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Sallie Mae Beats, Guidance Intact

Zacks Equity Research

Aided by a fall in loan loss provisions and decrease in expenses, SLM Corp.’s (SLM), better known as Sallie Mae, first-quarter 2012 core earnings came in at $284 million or 55 cents per share, ahead of the Zacks Consensus Estimate of 52 cents. Results also compare favorably with the prior-year quarter’s core earnings of $260 million or 48 cents per share.

The company’s private education loan origination advanced 23% year over year while loan charge-offs reached the lowest rate since the third quarter of 2008. However, the benefits were partly offset by a decline in net interest income and reduction in debt repurchase gains.

On a GAAP basis, Sallie Mae’s first-quarter 2012 net income came in at $112 million or 21 cents per share, down from $175 million or 32 cents per share reported in the comparable quarter last year.

Notably, in the reported quarter, Sallie Mae experienced a $131 million increase in unrealized “mark-to-market” losses on derivative contracts compared with the year-ago period.

Cost-cutting measures as well as lower servicing costs resulted in a 13.5% year-over-year decrease in operating expenses to $262 million at Sallie Mae.

Segment Performance

Consumer Lending:The segment’s core earnings stood at $81 million in the reported quarter, substantially up from $44 million in the year-ago quarter. Reduced loan loss provision aided the upswing. Net interest margin, before loan loss provision, improved to 4.26% from 4.11% in the comparable prior-year period. Private education loans origination were $1.2 billion, up 23% year over year.

The annual charge-off rate (as a percentage of loans in repayment) was 2.96% down from 3.94% in the prior-year quarter. This was the lowest charge-off rate on these loans since third-quarter 2008. Provision for loan losses decreased 15% year over year to $235 million in the reported quarter.

Business Services: The segment reported core earnings of $139 million, up 5% from the year-ago quarter. The company experienced a growth in servicing revenue in the reported quarter from the Department of Education loan servicing contract.

Notably, on behalf of the Department of Education, Sallie Mae provides service to 3.7 million loan customers. The company earned $17 million in servicing revenue in the first quarter of 2012 from its Department of Education loan servicing contract, up from $15 million in the year-ago quarter.

Federally Guaranteed Student Loans (FFELP): The business segment generated core earnings of $82 million in the reported quarter, down 25% from $109 million in the year-ago quarter. The reduction stemmed from lower net interest income that resulted from the fall in balances of the FFELP loan portfolio as well as higher funding costs.


Sallie Mae has reiterated its guidance for 2012. For the full year, management expects to generate core earnings of $2.00 per share and anticipates private education loan originations of $3.2 billion.

Capital Deployment Update

Sallie Mae remains committed to boost its shareholder wealth through dividend and share buybacks. In the reported quarter, the company has hiked its dividend to 12.5 cents per share from 10 cents paid earlier. Moreover, the company also bought back 16.7 million shares of common stock for $268 million. The share buybacks were made under the $500 million share repurchase authorization announced in January 2012.

Our Take

We believe that Sallie Mae’s leading position in the student lending market, its cost curtailment initiatives and the federal student loan assets acquisition augur well. Capital deployment efforts also give a fillip to investors’ confidence in the stock.

Though pausing new federal student loan origination to comply with the legislation would affect revenue generation at student lenders like Sallie Mae and Nelnet Inc. (NNI), we believe that the company’s diversifying efforts coupled with an economic recovery, though at a sluggish pace, 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’ recommendation.

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