that you didn't know that on September 30.

Speaker #5: Is there going to be some migration from the held for sale or the available for sale portfolio to held for investment in the fourth quarter?

Speaker #5: And what are the implications of that?

Pete Graham: Thanks for the question, Rick. I think the thing to keep in mind about the flow agreements, they have got an overall commitment for the year. Because of the seasonality in our business, it is not a ratable amount each month or each quarter. They will fluctuate according to the seasonality of our originations. Obviously, Q3, we just had, as Jon said on the call, the highest originations in our company's history, and that is the driver of why that held-for-sale number is bigger at the end of Q3.

Speaker #3: Thanks for the question, Rick. I think the thing to keep in mind about the flow agreements is they've got an overall commitment for the year.

Speaker #3: But because of the seasonality in our business, it's not a ratable amount each month or each quarter, and so they will fluctuate according to the seasonality of our originations.

Speaker #3: Obviously, third quarter, we just had, as Jon said on the call, the highest originations in our company's history. And that's the driver of why that held-for-sale number is bigger at the end of the third quarter.

Rick Shane: Got it. So it does not have anything to do with deciding not to do a traditional non-flow sale and some weird timing issue there?

Speaker #5: Got it. So it doesn't have anything to do with deciding not to do a traditional non-flow sale, and some weird timing issue there?

Pete Graham: Not at all.

Speaker #3: Not at all. Not at all.

Rick Shane: Okay. Got it. I appreciate the answers, guys. Thank you very much.

Speaker #5: Okay, got it. I appreciate the answer, guys. Thank you very much.

Pete Graham: Yep.

Speaker #3: Yep.

Operator: Thank you. Our next question comes from Giuliano Bologna, Compass Point. Please go ahead, your line is open.

Speaker #6: Thank you. Our next question comes from Juliano Bologna with Compass Point. Please go ahead. Your line is open.

Giuliano Bologna: Well, hopefully not going over too much that is already been asked, but when I look at the large held-for-sale portfolio, is it your expectation that you would complete the sale of a large portion of that or the majority of that held-for-sale portfolio in Q4? Or would a chunk of that leak into next year? Related to that, thinking about the seasoned seed portfolio, has that all been moved to held-for-sale already? Or is there more that would be moved to held-for-sale in Q4 and have some reserve reversals?

Speaker #8: Sorry, maybe hopefully I'm not going over too much, and it's already been asked. But when I look at that, they call it the large, kind of "held for sale" portfolio.

Speaker #8: Is your expectation that you would complete the sale of a large portion, or the majority, of that held-for-sale portfolio in the fourth quarter?

Speaker #8: Or would a chunk of that leak into next year? And then, kind of related to that, thinking about the seeding season portfolio—has that all been moved to held-for-sale already?

Speaker #8: Or is there more that would be moved to held for sale in the fourth quarter, and have some reserve reversals?

Pete Graham: Yeah. Let me take that question in two parts. With regard to the mechanics of how our flow portfolio transactions work, we generally will make sales from our bank into our warehouse on a monthly basis, and then generally have a takeout sale to the partner in the subsequent month end after the quarter. The held-for-sale at the end of Q3 will clear out when we make those sales to KKR in this case, for Q3. Additionally, in that held-for-sale is the $600 million of seasoned seed portfolio. A portion of that closed in Q3, and the remainder of that will close in Q4. Hopefully that gives you the answer to that.

Speaker #3: Yeah. Let me take that question in two parts. With regard to the mechanics of how our flow portfolio transactions work, we generally make sales from our bank into our warehouse on a monthly basis.

Speaker #3: And then, generally, we have a takeout sale to the partner in the subsequent month end after the quarter. And so, the held-for-sale at the end of the third quarter will clear out when we make those sales to KKR, in this case for the third quarter.

Speaker #3: Additionally, in that held for sale is the $600 million of seasoned seed portfolio. A portion of that closed in the third quarter. And the remainder of that will close in the fourth quarter.

Speaker #3: So hopefully that gives you the answer to that. With regard to the portfolio sale that we had planned, that we discussed that we weren't going to move forward with, we had not gone through a process of selecting a portfolio yet.

Pete Graham: With regard to the portfolio sale that we had planned, that we discussed, that we weren't going to move forward with, we had not gone through a process of selecting a portfolio yet. We typically will gauge indication of interest in the market by getting indicative bids from time to time. That helps us gauge where we think a loan process might come out. We had not gone through a process of selecting a portfolio, which would be a prerequisite for us putting anything into a different designation other than held for investment.

Speaker #3: We typically gauge indications of interest in the market by getting sort of indicative bids from time to time. That helps us gauge where we think a loan process might come out.

Speaker #3: But we had not gone through a process of selecting a portfolio, which would be a prerequisite for us putting anything into a different designation, other than held for investment.

Giuliano Bologna: That's helpful. As a side follow-up, I think the way that most of us read them all, it seems like what was implied was about a 2% gain on sale up front for the strategic partnership sales. They should talk through about low single digits in the 10-Q. When I think about that, the large held-for-sale book, is that still the right range to use, in the 2% range, or would that come down a little bit from the 2% ballpark?

Speaker #8: That's helpful. And as a side follow-up, I think the way that most history—it seems like kind of what was implied was about a 2% gain on sale upfront for the strategic partnership sales.

Speaker #8: And there's some commentary about Wilson with digits in the 10-Q. When I think about that, the large help-for-sale book, that's still the right range to use—in the 2% range?

Speaker #8: Or would that come down a little bit from the 2% ballpark?

Pete Graham: The disclosures in the Q would be in two parts. One would be, we have one disclosure of fair value, which is our broad sort of evaluation of our total portfolio. Then we have a separate valuation on the held-for-sale. That's a combination of both the flow commitment to KKR that's in the warehouse as well as the $600 million of seed portfolio. It's a combination of both.

Speaker #3: The disclosures in the Q would be in two parts. One would be, we have one disclosure of fair value, which is our broad sort of evaluation of our total portfolio.

Speaker #3: And then we have a separate valuation on the health for sale. That’s a combination of both the flow commitment to KKR that’s in the warehouse, as well as the $600 million of seed portfolio.

Speaker #3: It's a combination of both.

Giuliano Bologna: I guess, rough assuming is that call it $1.4 billion or $1.44 billion of loans held-for-sale as of the end of 30 September. We should expect the full gain on sale for the forward flow to be realized in Q4 on that chunk of the portfolio?

Speaker #8: Got it. Sorry. Roughly speaking, is that called $1.4 billion or $1.44 billion of loans held for sale as of the end of September 30th?

Speaker #8: Or September 30th. So, we should expect the full gain on sale for the forward flow to be realized in the fourth quarter on that chunk of the portfolio.

Pete Graham: Correct.

Speaker #3: Correct.

Giuliano Bologna: Got it. That's very helpful. Thank you. I'll come back in queue.

Speaker #8: Got it. That's very helpful. Thank you. I know I'll jump back in the queue.

Pete Graham: Sure.

Speaker #3: Okay.

Operator: Thank you. This concludes the Q&A portion of today's call. I would now like to turn the floor over to Mr. Jon Witter for closing remarks.

Speaker #6: Thank you. This concludes the Q&A portion of today's call. I'll now turn the floor over to Mr. Jon Witter for closing remarks.

Jon Witter: Thank you everyone for your time and engagement this evening. I know we've given you a lot of information to work through in understanding our Q3 performance and outlook. In its simplest form, we are excited about the origination growth opportunity ahead of us. We're pleased with the performance of our various loan mitigation programs, and we believe we're managing expense as well. We're grateful for the strategic flexibility and the competitive advantage of having a well-capitalized deposit-funded bank, now complemented through our emerging strategic partnerships business. We're building a more resilient, predictable, and profitable Sallie Mae. While we would prefer a different macroeconomic environment, times like this demonstrate the power of our franchise, the strength of our strategy, and the quality of our execution. Sallie Mae investor relations team is standing by to answer your more detailed questions.

Speaker #2: Thank you, everyone, for your time and engagement this evening. I know we've given you a lot of information to work through in understanding our Q3 performance and outlook.

Speaker #2: In its simplest form, we are excited about the origination growth opportunity ahead of us. We're pleased with the performance of our various loss mitigation programs, and we believe we're managing expenses well.

Speaker #2: We're grateful for the strategic flexibility and competitive advantage of having a well-capitalized, deposit-funded bank, now complemented by our emerging strategic partnerships business.

Speaker #2: We're building a more resilient, predictable, and profitable Sallie Mae. While we would prefer a different macroeconomic environment, times like these demonstrate the power of our franchise, the strength of our strategy, and the quality of our execution.

Speaker #2: The Sally Mae investor relations team is standing by to answer your more detailed questions. With that, I'll turn the call over to Kate for some concluding business.

Jon Witter: With that, I'll turn the call over to Kate deLacy for some concluding business.

Kate deLacy: Thanks, Jon. Thank you all for your time and questions today. A replay of this call and the presentation will be available on the investor page at salliemae.com. If you have any further questions, feel free to contact me directly. This concludes today's call.

Speaker #1: Thanks, Jon. Thank you all for your time and questions today. A replay of this call and the presentation will be available on the investor page at salliemae.com.

Speaker #1: If you have any further questions, feel free to contact me directly. This concludes today's call.

Operator: Thank you. This concludes today's Sallie Mae Q3 2026 earnings conference call and webcast. Please disconnect your lines at this time and have a wonderful evening.