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Sallie Mae's Earnings Beat

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SLM Corporation (SLM - Free Report) – commonly known as Sallie Mae – reported second-quarter 2013 core earnings of $1.02 per share, ahead of the Zacks Consensus Estimate of 69 cents. Results also compared favorably with the year-ago core earnings of 49 cents.

Including a $257 million gain from the sale of residual interest in a Federally Guaranteed Student Loans (FFELP) loan securitization trust, a $38 million after-tax gain from the sale of the company’s Campus Solutions business, and other one-time items, core earnings was $462 million, up 90% from $243 million in the prior-year quarter.

Higher net interest income and lower loan loss provisions primarily boosted the company’s better-than-expected results. However, increased operating expenses were a plausible concern.

Including the aforementioned one-time items, changes in mark-to-market unrealized gains and losses on derivative contracts, as well as amortization and impairment of goodwill and intangible assets, Sallie Mae recorded second-quarter 2013 GAAP net income of $543 million or $1.20 per share. This was up from $292 million or 59 cents per share in the prior-year quarter. Second-quarter 2013 GAAP results included a $143 million gain from derivative accounting treatment versus $83 million in the prior-year quarter.

Net interest income (NII) rose 5% year over year to $784 million, primarily due to escalation of non-cash premium expense recorded in second-quarter 2012 related to the U.S. Department of Educations (ED) consolidation of $5.2 billion of loans. This was partially offset by a decline in average FFELP Loans outstanding.

However, provision for loan losses fell 17% year over year to $201 million, primarily due to the overall improvement in Private Education Loans credit quality, delinquency and charge-off trends leading to a decline in expected future charge-offs.

The company’s operating expenses rose 12% year over year to $258 million. This was primarily due to an increase in both third-party servicing and collections activities as well as Private Education Loan marketing, together with continual investments in technology.

Segment Performance

Consumer Lending: The segment’s core earnings were $107 million in the reported quarter, compared with $85 million in the year-ago quarter. The increase was primarily attributable to a decrease in the provision for private education loan losses.

Core net interest margin, before loan loss provision, declined to 4.12% from 4.14% in the prior-year period. Private education loan originations were $368 million, up 15% year over year.

The charge-off rate (as a percentage of loans in repayment) was 2.7% on an annualized basis, down from 3.1% in the prior-year quarter. Provision for loan losses declined 17% year over year to $187 million.

Business Services: The segment reported core earnings of $166 million, up 21% from the year-ago quarter. The increase was primarily due to $38 million after-tax gain from the sale of the company’s Campus Solutions business.

FFELP: The segment generated core earnings of $237 million, up substantially from $44 million in the year-ago quarter. The increase resulted from a $257 million gain from the sale of residual interests in FFELP loan securitization trusts.


For full-year 2013, management expects to generate core earnings of $2.80 per share, including gains of 44 cents per share related to FFELP loan securitization trust residual sales and 8 cents per share from the business sale that occurred till Jun 30, 2013. Further, it anticipates private education loan originations of at least $4.0 billion.

Capital Deployment Update

Sallie Mae’s capital deployment efforts are encouraging. For second-quarter 2013, the company repurchased 9 million shares of common stock for $201 million. For the first six months of 2013, it repurchased 19 million shares for $400 million, thus completing the Feb 2013 share repurchase program. Further, in July 2013, the company authorized $400 million to be utilized in a new common share repurchase program that does not have an expiry date.

Our Viewpoint

To boost the company’s long-term growth in the present economic environment, in May, Sallie Mae announced the decision to split the company’s present business into 2 parts, namely an education loan management business and a consumer banking business.

Moreover, the company’s business shift toward private student loans and direct channel loans as well as cost reduction measures – to counter the legislative impact – are positives for the stock. Extensive capital deployment activities also continue to reinforce investors’ confidence in the stock.

However, the scope and profitability of Sallie Mae’s businesses are exposed to risks arising from legislative and administrative actions. Further, we remain concerned about the run-off of the company’s FFELP loan portfolio, which will weigh further on interest income. In addition, the deteriorating credit quality is a negative for the stock.

Sallie Mae currently carries a Zacks Rank #3 (Hold). Among other companies in the financial sector, Discover Financial Services (DFS - Free Report) will declare its earnings on Jul 23, while EZCORP, Inc. (EZPW - Free Report) will report fiscal third quarter earnings on Jul 30 and Regional Management Corp. (RM - Free Report) will report on Jul 31.  


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