SLM Corp. (SLM) better known as Sallie Mae, has reported second quarter 2011 core earnings of $260 million or 48 cents per share, ahead of the Zacks Consensus Estimate of 42 cents. The results compare favorably with prior-year quarter’s core earnings of $211 million or 39 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. The positives were partially offset by lower debt repurchase gains.
However, on a GAAP basis, Sallie Mae reported second quarter 2011 net loss of $6 million or 2 cents per share, down from a net income of $338 million or 63 cents per share in the comparable quarter last year.
The loss stemmed from a pre-tax $414 million unrealized, mark-to-market loss on certain derivative contracts recognized in the reported quarter. Notably, the year-ago quarter’s results included a $211 million unrealized, mark-to-market gain.
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 earnings ascended to $49 million in the reported quarter from a net loss of $12 million in the year-ago quarter. The progress reflected a reduction in loan loss provisions with both loan delinquencies and charge-offs improving.
Private education loans origination advanced 21% to $264 million. As of June 30, 2011, the portfolio totaled $35.8 billion, up from $35.2 billion a year ago. Net interest margin improved to 4.05% from 3.79% in the prior-year quarter.
Economic improvement, although at a sluggish pace, led to a better credit quality. Provision for loan losses declined to $265 million from $349 million in the prior-year quarter. Delinquencies of 90 days or more as a percentage of loans in repayment declined to 4.7% from 5.8% while annualized charge-off rate decreased to 3.7% from 5.3%.
Business Services: The segment reported core earnings of $140 million, up from $127 million in the year-ago quarter. The increase stemmed the considerable amount of FFELP loan acquisitions last year, aiding revenue growth from the servicing of such loans.
Federal Family Education Loan Program: The business segment generated core earnings of $108 million in the reported quarter, up from $95 million in the year-ago quarter. The improvement reflects the purchase of significant FFELP loan portfolio at the end of last year. Net interest margin grew slightly to 0.98% from 0.95% in the year-ago quarter.
Sallie Mae’s operating expenses were $268 million in the quarter, down 13% from the prior-year period. Reported quarter costs include $13 million of servicing costs associated with the $25 billion student loan portfolio acquisition from The Student Loan Corporation, a Citigroup Inc. (C) subsidiary at last year-end as well as $2 million for litigation contingencies. With the conversion of the acquired portfolio to the company’s loan servicing system in 2011, Sallie Mae anticipates a decrease in servicing costs.
Sallie Mae issued an $821 million FFELP asset-backed securitization and two private loan securitizations totaling $1.4 billion during the reported quarter. It also bought back $60 million of debt and realized $0.3 million of gains in the reported quarter, compared with $1.4 billion and $91 million, respectively, in the year-ago quarter.
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 $2.5 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 9.6 million common shares for $156 million as part of its previously announced $300 million share repurchase program. Concurrent with its first earnings release, the company the company had reinstated its dividend since 2007 and initiated the share repurchase program.
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 at the other student lender, Nelnet Inc. (NNI). Then again, we think 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 shares retain a Zacks #2 Rank, which translates into a short-term ‘Buy’ recommendation.
