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Sallie Mae (SLM) Q1 Earnings Beat Despite Higher Costs

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Sallie Mae (SLM - Free Report) reported first-quarter 2017 core earnings of 21 cents per share, easily beating the Zacks Consensus Estimate of 15 cents. Also, the bottom line increased 46% from the prior-year quarter.

Better-than-expected results were primarily driven by an increase in net interest income. Continued rise in private education loan originations and lower provisions were the tailwinds. However, these positives were offset by lower non-interest income and higher expenses.

Sallie Mae reported core earnings (primarily adjusting for derivatives), attributable to the company's common stock, of $92.7 million, up 51% from the year-ago quarter.

 

Higher Expenses Partially Offset Net Interest Income Growth

Net interest income for the first quarter was $268.1 million, up 28% year over year. The rise was mainly driven by an increase in the portfolio size of private education loans. Net interest margin expanded 19 basis points (bps) year over year to 5.96%.

Non-interest income came in at $6 million, reflecting a significant decrease from $20.7 million in the prior-year quarter, primarily reflecting loss on derivatives and hedging activities and lower other income recorded in the reported quarter.

The company’s total expenses were up 11% year over year to $102.8 million. The rise in expenses was mainly due to increased compensation and benefits expenses, higher FDIC assessment fees and other expenses as well.

Efficiency ratio, on a non-GAAP basis, declined to 36.8% in the quarter from 40.2% in the year-ago quarter. A lower ratio indicates improved profitability.

Provision for loan losses was $25.3 million, down 22% year over year.

As of Mar 31, 2017, the private education loan portfolio was $15.5 billion, up 29% year over year. Notably, loan origination climbed 2% year over year to $1.8 billion in the reported quarter.

Average yield on the loan portfolio was 8.26%, up 23 bps year over year. Delinquencies as a percentage of private education loans in repayment were 1.9%, down from 2.1%.

Deposits Rise

As of Mar 31, 2017, deposits of Sallie Mae Bank were $13.4 billion, up from $11.5 billion as of Mar 31, 2016. Increases in broker deposits along with retail and other deposits contributed to the rise.

Strong Capital Position

As of Mar 31, 2017, Sallie Mae Bank’s Tier 1 capital to risk-weighted assets and common equity Tier 1 capital were both 12.3%. Capital ratios exceeded the “well capitalized” industry benchmark in regulatory requirements.

2017 Outlook

Sallie Mae provided guidance for the remaining quarters of 2017. The company estimates core earnings per share in the range of 70–72 cents for this year. Operating efficiency ratio on a non-GAAP basis is expected in the range of 38–39%. Private education loan originations are projected to be $4.9 billion for the year.

Our Viewpoint

Results of Sallie Mae highlight the company’s consistent focus on increasing private education loan assets and revenues while maintaining a solid capital position and improving efficiency. We believe that Sallie Mae’s leading position in the student lending market and its focus on solidifying its presence in the consumer banking business space would help it perform well in the upcoming quarters.

Nevertheless, we remain cautious owing to consistently increasing expenses and the prevailing regulatory headwinds.

SLM Corporation Price and EPS Surprise

 

SLM Corporation Price and EPS Surprise | SLM Corporation Quote

Sallie Mae currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the finance space, Ally Financial Inc. (ALLY - Free Report) is slated to release results on Apr 27 while Trustmark Corp. (TRMK - Free Report) and Fifth Third Bancorp (FITB - Free Report) will release earnings on Apr 25.

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