SLM Corp.(SLM) better known as Sallie Mae, reported third-quarter 2011 core earnings of $188 million or 36 cents per share, in line with the Zacks Consensus Estimate. The results compare unfavorably with the prior-year quarter’s core earnings of $202 million or 37 cents per share.
Favorable results at Sallie Mae were primarily driven by an increase in student loan originations, improved credit quality with declines in student loan delinquencies and operating expenses.
However, on a GAAP basis, Sallie Mae reported third-quarter 2011 net loss of $47 million or 10 cents per share, down from a net loss of $495 million or $1.06 per share in the comparable quarter last year.
The loss stemmed from a $371 million unrealized, mark-to-market loss on certain derivative contracts recognized in the reported quarter. Notably, the year-ago quarter’s results included a $269 million unrealized, mark-to-market loss and a $660 million impairment of goodwill and intangibles.
Moreover, both GAAP and core earnings third-quarter 2011 results included an additional $124 million or 15 cents per diluted share of provision for private education loan losses, which was attributable to the adoption of recent accounting guidance for troubled debt restructurings (TDRs). Further, a gain of $35 million or 4 cents per diluted share on the sale of the company’s discontinued purchased paper business was also included.
The Quarter That Was
Sallie Mae stopped originating new loans under the Federal Family Education Loan Program (FFELP) after June 30, 2010 to comply with the legislation forbidding private sector companies from such loans. Consequently, the company modified its operating segments as Consumer Lending, Business Services and Federally Guaranteed Loans in the fourth quarter of 2010.
Consumer Lending: The segment’s core loss ascended to $27 million in the reported quarter from a net loss of $3 million in the year-ago quarter. The increase in loss was due to adoption of TDR accounting guidance.
Private education loans origination advanced 29% to $1.1 billion. As of September 30, 2011, the portfolio totaled $36.2 billion, up from $35.5 billion a year ago. Net interest margin improved to 4.00% from 3.90% in the prior-year quarter.
Economic improvement, although at a sluggish pace, led to a better credit quality, though provision for loan losses affected by TDR accounting guidance adoption. Provision for loan losses increased to $384 million from $330 million in the prior-year quarter. However, delinquencies of 90 days or more as a percentage of loans in repayment improved to 5.0% from 5.7%, while annualized charge-off rate decreased to 3.7% from 5.4%.
Business Services: The segment reported core earnings of $139 million, up from $131 million in the year-ago quarter. The increase stemmed from the considerable amount of FFELP loan acquisitions last year, aiding revenue growth for the servicing of such loans.
Federal Family Education Loan Program: The business segment generated core earnings of $107 million in the reported quarter, slightly down from $108 million in the year-ago quarter. Net interest margin increased to 0.97% from 0.91% in the year-ago quarter.
Sallie Mae’s operating expenses were $285 million in the quarter, down 5.6% from the prior-year period. The reported quarter costs included $8 million of servicing costs related to the $25 billion student loan portfolio acquisition from a subsidiary of Citigroup Inc.(C), The Student Loan Corporation, at the end of the previous year. Further, the costs also included $15 million related to the pending termination of the company’s defined benefit retirement plan. With the completion of the conversion of the acquired portfolio to the company’s loan servicing system in October 2011, Sallie Mae anticipates the decrease in servicing costs to continue.
Outlook
For full-year 2011, Sallie Mae’s management expects to generate core earnings of $1.80 per share in 2011 and anticipates private education loan originations of $2.7 billion. Reducing operating expenses is the company’s primary focus. Moreover, the company expects to achieve its quarterly operating expense target of $250 million by fourth-quarter 2011.
Capital Deployment Update
In the reported quarter, Sallie Mae paid a common stock dividend of 10 cents per share. The company also bought back 9.5 million common shares for $144 million. With this share repurchase, Sallie Mae has fully utilized its previously announced $300 million share repurchase authorization.
Our Take
We believe that Sallie Mae’s leading position in the student lending market, expense curtailment initiatives and federal student loan assets acquisition augur well. The dividend recommencement and share repurchase authorization also give a fillip to investors’ confidence in the stock.
Pausing new federal student loan origination to comply with the legislation would affect revenue generation at Sallie Mae as well as the other student lender, Nelnet Inc.(NNI). Further, we believe that Sallie Mae’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 #3 Rank, which translates into a short-term ‘Hold’ recommendation.
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