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Sallie Mae (SLM) Q3 Earnings Miss, Stock Gains on NII Beat

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Sallie Mae (SLM - Free Report) , formally known as SLM Corporation, gained 5.1% since the release of its third-quarter earnings despite reporting lower-than-expected numbers. Core earnings per share of 29 cents lagged the Zacks Consensus Estimate of 47 cents. The bottom line indicates a rise of 20.8% from the prior quarter. Core earnings per share exclude mark-to-fair value unrealized gains and losses on derivative contracts.

Sallie Mae completed $1 billion of private education loan sales in the third quarter, resulting in a $75-million gain. Moreover, the results were supported by higher net interest income (NII) and fee income. However, a rise in expenses and provision for credit losses affected bottom-line growth.

The company plans to dispose of its credit card business to recycle resources in its core business strategies. Meanwhile, it will process completed credit card applications received by 2022 end. As of the third-quarter end, SLM had $29 million of credit card loans held for sale.

The company’s GAAP net income attributable to common stock was $72.6 million, up 1.3% from the previous-year quarter.

NII Improves, Expenses Climb

NII in the third quarter was $369.5 million, up 3.4% year over year. Also, the reported figure surpassed the Zacks Consensus Estimate of $359 million.

The net interest margin (NIM) expanded to 5.27% from 5.03% in the year-ago quarter.

The company’s non-interest income was $95.1 million, significantly up from the prior-year quarter’s $13.9 million. The rise mainly stemmed from net gains on sales of loans.

Sallie Mae's non-interest expenses increased 8.2% year over year to $152.3 million. The increase mainly resulted from higher other operating expenses.

Credit Quality Deteriorates

The company recorded a provision for credit losses of $207.6 million, up from the prior-year quarter’s $138.4 million. Net charge-offs were $100.2 million, significantly up from the prior-year quarter’s $48.9 million.

Balance Sheet Position Robust

As of Sep 30, 2022, deposits of Sallie Mae were $21.27 billion, up 6.5% sequentially.

Private education loan held for investment was $18.98 billion, up 2.5% on a sequential basis. In the quarter, the company witnessed private education loan originations of $2.4 billion, increasing 13% from the year-ago quarter.

Capital Deployment Activities

In the third quarter, the company repurchased 1 million common stocks for $17 million under its share repurchase program.

2022 Outlook

The company expects core earnings per share (on a non-GAAP basis) of $2.50-$2.60.

It anticipates total loan portfolio net charge-offs of $325-$345 million.

Private education loan originations are projected to grow 9-11% year over year.

The company’s non-interest expenses are expected to be $555-$565 million.

Conclusion

The overall financial performance of the company seems decent. The improvements in NIM and NII are positive factors. Peak season aided loan demand. This, along with reduced prepayments, positions its balance sheet well. However, a rise in expenses and a deterioration in credit quality were concerning.

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Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance Other Consumer Loan Providers

Ally Financial’s (ALLY - Free Report) third-quarter 2022 adjusted earnings of $1.12 per share lagged the Zacks Consensus Estimate of $1.73. The bottom line reflects a decline of 48.1% from the year-ago quarter. Our estimate for earnings was $1.75.

Ally Financial’s results were primarily hurt by a rise in expenses, a decline in other revenues and higher provisions. However, an improvement in net financing revenues was an offsetting factor. ALLY witnessed a rise in loan balances in the reported quarter.

Navient Corporation’s (NAVI - Free Report) third-quarter 2022 adjusted core earnings per share of 75 cents missed the Zacks Consensus Estimate of 77 cents. Also, the bottom line was lower than the prior-year quarter’s 92 cents.

The results of Navient were affected by the fall in non-interest income and NII. An increase in the provision for loan losses also dragged the results. Nonetheless, lower expenses aided the company.


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