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Sallie Mae Earnings Lag on Derivative Losses

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SLM Corp's (SLM - Free Report) – commonly known as Sallie Mae – fourth-quarter results failed to encourage investors as the stock slipped 4% in the after hours trading session. The company missed the Zacks Consensus Estimate by 13% mainly due to elevated losses on derivative and hedging that overshadowed reduced loan-loss provisions and increase in loan originations.

Sallie Mae’s fourth-quarter 2013 core earnings were 61 cents per share, falling short of the Zacks Consensus Estimate of 70 cents. Results, however, compared favorably with 55 cents earned in the year-ago quarter.

For 2013, Sallie Mae reported core earnings of $2.83 per share, missing the Zacks Consensus Estimate of $2.92. However, earnings were higher than the prior-year figure of $2.16.

The rise in fourth-quarter 2013 core earnings per share was attributable to lower provision for loan losses, gains on asset sales and increase in servicing and contingency revenues.

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 $270 million or 60 cents per share in the said quarter. This compared unfavorably with $348 million or 74 cents per share in the prior-year quarter. The company’s GAAP results included $8 million of losses from derivative accounting treatment, compared with gains of $129 million in the year-ago period.

The company’s results suffered due to higher expenses and a decline in net interest income. However, a fall in provision for loan losses and higher loan originations were positives for the quarter.

Net interest income (NII) declined 5% year over year to $789 million in the reported quarter. The decrease was primarily due to lower FFELP net interest income owing to decline in average FFELP loans outstanding.  

However, provision for loan losses fell 39% year over year to $190 million, mainly due to the overall improvement in credit quality.

The company’s operating expenses rose 35% year over year to $305 million. In the fourth quarter, the company reserved $70 million for expected compliance remediation efforts related to pending regulatory inquiries. Excluding this one-time item, operating expenses increased 4% year over year to $235 million.

The increase for both periods was primarily the result of increases in third-party servicing and collection activities, continued investments in technology and rise in private education loan marketing activities. The higher expenses were also due to an increase in restructuring and other reorganization costs related to the company’s previously announced plan to split its existing organization into two, separate, publicly traded companies.  

Segmental Performance

Consumer Lending: The segment’s core earnings were $114 million compared with $45 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, remained unchanged at 4.1% from the prior-year period. Private education loan originations were $524 million, up 2% year over year.

The charge-off rate (as a percentage of loans in repayment) was 2.9% on an annualized basis, down from 4.2% in the prior-year quarter. Provision for loan losses declined 39% year over year to $180 million.

Business Services: The segment reported core earnings of $184 million, up 36% from the year-ago quarter. The increase in business services net income from the year-ago quarter was primarily due to the $62 million after-tax gain realized from the sale of the 529 college savings plan administration business.

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $82 million, down 8% from $89 million in the year-ago quarter. As of Dec 31, 2013, the company had $104.6 billion of FFELP loans versus $125.6 billion as of Dec 31, 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 expiry date. In the fourth quarter, the company repurchased 8 million shares of common stock worth $200 million.


For full-year 2014, the company expects to initiate earnings per share (EPS) guidance when the company is successfully divided into two separate entities.

The company expects full-year 2014 private education loan origination of $4.0 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, efforts to diversify 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 catalyst. The company’s capital deployment efforts are impressive and we believe that it will help the company to meet the new stringent regulations.

Nevertheless, suspension of the new federal student loan origination in compliance with the government legislation, will continue to dent revenue growth of student lenders like Sallie Mae. However, we believe that the company’s undertaken initiatives such as 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 fourth-quarter earnings on Jan 23 and Feb 26, respectively. World Acceptance Corp. (WRLD - Free Report) will release its fiscal third-quarter results on Jan 29.

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