Shares of Sallie Mae (SLM) gained more than 1% following the student lender’s release of its third-quarter 2014 results on Oct 22, after the market closed. Core earnings of 17 cents per share for third-quarter 2014 came in line with the Zacks Consensus Estimate. However, results compared favorably with 11 cents earned in the year-ago quarter.
Following the separation of SLM Corporation into two distinct publicly-traded entities on Apr 30, 2014, Sallie Mae started operating independently as a consumer-banking company focused on offering private education loans, saving and insurance products for higher education to students and families.
Results reflect increased net interest income, partially offset by higher expenses. A decent capital position, rise in loan originations and increased balance in the private education loan portfolio were the positives.
Core earnings (primarily adjusts for derivatives) for the quarter were $79 million, up from $49 million in the year-ago quarter.
Sallie Mae reported GAAP net income of $83 million or 18 cents per share compared with $49 million or 11 cents per share in the prior-year quarter.
Quarter in Detail
Net interest income ('NII') came in at $144 million, up 23% year over year. The increase was primarily due to higher average private education loans outstanding. Net interest margin ('NIM') increased to 5.25 % from 5.14 % in the prior-year period.
The company’s operating expenses rose 24.4% year over year to $87 million. The increase primarily reflects reorganization expenses of $14 million.
Private Education Loan Portfolio
As of Sep 30, 2014, the private education loan portfolio stood at $7.8 billion, up 26% year over year. Loan origination increased 8% year over year to $1.6 billion. Average yield on the loan portfolio was 8.20%, down from 8.22% in the year-ago period. Provision for loan losses stood at $15 million, down from $19 million.
Deposits
As of Sep 30, 2014, deposits of Sallie Mae Bank stood at $9.7 billion, up from $9.3 billion as of Dec 31, 2013. Increase in money market accounts contributed to the rise in deposits.
Capital Position
Sallie Mae Bank reported a strong capital position. As of Sep 30, 2014, Tier 1 leverage ratio and Tier 1 risk-based capital stood at 12.3% and 15.7%, respectively. Capital ratios exceeded the well capitalized regulatory requirements.
Outlook for 2014
Sallie Mae provided an updated guidance for 2014.
For full-year 2014, the company expects core earnings per share in the range of 42–43 cents, while operating expenses to be $312 million, including restructuring expenses of $32 million.
Private education loan originations are projected to be $4 billion for the year. For fourth-quarter 2014, the company expects provision for private education loan losses of around $35 million.
Our Viewpoint
Despite the challenges, we believe that Sallie Mae’s leading position in the student lending market, efforts to diversify and increasing private student loan originations would help it to navigate well in the upcoming quarters. Also, specialized focus on solidifying its presence in the consumer banking business space will be advantageous for the company.
The economic recovery and declining unemployment rate should further enhance the prospects of consumer banking. We believe the new company should capitalize on these positives.
Nevertheless, we remain cautious owing to several issues that the new entity is encountering. These include a competitive environment in the saturated banking space, absence of large scale benefits and the prevailing stringent regulatory landscape.
Sallie Mae currently carries a Zacks Rank #2 (Buy).
Performance of Other Companies in Finance – Consumer Loans Sector
Navient Corporation’s (NAVI) third-quarter 2014 core earnings came in at 52 cents per share, marginally beating the Zacks Consensus Estimate. However, the figure compared unfavorably with 58 cents per share earned in the year-ago quarter.
Lower expenses drove Capital One Financial Corp.’s (COF) third quarter 2014 earnings of $1.86 per share, up 1% from $1.84 earned in the prior-year quarter. Further, earnings from continuing operations of $1.94 per share beat the Zacks Consensus Estimate of $1.92 per share.
Discover Financial Services (DFS) managed to keep the earnings streak alive with its third-quarter 2014 financial results. This marked the company’s fourth consecutive earnings beat averaging 4%. Third-quarter 2014 earnings per share of $1.37 exceeded the Zacks Consensus Estimate of $1.34 and improved 14.2% from the year-ago quarter.
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