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Sallie Mae's Earnings Beat Marginally

SLM Corp. (SLM) – commonly known as Sallie Mae – reported its first-quarter 2013 core earnings of 61 cents per share, slightly ahead of the Zacks Consensus Estimate of 59 cents. Results also compare favorably with the year-ago core earnings of 55 cents.

Including a $55 million gain from the sale of residual interest in a FFELP loan securitization trust, a $12 million decline in the provision for loan losses and a decline in the number of common shares outstanding, which more-than-offset lower net interest income before provision for loan losses of $57 million and lower debt repurchase gains of $8 million, core earnings stood at $283 million compared with $284 million in the year-ago quarter.

Lower loan loss provisions primarily boosted the company’s better-than-expected results. However, decreased net interest income and elevated operating expenses remained the looming concerns.

Including the aforementioned one-time items along with 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 first-quarter 2013 GAAP net income of $346 million or 74 cents per share compared with $112 million or 21 cents per share in the prior-year quarter. First-quarter 2013 GAAP results included a $110 million gain from derivative accounting treatment versus losses of $264 million in the prior-year quarter.

Net interest income (:NII) declined 4% year over year to $795 million in the reported quarter, primarily attributable to a decrease in average FFELP Loans outstanding.

However, provision for loan losses dropped 5% year over year to $241 million, mainly due to the overall improvement in Private Education Loans’ credit quality and delinquency trends as well as probable decreases in charge-offs.

The company’s operating expenses ascended 3% year over year to $270 million.

Segment Performance

Consumer Lending: The segment’s core earnings stood at $88 million in the reported quarter compared with $84 million in the year-ago quarter.

Core net interest margin, before loan loss provision, declined to 4.15% from 4.26% in the prior-year period. Private education loan originations were $1.4 billion, up 22% year over year.

The charge-off rate (as a percentage of loans in repayment) was 3.0% on an annualized basis, stable from the prior-year quarter. Provision for loan losses increased 4% year over year to $225 million.

Business Services: The segment reported core earnings of $124 million, down 9% from the year-ago quarter. The decline resulted from lower balance of FFELP loans serviced by Sallie Mae.

Federally Guaranteed Student Loans (FFELP): The segment generated core earnings of $104 million, up 30% from $80 million in the year-ago quarter. The increase was driven by a $55 million gain from the sale of the residual interest in a FFELP loan securitization trust, which more than offset the decline in net interest income from the amortizing FFELP portfolio.

Outlook

For full year 2013, management expects to generate core earnings of $2.49 per share, inclusive of the contributions from the two FFELP loan securitization trust residual sales that were generated in 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 the first-quarter 2013, Sallie Mae repurchased 10 million shares of common stock for $199 million. The shares were repurchased under the company’s Feb 2013 program that authorizes buy back of shares worth up to $400 million.

Other Developments

In April, Sallie Mae completed the sale of its remaining interest in its SLM Student Loan Trust 2006-2 securitization to a third party. However, under the existing contract, Sallie Mae will continue servicing student loans in the trust. The sale will result in the elimination of student loans worth $2.03 billion and associated liabilities worth $1.99 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in additional 13 cents per share to Sallie Mae’s second-quarter 2013 GAAP as well as core earnings.

Earlier in February, Sallie Mae sold its remaining interest in its SLM Student Loan Trust 2007-4 securitization to a third party. However, under the existing contract, Sallie Mae will continue servicing the student loans in the trust. The sale will result in the removal of student loans of $3.8 billion and associated liabilities worth $3.7 billion from Sallie Mae’s balance sheet. Further, the gain from the deal will result in an addition of 8 cents per share to Sallie Mae’s full-year 2013 GAAP as well as core earnings.

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 the company navigate well through the current cycle. In addition, federal student loan asset acquisition serves as a positive catalyst. The company’s capital deploying efforts are impressive and we believe that it will succeed in managing the regulatory issues.

Suspension of the new federal student loan origination in compliance with the legislation will continue to impact revenue generation capabilities of student lenders like Sallie Mae and Nelnet Inc. (NNI). However, we believe that Sallie Mae’s efforts coupled with the improving economy will bolster its earnings by expanding its private education loan business and reducing its loan loss provision expenses.

Sallie Mae currently carries a Zacks Rank #4 (Sell). Other financial stocks that are performing better than Sallie Mae include First Defiance Financial Corp. (FDEF) and Flagstar Bancorp Inc. (FBC). Both these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on SLM

Read the Full Research Report on NNI

Read the Full Research Report on FBC

Read the Full Research Report on FDEF

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