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SLM Corp. (SLM - Analyst Report), better known as Sallie Mae, reported fourth-quarter 2011 core earnings of $268 million or 51 cents per share, a penny above the Zacks Consensus Estimate. However, the results compare unfavorably with the prior-year quarter’s core earnings of $401 million or 75 cents per share.
For full year 2011, Sallie Mae reported core earnings of $977 million or $1.83 per share, in line with the Zacks Consensus Estimate but below the prior year earnings of $1.03 billion or $1.92 per share.
Improvements in net interest income, loan loss provision, expenses and discontinued operations supported the core earnings figure. Yet, a decrease in gains on loan sales and debt repurchases from the prior-year period led to the drop in core earnings.
On a GAAP basis, Sallie Mae’s fourth-quarter 2011 net income improved to $511 million 99 cents per share from $447 million or 84 cents per share reported in the comparable quarter last year.
For full year 2011, GAAP net income increased to $633 million or $1.18 per share from $530 million or 94 cents per share in 2010.
Notably, Sallie Mae’s fourth-quarter 2011 and full-year 2011 GAAP results included a $302 million increase in gains and a $623 million increase in losses, respectively, in unrealized “mark-to-market” gains/losses on derivative contracts compared to the year-ago period. Besides, full-year 2011 results also had $660 million less goodwill and intangible impairment compared to the prior year.
Sallie Mae’s operating expenses were $243 million in the quarter, down 21.1% from the prior-year period, primarily due to the company’s ongoing cost savings initiative. For full year 2011, operating expenses decreased 8.9% year over year to $1.1 billion.
The Quarter That Was
Sallie Mae stopped originating new loans under the Federal Family Education Loan Program (FFELP) after June 30, 2010 to comply with the legislation forbidding private sector companies from such loans. Consequently, the company modified its operating segments as Consumer Lending, Business Services and Federally Guaranteed Loans in the fourth quarter of 2010.
Consumer Lending: The segment’s core earnings stood at $63 million in the reported quarter, substantially up from $24 million in the year-ago quarter. Reduced loan loss provision aided the upswing. Net interest margin, before loan loss provision, improved to 4.2% from 3.9% in the comparable prior-year period.
Loan delinquency and charge-off rates improved 5% and 27%, respectively, from the year-ago quarter. This represented the sixth consecutive quarter of such improvements. Provision for loan losses decreased 13.3% year over year to $255 million in the reported quarter.
Loan originations were $457 million in the reported quarter, up 11% year over year.
Private education loans origination advanced 19% year over year to $2.7 billion in 2011.
Business Services: The segment reported core earnings of $158 million, up 34% from $118 million in the year-ago quarter. The increase stemmed from the considerable amount of FFELP loan acquisitions last year, aiding revenue growth from the servicing of such loans.
On behalf of the Department of Education, Sallie Mae provides service to 3.6 million loan customers. The company earned $63 million in servicing revenue in 2011 from its Department of Education loan servicing contract, up from $44 million in 2010.
Federal Family Education Loan Program: The business segment generated core earnings of $109 million in the reported quarter, down significantly (62%) from $289 million in the year-ago quarter. The prior-year quarter results included $318 million gain from the sale of loans. Net interest margin slightly decreased to 0.97% from 0.99% in the year-ago quarter.
For full year 2012, Sallie Mae’s management expects to generate core earnings of $2.00 per share and anticipates private education loan originations of $3.2 billion.
Capital Deployment Update
In the reported quarter, Sallie Mae paid a common stock dividend of 10 cents per share. The company bought back 19.1 million shares of common stock at a cost of $300 million in 2011.
We believe that Sallie Mae’s leading position in the student lending market, its cost curtailment initiatives and the federal student loan assets acquisition augur well. Sallie Mae successfully accomplished the acquisition of $25 billion in securitized federal student loan assets from The Student Loan Corporation, a Citigroup Inc. (C - Analyst Report) subsidiary, in December 2010. The acquisition boosted Sallie Mae’s customer base by approximately 1.3 million and promises earnings accretion going ahead.
However, pausing new federal student loan origination to comply with the legislation would affect revenue generation at student lenders like Sallie Mae and Nelnet Inc. (NNI). However, we believe that the company’s diversifying efforts coupled with an economic recovery, though at a sluggish pace, would bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses. Capital deployment efforts also boost investors’ confidence in the stock.
Sallie Mae retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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