SLM Corp. (SLM) better known as Sallie Mae, reported first quarter 2011 core earnings of $260 million or 48 cents per share, ahead of the Zacks Consensus Estimate of 41 cents. The results compare favorably with prior-year quarter’s core earnings of $215 million or 40 cents per share.
Favorable results were primarily driven by a decrease in loan loss provisions, increased net interest income and gains from repurchasing debt. The company also announced its first common stock dividend since 2007 and a $300 million share repurchase program.
However, on a GAAP basis, first quarter 2011 net income came in at $175 million or 32 cents per share, down from a net income of $240 million or 45 cents per share in the comparable quarter last year.
Sallie Mae declared a quarterly dividend of 10 cents per share on its common stock, first since early 2007. The dividend is payable on June 17, 2011, to shareholders of record at the close of business on June 3, 2011.
Moreover, the company also announced a share repurchase authorization of up to $300 million of outstanding common stock in open-market transactions and terminated all previous authorizations.
The Quarter That Was
Sallie Mae stopped originating new loans under the Federal Family Education Loan Program (FFELP) after June 30 to comply with the legislation forbidding private sector companies from such loans. As a result, 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 earnings ascended to $44 million in the first quarter from $5 million in the year-ago quarter. Private education loans originated increased to $940 million, up 12% from the year-ago quarter. As of March 31, 2011, the portfolio totaled $36 billion. Net interest margin improved to 4.11% compared with 3.84% in the prior-year quarter.
With the economy registering improvements, though at a sluggish pace, the company experienced an improvement in credit quality. Provision for loan losses declined to $275 million from $325 million in the prior-year quarter. Delinquencies of 90 days or more as a percentage of loans in repayment declined to 5.1% from 6.4% while annualized charge-off rate decreased to 3.9% from 4.7%.
Business Services: The segment reported core earnings of $132 million, down from $141 million in the year-ago quarter. The decrease stemmed from reduced revenue from the servicing of FFELP loans.
Federal Family Education Loan Program: The business segment generated core earnings of $109 million in the reported quarter, up from $64 million in the year-ago quarter. The improvement reflects the purchase of $25 billion of loans at the end of last year.
Sallie Mae’s operating expenses were $303 million in the quarter, up 6% from the prior-year period. Results reflected expenses for litigation contingencies, accelerated stock compensation expense and servicing costs related to the $25 billion student loan portfolio acquisition from The Student Loan Corporation, a Citigroup Inc. (C) subsidiary at the end of last year. The company expects to achieve its quarterly operating expense target of $250 million by fourth-quarter 2011.
Sallie Mae raised $2 billion of unsecured debt and issued $812 million of FFELP asset-backed securities during the reported quarter. The company also repurchased $825 million of debt and realized gains of $64 million compared with $1.3 billion and $90 million in the year-ago quarter, respectively.
Our Take
We believe that Sallie Mae’s leading position in the student lending market, restructuring initiatives and an efficient cost structure would provide it with an edge over its peers. We expect the company to benefit from the servicing contract. Cash flows from its business activities are also expected to be decent.
Given the elimination of the federally guaranteed student loan origination business last July following the passage of the Student Loan Reform Act, business models of companies such as Sallie Mae and Nelnet Inc. (NNI) are undergoing significant changes as their traditional role requires significant modification.
However, credit improvement, strategic acquisition and overall economic improvement, though at a tardy pace, should support Sallie Mae’s future earnings. The dividend reinstatement and share repurchase authorization also give a fillip to investors’ confidence in the stock.
Sallie Mae shares retain a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
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