Back to top

Analyst Blog

SLM Corporation's (SLM - Analyst Report) – commonly known as Sallie Mae – first-quarter 2014 results failed to encourage investors as the stock slipped around 2% in the after hours trading session on Wednesday. The company missed the Zacks Consensus Estimate by 8.9% mainly due to undisciplined expense management.

Sallie Mae’s first-quarter 2014 core earnings were 51 cents per share, falling short of the Zacks Consensus Estimate of 56 cents. Further, results compared unfavorably with 61 cents earned in the year-ago quarter.

Our proven model predicted that Sallie Mae may not post an earnings beat as it did not have the right combination of two key ingredients – positive Earnings ESP and a Zacks Rank of #3 (Hold) or better. It had a Zacks Rank #4 (Sell) and the Earnings ESP was 0.00%.

Lower-than-expected results resulted from higher expenses, reduced net interest income and lower servicing revenue. However, lower provision for loan losses and increase in contingency revenues were the positives.

Sallie Mae reported GAAP net income of $284 million or 64 cents per share compared with $346 million or 74 cents per share in the prior-year quarter. Notably, the company’s GAAP results included $99 million gains from derivative accounting treatment, compared with gains of $110 million in the year-ago period.

Net interest income (NII) declined 4% year over year to $766 million in the reported quarter. The decrease was primarily due to lower FFELP net interest income owing to decline in average FFELP loans outstanding.  

However, provision for loan losses fell 23% year over year to $185 million, mainly due to the overall improvement in private education loans’ credit quality along with delinquency and charge-off trends.

The company’s operating expenses rose 11.9% year over year to $263 million. The increase was primarily the result of elevated third-party servicing and collection activities and higher account resolution efforts in the private education loan portfolio.

Notably, Sallie Mae recorded $26 million of restructuring and other reorganization expenses in the first quarter associated with its plan of separating existing organization into two, publicly traded companies.

Segmental Performance

Consumer Lending: The segment’s core earnings were $118 million compared with $87 million in the year-ago quarter. The increase was primarily attributable to a decline in the provision for private education loan losses.

Core net interest margin, before loan loss provision was 4.34%, up 19 basis points from the prior-year period. Private education loan originations were $1.5 billion, up 8% year over year.

The charge-off rate (as a percentage of loans in repayment) was 2.8% on an annualized basis, down from 3.0% in the prior-year quarter. Provision for loan losses declined 22.2% year over year to $175 million.

Business Services: The segment reported core earnings of $113 million, down 10.3% year over year. The decline was mainly due to lower balance of Federally Guaranteed Student Loans (FFELP) loans serviced by Sallie Mae.

FFELP: The segment generated core earnings of $66 million, down 36.5% from the year-ago quarter. The fall was mainly due to reduced net interest income as FFELP loans outstanding declined. As of Mar 31, 2014, the company had $102.6 billion of FFELP loans versus $119.2 billion as of Mar 31, 2013.

Capital Deployment Update

Sallie Mae’s capital deployment efforts are commendable. During the first-quarter 2014, the company repurchased 8 million shares of common stock worth $200 million.

Other Developments

Recently, Sallie Mae’s board of directors approved the separation of its consumer banking and loan management, servicing and asset recovery businesses. Further, a dividend distribution of Navient common stock on Apr 30, 2014, to Sallie Mae’s common shareholders as of Apr 22, 2014 was announced.

Further, Sallie Mae announced the suspension plan of its dividend payment on its common stock after the separation is complete. However, Sallie Mae will continue to pay the preferred stock dividend.

Navient’s common stock dividend policy to be decided by its board of directors is expected to continue with Sallie Mae’s prior common stock dividend policy, which includes second-quarter 2014 common stock dividend of 15 cents per share.

Our Viewpoint

Despite the challenges, we believe that the company’s leading position in the student lending market, efforts to diversify and increasing private student loan originations would help it to navigate well through the current cycle. The company’s capital deployment efforts are impressive and we believe that it will help the company to meet the new stringent regulations.

For Sallie Mae, the decision to split seems justified as it allows the company to separate its comparatively profitable business from an unprofitable one. Specialized managerial control will also help revive the shrinking government-backed loan servicing counterpart.

Nevertheless, suspension of the new federal student loan origination in compliance with the government legislation will continue to dent revenue growth of student lenders like Sallie Mae. However, we believe that the company’s initiatives that are currently underway, such as expansion of its private education loan business and reduction of loan loss provision expenses, coupled with an improving economy, will drive its earnings going forward.

Sallie Mae currently carries a Zacks Rank #4 (Sell).

Among other companies in the financial sector, Discover Financial Services (DFS - Analyst Report) is scheduled to release its March-quarter end results on Apr 22, while World Acceptance Corp. (WRLD - Snapshot Report) and Cash America International, Inc. (CSH - Snapshot Report) are expected to report on Apr 24.

Read the Full Research Report on DFS
Read the Full Research Report on SLM
Read the Full Research Report on WRLD
Read the Full Research Report on CSH


Zacks Investment Research

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
CENTURY ALU… CENX 22.53 +4.50%
ERBA DIAGNO… ERB 2.91 +4.30%
PLANAR SYST… PLNR 4.31 +3.86%
MALLINCKROD… MNK 72.17 +3.83%
GTT COMMUNI… GTT 12.06 +3.52%