SLM Corp. (SLM), commonly known as Sallie Mae, reported second quarter core earnings of $209 million or 39 cents per share, ahead of the Zacks Consensus Estimate of 30 cents. The results compare favorably with the prior-year quarter as well, when the company had posted core earnings of $170 million or 31 cents per share.
The better-than-expected results were driven by higher interest income on its student loans. After provision for loan losses, core net interest income was $377 million, up from $343 million in the prior quarter and significantly above $55 million reported in the year-ago quarter.
On a GAAP basis, Sallie Mae reported a net quarterly income of $338 million or 63 cents per share, compared with a net loss of $123 million or 32 cents per share in the year-ago quarter.
However, effective June 30, as a result of the signing of the student loan reform act by the President in March, which forbids private sector companies from making new federal student loans after June 30, 2010, Sallie Mae stopped originating federal student loans.
Besides Sallie Mae, the new Act also eliminated the role of other private lenders such as Nelnet Inc. (NNI) in originating federal student loans under the Federal Family Education Loan Program.
Behind the Headline Numbers
Sallie Mae originated $3.1 billion in federal student loans in the reported quarter, compared with $3.7 billion in the year-ago period. The decrease was driven by the termination of the guaranteed loan program that became effective on June 30, and a shift of institutions to the government’s loan program.
However, the origination of private education loans decreased significantly during the quarter as a result of the increased availability of federal student loan coupled with an increase in students enrolling for institutions with lower cost. Sallie Mae originated $219 million of private student loans, compared with $387 million in the year-ago period.
Overall provision for loan losses was $382 million in the reported quarter versus $359 million in the prior quarter and $402 million in the prior-year quarter. Credit metrics remain elevated during the reported quarter. Sallie Mae’s managed private education loan charge-offs were $336 million in the quarter compared with $284 million in the prior quarter and $355 million in the year-ago quarter.
However, managed delinquencies as a percentage of private education loans in repayment decreased to 11.9% from 12.2 % reported in the prior quarter. Core earnings provision for private education loan losses was $349 million in the reported quarter, compared with $325 million in the prior quarter. Core fee income including the debt repurchase gain was $308 million, compared with $336 million in the prior quarter and $528 million in the year-ago quarter.
Sallie Mae reported core operating expense of $331 million compared with $298 million in the year-ago quarter. Core operating expense excludes restructuring costs and related asset impairments.
However, as a result of the new law that forbids private lenders from originating federal loans, Sallie Mae is currently undergoing a significant restructuring of its operations to better align its cost structure with future revenue projections. As a result, the company incurred restructuring ($24 million) and other litigation expenses totaling $43 million in the quarter.
Sallie Mae also remains focused on bolstering its capital levels. The company completed a $1.2 billion long-term federal student loan securitization and had $11.8 billion of primary liquidity as of June 30, 2010.
Our Take
The passing of the Act forbidding private sector companies from making new federal student loans after June 30 is a concern for Sallie Mae. As a result, the company’s traditional role would change and its loan portfolio would become heavily weighted toward the higher-risk private student loans.
Nevertheless, we expect Sallie Mae to benefit from the Department of Education’s servicing contract. The company is expected to play a major role in the contract, under which it would service and collect government guaranteed loans. We believe that the company’s leading position in the student lending market and its efficient cost structure would provide it with an edge over its peers.
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