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Sallie Mae Beats on Lower Expenses

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SLM Corp. (SLM - Free Report) – commonly known as Sallie Mae – reported its third-quarter 2012 core earnings of $277 million or 58 cents per share, beating the Zacks Consensus Estimate of 54 cents. Results also compared favorably with the prior-year quarter’s core earnings of $188 million or 36 cents.

Lower loan loss provision, reduced operating expenses and higher debt repurchase gains were the reasons behind the company’s better-than-expected results. However, decreasing net interest income remained a cause of concern.

After considering “mark-to-market” unrealized losses on derivative contracts and amortization and impairment of goodwill and intangible assets, Sallie Mae’s third-quarter 2012 net income came in at $188 million or 39 cents per share on a GAAP basis compared to a net loss of $47 million or 10 cents per share in prior-year quarter.

Notably, Sallie Mae’s third-quarter 2012 GAAP results included $140 million “mark-to-market” unrealized loss on derivative contracts compared with a $371 million loss in the year-ago period.

Further, net interest income (NII) declined 7.5% year-over-year to $819 million, primarily attributable to higher funding costs.

However, the company’s cost-cutting measures primarily resulted in a 14.4% year-over-year decrease in operating expenses, bringing it to $244 million.

Segment Performance

Consumer Lending: The segment’s core earnings stood at $63 million in the reported quarter, compared to a loss of $27 million recorded in the year-ago quarter. Reduced loan loss provision aided the upswing.

Net interest margin, before loan loss provision, improved to 4.05% from 4.03% in the prior-year period. Private education loan originations were $1.3 million, up 25% year over year.

The charge-off rate (as a percentage of loans in repayment) was 3.23% on an annualized basis, dipping from 3.74% in the prior-year quarter. Provision for loan losses dropped 34.4% year over year to $252 million, mainly due to the provision attributable to the adoption of new accounting guidance for Troubled Debt Restructurings (TDRs) in 2011.

Business Services: The segment reported core earnings of $131 million, down 5.8% from the year-ago quarter.

Federally Guaranteed Student Loans (FFELP): This segment generated core earnings of $94 million, falling 12.1% from $107 million in the year-ago quarter. The reduction stemmed from lower net interest income from the reduced balances of the FFELP loan portfolio as well as higher funding costs.


Sallie Mae has kept its guidance stable for 2012. For the full year, management expects to generate core earnings of $2.15 per share and anticipates private education loan originations of at least $3.2 billion.

Capital Deployment Update

Sallie Mae’s capital deployment efforts are encouraging. In the quarter under review, the company repurchased 7.6 million shares worth $121 million. As of September 30, 2012, it had $170 million remaining under its current share repurchase authorization.

Our Take

We believe that Sallie Mae’s leading position in the student lending market and its cost curtailment initiatives will place it comfortably in the long run. Capital deployment efforts are further going to enhance investors’ confidence in the stock.

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 diversifying 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 #2 Rank, which translates into a short-term Buy rating. Also, considering the fundamentals, we maintain a long-term ‘Outperform’ recommendation on the stock.


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