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Sallie Mae's Earnings Beat Marginally

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SLM Corporation (SLM - Free Report) – commonly known as Sallie Mae – reported third-quarter 2013 core earnings of 60 cents per share, beating the Zacks Consensus Estimate by a penny. Results also compared favorably with 58 cents earned in the year-ago quarter.

The rise in third-quarter 2013 core earnings per share was due to a $31 million increase in servicing and contingency revenues, a $63 million decline in the provision for loan losses and a decline in the number of common shares outstanding. These positives more than offset lower net interest income before provision for loan losses of $30 million and lower debt repurchase gains of $44 million, higher operating expenses of $37 million and higher restructuring and other reorganization expenses of $10 million.

Lower loan loss provisions primarily boosted the company’s better-than-expected results. However, decreased net interest income and higher operating expenses were causes of concern.

Including the aforementioned one-time items, changes in mark-to-market unrealized gains, losses on derivative contracts as well as amortization and impairment of goodwill and intangible assets, Sallie Mae recorded GAAP net income of $260 million or 57 cents per share in the third quarter. This compared unfavorably with $188 million or 39 cents per share in the prior-year quarter. The company’s GAAP results included $19 million of losses from derivative accounting treatment, compared with losses of $140 million in the year-ago period.

Net interest income (NII) declined 2% year over year to $799 million in the reported quarter, primarily due to lower FFELP net interest income due to a decline in average FFELP loans outstanding.  

However, provision for loan losses fell 23% year over year to $207 million, mainly due to the overall improvement in Private Education Loans’ credit quality, delinquency and charge-off trends leading to decreases in expected future charge-offs.

The company’s operating expenses rose 17% year over year to $257 million. The increase was primarily due to rise in third-party servicing and collection activities as well as private education loan marketing activities, along with continued investments in technology and increase in pending litigation settlement expenses. Additionally, restructuring and other reorganization expenses related to the company’s plan to separate its existing organization into two, separate, publicly traded companies caused the increase in expenses.

Segment Performance

Consumer Lending: The segment’s core earnings were $105 million compared with $62 million in the year-ago quarter. The increase is primarily attributable to a decline in the provision for private education loan losses.

Core net interest margin, before loan loss provision, increased to 4.24% from 4.05% in the prior-year period. Private education loan originations were $1.5 billion, up 11% year over year.

The charge-off rate (as a percentage of loans in repayment) was 2.6% on an annualized basis, down from 3.2% in the prior-year quarter. Provision for loan losses declined 23% year over year to $195 million.

Business Services: The segment reported core earnings of $124 million, down 7% from the year-ago quarter. The decline in business services net income from the year-ago quarter was primarily due to a lower outstanding principal balance in the underlying FFELP portfolio serviced.

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $92 million, down 2% from $94 million in the year-ago quarter. As of Sep 30, 2013, the company had $106 billion of FFELP loans, compared with $128 billion as of Sep 30, 2012. The decline was due to decrease in sales of the residual interests in FFELP securitization trusts earlier in the year.

Capital Deployment Update

Sallie Mae’s capital deployment efforts are commendable. In Jul 2013, the company authorized a new common share repurchase program of $400 million, which does not have an expiration date. However, the company did not make any share repurchases in the third quarter of 2013.


For full-year 2013, management expects to generate core earnings of $2.94 per share, inclusive of 44 cents related to FFELP securitization trust residual sales, 8 cents from the business sale earlier this year, and the expected 14 cents from the business sale which will likely close in fourth-quarter 2013.  Further, it anticipates private education loan originations of at least $3.8 billion.

Other Developments

In Sep, 2013, the company announced the sale of its 529 college savings plan administration business. The transaction is expected to close in the fourth quarter of 2013 and Sallie Mae will reap a gain of approximately 14 cents per share.

Our Viewpoint

Despite the challenges, we believe that the company’s leading position in the student lending market, diversifying efforts and increasing private student loan originations would help it to navigate well through the current cycle. In addition, federal student loan asset acquisition serves as a positive catalyst. The company’s capital deployment efforts are impressive and we believe that it will help the company to meet the new stringent regulations.

Suspension of the new federal student loan origination in compliance with the legislation will continue to dent revenue growth of student lenders like Sallie Mae. However, we believe that Sallie Mae’s efforts that include 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 #3 (Hold).

Among other companies in the financial sector, Discover Financial Services (DFS - Free Report) and Regional Management Corp. (RM - Free Report) will declare their third-quarter earnings on Oct 21 and Oct 30, respectively. World Acceptance Corp. (WRLD - Free Report) will announce its fiscal second quarter results on Oct 24.

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