Sallie Mae SLM reported third-quarter 2015 core earnings of 10 cents per share, outpacing the Zacks Consensus Estimate of 8 cents. However, the reported figure declined from the year-ago quarter core earnings of 17 cents.
Better-than-expected results were driven by increased net interest income. The quarter witnessed continued rise in loan originations and increased balance in the private education loan portfolio. However, increased provision of loan losses and higher expenses were the headwinds.
Sallie Mae, (formally SLM Corporation) reported core earnings (primarily adjusts for derivatives) of $47 million, significantly down from $79 million in the prior-year quarter.
The company’s GAAP net income came in at $46 million (or $.09 per share), down from $83 million (or $.18 per share) in the year-ago quarter.
Performance in Detail
Net interest income came in at $175.4 million, up 22% year over year. The rise was mainly driven by increase in private education loan portfolio size. Net interest margin increased 11 basis points (bps) year over year to 5.36%.
Non-interest income came in at $9.9 million, compared to $96.0 million in the prior-year quarter. The decrease primarily reflects absence of gains on sale of loans in the reported quarter, compared to gains on sale of loans of $85 million in the year-ago quarter.
The company’s total expenses rose 7.8% year over year to $94.1 million. The current quarter includes reorganization expenses of $1 million compared to $14 million of reorganization expenses in prior-year quarter.
Provision for loan losses stood at $27.5 million, increasing from $14.9 in the prior-year quarter.
As of Sep 30, 2015, the private education loan portfolio stood at $10.8 billion, up 38% year over year. Further, loan origination increased 6% year over year to $1.7 billion. Average yield on the loan portfolio was 7.87%, down 33 bps year over year.
Deposits
As of Sep 30, 2015, deposits of Sallie Mae Bank stood at $10.6 billion, up from $9.2 billion as of Sep 30, 2014. Increases in brokered money market deposits and brokered CDs contributed to the rise in deposits.
Capital Position
Sallie Mae Bank reported a strong capital position. As of Sep 30, 2015, Tier 1 leverage ratio and Tier 1 risk-based capital stood at 12.2% and 13.3%, respectively. Capital ratios exceeded the well capitalized regulatory requirements.
Outlook
Concurrent with the earnings release, Sallie Mae revealed plans to sell around $750 million of private education loans through a securitization transaction to qualified institutional buyers. Though the transaction will remove the principal balance of the loans backing the securitization trust from the company's balance sheet, Sallie Mae will continue to service the loans.
The company expects to sell the loans at around 8% premium and expects a pre-tax gain of around $59 million on the sale, net of estimated closing adjustments and transaction costs. The transaction is anticipated to settle on or about Oct 27, 2015, and will be included in the company's fourth-quarter 2015 results.
Additionally, the company provided updated guidance for full-year 2015. The company expects core earnings per share of 58 cents for the year. Operating expenses are expected to be $353 million, with additional restructuring expenses of $7 million. The company expects provision for private education loan losses of $83 million.
Private education loan originations are projected to be $4.3 billion for the year.
Our Viewpoint
Sallie Mae, which started operating independently following the separation of SLM Corporation in April 2014, remains focused on enhancing private education loan assets and revenues, maintaining a strong capital position and improving efficiency.
We believe that Sallie Mae’s leading position in the student lending market, specialized focus on solidifying its presence in the consumer banking business space would help it to navigate well in the upcoming quarters. The economic recovery and declining unemployment rate should further enhance the prospects of consumer banking.
Nevertheless, we remain cautious owing to several issues that the 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 #4 (Sell).
Among other firms, Cash America International, Inc. CSH, Ally Financial Inc. ALLY and World Acceptance Corp. WRLD are slated to release results on Oct 29.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment