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SLM Corp. (SLM - Analyst Report) – commonly known as Sallie Mae – reported its fourth-quarter 2012 core earnings of 55 cents per share, inching past the Zacks Consensus Estimate of 53 cents. Results also compared favorably with the prior-year quarter’s core earnings of 51 cents.

Higher debt repurchase gains were the reasons behind the company’s better-than-expected results. However, decreased net interest income, elevated operating expenses and higher loan loss provision remained the looming concerns.

Including higher debt repurchase gains of $43 million and lower pre-provision net interest income of $59 million, core earnings stood at $257 million compared with $268 million in the year-ago quarter.

For the full year 2012, core earnings were $1.1 billion or $2.16 per share, up from $977 million or $1.83 per share recorded in 2011. Moreover, it beat the Zacks Consensus Estimate by a penny. Results included higher debt repurchase gains of $81 million and lower pre-provision net interest income of $246 million.
 
Sallie Mae recorded fourth-quarter 2012 GAAP net income of $348 million or 74 cents per share compared with $511 million or 99 cents per share in the prior-year quarter. For the year 2012, GAAP net income was $939 million or $1.90 per share compared with $633 million or $1.18 per share in the prior-year.

Notably, quarter-end and full-year 2012 GAAP results included gains of $128 million and losses of $194 million, respectively, resulting from derivative accounting treatment.

Net interest income (NII) declined 5.3% year over year to $832 million in the reported quarter, primarily attributable to higher funding costs. Provision for loan losses surged 7.5% year over year to $314 million.

The company’s operating expenses ascended 3.7% year over year to $252 million.

Segment Performance

Consumer Lending: The segment’s core earnings stood at $46 million in the reported quarter compared with $63 million recorded in the year-ago quarter. Increased loan loss provision aided the downswing.

Net interest margin, before loan loss provision, declined to 4.10% from 4.20% in the prior-year period. Private education loan originations were $514 million, up 12.5% year over year.

The charge-off rate (as a percentage of loans in repayment) was 4.19% on an annualized basis, surging from 3.52% in the prior-year quarter. Provision for loan losses increased 16.1% year over year to $296 million.

Business Services: The segment reported core earnings of $134 million, down 15.2% from the year-ago quarter.

Federally Guaranteed Student Loans (FFELP): This segment generated core earnings of $89 million, dipping 18.3% from $109 million in the year-ago quarter. The reduction stemmed from lower net interest income owing to the reduced balances of the FFELP loan portfolio.

Outlook

For the full year 2013, management expects to generate core earnings of $2.30 per share and anticipates private education loan originations of at least $4.0 billion.

Capital Deployment Update

Sallie Mae’s capital deployment efforts are encouraging. During 2012, the company repurchased 58 million shares worth $900 million. Notably, in the quarter under review, the company repurchased 9.9 million shares worth $170 million.

Our Viewpoint

Despite challenges, we believe that its leading position in the student lending market, diversifying efforts and increasing private student loan originations would help the company navigate well through the current cycle. In addition, federal student loan asset acquisition serves as a positive catalyst. The company’s capital deploying efforts are impressive and we believe that it will succeed in managing the regulatory issues.

Suspension of the new federal student loan origination, in order to comply with the legislation, will continue to impact revenue generation capabilities of student lenders like Sallie Mae and Nelnet Inc. . However, we believe that Sallie Mae’s efforts, coupled with the sluggishly improving economy, would bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses.

Sallie Mae retains a Zacks Rank #3 (Hold). We believe such strong results might lead to positive earnings estimate revisions.

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