SLM Corporation (SLM), commonly known as Sallie Mae, reported first quarter core earnings of $212 million or 39 cents per share, ahead of the Zacks Consensus Estimate of 29 cents. The results compare favorably with the prior-year quarter as well, when the company incurred a loss of 3 cents per share.
Results reflected higher revenues from interest income. The company also reported a significant increase in federal loan origination.
However, effective from July, Sallie Mae would not be able to originate federal student loans as a result of the signing of the student loan reform legislation by the President in March, which forbids private sector companies from making new federal student loans after June 30, 2010.
Along with Sallie Mae, the new legislation would eliminate the role of other private lenders such as Nelnet Inc. (NNI) in originating federal student loans under the Federal Family Education Loan Program effective July 1, 2010.
The company is currently undergoing a significant restructuring of its operations to better align its cost structure with future revenue projections. Quarterly results were reduced by $19 million or 4 cents per share attributable to after-tax restructuring and asset impairment costs related to the legislation. The company would also reduce its workforce by 2,500 people.
On a GAAP basis, Sallie Mae reported a net quarterly income of $240 million or 45 cents per share, compared with a net income of $309 million or 52 cents per share in the prior quarter and a loss of $21 million or 10 cents in the year-ago quarter.
Sallie Mae originated $7.7 billion in federal student loans in the reported quarter, up 16% from the prior-year period. However, the origination of private education loans decreased significantly during the quarter.
Sallie Mae originated $840 million in private education loans, compared with $1.5 billion in the prior quarter, primarily reflecting a conservative underwriting approach, an increase in federal student loan limits, an overall rise in the use of federal student loans and an increase in federal grants.
Net interest income on a core basis in the quarter was $702 million, compared with $686 million in the prior quarter and $429 million in the year-ago quarter.
Overall provision for loan losses was $359 million in the reported quarter versus $365 million in the prior quarter and $349 million in the prior-year quarter.
Credit metrics for the private education loans slightly improved during the reported quarter. Sallie Mae experienced a decline in managed private education loan charge-offs to $284 million in the quarter from $298 million in the prior quarter.
Managed delinquencies as a percentage of private education loans in repayment increased 10 basis points sequentially to 12.2%. As a result, core provision for private education loan losses slightly decreased to $325 million from $327 million in the prior quarter.
Core fee income including the debt repurchase gain was $336 million, down from $503 million in the prior quarter but up from $304 million in the year-ago quarter. The company reported core operating expenses of $318 million, up from both $293 million in the prior quarter and $285 million in the year-ago quarter, reflecting expenses related to restructuring.
Sallie Mae also remains focused on bolstering its capital levels. The company completed a $1.6 billion private education loan securitization and issued $1.5 billion in senior unsecured notes. Additionally, the company closed a federal student loan securitization of $1.2 billion under the most favorable terms since 2007.
Sallie Mae is expected to play a major role as a participant in the Department of Education’s servicing contract, under which it would service and collect government guaranteed loans. We believe that Sallie Mae’s leading position in the student lending market and its sturdy cost structure would provide it with an edge over its peers.
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