SLM Corp. (SLM), commonly known as Sallie Mae, reported its second-quarter 2012 core earnings of $243 million or 49 cents per share, lagging the Zacks Consensus Estimate by a nickel.
Results also compared unfavorably with the prior-year quarter’s core earnings of $260 million. However, aided by share buybacks, on a per share basis, earnings in the reported quarter were up a cent from 48 cents earned in the year-ago quarter.
Sallie Mae’s results were negatively affected by non-cash loan premium amortization in the quarter. It is attributable to federally guaranteed student loans of about $4.5 billion, which are anticipated to be integrated under the lately accomplished Special Direct Consolidation Loan Initiative.
Also, higher funding costs as well as a decline in federally guaranteed student loan balances added fuel to the fire. However, lower loan loss provision, reduced operating expenses and higher debt repurchase gains were the positives for the quarter.
On a GAAP basis, Sallie Mae’s second-quarter 2012 net income came in at $292 million or 59 cents per share, compared with a net loss of $6 million or 2 cents per share, reported in the comparable quarter last year.
Notably, the second-quarter 2012 GAAP results at Sallie Mae included $82 million “mark-to-market” unrealized gains on derivative contracts compared with a $414 million loss in the year-ago period.
However, the cost-cutting measures primarily resulted in a 10.8% year-over-year decrease in operating expenses, bringing it to $239 million at Sallie Mae.
Segment Performance
Consumer Lending: The segment’s core earnings stood at $85 million in the reported quarter, substantially higher than $49 million recorded in the year-ago quarter. Reduced loan loss provision aided the upswing.
Net interest margin, before loan loss provision, improved to 4.14% from 4.05% in the prior-year period. Private education loan originations were $321 million, up 22% year over year.
The charge-off rate (as a percentage of loans in repayment) was 3.09% on an annualized basis, dipping from 3.71% in the prior-year quarter. Provision for loan losses dropped 15.1% year over year to $225 million in the reported quarter.
Business Services: The segment reported core earnings of $138 million, down 1.4% from the year-ago quarter. Notably, on behalf of the Department of Education, Sallie Mae provided services to 3.8 million loan customers as of June 30, 2012. The company earned $22 million in servicing revenue in the second quarter of 2012 from its Department of Education loan servicing contract, growing from $15 million in the year-ago quarter.
Federally Guaranteed Student Loans (FFELP): The business segment generated core earnings of $44 million in the reported quarter, falling 59.3% from $108 million in the year-ago quarter, reflecting the non-cash loan premium amortization. Moreover, the reduction stemmed from lower net interest income that resulted from the reduced balances of the FFELP loan portfolio as well as higher funding costs.
Outlook
Sallie Mae has updated its guidance for 2012. For the full year, management now expects to generate core earnings of $2.15 per share and anticipates private education loan originations of at least $3.2 billion.
Capital Deployment Update
Sallie Mae’s capital deployment efforts are encouraging. In the quarter under review, the company authorized an additional $400 million for its ongoing share repurchase program, which was announced in January 2012.
In the quarter under review, Sallie Mae repurchased 23.8 million shares worth $341 million. As of June 30, 2012, the company had $291 million remaining under its current share repurchase authorization.
Our Take
We believe that Sallie Mae’s leading position in the student lending market and its cost curtailment initiatives will position it comfortably in the long run. Capital deployment efforts further enhance investors’ confidence in the stock.
Suspension of the new federal student loan origination, in order to comply with the legislation, will continue to impact revenue generation at student lenders like Sallie Mae and Nelnet Inc. (NNI). However, we believe that the company’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 retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. Also, considering the fundamentals, we maintain a long-term Outperform recommendation on the stock.
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